Macro-Econ The federal Reserve, Monetary Policy, ECON 202: PCQ6, ILA #3 part 2 (1 of 2), ILA #3 part 2 (2 of 2), ILA #4 Part 2 (1 of 2), ILA #4 Part 2 (2 of 2), ILA #5 part 2of2, ILA #5 part 2 (1 of 2)

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The Federal Reserve is Independent within Government but not independent of Government.

An act of Congress in 1913 created the Federal Reserve System, and President Wilson signed the act into law. That law specifies that the U.S. president nominates Federal Reserve Governors, whom the Senate either confirms or rejects. The president appoints the Federal Reserve chairperson from among the Fed's board of Governors, and the chairperson is required to testify before congress. Most importantly congress could decide to terminate the Federal Reserve System or increase scrutiny of the Fed's accounting records. For these reasons, the federal reserve is not independent of government. However, the Federal Open Market Committee meets behind closed doors. Its meetings are never broadcast. The president or Congress does not order the Federal Reserve to pursue some specific course of action. Once a Fed governor is confirmed by the Senate, a president cannot decide to remove the governor from his or her position. In this way, the Federal Reserve operates Independently with government.

Aggregate supply illustrates the relationship between the price level:

And the amount of real GDP supplied in the economy.

Institutions can make small transfers using:

Automated clearinghouse services

we often simply call the federal reserve system the ________, whereas the _______ us used as an abbreviation for federal bureau of investigation (FBI) officers or for agents

Fed, Feds

The Federal Reserve is independent of government because:

Federal Open Market Committee Meets behind closed doors. Once a FED governor is confirmed by the senate, a president cannot decide to remove the governor from his or her position.

The market for borrowing and lending reserves between banks is the:

Federal funds market

The interest rate that helps determine the interest rates charged on other loans called

Federal funds rate

the entity that determines and implements the nations monetary policy and controls the money supply to promote stable prices and economic growth in the US economy is the

Federal open market committee

Financial transactions can be processed much more quickly than in the past because:

Fewer payments involve checks. banking institutions allow customers to deposit checks with their smartphones. electronic images of checks are sent people increasingly rely on debit cards and credit cards.

Banks can create money by making use of:

Fractional reserve banking

A banking system in which only fraction of bank deposits are backed by actual cash on hand and are available for withdrawal is known as:

Fractional reserve banking.

Which of the following will cause investments to fall

Higher interest rates and lower expected returns

Which of the following will cause investments to rise

Improve in frastru

which of the following statements is true?

In a traditional demand model, we compare the quantity demand of a good to its price; in an aggregate demand model, we use a price index like the consumer price index to represent the overall price level, or average price of goods and services in the economy

Given the demand for money an _______ in the money supply curve and lowers the interest rate.

Increase

Banks allow households who are spending less than their total income to keep their unused income in a safe place while are also earning ________

Interest

Federal Deposit Insurance Corporation. This ___ part of the Federal Reserve System.

Is not.

General services Administration. This ____ part of the Federal Reserve System.

Is not.

If the federal reserve increase the discount rate there will be ______ borrowing from the federal reserve and banks will ____ lending. this will ______ the money supply and _____ interest rate

Less, Decreases, Decreases, Increases

_____ policy primarily affct the economy by either encouraging or discouraging investment in a new capital

Monetary

______ policy is the accretions of a contry central bank to influence the supply of money and credit in the economy.

Monetary

The _______ market is a market in which the demand for and supply of money determine as interest rate, or opportunity cost of holding money balances

Money

The _______ multiplier is the amount by which a $1 change in reserve will change the money supply

Money

When the bank issues you a long, it is essentially creating___.

Money

With monetary policy changes in the:

Money supply, the quantity of investment demand and real GDP all move in the same direction.

Office of Comptroller of the Currency apart of the Federal Reserve System?

No

U.S Treasury apart of the Federal Reserve System?

No

When conducting monetary policy, the fed most often uses:

Open market operations

The Federal Reserve Board of Governors:

Oversees research into domestic and international financial conditions. Investigates the health of the economy.

A Bank ______ occurs when several banks experience bank runs simultaneously

Panic

In the aggregate demand and supply model the:

Price level is on the vertical axis of the graph and real GDP is on the horizontal axis.

You decide a habit of saving 100 dollars per month for emergencies. The price level falls so you decide that your emergencies can be funded with only 80 dollars per month, leaving you 20 dollars more to spend each month. This is an example of the:

Real Balance affect.

The Fed provides banks with financial services by:

Receiving and delivering the currency. transferring funds.

The Federal Reserve:

Regulates member banks to promote stable prices and economic growth.

Federal Reserve Board

The governing organization of the Federal Reserve System; also known as the Board of Governors. The Board consists of seven members who are appointed by the president and confirmed by the Senate to serve 14-year terms of office.

The percentage increase in the overall price of goods and services in the economy from one time period to another is called

The inflation Rate

Discount rate

The interest rate at which banks can borrow money directly from the Federal Reserve.

Open Market operations

The purchase or sale of government securities by a central bank; a key tool of monetary policy used to influence the money supply and interest rates.

Every dollar bill has a few things in common. These include:

The words Federal Reserve Note are at the top. A circular emblem with a letter inside and the location of the issuing Federal Reserve Bank is on the left hand side.

The Federal Reserve is so powerful that statements made can affect stocks halfway around the world.

True

The Federal Reserve changes the amount of money in circulation by:

Using open market operations to buy and sell government debt (U.S. Treasury bonds)

Which of the following is true?

We use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy. We use demand to talk about the price and quantity of a single good or service produced in a specific market.

Which of the following statements are true?

We use demand to talk about the price and quantity of a single good or service produced in a specific market; we use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy

Federal Open Market Committee apart of the Federal Reserve System?

Yes

Is the Board of Governors part of the Federal reserve system.

Yes

You Have been wanting to purchase a new car but have not yet saved enough money to make the payments. The price level in the U,S falls.

You can expect that the interest rate will also fall, causing consumers, like yourself, to spend more on goods requiring financing. This is an example of the interest rate effect.

The price level in the U.S rises, but does not change in Japan.

You can expect that: More buyers will purchase Japanese cars, so: U.S Imports rise and exports fall, causing aggregate demand to: Decrease. This is an example of the: Foreign trade effect.

mathematically, the marginal propensity to consume is equal to

a change in consumption divided by the corresponding change in income

the expenditures multiplier times the initial change in expenditures equals

a change in real GDP

every dollar bill has a few things in common. these include

a circular emblem with a letter inside and the location of the issuing federal reserve bank is on the left-hand side; the word federal reserve note are at the top

in deriving demand curve from the aggregate expenditures model

a decrease in the price level shifts the aggregate expenditures schedule upward so that the new equilibrium GDP is higher than it was before the price changes

According to the foreign purchase effect, if prices in the united states rise and the prices in other countries remain stable, without a corresponding adjustment, in exchange rates:

a reduction of net exports causes reduction of real GDP demand if prices in united states rise, and prices in other countries remain stable (and without corresponding interest rates) consumer will buy more foreign goods and services (imports rise) also, foreigners will also buy fewer goods and services produced in the US (exports fall)

comparisons of the value of goods relative to everything else are easy when money is used as

a unit of account

when used as a unit of measurement that communicates the market value of goods and services money is

a unit of account

suppose there is a positive supply shock. In the short run, the economy moves to a new equilibrium where real GDP is

above the full-employment and unemployment is lower than the natural rate

the expected rate of return is the ____ profit the firms expects to earn for each dollar of physical ____ purchased, expressed as a percentage

additional; capital

___ demand can be interpreted as the overall demand for real GDP from four different sources

aggregate

___ demand relates the price level to real GDP

aggregate

_____demand describes the overall, or total demand for all final goods and services produced in an economy

aggregate

adding the given level of government purchases to consumption and gross investment increases ___ expenditures by the level of government purchases

aggregate

the equilibrium price level and real GDP are determined by the intersection of the

aggregate demand and short-run aggregate supply curves

the equilibrium condition of the aggregate expenditure model is

aggregate expenditure equals income

the equilibrium condition of the aggregate expenditures model is

aggregate expenditures equals income

the equilibrium level of real GDP is found at the intersection of the

aggregate expenditures schedule and the equilibrium line

just like traditional demand and supply, the ___ demand and supply model in a(n)___

aggregate; equilibrium

the long run aggregate supply curve is a vertical line originating at the full employment level of real GDP because

all input are flexible in the long run

The long-run aggregate supply curve is a vertical line originating at the full-employment level of real GDP because

all input prices are flexible in the long run

when economist talk about "interest rates" or even "the interest rate" they mean

all interest rate since interest rates all tend to move in the same direction

When economists talk about interest rates or even the interest rate they mean:

all interest rates since interest rate all tend to move in the same direction.

positive shocks or changes to aggregate supply include:

an abrupt decrease in oil prices; an unexpected increase in productivity

negative shocks or changes to aggregate supply include

an abrupt increase in oil prices; a natural disaster

negative shocks or changes to aggregate demand include

an increase in taxes; a decrease in consumer confidence

economic growth can be shown as

an outward shift of the production possibilities frontier

the ___ demand for money is sensitive to the prevailing interest rate

asset

loans are an ___ to a bank and a ___ to the person who borrowed the money

asset; liability

If someone deposits money into a checking account,

assets and liabilities both increase.

banks can expand reserve, and make more loans by

attracting deposits and encouraging saving; borrowing from the federal reserve

There is an ___ correction mechanism in our economy, which operates through the aggregate supply

automatic

aggregate expenditures equals

autonomous expenditure plus the marginal propensity to consume times income minus taxes plus gross investment plus government purchases plus net exports

___ are businesses that provide financial services to the marketplace and try to make profit along the way

banks

___ can affect the money supply by increasing or decreasing the number of loans they make

banks

in the real world, the actual money multiplier tends to be smaller than 1/rr because

banks do not loan out all of excess their reserves; people hold some loaned money as cash

with fractional reserve banking

banks have to keep a fraction of deposits on hand

if actual output is greater than the full-employment level, the current unemployment rate is ___ than the natural rate of unemployment

below

in the short run, the economy moves to a new equilibrium where real GDP is

below the full-employment level and unemployment is high than the natural rate

when firms consider investment, they compare the marginal ___ of the investment to the marginal ___

benefit; cost

A _______ is a financial instrument that obligates a borrower to repay money, with interest, to a lender.

bond

a ___ is a financial instrument that obligates a borrower to repay money, with interest to a lender

bond

When the federal government borrows money, it issues three different assets:

bonds notes and bills

Loans created from ______ reserved expands the money supply by creating excess reserve in the banking system.

borrowed

The federal funs rate is determined by the supply and demand for _______ reserve.

borrowed

loans created from ___ reserves expand the money supply by creating excess reserves in the banking system

borrowed

The federal funds rate is one of the "key" interest rate in the economy because:

by changing the federal funds rate the fed can change every other interest rate in an economy, it represents the interest rate for the least ricky loans in the market.

the federal reserve adopts a policy of lowering interest rates, some people

can stay in homes that they might otherwise have had to sell; can chose to refinance their loans; will continue to buy new homes despite the weak economy

economic investment takes place when a firm purchases ___ goods to replace worn-out equipment or to expand production

capital

high interest rates make firms' purchases of new ___ more expensive, reducing how much is purchase, so that, over time, the economy may become ___ productive

capital; less

an important role of ___ banks is to make loans to banks that fall short of funds

central

in the real world, exports and imports

change as income, or real GDP, changes

the peaks and troughs that we observe in the business cycle are the result of

changes in consumption, gross investment, government purchase, or net exports

assuming taxes are zero, changing disposable income in the aggregate expenditures model

changes the intercept of the consumption schedule

during the great depression, chronic unemployment challenged___ theories of labor market

classical

in ___ economic models, any surplus in the labor market, or unemployment, would be eliminated as workers competed for jobs and wages fell

classical

the fed provides banks with financial services by

clearing checks; receiving an delivering the currency; transferring funds

when a check ___ and money is transferred out of out of a checking account, it is the transfer of funds that constitutes the actual payment for the good and services

clears

the federal reserve is not independent of government because

congress can decide to terminate the federal reserve system; the chairperson of the federal reserve board of governors is required to testify before congress; the president appoints the federal reserve chairperson from among the federal reserve board of governors; the senate either confirms or rejects a nominated federal reserve governor

assuming taxes are zero, the equilibrium consumption and disposable income occur when the

consumed schedule, crosses the equilibrium line

the sum of the marginal propensities to consume and save equals 1, because a fraction of each additional dollar is ___, and the remaining fraction is

consumed; saved

if there is no taxes, the economy is in equilibrium when disposable income, equals ___

consumption

the ___ schedule is the first basic piece in the aggregate expenditures model

consumption

aggregate demand can be interpreted as the overall demand for real GDP, Y, from four different sources

consumption; gross investment; net exports; government purchases

in an economy where all spending is done by households and individuals, in equilibrium ___ equals disposable income, and ___ equals zero

consumption; saving

When aggregate demand rises too much, to decrease aggregate demand we can use ______ monetary policy

contractionary

a reduction in the money supply designed to slow down economic activity, is called ____ monetary policy

contractionary

tight money describes ___ monetary policy

contractionary

inflation that results from a decrease in aggregate supply is called ___ ___ inflation

cost push

If___ push inflation is occurring, it is because the aggregate ___ curve is shifting to the ___, resulting in lower output and higher prices

cost; supply; left

A(n) ___ in aggregate demand may lead to a recession

decrease

a decrease in consumer confidence cause aggregate demand to ___

decrease

given the demand for money, a(n) ___ in the money supply shifts the money supply curve and raises the interest

decrease

to increase gross investment, the interest rate must_______

decrease

to minimize the effects of inflation, the fed needs to ___ the money supply

decrease

when aggregate demand ___ there is higher inflation and lower unemployment

decrease

when the fed ___ the federal funds rate target, the money supply increases and interest rates fall

decrease

If consumers ___ the amount of goods and services they purchase, given constant prices, then aggregate ___ for real GDP increases

decrease, demand

Holding the price level constant, a(n) ___ in net exports reduces the aggregate ___ for real GDP

decrease; demand

if consumers ___ the amount of goods and services they purchase, given constant prices, then aggregate ___ shifts to the left, since ___ goods are being purchased at every price level

decrease; demand; fewer

Which of the following will cause government purchase to fall

decreased spending on airports; decreased spending on highways

during the great depression, the money multiplier greatly ___ resulting in a ___ of the money supply

decreased; contraction

if resource costs rise, output ___ at every price level

decreases

if the government ___ the amount of spending, aggregate demand shifts to the left

decreases

When foreign income rises, aggregate ___ shifts to the right

demand

a decrease in the money ____ all else equal cause the interest rate to fall

demand

an increase in the money ___ all else equal, causes the interest rate to rise

demand

Changes to government purchases and net exports directly affect the aggregate:

demand for real GDP

if an economy is experiencing _____ inflation an increase in interest rate will reduce consumption and investment and will cool the economy

demand-pull inflation

the argument can be made that demand-pull inflation is better than cost-push inflation because with

demand-pull inflation, there is a positive relationship between output and inflation

the investment ___ shows the level of investment for each level of real interest rates, whereas the investment ___ shows the level of investment for each level of real GDP

demand; schedule

banks can expand reserves and make more loans by attracting ___

deposites

the reserve requirement is the minimum % of _____ that banks must keep on hand

deposits

The interest rate at which banks can borrow money directly from the Federal Reserve is called the:

discount rate.

higher taxes mean less ___ income and fewer expenditures

disposable

the total demand for money is

downsloping as a result of asset demand

aggregate demand is

downward slope

monetary policy affects interest rates which in turn affect

economic growth; employment; investment; inflation

the ___ line represents the combination when aggregate expenditures and real GDP equal one another

equilibrium

when aggregate expenditures increases by the amount of government purchase

equilibrium real GDP increases

when aggregate expenditures increases by the amount of gross investment

equilibrium real GDP increases

you can measure the size of an economy by measuring

everyones income; the value of all the final goods and services that produced

___ reserves are equal to the total reserves minus required reserves

excess

______ reserve held as currency earn no interest

excess

a bank can make loans depending on the value of ___ reserves

excess

when ___ reserves are lent, new checkable deposits, and additional __ reserves are created

excess; excess

___ reserves, the amount the bank can lead out to earn interest, equal ___ reserves minus ___ reserves

excess; total; required

the two main determinates of net exports are

exchange rates; national income levels-- productivity, resource prices, social institutions

An increase in the money supply, designed to stimulate economic activity, is called _______ monetary policy.

expansionary

When the aggregate demand falls, to increase aggregate demand we cause use ______ monetary policy

expansionary

actions taken by a countrys central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is ___ monetary policy

expansionary

easy money describes ___ monetary policy

expansionary

in countering recession

expansionary monetary policy can lower interest rates, increase gross investments and increase aggregate demand

two variables that affect investment are the

expected rate of return; interest rate; opportunity cost investment

in the aggregate expenditures model, output, or real GDP, is driven by ___

expenditure

in the aggregate expenditures model, output, or real GDP, is driven by ____

expenditure

a change in real GDP equals the ___ multiplier times the initial change in expenditures

expenditures

the multiplier effect on real GDP from a change in expenditures, and its size, is determined by the ___ multiplier

expenditures

expenditures in an economy depend on

expenditures of house holds, firms, government, and buyers in other countries

suppose there is an increase in taxes of $20. If the MPC equals .75 consumption will __ fall by __

fall $15

suppose there is a positive supply shock. in the long run, wages and production costs:

fall, the short-run aggregate supply curve to shift to the right: the price level falls; real GDP rises, and eventually, the economy returns to its full-employment level of real GDP

suppose there is a negative shock. in the long run, wages and production costs:

fall, the short-run aggregate supply curve to shift to the right; the price level fails; real GDP rises, and eventually, the economy returns to its full-employment level of real GDP

suppose there is an increase in taxes $20. if the MPC equals .8, consumption will ___ by $___

fall; 16

if the purchasing power of the US dollar __ relative to other currencies, it is known as a depreciation of the US dollar

falls

the ___ can change the money supply by increasing or decreasing the amount of serves in the banking system

fed

the ___ removes unfit or worn currency from circulation, introducing new currency as needed

fed

the market for borrowing and lending reserves between banks is the

federal funds market

the interest rate that banks pay in the formal market for oversight loans

federal funds rate

the supply of money in an economy is largely determined by a central monetary authority. in the united states, that authority is the ___ ___

federal reserve

The supply curve for federal funds is ___

flat

the supply curve for federal funds is ___

flat

the substation effect for an individual good is similar to the

foreign purchases effect for the aggregate demand

A ____ of the money in an economy is issued by the Federal Reserve; the rest is created by banks.

fraction

a ___ of the money in an economy in an economy is issued by the federal reserve; the rest is created by banks

fraction

a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal is known as

fractional reserve banking

The long run aggregate supply curve is a vertical line originating at the:

full employment level of real GDP.

which of the following levels of output correspond to the long-run aggregate supply curve

full-employment real GDP; long-run level of output; natural rate of real GDP;;;;; potential output;;; full employment output;; full employment output;; long run real GDP

when the federal reserve wants to buy or sell US Treasury bonds, the Fed makes these transactions with the

general public

when disposable income is ___ than consumption, savings is positive, and people save the difference

greater

since 2009, the avg interest rate in saving accounts;

has decreased

many things affect productivity, including

health of workers; technology; education

at _____ interest rates the opportunit can cost of borrowing funds rises so banks will be less willing to borrow reserves

high

if output is higher than the full-employment level, expenditures are too___

high

___ resource costs will shift the aggregate supply curve to the left

higher

___ resources costs will shift the aggregate supply curve to the left

higher

the aggregate supply shock of the 70s, caused by oil embargoes and domestic economic policies, drove both inflation and unemployment__

higher

Which of the following will cause consumption to fall

higher taxes, repayment of loans, deteriorating expectations, falling wealth.

cause consumption to fall

higher taxes; falling wealth; deteriorating expectations

When aggregate demand increase, there is ___ inflation and ___ unemployment

higher; lower

lower US income to decrease US ____ and increase net ___

imports; exports

cause investment to rise

improved infrastructure; higher expected returns

which of the following will cause investment to rise

improved infrastructure; higher expected returns

intervening in the economy to help it recover does have a downside: when the government spends more or takes in less tax revenue, the deficit and dept

inceases

both consumption and savings increase with the increase in ____ of an individual

income

disposable income is

income minus taxes

all else equal, when the money supply ___ interest rate decrease

increase

all else equal, when the money supply decreases interest rates ___

increase

an ___ in taxes will reduce real GDP

increase

an ______ in aggregate demand will cause the price level to rise and unemployment to fall in the short run.

increase

for both households and firms a(n) ____ in interest rates will result fewer purchases of new goods and services

increase

suppose income rises in foreign countries this will:

increase US exports, net exports, and aggregate demand

in the short run, a shift of the aggregate supply curve to the right indicates ___ production at every price level

increased

cause consumption rise

increased borrowing; lower personal taxes; rising wealth

which of the following will cause government purchase to rise?

increased spending on airports; increased spending highways

which of the following will cause government purchase to rise

increased spending on defense; increased spending on highways;

When the fed ____ the federal funds rate target the money supply decrease and interest rates rise

increases

all else equals, when the money supply ______ interest rates decreases

increases

if consumers ___ the amount of goods and services they purchase, given constant prices, than aggregate ____ for real GDP increases

increases; demand

asset money demand is downsloping line because it is

independent of the interest rates

the fed operates

independently within the government, but not independent of it

Both recession and expansions can cause ___, or a general increase in the level of prices

inflation

When aggregate demand rises, to avoid _____ and return to the long run equilibrium we must decrease aggregate demand

inflation

demand pull ___ occurs as consumers compete with each other for goods and services, shifting aggregate demand to the right

inflation

monetary policy affects interest rates which in turn, affect

inflation; investment; economic growth ; employment

When aggregate demand decreases, there is lower ___ and higher ___

inflation; unemployment

in the long run as ___ prices adjust for all firms, ___ falls and the economy returns to the full-employment level of real GDP

input, output

Banks pay their expenses and hope to make a profit by charging _______ on loans

interest

banks allow households who are spending less than their total income to keep their unused income in a safe place while also earning ___

interest

the ___ rate is the payment made to agents that lend or save money, expressed as an annualized percentage of the monetary amount lent or saved

interest

the discount rate is the ___ rate at which banks can borrow money directly from the federal reserve

interest

Changing the money supply can affect

interest rate thereby changing investments spending

Depository Institutions. This ___ part of the Federal Reserve System.

is

if the short-run aggregate supply curve and the aggregate demand curve intersect at the full employment level of output the economy

is in its short and long run equilibrium

Federal Financing Bank. This ____ part of the Federal Reserve System.

is not.

The Financial Management Service. This ___ part of the Federal Reserve System.

is not.

The interest rate:

is the price of money

When the feds open market committee decides on a target for the federal fund rates:

it commits to buy and sell bonds through open market operations to maintain the target

identify the primary functions of money

it serves as a medium of exchange; it is used as a store of value; it is used as a unit of account

input prices tend to be sticky because

labor contracts might commit firms to paying a certain wage over multiple years

after analyzing the Great Depression, John Maynard Keynes concluded that because

labor is used to produce goods and services, the overall demand for labor depends on the overall demand for whats gets produced

the ______ the reserve requirement, the smaller the money multiplier

larger

if consumers decrease the amount of spending, aggregate demand shifts to the ___

left

When income decrease in foreign countries, foreigners may be ___ willing and able to purchase goods and services produced in the United States

less

the net exports schedule shows the

level of net exports at each level of real GDP

equilibrium in the aggregate demand and supply model consists of a price ___ and a quantity of ___ ___

level; real GDP

the ___ run aggregate supply curve is a vertical line originating at the full-employment level of real GDP

long

in the long run, the equilibrium price level is determined by the intersection of the

long-run aggregate supply curve and the aggregate demand curve

with a ___ expenditures multiplier, the swings in output will tend to be smaller

low

if the economy is producing above equilibrium, unemployment is very

low, wages will start to rise, which puts upward pressure on prices

___ interest rates make purchasing new capital less expensive, potentially increasing ___ spending and productivity over time

low; investment

which of the following will cause investment to fall

lower expected returns; higher interest rates

if someone deposite money into a checking account

m1 and the money supply both increase

the supply curve for an individual good or service is upward-slopping because

marginal costs are increasing

the fraction of each additional dollar of income spent on consumption is called the:

marginal propensity to consume

the federal reserve system is sometimes referred to as a quasi-governmental agency because

members of the board of governors are somewhat removed from the political process; it does not rely on the federal government for financial funding of its operations

___makes specialization and trade easier

money

as ___ evolves, so does our ability to specialize and trade

money

by facilitating trade ____ facilitates specialization

money

the ___ market is a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances

money

when the bank issues you a loan, it is essentially creating ___

money

For every dollar of bond the fed buys or sells the money supply will increase or decrease by an amount equal to the:

money multiplier

for every dollar of a bonds that fed buys or sells, the money supply will increase or decrease, by an amount equal to the

money multiplier

the difference between expenditures at the full-employment level of output and expenditures when output is ___ than the full-employment level is called an inflationary gap

more

economic expansions are beneficial since

more people will be working and saving money that can lead to more investment down the road

if consumption or gross investment is increasing because of the lower price level that's a

movement along the aggregate demand

if consumption or gross investment is increasing because of the lower price level, that's a:

movement along the aggregate demand

if firms are producing more output because of the higher price level that's a

movement along the aggregate supply

if firms are producing more output because of the higher price level, that's a

movement along the aggregate supply

net exports are

national income levels; exchange rates

a fully employed economy is one that is operating at what economists call the

natural rate of unemployment

suppose there is a negative demand shock; In the short run, the economy moves to a new equilibrium where real GDP is below the full employment level, and unemployment is high than the ____ rate. In the long run, wages and production costs ___. Firms produce more at every price level. The short-run aggregate supply curve shifts to the right moving the economy to a new high equilibrium. The price level __- and real GDP ___ . Eventually, the economy returns to its full-employment level of real GDP

natural; fall; falls;rises

suppose there is a negative demand shock;In the short run, the economy moves to a new equilibrium where real GDP is below the full employment level, and unemployment is high than the ____ rate.In the long run, wages and production costs ___. Firms produce more at every price level. The short-run aggregate supply curve shifts to the right moving the economy to a new high equilibrium. The price level __- and real GDP ___ . Eventually, the economy returns to its full-employment level of real GDP

natural; fall; falls;rises

expenditures on real GDP come from four sources

net exports; investment; government; consumption

when the fed buys or sells government securities in the open market to change the money supply is called

open market operations

To minimize the effect of recession the feds most often uses

open market operations.

the cost of keeping more reserves than the fraction required instead of lending out these funs, is the ______ cost of the forgone interest the funds would have earned

opportunity

when developing the aggregate expenditures model

other categories of expenditure in the model are independent of income, and are added to consumption, which depends on income

as wages rise, firms cut back production in the long run and ___ falls

output

the aggregate expenditures model assumes that

output can increase or decease without causing the price level to change; certain categories of expenditures are independent of real GDP

the aggregate expenditures model assumes that

output can increase or decrease without causing the price level to change; certain categories of expenditures are independent of real GDP

improved productivity means that we can produce more ___ with fewer ___

output, input

The Federal Reserve Board of Governors:

oversees research into domestic and international financial conditions. Investigates the effect of banking laws.

a "bank ___ " occurs when several banks experience bank runs simultaneously

panic

US treasury bills are

payable only at the end of the bills maturity date; issued for less than one year

US Treasury bonds and notes are

pays interest every six months until the end of the maturity date; specifies the amount of interest it will pay, frequently called the coupon rate; issued for more than one year

the money multiplier will equal 1/rr so long as

people can hold any loaned money as cash; banks loan out all of their excess reserves

financial transactions can be processed much more quickly than in the past because

people increasingly rely on debit cards and credit cards; electronic images of checks are sent; fewer payments involve checks; banking institutions allow customers to deposit checks with their smartphones

interest rate changes

play little, if any, role in government purchases

if the purpose of a tax cut is to increase consumption spending, we often see tax cuts for the ___ in times of economic hardship

poor

when there is a ___ supply shock, real GDP rises above the full-employment level, and unemployment is lower than the natural rate

positive

The Federal Open Market Committee include the Board of Governors, the ___ of the New York Fed, and ___ federal reserve bank presidents from other district banks, who serve on a rotating basis.

president, 4

aggregate demand relates the ___ level real GDP

price

aggregate supply illustrates how the total amount of goods and services produced in an ecoas nominomy relates to ___ level

price

in the short run, an increase in the ___ level will increase the quantity of real GDP supplied

price

the supply of money is not influence by its ___ in this case the interest rate

price

in the aggregate demand and supply model the

price level is on the vertical axis of the graph and real GDP is on the horizontal axis

a leftward shift of aggregate supply causes ___ to rise with ___

prices; unemployment

___ is defined as the total amount of output produced with a given level of inputs

productivity

social institutions include

property rights courts police protection government

investment demand slopes downward because the

quantity of investment demanded increases as interest rates fall

aggregate demand relates the price level to ___ GDP

real

the ___ interest rate is adjust for inflation

real

when the price level rises the real value of saving falls, and people are less willing or able to buy goods and services. As a result, consumption falls, and the quantity of real GDP demand decreases. This described

real balance effect

the income effect for an individual good is similar to the

real balance effect for the aggregate demand

a policy often during an economic ___ is to decrease taxes

recession

when aggregate demand falls to avoid a ___ and return to the long-run equilibrium. we must increase aggregate demand

recession

Holding the price level constant, a decrease in net exports ___ the aggregate demand for real GDP

reduces

holding the price level constant, a decrease in net exports ___ the aggregate demand for real GDP

reduces

___ reserves are equal to deposits times reserves requirement

required

___ reserves are the fraction, or portion, of checkable deposits that a bank must keep on hand

required

The _____ requirement is the fraction of checkable deposits that banks must keep on hand as reserve either as currency or on deposit with the federal reserve.

reserve

on any given day, while some banks come up short on their ___ holdings, other banks have more than they need

reserve

The fraction of checkable deposits that banks must keep on hand as reserve, either as currency or on deposit with the federal reserve is called the:

reserve requirement

The fraction of checkable deposits that banks must keep on hanf reserve, wither as currency or on deposit with the federal reserve is called the:

reserve requirement

To make sure banks meet the daily needs of customers, the federal reserve enforces a:

reserve requirement

The federal funds rate is determined by the supply and demand for borrowed ________.

reserved

According to the interest rate effect, when the price level ___ people need more money to make the same number of purchases so the demand for money ___ . As a result, interest rates increase which lowers consumption and investment causing the quality of real ___ demand to ___

rises, rises, GDP, decrease

which of the following will cause consumption to rise?

rising wealth; increased borrowing; lower personal taxes

During the 1970s, the inflation ___ faster than the nominal interest rate, meaning real interest rates were___

rose, negative

a "bank ___" occurs when despositors rush, in mass, to withdraw funds from a bank

run

a "bank ____" occurs when depositors rush in mass to withdraw their funds form a bank

run

you can do two things with disposable income

save it or spend it on consumption

demand for money comes from two sources. the demand for money to be

saved for future use; used in daily transaction

when the fed decreases interest rates during tough economic times, it is hoping that investments spending and output in he economy will increase but _____ are negatively affected by this policy.

savers

greater capital formation and increased productivity in the future is made possible when there is

saving

when consumption is greater than disposable income, ___ is negative

saving

you can convert a ___ deposit to currency, but this usually takes time

savings

when the equilibrium is above potential output, the fed should ___ bonds equal to the needed decrease in reserve

sell

The federal reserves is concerned about accelerating inflation and wants the money supply to decrease by $20 billion. The FOMC should ______ bonds. With a reserve requirement of 10% the money multiplier is ______. If the money supply needs to decrease by $20 billion, the Fed must _______ in bonds.

sell, With the reserve requirement of 10%, the money multiplier is 1/rr=1/0.1=10, The FED must sell $20 billion/10=$2 billion in bonds.

when the fed ___ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest rates to ___

sells; rise

Changing one of the determinates of aggregate supply will cause the aggregate supply curve to___

shift

if the amount of output firms want to produce increases, but the price does not change, that's a

shift of the aggregate supply

An increase in investment will

shift the AE line upward and shift the AD curve to the right

changes in consumption and gross investment can

shift the aggregate demand curve

In the ___ run, the aggregate supply curve slopes upward

short

a ___ change in interest rates could have an enormous impact on employment output, and future economic growth

small

People in Japan tend to consume a much ___ proportion of additional income that do people in the US

smaller

people hold some of their savings as money instead of putting it all in stocks or bonds for two reasons

so they can purchase goods and services; money is a stable asset that you can hold on to and use for future expenses

aggregate supply

social institutions; productivity

formal rules, like minimum wage laws, insurance requirements, and worker safety requirements are examples of ___ institutions that influence the aggregate

social; supply

The _______ is the difference between the interest rate a bank earns in a loans and the interest rate it pays

spread

the ___ is the difference between the interest rate a bank earns on a loan and the interest rate it pays

spread

the government is often actively involved in ___ policy, trying to keep output near its long-run potential level

stabilization

The term ___ was coined in the 1970s during a period of high unemployment in the united states

stagflation

___ is used to describe an economy that is not growing but has rising inflation together with high unemployment

stagflation

aggregate ___ illustrates how the total amount of goods and services produced in an economy relates to the price level

supply

by changing the money ___ the federal reserve can influence real GDP

supply

generally, changes to social institutions that facilitate production shift aggregate ___ to the right

supply

suppose that the government increase paperwork and raises fees for stating a business. This will cause aggregate

supply to decrease, shifting to the left

the federal reserves can influence real GDP by changing the money ___ which will influence gross ___

supply; investment

traditional models of labor markets implied that if unemployment was very high, there was a ___ of labor and over time wages would ___ making firms ___ wiling to hire the unemployed

surplus; fall; more

a change in real GDP equals the ___ multiplier times the initial change in taxes

tax

a policy often used during an economic recession is to decrease ___

tax

the size of the multiplier effect caused by a change in taxes is determined by the ___ multiplier

tax

the long run equilibrium occurs when

the AD and AS and LRAS curve intersect

as nominal wages and the costs of other resources rise during an expansion

the aggregate supply curve shifts to the left, real output falls and the price level rises further

once a expansion occurs, as nominal wages and the costs of other resources rise, eventually

the aggregate supply curve to the left, the price level rises, and real GDP returns to the full employment level

a bank can find itself short of the reserve requirement at the end of the day and in a need to borrow reserve from another bank. this could happen

the bank allows its account-holders to withdraw their money at the same time.

the activity of investment can take a variety of forms

the construction of a ski lift; the purchase of real estate; the purchase of a highway convenience store

which three values are all related, so that when one changes, so do the others?

the dollar value of deposits held by banks, bank reserves, and the money supply

when a company borrows money by selling a bond, it specifies the term of the bond

the interest rate; the face value; term to maturity

if we increase our resources or productivity

the long run aggregate supply curve shifts to the right; the production possibilities frontier will shift out

in the absence of taxes, the slope of the savings schedule is equal to

the marginal propensity to save

when using the aggregate expenditures model, if expenditures change:

the model will move to a new equilibrium

The money multiplier equals

the overall change in the money supply/ the initial change in reserves

the money multiplier equals

the overall change in the money supply/the initial change in reserves

when we draw an aggregate demand curve we're assuming that the only thing that is changing as we move up and down the curve is:

the overall price level

The FED operates independently within the government, but not independent of it because new members are appointed by:

the president of the United States and confirmed by the Senate.

the federal reserve operates independently within the government because

the president or congress does not order the federal reserve to pursue some specific course of action; the federal reserve does not rely upon congress to fund its operations; once a fed governor is confirmed by the senate, a president cannot decide to remove the governor from his or her position

the activity of saving can take variety of forms

the purchase of individual stocks; money in savings account at the bank; the purchase of real estate

the nominal interest rate includes two components

the real interest rate; the expected rate of inflation

because the only category of spending that depends on income is consumption

the slope of the aggregate expenditures line is the same as the slope of the consumption schedule

banks don't perfectly hit their reserve requirement lending up to the maximum of their deposits because

they do not control hoe much is deposited or withdrawn in any particular day.

The fed used open market operations;

to keep the federal funds rates on target

because ___ checks are immediately convertible they are highly liquid and go into ___

travelers; m1

Every ___ years, a new member is appointed to the Federal Reserve Board of Governors.

two

In the short run, the aggregate supply curve slopes

upward

because transaction money demand is independent of the interest rate is a ___ line

vertical

when graphing the savings schedule, place savings on the ___ axis and disposable income on the ___ axis

vertical, horizontal

adding the given level of government purchases to consumption shifts the aggregate expenditure schedule

vertically, by an amount equal to government purchases

if gross investment increases, it will shift the aggregate expenditures schedule

vertically, by an amount equal to gross investment

investment, government spending, and net exports are affected by

very different economic variables, so any change to government policy will likely affect them differently

During the great depression

wages wee not falling, and high levels of unemployment persisted for years

Keynes reasoned that by understanding what determines expenditures on consumption, gross investment, government purchases, and net exports

we can explain the level of output in an economy

one of the challenges of using government expenditures to stimulate the economy is that

when spending needs to cut, it can cause a recession

Institutions can transfer large amounts of money in a timely and efficient way using

wire transfers

Today, the Federal Deposit Insurance Corporation insures accounts up to

$250,000

The money multipler will equal 1/rr as long as:

-banks loan out all their excess reserves -people can't hold any loaned money as cash

In the real world, the actual money multiplier tends to be smaller than 1/rr because

-people hold some loaned money as cash, -banks do not loans out of excess their reserves.

suppose you get $500 for your birthday and you spend $400 and save the remaining $100. The marginal propensity to save, or MPs, is equal to ___

.20

suppose you get $100 for your birthday and you spend 475 on a new smartphone and save the remaining $25. The marginal propensity to save, or MPS is equal to ___

.25 MPS= change in savings/change in income. A change in income of $100 changes savings by $25

as disposable income rises, so does consumption, but not by the full amount, because the marginal propensity to consume is less than ___

1

Which of the following will cause government purchases to rise.

1) Increase spending on airports 2) Increase spending on defense

mathematically, the expenditures multiplier equals

1/(1- MPC)

The money multiplier equals

1/reserve requirment

with an MPC of .6, the expenditures multiplier will equal

2.5

if the multiplier equals 4, an increase in investment spending of $5 billion will result in an overall increase in real GDP of $___ billion

20

the equilibrium line is sometimes called the

45-degree line

Central bank

A bank that provides financial services to a country's government and is responsible for the nation's monetary policy. The central bank of the United States is the Federal Reserve.

Fractional reserve banking

A banking system in which banks have to keep only a fraction of checkable deposits on hand and available for withdrawal.

Federal; Open Market Committee (FOMC)burn

A committee of the Federal Reserve System that is responsible for monetary policy decisions, specifically for open market operations for the Federal Reserve System. The FOMC consists of the Federal Reserve Board, the president of the New York Fed, and 4 of the 11 regional bank presidents.

The _________demand and supply model can be used to describe changes in an economy's price level and real GDP in the short and the long run.

Aggregate

______ demand describes the overall, or total, demand for all final goods and services produced in an economy

Aggregate

Positive shock or changes to aggregate supply include,

An unexpected increase in productivity an abrupt decrease in oil prices

The federal funds is the interest rates that banks pays when borrowing reserves from other ________

Banks

With fractional reserve banking

Banks have to keep a fraction of deposits on hand

A ______ is a financial instrument that obligates a borrower to repay money, with interest, to a lender.

Bond

Banks can expand reserves, and make more loans by:

Borrowing from the federal reserve Attracting deposits and encouraging savings

the aggregate expenditures model states that in equilibrium output, or real GDP, Y, will be equal to

C plus I plus G plus NX

Aggregate demand:

Can be interpreted as the overall demand for real GDP from four different sources.

The Federal Reserve is a Central Bank.

Central banks do not make loans to you, to households, or to businesses other than banks. Instead, and important role of central banks is to make loans to banks that fall short of funds.

As the bank for the federal government the FED:

Collects federal tax payments processes US savings bonds processes postal money orders.

______ monetary policy is sometimes referred to as "tight money'

Contractionary

In countering inflation:

Contractionary monetary policy can raise interest rates, decrease gross investment and depress aggregate demand

Holding the price level constant, a(n):

Decrease in net exports reduces the aggregated demand fir real GDP.

A decrease in aggregate demand will cause the price level to _______ and unemployment to _____ in the short run.

Decrease, Rise

The interest rate at which banks can borrow money directly from the federal reserve is called the:

Discount rate

______ reserve are equal to total minus required reserve.

Excess

______ reserves the amount the bank can lend out to earn interest equal _______ reserve minus ________ reserve.

Excess, total, required

______ monetary policy is sometimes referred to as easy money

Expansionary

The ___ serves as the bank for the federal government.

FED

we often simply call the federal reserve system the ___ whereas the ___ is used as an abbreviation for federal bureau of investigation officers or for agents

Fed; Feds

both the ___ and ___ can influence the money supply

Fed; banks

Monetary policy refers to the action of the ______ reserve to influence the supply of money and credit in the U.S economy

Federal

A formal market for overnight loans of federal reserves is the:

Federal funds market

On of the Keys interest rates in the economy is called the:

Federal funds rate

Deposits that automatically transfer money balances from savings accounts to checking accounts are part of ____

M1

When there are taxes, the initial change in consumption will equal the

MPC times the change in disposable income due to taxes

_____ reserves are equal to deposits times the reserve requirement

Required

Exports from the U.S will tend to rise when foreign incomes:

Rise

marginal propensity to save is equal to

S/Y

the slope of the savings schedule equals:

Savings/Disposable Income

When the Fed ____ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest to _____

Sells, Increases

An increase in the money _______ will cause interest rates to fall

Supply

By changing the money ____, the federal reserve can influence real GDP

Supply

Many things affect productivity, including

Technology Education Heath of workers

The Federal Reserve is not independent of government because:

The Senate either confirms or rejects a nominated Federal Reserve governor. Congress can decide to increase scrutiny FEDS accounting records. The chairperson of the Federal Reserve Board of governors is required to testify before congress. Congress can decide to terminate the Federal Reserve System.

Monetary Policy

The actions taken by a country's central bank to influence the supply of money and credit in the economy.

Federal Reserve System

The central bank of the United States, consisting of 12 regional banks and the Board of Governors. The Federal Reserve System conducts monetary policy, supervises and regulates banks, monitors the stability of the financial sector, and provides financial services to the U.S. government.

One of the Feds most important jobs is supervision and regulation of member banks to prevent banking panicks or distruptions. This is accomplished through:

The creation of regulations and guidelines. regular inspections

Which three values are all related, so that when one changes, so do the others.

The dollar value of deposits held by banks, baks reserve, and the money supply

Reserve Requirement (rr)

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve.

The federal reserve changes the amount of money in circulation by:

Using open market operations to buy and sell government Debt (U.S treasury Bonds)

the tax multiplier times the initial change in taxes equals

a change in real GDP

mathematically, the expenditures multiplier is equal to

a change in real GDP divided by the corresponding change in aggregate expenditures

equilibrium in the aggregate demand and supply model consists of

a price level and a quantity of real GDP

negative shock or changes to aggregate supply include

an abrupt increase in oil prices; a natural disaster

The Federal Reserve is concerned that sluggish economic activity. It believes an increase in the money supply of $100 billion will be adequate to allay any fears of recession. The FOMC should _____ bonds. With a reserves requirement of 10% the money multiplier is _____. If the money supply needs to increase by $100 billion, the FED must ______ in bonds.

buy, 10, buy $10 billion

when the dollar ___ foreign goods and services become more expensive US consumers, and ___fall

depreciates; imports

the expected rate of return will fall for each additional purchase of capital because of _____ returns

diminishing marginal

there is a ___ relationship between disposable income and savings

direct

when banks borrow from the fed, the interest rate they pay is set by the fed, and its called the ___ rate

discount

assuming there are no taxes, income equals ___ income

disposable

exports from the US will tend to ___ when foreign income decrease

fall

when there is a recession, we often see taxes cut for the poor instead of he rich, because people with lower income tend to have a ___ MPC than the rich

higher

Which of the following will cause investments to rise

higher expected returns, improved infrastructure.

cause investment to fall

higher interest rates; to lower expected returns

will cause consumption to fall

higher taxes ; deteriorating expectations; falling wealth; repayments of loans

monetary policy affects

interest rates charged paid on savings; the price of goods, services and resources; interest rates charged on loand

changing the money supply can affect:

interest rates, thereby changing investment spending

economic ___ takes place when a firm purchases capital goods to replace worn-out equipment or to expand production

investment

Monetary policy affects interest rates which in turn, affects

investment, employment, economic growth, inflation.

Is office of Management and Budget apart of the Federal Reserve System?

no

the short-run equilibrium level of real GDP is

not necessarily the full-employment level of output that is consistent with the long run

to influence the money supply and interest rates the federal reserve buys or sells government debt. this is called

open market operations

to minimize the effects of inflation, the fed most often uses

open market operations

when conducting monetary policy, the fed most often uses

open market operations

when the money supply changes

people will rebalance their savings to maintain the level of risk versus return they prefer

The federal funds market is the market for borrowing and lending _____ between banks

reserves

if the bank keeps all of its deposits as ___ the bank wont make any money

reserves

the federal funds rate is determined by the supply and demand for borrowed ___

reserves

when a bank makes a loan, it hands over some of its ___ to the person who borrowed the money

reserves

if ___ costs rise, each additional unit of output will cost more to produce

resource

a shock to aggregate supply that affect the economy in a negative way include

rising oil changes

if consumption, gross investment, or net exports are increasing because of some non-price change, there will be

shift of the AD curve

if net exports are increasing because of some non-price change, there will be a

shift of the AD curve

if there is a dramatic reduction in electricity prices, there will be a

shift of the AS curve

as nominal wages and the costs of other resources fall during a recession

the aggregate supply curve shifts to the right, real output grows and the price level falls further

mathematically, the tax multiplier is equal to

the change in real GDP divided by the initial change in taxes


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