Macro Economics ECON 1113-900 Chapter 14

Part of the cost of holding money is that it typically yields a ______ rate of return than stocks and bonds. A. lower B. higher

A. lower

Historically, the Fed has used monetary policy primarily to _____ output gaps and keep ______ low. A. Reduce; inflation B. Reduce; deflation C. increase; inflation D. increase; deflation

A. reduce; inflation

The Federal Funds Rate is the interest rate that commercial banks charge each other for very ______-term loans and is closely watched by the public, politicians, the media, and the financial markets. A. short B. long

A. short-term

Reduced holdings of longer-term assets acquired during quantitative easing programs and raising the federal funds rate by raising the rate paid to banks on required reserves are consistent with __________ policy normalization.

monetary

Nominal interest rates are determined by the quantity of ______ supplied to the economy.

money

_________ requirements are the minimum values of the ratio banks reserves to bank deposits that the Fed allows commercial banks to maintain

Reserve requirements

If the Fed reaches the zero lower bound, the rate on federal funds rate is between ____%-___% and stimulating the economy by lowering the federal funds rate is ________. A. not possible B. possible

0%-0.25%; A. not possible

Which of the following are consistent with the Taylor rule (can be more than 1 answer) A. Modified versions of the Taylor Rule, where the Fed considers inflation forecasts, provide a better description of the Fed's behavior B. The government responds to output gaps and the rate of inflation C. The Fed responds to output gaps and the rate of inflation D. The Fed doesn't consider inflation forecasts.

A & C

Which of the following are true regarding money (can be more than 1) A. It's a type of financial asset B. Its a store of value C. Determines your social status D. It's a way of holding wealth

A, B & D

The Federal Reserve can control the money supply (can be more than 1 answer): A. through discount window lending B. Through closed-market operations C. By changing commercial banks' reserve requirements D. through open-market operations

A, C, & D.

The money demand curve shows the relationship between the ____ interest rate and the aggregate quantity of money demanded. A. Nominal B. Real

A. Nominal

The money demand curve will shift to the left if real GDP __________ A. decreases B. increases

A. decreases

An individuals _______ money is the amount of wealth that individual chooses to hold in the form of money A. demand for B. supply of

A. demand for

The Fed takes steps to eliminate ____ gaps because they lead to inflation A. Expansionary B. Recessionary

A. expansionary

The demand for money will ____ if real income decreases A. fall B. rise C. stay the same

A. fall

As the nominal interest rate rises, the quantity of money demanded _______. A. falls B. raises

A. falls

The nominal interest rate will fall if the quantity of money demanded is _____ the quantity of money supplied. A. less than B. more than C. equal to

A. less than

By changing the federal funds rate, the Fed is able to influence interest rates throughout the economy because there's a tendency for all in interest rates to move in ________ direction(s). A. the same B. different

A. the same

The quantity of money supplied is fixed and determined by the ________ ________. A. Federal Reserve B. Central bank C. Inflation rate D. Output gaps

B. Central bank

The interest rate that the Fed charges on loans they grant to commercial banks. A. Federal funds rate B. Discount rate C. Nominal interest rate

B. Discount rate

The Fed takes steps to eliminate ______ gaps because they lead to inflation. A. Output B. Expansionary C. Recessionary

B. Expansionary

In the market for money, the equilibrium _______ rate equates the quantity of money supplied with the quantity of money demanded. A. Real interest B. Nominal interest C. Discount D. Federal funds

B. Nominal interest rate

Type of rate when banks charge each other for very short-term loans. A. Discount rate B. Federal funds rate C. Real interest rate D. Nominal interest rate

B. The federal funds rate

The demand curve will shift to the left if the real price level ____. A. Rises B. Falls

B. falls

Because discount window lending increases banks' reserves, it ______ the money supply. A. decreases B. increases

B. increases

The money demand curve will shift to the right if real income _____ A. decreases B. increases

B. increases

The Fed can influence the real interest rate by changing the nominal interest rate because _____ responds slowly to changes in policy or economic conditions. A. deflation B. inflation

B. inflation

The federal funds rate is closely watched by the public, politicians, the media, and the financial markets because it's a strong indicator of the Fed's plans for _______ policy A. Fiscal B. monetary

B. monetary policy

When the economy faces a condition where it's overheating, the Fed ______ real interest rates. A. lowers B. raises

B. raises

If the Fed's policy reaction function contains 2 variables, the real interest rate and the inflation rate, then the curve associated with this information will be _____-sloping. A. downward B. upward

B. upward

_________ rates influence the behavior of households and firms A. Federal funds rates B. Discount rates C. Real interest rates D. Nominal interest rates

C. Real interest rates

The opportunity cost of holding money is the _________ rate A. Real interest rate B. Discount rate C. Nominal interest rate D. Federal funds rate

C. nominal interest rate

A higher real interest rate discourages firms from making ______ investments

Capital investments

Factors that decrease the benefit of holding money, such as ATM machines, shift the money ______ curve to the ______ and ______ the demand for money. A. Supply; right; increase B. Supply; Left; decrease C. Demand; right; increase D. Demand; left; decrease

D. Demand; left; decrease

The money demand curve slopes___ because as the nominal interest rate increases, the opportunity cost of holding money _____ A. upward; increases B. upward; decreases C. downward; decreases D. downward; increases

D. downward; increases

If actual output is below potential output, there is a ________ gap, so the Fed will take steps to ______ the real interest rate A. expansionary; raise B. recessionary; raise C. expansionary; lower D. recessionary; lower

D. recessionary; lower

If real GDP rises, the money demand curve will shift _______. A. down B. to the left C. up D. to the right

D. to the right

The lending of reserves by the Federal Reserve to commercial banks

Discount window lending

Which of the following will shift the money demand curve to the right? A. an increase in the price level B. a decrease in he price level C. an increase in the real income D. a decrease in the real income E. A & C F. B & D

E. A & C

True/False: The government has the greatest control over the real interest rate in the short-run.

False; The FED has the greatest control over the real interest rate in the short-run.

Real interest rate formula:

Nominal interest rate- rate of inflation

When the Fed buys long-term financial assets, thereby lowering their yield and increasing the money supply.

Quantitive easing

The decision about the firms in which to hold one's wealth.

The Portfolio allocation decision

Who is the money supply determined by in the U.S?

The federal Reserve

Why do banks typically borrow from other banks over short periods of time (usually overnight)?

To meet their legal reserve requirements

True/ False: The Fed can lower the federal funds rate by purchasing government bonds from the public

True