Macro Exam 4
The main policy making body of the Federal Reserve System is the
Federal Open Market Committee
Open market operations are when the Fed buys or sells
government securities from banks or some other business.
The currency drain ratio is 0.2 and the desired reserve ratio is 0.4. What is the money multiplier?
(1 + 0.2)÷(0.4+0.2) =2
What is the fraction of a bank's total deposits that it holds in reserve? What is the ratio of reserves to deposits that a bank wants to hold? What is the effect of a larger desired reserve ratio? (a)The fraction of a bank's total deposits that it holds in reserve is the _______, and the ratio of reserves to deposits that a bank wants to hold is its _______. (b)The greater the desired reserve ratio, _______.
(a)actual reserve ratio; desired reserve ratio (b)the smaller the money multiplier
If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation is
1.5
Sally has a credit card balance of $1,000. The credit card company charges a nominal interest rate of 14 percent a year on unpaid balances. The inflation rate is 5 percent a year. Calculate the real interest rate that Sally pays the credit card company. The real interest rate that Sally pays the credit card company is ______percent a year.
14-5 9 percent a year
Suppose the nominal interest rate on a savings bond is 7 percent a year and the inflation rate is 4.5 percent a year. How much is the real interest rate?
2.5 percent
Which of the following statements about inflation is true?
Inflation is a tax on holding money.
Sara withdraws $1,500 from her checking account at Bank of America, keeps $200 in cash, and deposits the balance in her small time deposit account at Citibank. What is the immediate change in M1 and M2?
M1 decreases by $1,300 and there is no change in M2.
Philip takes $900 from his checking account and deposits the $900 in his savings account. What is the immediate change in M1 and M2?
M1 decreases by $900 and M2 does not change.
Pam buys $1,000 worth of American Express traveler's checks and pays for her purchase using funds from her savings account. What is the immediate change in M1 and M2? The immediate effect on M1 and M2 is _______.
M1 increases by $1,000 and M2 does not change
Which of the following statements about the Fed is correct?
The FOMC meets approximately every six weeks to review the state of the economy.
The table gives information about items on a bank's balance sheet. Calculate the bank's deposits that are part of M1, deposits that are part of M2, and the bank's loans, securities, and reserves. Checkable deposits=400 Savings deposits=500 Small time deposits=720 Loans to businesses=950 Government securities=600 Currency=30 Reserves at the Fed=40 The bank's deposits that are part of M1 equal ______ The bank's deposits that are part of M2 equal ______ The bank's loans are $____million and the bank's securities are $____million. The bank has reserves of $____ million.
The bank's deposits that are part of M1 equal $400 million.(checkable deposits) The bank's deposits that are part of M2 equal $1620 million.(checkable deposits plus savings deposits plus small time deposits) The bank's loans are $950 million and the bank's securities are $600 million. The bank has reserves of $70 million.(currency plus reserves at the fed)
The demand for money increases if _______.
banks increase the interest rate on deposits
Holding money provides a benefit _______.
because it is a means of payment
Because the Federal Reserve System is a central bank, it provides banking services to
commercial banks.
What are the institutions that make up the banking system? The institutions that make up the banking system are _______.
commercial banks, money market funds, thrift institutions, and the Federal Reserve
Which of the following is an example of money?
currency in your wallet
All else the same, when real GDP increases the
demand for money increases.
The opportunity cost of holding money _______.
equals the nominal interest rate on bonds
Barter requires the
exchange of goods and services directly for other goods and services
A commodity or token is money if it is _______.
generally accepted as means of payment
One effect of inflation is that it is a tax that redistributes goods and services from
households and businesses to the government.
If the money multiplier is 3.0, a $1,000 increase in the monetary base
increases quantity of money by $3,000.
The opportunity cost of holding money
is fixed at all interest rates.
How does a bank maximize its stockholders' wealth? A bank maximizes its stockholders' wealth by _______.
lending for long terms at high interest rates and borrowing from depositors and others
Commercial banks' assets include _______.
loans to individuals and businesses and government securities
The largest category of commercial banks' assets is
loans.
High inflation
makes money function less well as a store of value.
Banks create money by
making loans and creating deposits, a process that is limited by the size of banks' excess reserves.
Banks earn a profit by
making loans at a higher interest rate than the rates that they offer on their deposits.
The functions of money are
medium of exchange, unit of account, and store of value.
The proposition that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of
money.
What is a bank's balancing act? A bank must balance _______ against _______.
security for depositors; profit for stockholders
What is an open market operation? An open market operation is _______.
the purchase or sale of government securities by the Federal Reserve System in the open market
Which of the following are examples of money in the United States today? In the United States today, money includes _______.
the quarters inside public phones and the funds in a student's checking account
The word "fiat" is
used to describe today's money because it is money set by law.
The average number of times in a year each dollar is used to buy goods and service is called
velocity of circulation.
The supply of money curve is
vertical because the quantity of money is fixed at any one moment
The People's Bank of China, China's central, conducted an open market operation that injected 270 billion yuan into China's banking system. In the open market operation described in the news clip, explain whether the People's Bank of China buys or sells securities. The People's Bank of China _______ securities because _______. Suppose People's Bank of China buys 20 billion yuan of government securities from ICBC. Show how the transaction changes the balance sheets by filling in the numbers.
buys; money is being injected into the banking system Securities=20 Reserves of ICBC=20 Securities=−20 Reserves=20
What is the monetary base? The monetary base is the sum of _______.
coins, Federal Reserve notes, and banks' reserves at the Fed
Does an increase in real GDP change the demand for money? Do changes in financial technology change the demand for money? An increase in real GDP _______ the demand for money and changes in financial technology _______.
increases; can increase the demand for money or decrease the demand for money
In the 2000s and 2010s, the quantity theory of money did a ________ job of predicting changes in the inflation rate because ________.
poor; velocity of circulation plunged
The table shows the quantities of M1, M2, and their components in September 2020. M2=18,648.1 Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 M1=5,502.4 Checkable deposits=3,571.3 Currency and traveler's checks=1,931.1 (a)What is the largest component of M1? (b)What is the largest component of M2?
(a)Checkable deposits (b)Savings deposits
The velocity of circulation is constant, real GDP is growing at 4 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 4 percent a year. Calculate the inflation rate, the growth rate of money, and the growth rate of nominal GDP. (a)The inflation rate is ______percent a year. (b)The growth rate of money is _____ percent a year. (c)The growth rate of nominal GDP is ______ percent a year.
(a)The inflation rate is 2 percent a year. (nominal interest rate-real interest rate) (b)The growth rate of money is 6 percent a year.(nominal interest rate+real gdp-real interest rate) (c)The growth rate of nominal GDP is 6 percent a year.(real gdp+inflation rate)
What is the effect of an open market sale of $1 million of securities by the Fed? (a)The quantity of money _______ by $1 million multiplied by _______. (b)Desired reserve ratio = R/D; Currency drain ratio = C/D; Monetary base = MB; Quantity of money = M. The formula used to calculate the money multiplier is _______. (c)The sign of the money multiplier is _______. (d)The quantity of money _______.
(a)decreases;the money multiplier (b)(1 + C/D)/(R/D)+ (C/D) (c)positive (d)decreases
What is the demand for money? When the nominal interest rate rises, does the opportunity cost of holding money increase or decrease? Does the quantity of money demanded increase or decrease? (a)The demand for money is the relationship between the quantity of money demanded and the _______ when all other influences on the amount of money that people wish to hold remain the same. (b)When the nominal interest rate rises, the opportunity cost of holding money _______ and the quantity of money demanded _______.
(a)nominal interest rate (b)rises; decreases
If the Fed wants to increase the quantity of money, what actions does it take? What is the effect on reserves in the banking system, loans, bank deposits, and the quantity of money? (a)If the Fed wants to increase the quantity of money, it makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)purchase (b)increase;make more (c)increase;increase
People's Bank of China boosts liquidity with open market operations People's Bank of China, China's central, conducted an open market operation that injected 270 billion yuan into China's banking system. Explain how the open market operation described in the news clip will change the quantity of money in China. (a)The Bank of China makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)purchase (b)increase; make more (c)increase; increases
f the Fed wants to decrease the quantity of money, what actions does it take? What is the effect on reserves in the banking system, loans, bank deposits, and the quantity of money? (a)If the Fed wants to decrease the quantity of money, it makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)sale (b)decrease;call in (c)decreases;decreases
If the Fed doubled the quantity of money and nothing else changed, what would happen to the price level in the short run and the long run? What would happen to the inflation rate? (a)If the Fed doubled the quantity of money and nothing else changed, the price level would _______ in the short run. (b)In the long run, the price level would _______ and the inflation rate would be _______ percent.
(a)start to rise (b)double; 100
Cash is more popular than bonds Money in the bank earns almost nothing. Even so, in the second half of 2015 an additional $208 billion was added to bank deposits and money market funds and billions of dollars were moved from bonds. What is the opportunity cost of holding money? If people move out of bonds and into money, how will the demand for money and the interest rate change? (a)The opportunity cost of holding money is _______ (b)When people move out of bonds and into money, the demand for money _______ and the interest rate on bonds _______.
(a)the interest rate forgone on an alternative asset (b)increases; rises
What to do with $50,000 now A good strategy: Put about two-thirds of the money into bonds of developed nations and the rest into riskier emerging- market bonds. What is the opportunity cost of holding money? If lots of people put their money into bonds, how will the demand for money and the interest rate change? (a)The opportunity cost of holding money is _______. (b)When lots of people followed this advice and put their money into bonds, the demand for money _______ and the interest rate on bonds _______.
(a)the interest rate forgone on an alternative asset (b)decreases; falls
Annualized inflation in Venezuela soars to 1,000 percent Inflation in Venezuela hit a monthly rate of 23.3 percent in June and it was feared that it would soon move into unstoppable hyperinflation. The country faced constant looting and social unrest. What is hyperinflation? Is Venezuela in a hyperinflation? Hyperinflation is an inflation rate that exceeds _______. In 2016, Venezuela is _______ a hyperinflation.
50 percent a month; not in
The above table has the demand and supply schedules for money. What is the equilibrium nominal interest rate?
9 percent
The table shows the quantities of M1, M2, and their components in September 2020 but with two items missing. What are the missing items? M2=18,648.1 Money market funds=1,100.5 A=345.3 Savings deposits=11,699.9 M1=5,502.4 B=3,571.3 Currency and traveler's checks=1,931.1
A is Small time deposits B is Checkable deposits
Businesses paid workers twice a day during the hyperinflation in Germany after World War I and workers spent their incomes as soon as they were paid. Which statement explains these facts?
Businesses paid workers twice a day so that employees would not leave their jobs and search for employment elsewhere. Workers spent their incomes as soon as they were paid to minimize the loss in value of their income.
Draw a demand for money curve. Label it MD0. Draw a demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of new financial technology that decreases the demand for money and that follows the decrease in real GDP. Label it MD2. What is the effect in the money market of a decrease in real GDP? When real GDP decreases, _______.
Draw line MD0 as a normal negative line Draw line MD1 directly under MD0 Draw line MD2 under MD1 a decrease in the demand for money occurs
The graph shows a demand for money curve. Draw a new demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of a decrease in the number of families that have a credit card. Draw this demand for money curve in relation to the original demand for money curve, MD0. Label the new curve MD2.
Draw line MD1 under the line already there. Draw line MD2 over the line already there.
In October 2020, the quantity of M2 was $18,812 billion and the nominal interest rate was 0.10 percent. In the graph to the right, draw a point that shows the money market in October 2020 and label it A. Draw and label the M2 demand curve in October 2020. Draw and label the M2 supply curve in October 2020.
Draw line MS straight up and down on 18,812. Plot point A at the intersection, that corresponds to 10% Draw line MD at a negative slope going through the point
Which of the following describe the "invention" of banking?
Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand.
Suppose that potential GDP and the velocity of circulation are constant. What is the change in the price level in the long run if the quantity of money increases by 3 percent a year? If the quantity of money increases by 3 percent a year, the change in the price level is ______ percent a year in the long run.
If the quantity of money increases by 3 percent a year, the change in the price level is 3 percent a year in the long run.
The table shows the quantities of the components of M1 and M2 in September 2020. In September 2020, M1 was $_____ billion. Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 Checkable deposits=3,571.3 Currency and traveler's checks=1,931.1 In September 2020, M1 was $_____ billion. In September 2020, M2 was $______ billion
In September 2020, M1 was $5502.4 billion.(add checkable deposits and currency and traveler's checks) In September 2020, M2 was $18,648.1 billion.( add everything)
The figure shows the demand for money curve. Draw the supply of money curve if the quantity of money is $5.9 trillion. Label it MS. Draw a point at the equilibrium quantity of money and nominal interest rate. What is the equilibrium nominal interest rate?
Plot a line downwards on 5.9 and plot a point on the intersection. The equilibrium nominal interest rate is 6 percent a year. (whatever number is on the left at the intersection)
Which statement most accurately describes the effect financial technology has had on the demand for money in the United States?
Some advances in financial technology have increased the demand for money while others have decreased it.
What is the Fed and what is the FOMC?
The Fed provides banking services to banks and governments and the FOMC meets approximately every six weeks to review the state of the economy.
The table shows the quantities of M1, M2, and the monetary base in October 2020. What are the values of the M1 money multiplier and the M2 money multiplier in October 2020? M1=5,579.9 M2=18,811.6 Monetary base=3,115.6 The M1 money multiplier is ______ The M2 money multiplier is _____
The M1 money multiplier is 1.8(5,579.9/3,115.6) The M2 money multiplier is 6(18,811.6/3,115.6)
If the quantity of money grows at 14 percent a year, the velocity of circulation is constant, and potential GDP grows at 4 percent a year, what is the inflation rate in the long run?
The inflation rate in the long run is 10 percent a year. (14-4)
The economy is at full employment. The quantity of money grows at a rate of 14 percent a year, real GDP grows at 4 percent a year in the long run, and the velocity of circulation increases at 1 percent a year. What is the inflation rate in the long run?
The inflation rate in the long run is 11 percent a year. (14+1-4)
GDP is $20 billion and the velocity of circulation is 5. What is the quantity of money?
The quantity of money is $4 billion (20/5)
The rate of increase in velocity is 0 percent a year, the money growth rate is 18 percent a year, and the inflation rate is 16 percent a year. What is the real GDP growth rate?
The real GDP growth rate is 2 percent a year. (money growth rate-inflation rate + rate of increase in velocity)
The money multiplier is 2.0 and the currency drain ratio is 0.2. What is the desired reserve ratio?
[(1 + 0.2)÷(2.0)]−0.2, =0.4.
In 2007, the United States was at full employment. The quantity of money was growing at 6.4 percent a year, the nominal interest rate was 4.4 percent a year, real GDP grew at 1.9 percent a year, and the inflation rate was 2.9 percent a year. Calculate the real interest rate.
The real interest rate was 1.5 percent a year. 4.4-2.9=1.5
The table shows the amounts held as the various components of M1 and M2. Calculate the value of M1 and M2. Savings deposits=400 Checking deposits=150 Small time deposits=220 Money market funds and other deposits=280 Currency and traveler's checks=140
The value of M1 is $290 billion. (add checking deposits and currency and travelers checks) The value of M2 is $1190 billion.(add all together)
In the fourth quarter of 2020, M2 was $18,322.1 billion, real GDP was $18,584.0 billion, and the price level was 113.8. What was the velocity of circulation of M2 in the fourth quarter of 2020? The velocity of circulation of M2 was ______
The velocity of circulation of M2 was 1.2
The table gives information from a bank's balance sheet. Calculate the bank's loans, securities, and reserves. Checkable deposits=300 Savings deposits=400 Small time deposits=1240 Loans to businesses=1,150 Government securities=700 Currency=40 Reserves at the Fed=50
The bank's loans are $1150 million. The bank's securities are $700 million. The bank's reserves are $90 million. (currency plus reserves at the fed)
Which countries have experienced a hyperinflation during recent times?
Zimbabwe
Your bank manager tells you that she does not create money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because _______.
a bank that has excess reserves can make loans. When a bank creates a loan, the bank increases the balance of the borrower's account and that increase in deposits is new money
Pam buys $1,000 worth of American Express traveler's checks and charges the purchase to her American Express card. What is the immediate change in M1 and M2? The immediate effect on M1 and M2 is _______.
both M1 and M2 increase by $1,000
If you deposit $1,000 in cash in your checkable deposit at your bank, the quantity of M1 immediately
does not change in size.
What is the effect of the spread of ATMs and the increased use of debit cards on the money market? The spread of ATMs and the increased use of debit cards _______ money. Everything else remaining the same, the nominal interest rate _______.
increase the demand for; rises
Phyllis transfers $3,000 from her savings account at the Bank of Idaho to her checking account. What is the immediate change in M1 and M2?
increases by $3,000; does not change
Hyperinflation is defined as periods of
inflation over 50 percent per month.
If the quantity theory of money is correct and other things remain the same, an increase in the quantity of money increases _______.
nominal GDP and the price level
During the past five years, the quantity theory of money has been a _____ predictor of changes in the inflation rate because changes in the velocity of ciruclation have been ______ in comparison to changes in the quantity of money.
poor;large
When a commercial bank receives a deposit, it must keep part of the deposit as cash reserves to satisfy its
required reserves.
In order to influence the interest rate, the Federal Reserve System can immediately adjust the
reserves of the banking system.
What is the role of the central bank of the United States? The central bank of the United States is _______.
the bank that provides services to commercial banks and governments and that regulates the banking system
The "shoe−leather costs" of inflation are the costs from
time spent trying to spend money quickly.
Suppose that banks launch an aggressive marketing campaign to get everyone to use debit cards for every conceivable transaction. They offer prizes to new debit card holders and introduce a charge on using a credit card. How would the demand for money and the nominal interest rate change? The demand for money _______ and the nominal interest rate _______.
increases; rises
