macro test 3 bonus questions

suppose all of the banks in the fed reserve system have $500bil in transactions accounts, the RRR is .3, and there are no excess reserves in the system, if the RRR is changed to .25, the total lending capacity of the system is increased by....

$100bil

suppose a banking system has a required reserve ratio of 10%. What is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system?

$20 bil

suppose all of the banks and the federal reserve system have $100 billion in transaction accounts, the required reserve ratio is 25%, and there are no excess reserves in the system. If the required reserve ratio is changed to 20%, the total in a capacity other system is increased by

$25 bil

Suppose a banking system has $120 million in deposits, a required reserve ratio of 20%, and total bank reserves for the whole system of $100 million. Then the potential increase in deposit creation for the whole system is equal to

$380 million

A single bank with $20,000 of reserves and a reserve ratio of 5% could support total transaction account balances of at most

$400,000

suppose a bank has $300,000 in deposits and a RRR of 15%. required reserves are...

$45,000 (300,000 * .15)

suppose the banks in the federal reserve system have $100 billion in transaction accounts, the required reserve ratio is 10% and there are no excess reserves in the system. If the required reserve ratio is changed to 15%, the deficiency of reserves would be

$5 bil

suppose a bank has $200,000 in deposits, a required reserve ratio of 25%, and bank reserves of $100,000. Then this bank and make new loans in the amount of...

$50,000

if the reserve ratio for all banks is 20%, then $100 of new reserves can generate...

$500 of new money in the economy

suppose a banking system has a RRR of .15. how much can the money supply increase in response to a $1bil increase in excess reserves for the whole banking system?

$6.67bil ((1/.15) * 1)

given a RRR of .25, what is the maximum amount by which the money supply can increase in response to a $200mil increase in excess reserves for the whole banking system?

$800mil ((1/.25) * 200)

what equation do you use to find MAX TOTAL TRANSACTION ACCOUNT BALANCES when given reserves and reserve ratio?

(1/RRR) * reserves

when given total reserves, excess reserves, and demand deposits, what formula do you use to find the money multiplier?

(total reserves - excess reserves)/demand deposits = RRR, 1/RRR = money multiplier

what equation represents the lending capacity of an entire banking system?

(total reserves - required reserves) x money multiplier

if MPC is .85, the multiplier is about...

1.18

what is the formula for the money multiplier?

1/(RRR)

money multiplier =

1/RRR

the federal reserve: was created in ______; has more than one specific job to perform; is an example of a ________ bank

1913; central

if the banking system has a required reserve ratio of 20%, the money multiplier is

5

Deposit creation occurs when

A bank lends money.

which of the following is a goal of supply-side policy? A. A lower rate of inflation at every unemployment rate B. A leftward shift in the aggregate demand curve C. A steeper slope for the Phillips curve D. A movement along the Phillips curve

A. A lower rate of inflation at every unemployment rate

which of the following shifts, ceteris paribus, will cause lower rates of both unemployment and inflation? A. increase in AS B. decrease in AS C. decrease in AD D. increase in AD

A. INCREASE in AS

which of the following is NOT included in either M1 or M2? A. US treasury bills B. small time deposits C. demand deposits D. money market mutual funds

A. US treasury bills

internal ownership of the national debt occurs when US treasury bonds are purchased by all of the following EXCEPT: A. foreign countries we trade with B. social security administration C. federal reserve system D. individual US citizens

A. foreign countries we trade with

what characterizes stagflation?

An increase in both unemployment and inflation

A decrease in marginal tax rates will cause _________ in investment and a _________ shift in AS

An increase; rightward

which of the following policies is a positive supply-side lever? A. income transfers B. human capital investment C. open market operations D. lowering the minimum reserve requirement

B. human capital investment

which of the following causes the opportunity cost of holding money in the form of cash to DECREASE? A. higher short-term yields B. lower interest rates C. higher long-term yields D. higher reserve requirement

B. lower interest rates

if congress cuts spending to balance the federal budget, the fed can act to prevent unemployment and recession by...

BUYING bonds to INCREASE the money supply

an open market purchase occurs when the Fed

Buys bonds from the public, increasing bank reserves

according to supply side theory, which of the following would shift the aggregate supply curve leftward? A. govt deregulation B. increase in money supply C. increase in unemployment and welfare benefits D. lower marginal tax rates

C. increase in unemployment and welfare benefits

which of the following will cause and increase in unemployment and inflation at the same time? A. rightward shift of AS B. rightward shift of AD C. leftward shift of AS D. leftward shift of AD

C. leftward shift of AS

when a bank makes a loan, it

Creates a transactions account balance for the borrower

if the Fed wishes to reduce the money supply, it can do all of the following EXCEPT: A. raise the discount rate B. raise the minimum reserve ratio C. sell securities on the open market D. Buy shares of common stock in a large bank

D. Buy shares of common stock in a large bank

Regional fed banks are responsible for all the following EXCEPT: A. holding bank reserves B. providing currency for private banks C. providing loans to private banks D. cashing checks for large non-financial corporations

D. Cashing checks for large non-financial corporations

if a bank does NOT have enough reserves to satisfy the reserve requirement, it is likely to do any of the following EXCEPT: A. borrow additional reserves in the federal funds market B. sell securities C. borrow from the discount window at the federal reserve bank D. buy securities

D. buy securities

which of the following is NOT an automatic stabilizer? A. progressive income taxes B. unemployment benefits C. welfare payments D. defense spending

D. defense spending

A change in the reserve requirement causes a change in all of the following EXCEPT: A. money multiplier B. lending capacity of the banking system C. excess reserves D. pretax income

D. pretax income

if bank customers decide as a group to pay off their loans and to not take out new loans, the money supply will ______

DECREASE

assuming a reserve requirement of 20%, if the fed sells $20bil in bonds in the open market, the lending capacity of the system will eventually...

DECREASE by $100bil

if the fed sells $10bill of US bonds in the open market and the reserve requirement is 10%, M1 will eventually...

DECREASE by $100bil

suppose the fed reserve system has a RRR of .2. if the open market committee sells $10bil of securities to the commercial banking system, then before the money multiplier takes effect, initially excess reserves...

DECREASE by $10bill

a sale of govt bonds by the fed

DECREASE the money supply and INCREASES the federal funds rate

Supply side economists favor tax incentives that

Encourage investment

T/F: as the price of a bond rises, its yield rises

FALSE

T/F: externally held debt refers to that part of the national debt owned by private individuals, and internal held debt refers to that part owned by govt agencies

FALSE

T/F: Government spending on quality R&D programs that will spawn new high tech, high-paying industries causes a leftward shift in AS.

FALSE (its rightward)

a higher reserve requirement

Further limits deposit creation.

What macroeconomic conditions occur simultaneously when the economy experiences a supply shock?

Higher prices, higher unemployment, & reduced output

Keynesians believe that during recessions, a monetary stimulus can lead to an _________ in aggregate demand.

INCREASE

outlays for unemployment compensation and welfare benefits __________ when the economy goes into a recession

INCREASE

according to supply-side economists, what impact fo mandatory benefits have?

INCREASE payroll costs and shift AS to the LEFT

sometimes during wars, govt expenditures are larger than normal. to reduct the effects this spending creates on interest rates, the federal reserve could....

INCREASE the money supply by BUYING bonds

a decrease in marginal tax rates will _________ after-tax profits and _________ more investment

INCREASE; encourage

When the federal reserve system buys bonds in the open market, the national debt

Is not affected

_____ money includes all of the above types of money, PLUS it also consists of the least liquid forms of money such as 10-year T-Bills, 30-year mortgages, 20- & 30-year government bonds, municipal bonds, US savings bonds, etc.

L

supply-side policies are design to achieve a...

LOWER inflation rate and a LOWER unemployment rate

discounting refers to the feds practice of

Lending reserves to private banks.

what are the components of the equation of exchange?

M = money supply, V = velocity of money, P = price lvl, Q = # of items produced

___ money consists of cash, travelers checks and transactions accounts

M1

what type of money supply is the most liquid?

M1

M2 money supply is defined as...

M1 plus balances in most savings accounts and money market mutual funds

what money supply is M2 money PLUS time deposits of more than $100,000

M3

equation of exchange can be stated as...

MV = PQ

The fiscal year for the federal government begins on

October 1

Increased government purchases crowd out private purchases whenever the economy is...

On the production possibilities curve

The choice of how and where to hold idle funds is

Portfolio decision

A bond is a

Promise to repay borrowed funds

When a bank borrows money from the federal reserve,

Reserves increase for the bank.

The Fed can increase the federal funds rate by

Selling government bonds, which causes market interest rates to rise.

A growing economy needs a...

Steadily increasing supply of money to finance market exchanges

T/F: Less government regulation of industry causes a rightward shift in AS.

TRUE

T/F: Monetary policy in the liquidity trap will be unable to reduce interest rate further to stimulate investment

TRUE

T/F: Rising interest rates can cause crowding out, but they are also the result of crowding out

TRUE

T/F: The opportunity Cost of the debt is the change in the mix of output that occurs when public sector spending crowds out private sector spending

TRUE

T/F: The ratio of the debt to GDP is a measure of the burden of the debt places on the economy

TRUE

T/F: credit union share drafts, transactions-account balances at mutual savings banks, and currency in circulation outside of commercial banks are included in ALL 4 types of money supply.

TRUE

T/F: in the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 1, and banks do not create money

TRUE

T/F: transactions accounts allow for direct payment to a third party

TRUE

Selling bonds to finance new government debt leads to an opportunity cost that is

The same as financing government debt with taxes

A bank account that permits direct payment to a third-party is a

Transactions account.

when the investment spending curve is _________, lower interest rates do NOT stimulate additional business spending

VERTICAL

holding the velocity of money constant, according to the equation of exchange, a 10% increase in the money supply could possibly cause....

a 10% INCREASE in the PRICE level

stagflation is the result of

a decrease in aggregate supply

assume the reserve requirement is 25%, demand deposits are $500mil, and total reserves are $32mil. if the reserve requirement is decreased to 20%, the banking system will experience....

a deficiency of required reserves equal to $68mil

required reserves represent...

a leakage from the flow of money

what are the 3 functions of a bank?

accept deposits, offer check-writing privileges, and make loans

A budget surplus is

an excess of government revenues over government expenditures in a given time period

current yield on a bond =

annual interest payment/current market price of the bond

what are bank reserves?

assets held by a bank to fulfill its deposit obligations

The Federal Reserve holds deposits from

banks

excess reserves are...

banks reserves in excess of required reserves

if the fed wants to increase the lending capacity of the system by $60bil and the reserve requirement is 10%, it should...

buy $6bil in bonds from banks

If excess reserves are too large, a bank is likely to

buy government securities

when the fed wishes to increase the reserves of the member banks, it....

buys securities

when cash or coins are initially deposited into a bank, the ___________ of the money supply changes, but the ______ of the money supply does not change

composition; size

the money supply will grow even larger through deposit creation when...

consumer, businesses, and govt increases their borrowing

One of the main functions of banks is

creating money

A decrease in private sector borrowing and spending caused by increased government borrowing is

crowding out

basic money supply includes:

currency, transactions accounts, and traveler's checks

The quantity of money people are willing and able to hold at alternative interest rates, ceteris paribus, is known as the

demand for money

banks are required to keep a minimum amount of funds in reserve bc

depositors may decide to withdraw funds at any time

the rate of interest charged by fed reserve banks for lending reserves to member banks is the....

discount rate

supply-side economists favor tax incentives that...

encourage saving

assuming the aggregate supply curve is vertical, what is most likely to occur if the Fed pursues expansionary monetary policy?

equilibrium price level will INCREASE but output will stay the SAME

if the supply of a product increases, then we would expect...

equilibrium price to DECREASE and equilibrium quantity to INCREASE

As interest rates _____, businesses are encouraged to borrow more money to finance their expansion and growth.

fall

If people decide to hold more currency relative to deposits, the money supply ______. the fed could lessen the impact of this by buying _______ _____

falls; treasury bonds

banks may opt to lend their excess reserves to other banks and charge interest on the loan, called the _________ ______ rate.

federal funds

what is responsible for buying and selling government securities to influence reserves in the banking system?

federal open market committee

what sets the legal minimum reserve ratio?

federal reserve

under a fractional-reserve banking system, banks

generally lend out a majority of the funds deposited

a basic contention of supply-side economists is that regulatory costs are now too _____ and cause AS to shift to the ______

high; left

a progressive income tax system is particularly effective as an automatic stabilizer bc

in a booming economy, tax payers move into higher tax brackets which restrains their spending

by raising and lowering the discount rate, the fed changes the...

incentive for banks to borrow reserves

When the supply of money ________, the cost of borrowing money becomes cheaper

increases

Monetarists say that monetary policy is only useful in controlling ___________.

inflation

___________ _____ is the price paid for the use of money

interest rate

supply-side economics says ________ should reduce the marginal tax on capital gains and dividends

investors

________ ______ refers to the possibility that interest rates may not respond to changes in the money supply

liquidity trap

____________ _______ is the use of money and credit controls to influence macro outcomes of price, output and employment.

monetary policy

the govt uses _______ ______ to regulate the amount of money banks lend

monetary policy

when given the RRR and the amount of increase in excess reserves, what formula do you use to find the maximum possible increase in the money supply?

money multiplier x amount of increase in excess reserves

current held by the public, balances in transactions accounts, plus balances in most savings accounts and money market mutual funds are the..

money supply (M2)

1/(1-MPC) =

multiplier for changes in govt spending

the ___________ effect amplifies the effects of an increase in govt expenditures, while the ______________ effect diminishes the effects

multiplier; crowding-out

__________ ____ equals the dollar amount of outstanding US treasury bonds

national debt

if a lender desires to earn a real return of 3% on a loan and the anticipated rate of inflation is 2%, the lender should charge a....

nominal interest rate of 5%

The federal funds rate is the interest rate charged when

one bank lends reserves to another bank

What tool is used most frequently by the Fed

open market operations

the purchase and sale of govt bonds by the fed for the purpose of altering bank reserves is known as...

open market operations

through open market operations, the fed is able to influence

portfolio decisions

members of the federal reserve's board of governors are appointed by the _________ and confirmed by the ________

president; senate

money demand depends on...

price level and the interest rate

according to supply-side theorists, a decrease in marginal tax rates will provide the incentive to

produce more

supply-side economics says ___________ should decrease corporate taxes, lower the marginal tax rate on personal income for small business owners, decrease capital gains tax, and de-regulate the industry

producers

The money supply is reduced or "tightened" by __________ the required reserve ratio

raising

The money supply is expanded by _____________ the required reserve ratio

reducing

what clears checks between private banks?

regional fed banks

the minimum amount of reserves a bank is required to hold is...

required reserves

required reserves/total deposits =

required reserves ratio

What are a bank's total deposits comprised of?

reserve deposits and loan deposits

the ratio of a bank's total reserves to its total transactions deposits is known as the ...

reserve ratio

_________ can be altered to change the lending capacity of the banking system

reserve requirement

What are the three tools available to the Fed for controlling the money supply?

reserve requirement, discount rate, open market operations

Government production subsidies to industries of strategic importance to economy causes a ___________ shift in AS

rightward

Government spending on infrastructure that ultimately makes business operations more efficient and easier causes a _________ shift in AS

rightward

As consumption ______, demand for goods rises.

rises

crowding out is most likely to occur when the federal govt....

runs a deficit and sells bonds to make up the difference

supply-side economics says ________ should reduce the marginal tax rate on interest earned and provide savers with responsible rate of return on savings

savers

if banks do NOT have enough reserves to satisfy the reserve requirement they can

sell securities

a reduction in the discount rate...

signals the fed reserve's desire for additional credit expansion

Money held to take advantage of future financial opportunities is the

speculative demand for money

when money serves as a mechanism for transforming current income into future purchases, it is functioning as a...

store of value

abrupt increases in the price of essential raw materials like crude oil can cause a __________ _____

supply shock

what theorists believe a decrease in marginal tax rates will increase the incentives to work and invest

supply side economists

what organization insures deposits at banks?

the FDIC

what organization is responsible for the fed's daily activity in financial markets?

the FOMC

Students Bank and Trust has zero excess reserves. Ceteris paribus, if the required reserve ratio decreases...

the bank will be able to make additional loans

a bank's liabilities include

the deposits of its customers, but not its reserves

The feds canNOT use _________ to change the lending capacity of the baking system

the excess reserve requirement

the federal open market committee is responsible for...

the fed's daily activity in financial markets

'crowding out' refers to

the reduction in AD that results when a fiscal expansion causes the interest rate to INCREASE

initially a bank has a required reserve ratio of 20% and no excess reserves. If $5000 is deposited into the bank, then initially, ceteris paribus,

this bank can INCREASE loans by $4000

Banks that have excess reserves can earn additional income by lending the money overnight...

to other banks in the federal funds market

total excess reserves x money multiplier =

total lending capacity of the banking system

what equation do you use to find EXCESS RESERVES when given deposits, RRR, and total reserves?

total reserves - (RRR * deposits)

money held for making everyday market purchases represents the

transactions demand for money

the primary method for controlling the money supply in the US is to limit the...

volume of loans the banking system can make

supply-side economics says _________ should reduce the marginal tax rate and use tax-deferred savings plans

workers