Macroeconomics

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The Fed's inability to stimulate the economy by reducing interest rates is known as the

zero lower bound problem.

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

$200 billion.

Assume that U.S. National Bank has no excess reserves and that the reserve ratio is 20 percent. If U.S. National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of

$5 million.

A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are

$5,000.

If P equals the price level expressed as an index number and $V equals the value of the dollar, then

$V = 1/P.

Which of the following describes the identity embodied in a balance sheet?

Assets equal liabilities plus net worth.

The central authority of the U.S. banking system is the

Board of Governors of the Federal Reserve.

As it relates to Federal Reserve activities, the acronym FOMC describes the

Federal Open Market Committee.

The discount rate is the rate of interest at which

Federal Reserve Banks lend to commercial banks.

Paper money (currency) in the United States is issued by the

Federal Reserve Banks.

A $20 bill is a

Federal Reserve Note

Which of the following does not explain what backs the money supply in the United States?

It is backed by gold.

Market Economy

Laisse Faire; essentially no oversight, where consumers and businesses interactions determine output through consumer sovereignty

The M2 definition of money includes

Savings deposits, Currency (coins and paper money) in circulation, Small-denominated (under $100,000) time deposits, Checkable deposits, Money market deposit accounts, and Money market mutual fund balances held by individuals

The securities held as assets by the Federal Reserve Banks consist mainly of

Treasury bills, Treasury notes, and Treasury bonds.

True or False: Interest rates and bond prices vary inversely

True

True or False: The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.

True

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

a vertical line.

A restrictive monetary policy is designed to shift the

aggregate demand curve leftward.

Land

both literally land and also naturally occurring resources that are used by the economy

The reserves of a commercial bank consist of

deposits at the Federal Reserve Bank and vault cash.

Excess reserves refer to the

difference between actual reserves and required reserves.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

The amount that a commercial bank can lend is determined by its

excess reserves.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

horizontally adding the transactions and the asset demand for money.

According to the Taylor rule,

if inflation rises by 1 percentage point above its target, then the Fed should raise their targeted interest rate by one-half a percentage point.

If the Fed wants to discourage commercial bank lending, it will

increase the interest paid on excess reserves held at the Fed.

The purchasing power of money and the price level vary

inversely.

The amount of money reported as M2

is larger than the amount reported as M1.

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves

is larger, the smaller the required reserve ratio.

A fractional reserve banking system

is susceptible to bank "panics" or "runs."

Which of the following is not part of the M2 money supply?

large-denominated time deposits

A bank that has assets of $85 billion and a net worth of $10 billion must have

liabilities of $75 billion.

Purchasing groceries using a debit card best exemplifies money serving as a

medium of exchange

The transactions demand for money is most closely related to money functioning as a

medium of exchange.

Currency held in the vault of First National Bank is

not counted as part of the money supply.

The primary purpose of the legal reserve requirement is to

provide a means by which the monetary authorities can influence the lending ability of commercial banks.

The possible asymmetry of monetary policy is the central idea of the

pushing-on-a-string analogy.

The desire to hold money for transactions purposes arises because

receipts of income and expenditures are not perfectly synchronized.

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value

Money functions as

store of value, unit of account, medium of exchange

The asset demand for money is most closely related to money functioning as a

store of value.

The equilibrium rate of interest in the market for money is determined by the intersection of the

supply-of-money curve and the total-demand-for-money curve.

The liquidity trap refers to the situation where

the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.

In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of

the liquidity trap.

The purchase of government securities from the public by the Fed will cause

the money supply to increase.

The asset demand for money

varies inversely with the rate of interest

Which of the following are all assets to a commercial bank?

vault cash, property, and reserves

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

Commercial bank reserves will increase.

Currency in circulation is part of

both M1 and M2

An increase in nominal GDP increases the demand for money because

more money is needed to finance a larger volume of transactions.

Since the 2008 financial crisis, the Federal Reserve has added a significant amount of which securities?

mortgage-backed securities

The claims of the owners of a bank against the bank's assets are called

net worth

Banks lost money during the mortgage default crisis because

of defaulted loans to investors in mortgage-backed securities, they held mortgage-backed securities they had purchased from investment firms, and homebuyers defaulted on mortgages held by the banks.

When the Fed loans money in exchange for government bonds being posted as collateral, this is known as a

repo.

The four main tools of monetary policy are

repos and reverse repos.

If the quantity of money demanded exceeds the quantity supplied,

the interest rate will rise.

Other things equal, if there is an increase in nominal GDP,

the interest rate will rise.

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the

M1 money supply will decline and the M2 money supply will remain unchanged.

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the

M1 money supply will not change.

Capital

Machines and automation that help workers make things

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Open-market operations are done to lower interest rates; quantitative easing is done to increase the quantity of bank reserves.

law of diminishing marginal utility

The more of something you already have, the less useful more it is to you

Labor

Workers that operate within the economy

Economics Golden Rule

You will do anything so long as the Marginal Benefit of the next unit of consumption exceeds the Marginal Cost of consumption

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by

a downsloping line or curve from left to right.

When economists say that money serves as a medium of exchange, they mean that it is

a means of payment

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as

a medium of exchange

When economists say that money serves as a unit of account, they mean that it is

a monetary unit for measuring and comparing the relative values of goods.

barter system

a system of exchange in which goods or services are traded directly for other goods or services without the use of money.

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of account

Command Economy

an overseer, committee or other governing body that directly decides what will be produced and sets output targets.

Bank panics

are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.

Near monies

are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.

A bank that has liabilities of $150 billion and a net worth of $20 billion must have

assets of $170 billion.

In a fractional reserve banking system,

banks can create money through the lending process.

During periods of rapid inflation, money may cease to work as a medium of exchange

because people and businesses will not want to accept it in transactions.

The money supply is backed

by the government's ability to control the supply of money and therefore to keep its value relatively stable.

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

can be implemented more quickly.

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank

cannot safely lend out more money.

In the United States, the money supply (M1) includes

coins, paper currency, and checkable deposits

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

cyclical asymmetry of monetary policy.

An increase in the legal reserve ratio

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

A commercial bank can expand its excess reserves by

demanding and receiving payment on an overdue loan.

Which one of the following is presently a major deterrent to bank panics in the United States?

deposit insurance

Reserves must be deposited in the Federal Reserve Banks by

depository institutions, that is, commercial banks and thrift institutions.

Overnight loans from one bank to another for reserve purposes entail an interest rate called the

federal funds rate.

Most modern banking systems are based on

fractional reserves

It is costly to hold money because

in doing so, one sacrifices interest income.

A contraction of the money supply

increases the interest rate and decreases aggregate demand.

The M2 money supply includes

individual shares in money market mutual funds

Entrepreneurship

innovation and investment

utitlity

the satisfaction, happiness, or general benefit of a good

The Federal Open Market Committee (FOMC) is made up of

the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.

To say that coins are "token money" means that

their face value is greater than their intrinsic value

In defining money as M1, economists exclude time deposits because

they are not directly or immediately a medium of exchange.

Checkable deposits are classified as money because

they can be readily used in purchasing goods and paying debts

Goal of an economic system

to produce an output for as low a cost as possible, to maximize effective use of resources


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