Macroeconomics Final

If a bank has a required reserve ratio of 25% and there is $10,000 in deposits, what is the maximum possible change to the money supply?

$40,000 (10,000/25%)

Assuming the theory of purchasing power parity holds, if the exchange rate between the United States and Europe is $1..33 per euro, then how much does a 35 euro bottle of French Champagne cost in US dollars?

$46.55 ($1.33 x 35)

Contractionary Monetary Policy in short run

Decreases supply of loanable funds Increases interest rates Decrease in investment Decreases Aggregate Demand Real GDP declines Increases unemployment

Monetary Policy in the Long Run

Does not effect GDP or Unemployment

Contractionary Monetary Policy on firms in short run

Downward pressure on prices Cant adjust wages which reduces output and increases layoffs

Effects of Monetary policy

Short term: Y and P increase, u decreases Long term: Y and u are unchanged, P increases ineffective in the long run

Monetary policy has real effects only when?

Some prices are sticky

Monetary Neutrality is

The idea that the money supply does not affect real economic variables

when demand for Canada's exports rises,

demand for the Canadian dollar in the foreign exchange market rises

Fixed exchange rates are rates

held at a certain level through the actions of a government

monetary neutrality

the idea that the money supply does not affect real economic variables

If Japanese cars become popular again in the US, then we can expect that the demand for yen

will increase from D1 to D2

Buying bonds to increase money supply which increases loanable funds market and the amount of money a bank can loan

expansionary monetary policy

In recent years, the United States has?

exported more services abroad than it has imported

If the required reserve ratio is 10%, what is the simple deposit multiplier?

10 (1/10%)

Governors of the board of Federal Reserve are appointed for?

14 year term

The Federal Reserve was created in?

1913

FOMC meets how many times a year?

8

Short-run effects of expansionary monetary policy?`

Aggregate Demand Curve shifts right

If the Bank of Japan were to take steps to devalue the yen in foreign currency markets, ________ , which would cause Japanese real GDP to increase in the short run

Aggregate Demand for Japanese goods and services would increase

What is an assumption made in the money-creation process?

Banks hold no excess reserves

To increase the money supply, the Federal Reserve could?

Conduct an open market purchase of U.S. treasury securities

A central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly

Contractionary Monetary Policy

For Country A, an export good is produced in?

Country A and purchased by residents of country B

Holding all else constant, in the short run, a decrease in the money supply can cause a(n)?

Decrease in real gross domestic product (GDP)

The sale of existing U.S Treasury securities by the Federal Reserve will?

Decrease the Money supply

If Interest rates fall in the United States relative to the rest of the world, the demand for U.S. dollars will _______ because there is lesser demand for assets with _______ returns

Decrease; Lower

This policy is when a central bank acts to increase the money supply in an effort to stimulate the economy

Expansionary Monetary

Shifts Supply of loanable funds and Aggregate demand right

Expansionary Monetary Policy Decreases Interest, Reduced Unemployment, Increases Price Level and Increase in GDP

What is meant by the phrase "Prices are sticky"

In the short run, contracts, loans, and wages are often fixed

The discount rate by definition?

Interest rate on the loans made by the Federal Reserve to private banks

The idea that the money supply does not affect real economic variables is called?

Monetary Neutrality

When supply shifts cause a downturn in the economy

Monetary Policy is much less likely to restore the economy to its precession conditions

If a currency becomes ____________ valuable in world markets, then its price rises, and this increase is called ____________.

More; Appreciation

Suppose Big Mac costs $5.50 in the US and 80 pesos in Mexico. If the current exchange rate between peso and dollar is $0.1 per peso, then peso is ________ and dollar is ______ according to PPP

Overvalued; Undervalued

Federal Funds are?

Private Bank deposits at the Federal Reserve

Contractionary Monetary Policy _______ interest rates, causing __________ to shift to the _________

Raises; Aggregate Demand; Left

If expansionary Monetary policy is expected

This will cause the equilibrium to go straight up because SRAS shifts with AD

How does the Fed engage in expansionary monetary policy

buys bonds from financial institutions

Increasing money in the short run leads to

expands the amount credit available and paves the way for economic expansion

Contractionary Monetary Policy ________ interest rates by __________ the __________

raises; decreasing; supply of loanable funds