QUIZ 8 (macro test 4)

Which asset would you classify as being most liquid?

Demand Deposits

A nominal GDP rule says ________ shouls always grow at a constant rate

Mv

in the long run a negative real shock will cause output growth to

decrease

Some economists argue that the Fed should commit to keeping M+v fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

increase M; do nothing

To offset the effect of negative growth in money velocity, the central bank should?

increase the growth rate of the money supply

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising

inflation

In the absence of monetary intervention following a negative shock to aggregate demand:

inflation, real growth, and nominal wage growth will all decrease

If the reverse ratio is 4%, the money multiplier is: (refer to 3 and 4)

25

Suppose the reverse ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will:

Increase by $1,000 (1/.2=5) soo 200x5

To reduce the money supply in the economy, the Fed would:

Increase the discount rate

The main difference between M1 and M2 is that: (refer to 3 and 4)

M2 includes some less liquid assets in addition to the assets in M1.

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

Which is an example of quantitative easing by the Federal Reserve?

The Fed purchases $50,000 worth of long term government bonds?

One of the Fed's greatest powers is its ability to

boost market confidence

The Federal Reserve's major tool to control the money supply is

open market operations, discount rate lending, and paying interest on reserves

To increase the money in the economy, the Fed would:

Carry out open market purchases and/or lower the disocunt rate

If the total liabilities of Bank A are less than its total assets but its short-term liabilities are greater than its short-term assets, Bank A is:

illiquid, but solvent

In the long run, a negative real shock will cause the inflation rate to

increase

The risk that the failure of one financial institution can lead to the failure of other financial institutions is called:

systemic risk

The Federal Reserve can influence the economy by shifting?

the AD curve

What is the overnight lending rate from one bank to another?

the Federal Funds rate