Chapters 18-20
The monetary base is equal to the sum of coins,
currency and banks' reserves at the Federal Reserve.
In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases.
cut taxes
If the price level doubles, it will
decrease the buying power of money
A tax increase
decreases aggregate demand and the AD curve shifts leftward.
To increase the quantity of money in the economy, the Federal Reserve can
buy government bonds in an open market operation.
The AD curve is a graph depicting the
relationship between the price level and the quantity of real GDP demanded.
Required reserve ratios are the minimum amount of
reserves any one bank must hold as a percentage of its deposits.
Needs-tested spending is best described as
spending on programs that entitle qualified persons and businesses to receive benefits.
A combination of recession and inflation is called
stagflation.
Control of monetary policy rests with
the federal reserve
The function of money that helps assess the opportunity cost of an activity is money's use as a
unit of account
Because there is a ________ relationship between the price level and the quantity of real GDP supplied, the aggregate supply curve is ________ curve.
positive; an upward-sloping
As the central bank, the Federal Reserve System provides banking services to
banks and regulates financial institutions and markets.
If the Fed increases the discount rate,
banks pay a higher interest rate if they borrow from the fed
For a commodity or token to be money it must
be accepted in exchange for all other goods and services.
A barter system of payment is
different from a money system of payment because money does not require a double coincidence of wants
The interest rate the Federal Reserve charges a bank when it borrows reserves from the Fed is called the
discount rate
When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1
does not change
When the Fed buys securities from the public, banks' reserves ________ and the quantity of money ________.
increase; increases
Sherri lives in Canada and is considering buying a new sofa. If the price level in Canada falls and the price level in the United States does not change, Canadian manufactured sofas are relatively
less expensive, so Sherri will likely purchase a Canadian manufactured sofa.
When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP.
lower; increases; increases
If the Federal Reserve ________ the required reserve ratio, the interest rate ________.
lowers; falls
Banks create money by
making loans and creating deposits, a process that is limited by the size of banks' excess reserves.
A commercial bank's main goal is to
maximize the wealth of its stockholders
The functions of money are
medium of exchange, unit of account, store of value
When the government's expenditures exceed its tax revenue, the budget
has a deficit and the national debt is increasing.
If the Fed raises the federal funds rate, eventually the
AD curve shifts leftward and real GDP decreases.
When tax revenues equal government outlays, the situation is referred to as
a balanced budget
When Zane deposits $20,000 cash in his checkable deposit at the Citicorp and the Citicorp's desired reserves increase by $5,000, the desired reserve ratio is
25 percent
The desired reserve ratio is 10 percent and banks have no excess reserves. Juliet deposits $300 in her bank. What is the maximum that Juliet's bank can now loan?
270
The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase?
300,000
A bank has checkable deposits of $1,000,000, loans of $600,000, and government securities of $400,000. If the required reserve ratio is 5 percent, the amount of required reserves is
50,000
Which statement is most correct about the types of deposits a commercial bank can accept?
A commercial bank accepts checking, savings and time deposits.
If the Fed lowers the federal funds rate, which of the following occurs?
Investment increases.
M2 consists of
M1 plus saving deposits, small time deposits, and money market funds.
________ the quantity of money in the United States.
The Federal Reserve System regulates
Which of the following is a problem in pursuing monetary policy
The lag between a change in the quantity of money and its effect on economic activity may be long.
If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP less than potential GDP, there is
a recessionary gap.
An increase in government expenditure on goods and services leads to the
aggregate demand curve shifting rightward.
As the Fed lowers the federal funds rate,
aggregate demand increases.
If the money wage rate increases, then the
aggregate supply curve shifts leftward.
The government expenditure multiplier is used to determine the
amount aggregate demand is affected by a change in government expenditure.
Demand- pull inflation starts with
an increase in aggregate demand
If the costs of production decrease, there is
an increase in aggregate supply and the AS curve shifts rightward.
Cost-push inflation might initially result from
an increase in the cost of resources
If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP more than potential GDP, there is
an inflationary gap.
When the Fed buys or sells securities, it is conducting ________ operation.
an open market
An increase in the price level leads to
an upward movement along the aggregate supply curve.
Fiscal policies that move the economy toward potential GDP without a change in policy are called
automatic stabilizers.
A decrease in investment leads to ________ in aggregate demand and ________ in real GDP.
a decrease; a decrease
The annual statement of the outlays, tax revenues, and surplus or deficit of the government of the United States is the federal
budget
Banks generally earn the highest interest rate
by making credit card loans.
An advantage monetary policy has over fiscal policy is that monetary policy
can be quickly changed and implemented.
The federal budget
can have a deficit, a surplus, or a balance.
M1 is composed of
currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses
The objects we use as money today include
currency outside the banks and bank deposits
The aggregate demand multiplier effect says that an initial increase in expenditure plans leads to an induced
increase in consumption expenditure.
The Fed raises the interest rate when it
fears inflation.
he Fed's policy is determined by the
federal open market committee
Regulating the amount of money in the United States is one of the most important responsibilities of the
federal reserve
Who regulates the quantity of money circulating in the economy?
federal reserve
When Dale buys a new computer for $1,000 using a credit card
he is taking out a loan for $1,000
The aggregate supply curve illustrates that the
higher the price level, the greater the quantity of real GDP supplied.
The store of value function is defined as the
holding of money from one transaction to be used later in another transaction
An increase in technology ________ potential GDP and ________ aggregate supply.
increases; increases
A tax cut ________ aggregate demand and ________.
increases; shifts the AD curve rightward
Demand-pull inflation results from continually increasing the quantity of money, which leads to a continually
increasing aggregate demand.
If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________ because the interest rates ________.
more loans; will fall
A fall in the price level produces a ________ the aggregate demand curve.
movement downward along
A fall in the price level produces a ________ the aggregate supply curve.
movement downward along
The Fed is a central bank and as such
provides banking services to banks but not individuals.
Open market operations are the
purchase or sale of government securities by the Fed.
If a country is trying to recover from a recent recession, it is unlikely their government officials will decide to ________ because it would ________.
raise interest rates; decrease aggregate demand
An inflationary gap is created when
real GDP is greater than potential GDP
If the Fed's policies aim to increase aggregate demand, the Fed must fear
recession
Which of the following is NOT a component of M1?
savings deposits
Because of the existence of the aggregate demand multiplier, a $10 billion change in expenditure
shifts the aggregate demand curve by more than $10 billion.
Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic
stabilizers.
Keeping $20 in currency to be able to buy gasoline, money is performing which function?
store in value
if the federal government has a budget surplus, then it is definitely the case that
tax revenue exceeds government outlays.
To prevent demand- pull inflation
the Fed must not let the quantity of money persistently rise.
If there is an increase in expected future income, then
the aggregate demand curve shifts rightward.
Macroeconomic equilibrium occurs when
the aggregate quantity demanded is equal to the aggregate quantity supplied.
The amount of loans that a bank can create is limited by
the bank's excess reserves
Open market operations are defined as
the buying and selling of securities by the Fed.
Quantitative easing by the Fed refers to
the creation of bank reserves by engaging in largeminusscale open market operation at very low interest rates.
In a demand-pull inflation, if the Fed stops expanding the quantity of money,
the demand-pull inflation ends.
The Fed affects aggregate demand through monetary policy by changing
the federal funds rate and the quantity of reserves.
The main sources of cost-push inflation are increases in
the money wage rate and the price of raw materials.
The aggregate demand curve shifts when any of the following factors change EXCEPT
the price level
If the quantity of real GDP demanded is greater than the quantity of real GDP supplied, then
the price level rises and firms increase production.
A reason why an increase in the price level decreases the quantity of real GDP demanded is that
the price of domestic goods and services increases relative to foreign goods and services.
The aggregate supply curve shows the relationship between
the quantity of real GDP supplied and the price level.
In the short run, when the Fed increases the federal funds rate
the real interest rate rises and investment decreases.
In order to influence the interest rate, the Federal Reserve System can immediately adjust the
the reserves of the banking system
If there is a rise in the price level, there is a(n) ________ movement along the AS curve because there is ________ in the quantity of real GDP supplied.
upward; an increase
Since 2000, the U.S. government has generally had a government budget ________ and so the national debt has ________.
deficit; increased
Transfer payments include i. Social Security benefits ii. Medicare and Medicaid benefits iii. Unemployment benefits
i, ii, and iii.
