Econ 151 Final

M1 includes

Currency, demand deposits, other checkable deposits, traveler's checks

$1,500 balance on your credit card is catergorized as

Neither M1 nor M2

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

Buying government securities and lowering the discount rate.

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPC is 0.75, then it could

Increase taxes by $16 billion

The federal reserve's purchase or sale of government securities to change the money supply

Open market operations

Three tools

Open market operations, RR, and discount rate

Which combination of fiscal policy actions would most likely offset each other?

an increase in taxes and an increase in government purchases

The fraction of checkable deposits the bank must keep on hand, either as currency or on deposit with the Federal Reserve

Reserve requirement

To decrease AD the fed should conduct an

open market sale

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

stimulate the economy.

Tax multiplier

=-MPC/MPS

The economy is in a recession. The government enacts a policy to increase purchases by $2 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government purchases at a given price level?

$10 billion

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPC is 0.6, then it would increase government purchases by

$20 billion

MPC =

1-MPS

Expenditures multiplier

1/MPS

Money Multiplier =

1/Reserve Rate

$500 in your checking account is categorized as

Both M1 and M2

Why are deposits considered liabilities for a bank?

Deposits can be withdrawn at any time.

The interest rate at which banks can borrow money directly from the Federal Reserve

Discount rate

$4000 in your savings account is categorized as

M2 only

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Selling government securities in the open market and decreasing government spending.

If the economy falls into a recession, automatic stabilizers will cause

Tax receipts to fall and government spending to rise

Which of the following statements best describes what occurs when monetary authorities sell government securities?

The size of commercial banks' excess reserves decreases, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP.

Recession:

Y down = G goes up, T goes down, Y will go up

Expansion:

Y up = G goes down, T goes up, Y will go down

Which of the following fiscal policy changes would be the most contractionary?

a $10 billion increase in taxes and a $30 billion cut in government purchases

The sale of government bonds by the Federal Reserve Banks to commercial banks will

decrease aggregate demand.

Fiscal policy is typically

difficult to implement quickly.

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the

economy's MPC is large.

Congress controls

expansionary and contractionary policy

The interest rate that commercial banks charge each other for very short-term loans is called the

federal funds rate.

A contraction of the money supply

increases the interest rate and decreases aggregate demand.

If the Fed were to reduce the reserve requirement, we would expect

lower interest rates, an expanded GDP, and a higher rate of inflation.

Fisher equation: Nominal interest rate =

real + inflation

The goal of expansionary fiscal policy is to increase

real GDP

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to

reduce inflationary pressures in the economy.

As the economy expands, tax revenues

rise and transfer payments fall, causing the economy to expand by less than it would in the absence of automatic stabilizers.

If the Fed wishes to increase nominal interest rates, it must engage in an open market ______ of bonds to ______ the money supply.

sale; decrease

The level of GDP, all else held constant, will tend to increase when

the Federal Reserve buys government securities in the open market.

As people desire to hold less money as an asset

the money demand curve will decrease, causing a surplus of money, which makes interest rates in the money market fall

When government purchases are increased, the amount of the increase in aggregate demand primarily depends on

the size of the multiplier.

Assume that there is a 25% reserve requirement and that the Federal Reserve buys $4 billion worth of government securities. This action has the potential to increase the money supply by a maximum of

$16 billion