Econ. CH 16

transactions demand for money.

A consumer holds money to meet spending needs. This would be an example of the:

increases in the amount of money held as an asset.

A decrease in the interest rate will cause a (n):

increase the required reserve of commercial banks and thus decrease the money supply.

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

The interest rate decreases and nominal GDP increases.

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

8 percent.

Interest RateTransactions Demand for MoneyAsset Demand for MoneyMoney Supply2%$220$300$46042202804606220260460822024046010220220460 Based on the given table, the equilibrium interest rate is

1 percent.

Refer to the above graph, if the supply of money was $250 billion, the interest rate would be:

$200. Total demand for money=transactions demand + asset demand. Therefore, asset demand=total demand-transaction demand. When the interest rate was 4 percent, the total demand curve Dm interacts with supply curve Sm3, and generates the equilibrium quantity is $325. So $325 is the total quantity of money demanded in the economy, and transactions demand is $125, the asset demand is $200 ($325-$125).

Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, then the asset demand for money in this money market is:

Sell government securities in the open market and decrease government spending.

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?

store of value.

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

discount rate.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

Federal funds rate.

The interest rate that banks charge one another on overnight loans is called the

quantity of money supplied exceeds the quantity of money demanded.

The interest rate will fall when the:

increase the excess reserve of banks and allow banks to increase their lending.

The major purpose of the Federal Reserve buying government securities in open-market operations is to:

open-market operations.

The most frequently used monetary device for achieving price stability is:

discount rate, reserve ratio, interest on reserves, and open market operations.

The tools of monetary policy for altering the reserves of commercial banks are the:

adding the transactions demand for money to the asset demand for money.

The total quantity of money demanded is determined by:

medium of exchange.

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

$200 billion. Each dollar is spent four time over a year, therefore, $200 billion = $800 billion/4 times is needed to purchase that GDP.

When nominal GDP is $800 billion, and, on average, each dollar is spent four times in the economy over a year, the quantity of money demanded for transactions purposes will be:

Increase the money supply to shift the aggregate demand curve rightward. Remember the Cause-Effect Chain, the expansionary/contractionary monetary policy will affect the money market first by increasing/decreasing money supply, then money market will affect investment spending through interest rate, as part of GDP, investment spending will finally affect aggregate demand and shift the aggregate demand curve leftward/rightward.

Which is an expansionary money policy?

Line 1

Which line in the above graph would best reflect the slope of the total demand for money curve?

Line 2

Which line in the above graph would best reflect the slope of the transactions demand for money curve?

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

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

Federal Reserve.

The conduct of monetary policy in the United States is the main responsibility of the:

The opportunity cost of holding money.

Which varies directly with the interest rate?