Econ Exam 4

reserve requirements

The reserve requirement is the ratio of funds commercial banks and other depository institutions must hold in reserve against deposits.

Suppose Congress enacted investment tax credits to spur more business investment. What impact would this have on the loanable funds market?

There would be an increase in demand; the entire demand curve shifts right.

The supply in the loanable funds market come from saving by the households and the government.. T/F?

True

When the economy is facing a problem with inflation, Keynesian theory says the Fed should reduce aggregate demand by raising interest rates.

True

percent change in price

[(CPI in current year/CPI in original year) × 100] − 100.

the Fed consists of

a central governing agency, the Board of Governors, and 12 regional Federal Reserve Banks.

Assume that the population of Lauronia increased and so did its total production. What would this look like on a graph of the production possibilities frontier?

a new curve that is to the right of the original curve

Consider the difference between a pension and a fixed contribution plan such as a 401(k) account. The difference is that

a pension provides a guaranteed income for life. Balances in a 401(k) can eventually be used up.

marginally attached worker

a person who does not have a job, willing to work, has looked for work in past year but not in last four weeks

escalator cause

a section in a contract that provides for price increases if certain, specified conditions occur

Which action would a monetary hawk endorse?

a tight monetary policy to keep inflation low

Consider the similarities and the differences between cryptocurrency and U.S. dollars that are stored on a popular phone app. Both function as

a unit of account and a store of value, but only U.S. dollars stored on a phone app function as a medium of exchange.

Employers who choose to pay efficiency wages keep wages _____ market equilibrium wages.

above (Efficiency wages are above the market equilibrium rate so as to reduce turnover, boost morale, and increase employee productivity.)

monetary policy influences

aggregate demand

Suppose that the central bank increases interest rates in an economy. How would this affect aggregate demand and inflation?

aggregate demand would fall and inflation would fall

Traditionally, the chair of the Board of Governors has

also served as the chair of the FOMC.

Suppose the economy is in a recession. The Fed should use ___.

an expansionary monetary policy

gdp deflator

an index of the average prices for all goods and services in the economy

consumer price index

an index of the cost of all goods and services to a typical consumer. CPI of base year is always 100 unless specified. dividing the cost of a typical market basket of consumer goods and services in the current year by its cost in the base year and multiplying cpi in base year.

If the reserve ratio is greater than the reserve requirement, excess reserves

are greater than zero

The Classical model argues that production and employment are determine by:

available resources technology institutional rules and regulations

What gives our money its value if there is no gold or silver backing the currency? Our nation's money is highly valued because it is

backed by people's faith in our government.

what is not an example of a financial intermediary?

central banks

opportunity cost

combinatino of implicit and explicit cost. refers to the second best option

For which type of borrowing does the federal funds rate apply?

commercial banks borrowing from other commercial banks.

What is not a financial intermediary in the loanable funds market model?

corporations and the government

federal reserve system

creates money

when the money multiplier is decreased, the effects of monetary policy

decrease

sending more decreases the amount in reserves, which _____ the reserve ratio. In turn, the money multiplier ___ As a result, each dollar injected into the banking system has _______ effect on the money supply.

decreases, increases, a more powerful

liability for a bank

deposits

What is a necessary condition for a barter exchange to occur?

double coincidence of wants

If the reserve ratio is equal to the reserve requirement, excess reserves

equal zero

A(n) _____ is designed to adjust payments or wages for changes in the price level.

escalator cause

austerity leads to

fall in aggregate demand

Suppose the PPI data showed strong increases. An economist might expect

higher costs for producers to be translated into higher prices for consumers.

The ____ lag for monetary policy is long and variable.

implementation

lower interest rates

increase consumption and investment spending.

The existence of ATMs

increases excess reserves because ATMs require a lot of vault cash.

When the interest rate increases, the amount of loanable funds supplied to the market

increases; this is a movement up and to the right along the supply curve.

The Fed has recently talked about minimizing the risk of inflation. Which of these tools would accomplish this?

increasing the discount rate

producer price index

index of the average prices received by domestic producers for their output.

tradeoff

individuals must choose between options

In the short run, the Fed faces a tradeoff between

inflation and unemployment

The time the Fed must wait for economic data to be collected, processed, and reported is the

information lag

inflation targeting

involves setting a target on the inflation rate and adjusting monetary policy to keep inflation in that range.

In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result?

it was decreasing

When a strong economy calls for contractionary monetary policy, some politicians tend to _____ monetary policy because of the short-run economic and political benefits.

keep using expansionary

Microeconomics includes

labor markets and environmental policy.

The Fed is worried about rising unemployment. Which of these tools would it use if it wanted to lower unemployment?

lower the discount rate

The mission of the Fed is to

maintain the stability of the financial system.

Higher interest rates

make bonds a more attractive investment. mean that the Fed is trying to restrain the economy.

Physical capital consists of

manufactured products that are used to produce other goods and services.

Barbara just purchased a car for $14,000. This is an example of which function of money?

medium of exchange

Money is readily accepted in payment for all debts. This refers to money's role as a ___.

medium of exchange

taylor rule

monetary rule: would stipulate exactly how much the Federal Reserve should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

Suppose the bank borrows $10,000 of reserves from the Fed. The money supply would change by $___.

money multiplier*10000

Higher interest rates would result in

more saving (funds) supplied to the market.

If the reserve requirement is greater than the reserve ratio, excess reserves are

negative

unexmployed

not with work but is seeking work within past four weeks

production efficiency economics

occurs when goods are produced at lowest possible cost

The Federal Reserve's preferred tool of monetary policy is ___.

open market operations

Which of the following is the primary tool used by the Federal Reserve to conduct monetary policy?

open market operations

What are required reserves?

represent the amount of money a depository institution must hold.

The loanable funds market model describes the financial market for

saving and investing

Which of the following is in the M2 definition of money, but not in the M1 definition?

savings deposit

compound interest causes

savings to increase dramatically over time

Suppose the Fed decided to reduce the money supply. It could ___.

sell bonds

Suppose that the Federal Reserve analyzed some data showing that the economy was heading toward an inflationary spiral. Which policy move would be the MOST likely to be considered?

selling bonds in open market operations

When households fear job loss in a recession, the supply curve of loanable funds would _____ and the real interest rate would _____.

shift to the right; decrease

expansionary monetary policy

shifts the aggregate demand curve to the right

monetary lags

shorter than fiscal lags. federal reserve conducts monetary policy

Amanda was saving for college. Whenever she earned money, she put in her savings account. This describes money in its role as a _____.

store of value

Suppose the government introduces a new incentive for individuals to save money for retirement. How would this affect the market for loanable funds and the interest rate?

supply of loanable funds would increase and interest rates would fall

If people decide to save more of their income, then the

supply of loanable funds would increase.

monetary changes

take time

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Ceteris paribus, there has been an increase in the demand for bonds. We would predict _____.

the price of bonds will rise and the interest rate will fall

What happens to savings if the real interest rate goes up? What happens to the demand for borrowing?

the quantity of savings offered by households increases, and the quantity of loans demanded by firms decreases

What is not a major function of financial institutions?

to minimize interest paid to savers

how many more loans can bank make? (what are the excess reserves)

total reserves-required reserves required reserves=reserve requirement*liabilities

T/F. Suppose that the federal government begins an expansionary fiscal policy. As a result, the government has a budget deficit for the year. This will raise the interest rate and reduce business borrowing and investment.

true

unemployment rate

unemployed/labor force x 100

cyclical unemployment

unemployment caused by a business cycle recession

frictional unemployment

unemployment that occurs when people take time to find a job

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available. change in demand or technology

allocative efficiency

when the mix of goods being produced represents the mix that society most desires

unpaid family worker

works 15+ hours a week for a family enterprise

FDIC insurance

works in coordination with reserve requirements to ensure depositor confidence, preventing bank runs.

The AD/AS model can show that changes in the money supply

would change prices in the economy

This year government spending was $4 trillion and tax revenues were $2.7 trillion. If the government has not increased its borrowing and did not sell any assets, the money supply must have decreased by $1.3 trillion. True or False?

(gov has a deficit right now of $1.3 trillion) FALSE. gov would increase the money supply to help with the deficit

If nominal GDP increases by 7.5% in one year, and inflation as measured by the GDP deflator grows by 7.5%, how much has real output increased?

0%

money multiplier

1/reserve ratio

Assume a bond has an annual interest payment of $196 and the price of the bond is $9,800. The interest rate (yield) on the bond is _____.

2.0%

The Fed's Board of Governors consists of _____ members who are appointed by the president and confirmed by the Senate.

7

What would cause the demand for loanable funds to increase?

A new investment tax credit for businesses to expand.

What asset will likely show the greatest increase in value over time?

Blue-stock chips

When the stock market is rising rapidly, what tends to happen to bond prices and interest rates on bonds?

Bond prices fall, and interest rates on bonds rise.

Suppose the stock market and the bond market are substitutes for one another. Consider what happens to bond prices if the stock market increases sharply and investors move money from bonds into stocks.

Bond prices will decrease. Interest rates on bonds will increase.

A popular teacher hands out candy bars to her students as an incentive for good behavior. If students choose to, they could then trade one candy bar for a sheet of stickers or two candy bars to skip a quiz. In this classroom, the teacher is using candy bars as a form of:

Commodity

Which act further clarified, supplemented, and expanded the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?

Depository Institutions Deregulation and Monetary Control Act of 1980

If the economy has just experienced a severe recession, which type of Fed policymaker would be more focused on a quick recovery?

Doves

If businesses become more optimistic about the future outlook of the economy, interest rates will fall and more funds will be borrowed. T/F

False. they will borrow more but the interest rates will increase

The _____ protects bank deposits up to $250,000 from bank failure.

Federal Deposit Insurance Corp

After an economy begins to recover, suppose that the Fed quickly raises interest rates back to the level seen before the recession in order to prevent inflation. Which type of Fed policymaker would be more likely to favor this action?

Hawks

Which of these is a reason people choose to hold more cash?

Interest rates paid on savings and checking accounts at the bank are near zero.

Martha needs to acquire funds in order to expand her bakery. She does not want to give up control of her business, but her credit score is weak due to the recent foreclosure on her home. What should Martha do to acquire these funds?

Issue bonds to willing investors

What effect does overstating inflation have on real earnings in the long run?

It makes real earnings appear smaller than they actually are.

All else remaining equal, if the amount of demand deposits increases, this will increase the size of:

M1 and M2

Janeese transfers $200 from her checking account to her savings account. We can say ___.

M1 has decreased and M2 has not changed

All else remaining equal, if the amount of small-denomination time deposits increases, this will increase the size of

Only M2

Monetary policy would be involved in

Raising the money supply. The Federal Reserve raising interest rates

If nominal GDP is $15 trillion and the GDP deflator is 114, what is real GDP?

Real GDP is $13.16 billion. Real GDP is determined by multiplying the nominal GDP by the base year index divided by the current year index, so real GDP = $15 trillion × (100/114) = $15 trillion × 0.877 = $13.16 billion.

What happens to the amount of funds supplied to the loanable funds market when the interest rate increases?

The amount of loanable funds supplied increases.

ways the housing bubble at the beginning of the 21st century may have caused the Taylor rule target to exceed the actual federal funds rate.

The housing bubble caused prices of housing and related goods to rise, contributing to higher inflation. Increased aggregate demand associated with the housing bubble contributed to a positive output gap.

According to classical economists, if there is a 12% increase in the money supply, what will happen to price levels?

The price level will increase by 12%.

What might cause the real value of money to rise in an economy?

The price of houses and apartment rentals falls by 30%.