Economics-Mod. 7 WS2: Money, Monetary Policy

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.

reduce; lower

The major assets on a bank's balance sheet are it

reserves, loans, and holdings of securities.

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates

sell; up

The money supply curve is vertical if

the Fed is able to completely determine the money supply

The velocity of money is defined as

the average number of times each dollar is used to purchase goods and services

An increase in the price level causes

the money demand curve to shift to the right

Refer to Figure 15-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if

the price level increased

The more excess reserves banks choose to keep,

the smaller the deposit multiplier

Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800

Refer to Table 14-1. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of

$3,600

Refer to Table 14-2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of

$7,200

If the required reserve ratio is RR, the simple deposit multiplier is defined as

1/RR

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

4%

If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is

5

The quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP

The quantity equation states that the

money supply times the velocity of money equals the price level times real output

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded

Which of the following are goals of monetary policy?

price stability, economic growth, and high employment

Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

real GDP increased

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease

An increase in the money supply will

decrease the interest rate

An increase in interest rates

decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports

The required reserves of a bank equal its ________ the required reserve ratio

deposits multiplied by

In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. Any of these new funds that are loaned out by banks would be classified as ________ of the banks

excess reserves

When the price of a financial asset ________ its interest rate will ________.

falls; rise

In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in

bank deposits

Which of the following best describes how banks create money?

Banks create checking account deposits when making loans from excess reserves

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

Expansionary monetary policy refers to the ________ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

buy Treasury bills

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Suppose you decide to borrow money from an online peer-to-peer lending site. On the T-account for the lending site for this transaction, the funds from the investor who chooses to fund the loan would be classified as ________, and the loan made to you would be classified as ________.

a liability; an asset

An increase in the interest rate causes

a movement up along the money demand curve

Banks can continue to make loans until their

actual reserves equal their required reserves

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.

an asset; a liability

Refer to Figure 15-4. In the figure above, a movement from point A to point B would be caused by

an increase in the interest rate.

Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase

An increase in the interest rate

increases the opportunity cost of holding money

Banks can make additional loans when required reserves are

less than total reserves.