Macro 6
by how much does money supply increase when reserves change by $1,000 and ARR=10%?
$10,000
if RRR decreases from 20% to 10%
-banks will have more money to loan out -money multiplier increases -money supply increases -this is expansionary policy
US money has several positive attributes, some of which are related to the fact that it's fiat money. positive attributes include:
-easy to transport -easy to verify -easy to use in large & small donations -fairly stable over time
what is velocity when the price level is 110, RGDP is 7200, and M is 660?
12
what is the value of P when M, V, & Q and m=5%, v=2%, q=3%?
4
what is the size of the money supply when NGDP is 5000 and V is 10
500
what is money multiplier when RRR = 9% and ERR=3%? please round answer to nearest hundreth.
8.33
which of the following is NOT one of the main operating arms of the Fed?
Congress
True or False: Since rational expectations are based on a wealth of information, and adaptive expectations are based on what has happened in the recent past, it's always better to use rational expectations.
FALSE
True or False: The natural rate hypothesis refutes that there is a long-run tradeoff between inflation and unemployment.
FALSE
money supply is amount of currency in circulation in economy
FALSE
fed insurance program for bank deposits is the
FDIC
which equation shows how the money multiplier is calculated when banks hold NO excess reserves?
MM = 1/RRR
which of the following assets is the most liquid?
a $20 bill
which of the following is NOT an example of a financial intermediary playing its role in the economy?
a bank pays its employees their wages
money multiplier arises because initial increase in excess reserves creates ____ in total quantity of money in the economy
a proportionally larger increase
the Fed uses monetary policy to:
alter the money supply
money stock
amount of money in an economy at a point in time
if mary takes money from her savings account & buys a t-bond from Jody w that money, it's
an example of neutral (neither expansionary nor contractionary) policy
which equation shows how the actual reserve ratio is calculated?
arr = rrr + err
net worth
assets minus liabilities
Gresham's Law
bad money drives good money out of circulation; type of commodity money that has lowest intrinsic value will become dominant type of money, & money w highest intrinsic value will be hoarded rather than used as money
fractional reserve banking
banking system in which banks keep a small share (fraction) of their depositors' funds on hand (in reserve) and loan out the rest; banks don't keep all of their depositors' funds
discount rate is the rate:
banks are charged by fed for overnight loans
long-run phillips curve
based on natural rate hypothesis, long-run phillips curve is a vertical line at the natural rate of unemployment, on a graph comparing inflation & unemployment rates
why did US savings & loan failures in the early 1980s create a large problem?
because deposits at savings & loans were insured by the FSLIC
monetarism
belief that fed's monetary policy should be to grow money supply at constant rate
treasury securities
bonds issued by US treasury department
if interest rates fall & money supply remains constant, what will happen?
both velocity & NGDP will decrease - when interest rates fall people choose to hold more money, which decreases velocity & decrease in velocity with a constant money supply decreases NGDP
To increase the money supply, the Fed can:
buy bonds
one of the ways the fed could implement expansionary monetary policy is to:
buy t-bonds
debit card
card that can be used to purchase goods & services electronically; bank reimburses vendor that accepts debit card as payment & then deducts the purchase from a checking account
credit card
card that can be used to purchase goods & services electronically; credit card company reimburses the vendor and issues a loan to the purchaser
natural rate hypothesis
certain real variables have natural rates of growth that they follow in the long run; many times, this hypothesis refers to the assumption that their is a natural rate of unemployment to which the economy will always return, in the long-run
Volcker, Paul
chairman of Fed during late 1970s and early 1980s who presided over a contradictory monetary policy to combat inflation
banks earn money by:
charging interests on loans
traveler's checks
check issued by financial intermediary that households can use as they would use a regular check
money in what type of account is included in all 3 measures of the money stock?
checking account
demand deposits
checking account deposits; traditionally, these deposits do not earn interest
which of the following illustrates money as medium of exchange?
chris buys compact disc for $12 at music store
two big categories of money are:
commodity & fiat
life insurance company
company that takes small amounts of money from a large group of policy holders, invests the money, & then pays large amounts of money to the beneficiaries of the small # of policy holders who die
Say the Fed decides that it's going to increase the required reserve ratio. This is an example of:
contractionary policy
on balance sheet for most modern banks, _____ appear on liability side of sheet
customer deposits
what is example of contractionary fiscal policy?
cuts in gov spending
which of these is a possible short-run effect of a contractionary monetary policy?
decrease in price level
in the early 1980s, tax breaks & increases in gov spending occurred simultaneously, significantly increasing the federal debt. how does increased debt affect long-term growth?
decreases long-term growth
portfolio motive
desire to hold money, instead of investing it in a financial instrument, to diversify a household's portfolio of assets
lender of last resort
duty of federal reserve, which is to lend funds to banks that cannot obtain the funds from anywhere else
liquidity
ease with which an asset can be converted into its full cash value
M1 is larger than M2
false
True or False: Monetary policy can easily pull the economy out of a period of stagflation.
false
True or False: The Fed issues bonds.
false
large time deposits
financial instrument is similar to savings account since it earns interest; the account is more than $100,000, the funds are deposited for less than 90 days but for a specified length of time, and there's a penalty for early withdraw of funds
purchasing power
goods & services an amount of money can purchase
which of the following is NOT one of the tools of monetary policy?
government spending
phillips curve
graphical representation of a hypothesized, inverse relationship between the unemployment rate & the rate of inflation
money demand curve
graphical representation of money demand
Federal Reserve Board of Governors
group of seven governors, each of whom is appointed by the president and confirmed by the Senate to one, 14-year term. board helps to manage the federal reserve
permanent income theory of consumption
idea that people base their consumption decisions on the income they expect to earn over their lifetime; this is in contrast to the keynesian approach of basing consumption on current income
rational expectations theory
idea that people make their decisions based on all the information they can gather, including events from the recent past, news media reports, & their understanding of how the economy works
adaptive expectations theory
idea that people make their decisions based on information from the recent past
money multiplier
increase (or decrease) in money supply when Fed increases (or decreases) excess reserves by one dollar; reciprocal of required reserve ratio
to induce a 3% growth rate in the economy, monetarists believe the the money supply should be
increased by 3% per year
what is short-run effect of an expansionary fiscal policy
increased inflation
Changing the amount of money in the economy directly changes the:
interest rate
what happens when investment demand is elastic & the Fed sells a lot of bonds?
investment decreases a lot
An expansionary monetary policy:
is used to expand the economy
how large is the effect of a tax break on the economy?
it depends on people's perceptions of whether it's a permanent or temporary decrease in taxes
Federal Reserve Act of 1913
law enacted in 1913 that established the federal reserve & made it responsible for providing money for economic activity & overseeing health of banks & the economy
which of following illustrates money being used as store of value?
michelle budgets her monthly paycheck so it will last until the next payday
what happens if the public does not believe in the fed's ability to carry out its policy?
monetary policy takes longer to reach its desired effects
contractionary monetary policy
monetary policy w goal of decreasing the money supply; policy usually used to deal w inflation
expansionary monetary policy
monetary policy w goal of increasing money supply; usually used to deal w recession
checking account
money a household deposits at a bank; household can make purchases using checks drawn on the account. recipient of a check presents it to bank & receives money, which the bank deducts from the household's checking account
savings account
money a household keeps in a bank to earn interest payments, to keep the money safe, & to allow easy access to their funds
flat money
money that has no use besides being a medium of exchange, unit of account, & store of value. money with NO intrinsic value
Federal Savings & Loan Insurance Corporation (FSLIC)
now defunct insurance program administered by fed gov, similar to FDIC except it insured deposits at savings & loan associations; it went bankrupt during the Saving & Loan Crisis of the 1980's
velocity of money
number of times, on average, that a dollar is used to purchase final goods & services over a period of one year
liability
object that a business, household, or government owes, such as a loan received from others
Banks usually keep the largest portion of their reserves:
on deposit with the fed
which of the 3 tools of monetary policy is the preferred tool for changing the money supply?
open market operations
discount window loan
overnight loan issue by Fed to allow a bank to meet its reserve requirement at end of day
Which of following illustrates money being used as unit of account?
pat's paycheck is $200 this month
For contractionary monetary policy to be effective:
people must expect that the Fed will follow through with policy
coupon payment
periodic interest payments made by bond issuers to bond holders
monetarist
person who believes in monetarism
according to the life-cycle theory and permanent income theory, which person would spend a smaller percentage of his/her winnings during the first year?
person who won 1-time jackpot of $10,000
what happens when people have low inflationary expectations?
phillips curve shifts downward, giving policymakers better options
which of the following is NOT one of the ways a bank can increase its reserves to meet its required reserve ratio? (doesn't need to be an overnight fix)
print more money
open market operations
sales & purchases of treasury bonds by fed, w intent of changing the money supply & the interest rates
regulating banks & savings & loans differently (specifically limiting the amount of interest that a savings and loan can offer to potential savers) causes:
savings & loans to have a competitive disadvantage
what can fed do to pursue contractionary monetary policy?
sell bonds
when there is hyperinflation & prices rise very quickly, which does money fail to fulfill?
store of value
The Federal Reserve (Fed) influences the economy by controlling:
supply of money in economy
balance sheet
system of keeping track of a business's assets and liabilities over time
True or False: The Fed issues new money.
true
True or False: The two main types of tools of economic policy are fiscal policy and monetary policy.
true
what increase in bank deposits is needed to increase money supply by $10,000 when actual reserve ratio is 12%?
$1,200
bank reserves increase by $5,000 when RRR is 15%. banks initially hold additional 1% as excess reserves but then lend out all excess reserves so that the actual reserves are equal to the required reserves. by how much does the money supply increase when when the banks change from 1% to 0% excess reserves? please round to nearest hundreth.
$2,100
the RRR is 10% and bank holds 5% excess reserves. what change in deposits results in $20,000 increase in money supply
$3,000
bank reserves increase by $5,000 when RRR is 15%. if banks hold an additional 1% as excess reserves, by how much does money supply increase
$31,250
friedman, milton
(1912-2006) an american economist who advocates a laissez fair approach to fiscal policy & who developed the permanent income theory of consumption
modigliani, franco
(1918-) economist who helped to develop the life-cycle theory of consumption concurrently with friedman's development of the permanent income theory of consumption
brumberg, richard
(1930-1955) economist who helped develop the life-cycle theory of consumption concurrently with friedman's development of the permanent income theory of consumption
Which of the following is not one of the tools of monetary policy?
-federal funds rate
which of the following is not on of the function of money
-medium of value
gresham's law implies
-people hold onto their silver quarters -bad money drives good money out of circulation -commodity money is worth more than fiat money -silver dimes & copper sandwich dimes might not be worth the same amount
primary activities of Fed include
-research -regulation -issuing currency -acting as bank for banks
if RRR is required reserve ratio, money multiplier is equal to
1/RRR
US banks hold roughly ______ of their deposits as reserves
10%
a $3,000 deposit increase the money supply by $20,000. banks holding excess reserves of 5%, what is RRR?
10%
in US, most banks hold a small percentage of their total deposits on hand. what percentage is commonly held by US banks?
10%
if rrr=8% and a $1,000 change in reserves yields a $9,090 increase in the money supply, what percentage of excess reserves do banks hold?
3%
if RRR is 25%, money multiplier is:
4
savings & loan crisi
collapse of many saving & loan associations in late 1980s caused by improper deregulation and risky investments; required fed gov to spend large amounts of money to correct the situation
Which of the following statements about monetarism is not true?
current monetary policymakers are monetarists TRUE STUFF: -Monetarists believe the AD/AS model predicts short-term effects on production. -Monetarists believe the Fed shouldn't actively increase the money supply in an attempt to match changing economic conditions. -The equation of exchange says the money supply times the velocity of money equals nominal GDP. -Monetarists believe changes in the money supply don't affect real production or the velocity of money.
as the interest rate increases, people:
decrease the quantity of money demanded
why does the fed rarely use RRR as policy tool?
decreasing RRR in time of recession makes banks less secure
Which of the following does not represent one of the goals of economic policy in most nations?
deflation
transaction motive
desire to hold money, instead of investing it in a financial instrument, because money enables a household to purchase goods & services
precautionary motive
desire to hold money, instead of investing it in a financial instrument, to pay for future unexpected expenditures
the US savings & loan crisis of the 1970s & 1980s is an example of:
disintermediation - occurs when people w savings take their money out of financial intermediaries - in S&L crisis, savings & loans were unable to provide incentives for savers to invest money, causing people to take savings elsewhere
cigarettes have been used as money in many types of restrictive situations, such as prisons, prisoner-of-war camps, & close economies. which characteristic of good money do cigarettes meet?
easy to verify (don't split or keep well or retain their inherent value)
True or False: Assuming the permanent income hypothesis is true, the effectiveness of fiscal policy is increased if people believe that the changes in expenditures are only temporary.
false
True or False: Increasing the discount rate is an example of expansionary monetary policy.
false
True or False: The Fed sets the interest rate.
false
True or False: Though the effects of monetary policy can be analyzed with the AD/AS model, they cannot be analyzed with the Keynesian model.
false
disintermediation occurs when people take all their money & deposit it in a bank
false
excess reserves are share of bank's deposits that are in its vault or on deposit with the fed
false
fractional reserve banking works as long as people have faith in banking system & their bank. when that faith breaks down, there may be a run on a bank. bank run means that lots of consumers want to deposit their money into a certain bank
false
gold standard refers to ability to trade currency in for gold. means that gov has dollar's worth of gold for every dollar in circulation
false
the fed is a gov agency, meaning that the operations of Fed are under direct control of congress
false
velocity of money is number of cash transactions you make in a month
false
who controls quantity of money in US economy?
fed
Which interest rate does the Fed commonly target?
federal funds rate
central bank of US is
federal reserve
small time deposits
financial instrument similar to savings account since it earns interest; the account is less than $100,000, the funds are deposited for less than 90 days but for a specified length of time, & there's a penalty for early withdrawal
pension fund
financial organization that invests the savings of a large number of workers & then uses the funds to provide the workers with a source of income when they retire
money supply curve
graphical representation of money supply; since Fed determines money supply, money supply curve is vertical line
Federal Open Market Committee (FOMC)
group composed of Board of Governors, president of New York district's Fed bank, & presidents of four other Fed district banks. group selects the open market monetary policy the federal reserve will implement
near monies
group of least liquid types of money, such as large time deposits
the ____ sector provides the major source of savings in the US economy, while the _____ sectors are the major borrowers
household; business & government
supply-side economics
idea that the government should encourage economic growth by using fiscal policies to alter aggregate supply, by reducing taxes & decreasing cumbersome regulations, for example
fractional reserve banking means banks hold on to only small fraction of deposits they receive, loaning out rest. type of system will fall apart if:
if people fail to repay loans & if everyone demands their deposits at the same time
what are politicians likely to want to do to improve their chances of reelection?
increase gov spending
if the Fed wants to speed up effects of monetary policy, one combination of tools that it could use is to:
increase the RRR and sell bonds
one of the ways the fed could implement a contractionary monetary policy is to:
increase the discount rate
if the fed is following an expansionary monetary policy, it wants to:
increase the money supply
one of the ways the Fed could implement a contractionary monetary policy is to:
increase the required reserve ratio
If the interest rate decreases, the level of investment:
increases
When the Fed buys more T-bonds, the price of bonds _______ and the interest rate _______.
increases; decreases
which of following not included in M1
individual savings accounts
Monetary policy involves changes in the money supply designed to achieve full employment without ________.
inflation
overheated economy can lead to:
inflation
the phillips curve represents a trade-off between:
inflation & unemployment
if people have adaptive expectations, they'll change their expected rate of inflation under which condition?
inflation is low for several years
Federal Deposit Insurance Corporation (FDIC)
insurance program administered by federal gov that guarantees up to $100,000 of an individual's deposits in the bank
equilibrium interest rate
interest rate at which quantity of money supplied equals quantity of money demanded; money supply curve & money demand curve intersect at equilibrium interest rate
discount rate
interest rate the Fed charges to banks for discount window loans
what happens when money demand is elastic & Fed buys bonds?
interest rates decrease only a little
what happens in the credit market when Fed buys bonds?
interest rates fall
money demand
inverse relationship that shows the amount of money households want to hold at various interest rates; at higher interest rates, people want to hold less money, and at low interest rates people want to hold more money, ceteris paribus
The most volatile type of expenditure in the economy is:
investment
new york stock exchange
large market in which people can buy & sell shares of stock of certain corporations
M2 includes all the following except
large time deposits
Bank Deregulation Act of 1980
law enacted by Congress that introduced several changes into banking sector, such as requirement that all banks follow required reserve ratio that the Fed mandates
Full-Employment & Balanced Growth Act of 1978
law that reiterated the intentions of the employment act of 1946
which of these would lead to increase in unemployment?
less gov spending
federal funds market
loanable funds market in which banks borrow & lend funds to other banks
banks create money by:
loaning out money
mortgage
long-term loan used to purchase real estate
bond re-sale market
market in which people can buy & sell bonds that were previously issued
the money multiplier represents the _____ amount that the money supply will increase or decrease given a change in excess reserves
maximum
M2
measure of money stock; m2 equals m1 plus less liquid forms of money, which include savings deposits, small time deposits, & money market mutual funds
m3
measure of money stock; m3 equals m2 plus near monies
M1
measure of most liquid parts of the money stock; M1 is sum of currency in circulation, value of demand deposits, & value of traveler's checks
what happens when Fed sells bonds?
money supply decreases
what happens when fed buys bonds?
money supply increases
commodity money
money that has uses in addition to being a medium of exchange, a unit of account, and a store of value. money that has intrinsic value
expansionary monetary policy might increase aggregate supply because the lower interest rate would lead to:
more investment & capital
which of the following variables includes a money component?
nominal GDP
if fed wants to increase money supply, one way it can accomplish is to:
none
suppose last year's inflation rate was 5%, but wall street analysts expect this year's interest rate to be 4%. which of the following correctly describes people's beliefs according to rational or adaptive expectations theories?
none of these answers is correct
asset
object that business, household, or government owns, such as building, equipment, or a loan made to others
store of value
object that can be used to hold onto purchasing power
unit of account
object that can be used to measure value of good/service
required reserves may be he;d either in the bank's vault or:
on deposit with the fed
the single most important tool of monetary policy is:
open market operations
currency in circulation
paper money and coins used to pay for daily expenditures in the economy
Federal Reserve District Bank
part of the federal reserve that implements its policy & keeps track of economic activity for a certain geographic region of the nation
check clearing
process of taking checks desposited at one bank, sendign them to their issuers' banks, and adjusting the banks' Federal Reserve accounts in order to transfer the funds between them
When it was created, the central bank of the United States (the Fed) was given two mandates. They are: to oversee the health of banks and economy, and to __________.
provide money for economic activity
when created, central bank of US (the Fed) was given two mandates. they are: to oversee the health of banks & the health of the economy, and to:
provide money for economic activity
equation of exchange
quantity of money (M) multiplied by money's velocity (V), equals nominal GDP, which equals the price level (P) multiplied by RGDP (Q); M times V equals P times Q
required reserve ratio
ratio of (a) the deposits a bank doesn't loan to other to (B) the total deposits at the bank; this ratio is determined by the government and must be met by all banks
The two ideas of expectations discussed in this Tutorial are: adaptive expectations and ________.
rational expectiations
which of following is NOT example of financial intermediary?
real estate agent
identity
relationship that is true by definition
The monetary tool used the least by the Fed is:
required reserve ratio
In open market operations, the Fed can decrease the money supply by:
selling bonds
bank run
situation in banking in which a bank's depositors want to remove all their deposits at the same time; since a fractional reserve bank doesn't keep all its depositors' funds, it cannot deal with this situation & is forced out of business
disintermediation
situation that occurs when depositors withdraw their money from financial intermediaries
which of these is a type of commodity money?
spanish gold doubloons
Fiscal policy includes changes in government spending and taxation. Which of the goals of economic policy in most nations does fiscal policy fail to address?
stable prices
monetary policy is less effective in dealing with the problems of :
stagflation
fed engages in open market operations. these include buying & selling of:
t-bonds
which of the following is NOT one of the tools of monetary policy?
tariffs & quotas
The Fed's policy in its open market operations is determined by:
the FOMC
according to the quantity theory of money
the Fed has no control over the price level
what is ultimately responsible for the size of the money supply
the fed
which of the following is NOT one of the motives for holding money?
the income motive
when a firm decides to invest in new capital it looks at:
the interest rate & return on investment
why is the long-run phillips curve vertical?
the long-run phillips curve is vertical because any level of inflation can occur at the full-employment rate of unemployment in the long run
quantity theory of money
theory holding that a change in money supply leads to a change in price level but not to a change in RGDP
which theory states that people make decisions based on info they've gathered?
theory of rational expectations
maturity date
time at which bond issuer pays bond holder money that was initially borrowed w bond
excess reserves
total deposits at a bank minus its required reserves
True or False: Expansionary monetary policy increases the amount of money in the economy.
true
US currency is fiat money
true
an increase in discount rate will cause money supply to decrease
true
every bank has a balance sheet. on that balance sheet, your deposits are a liability to the bank
true
gold standard
type of fiat currency in which gov agrees to buy & sell gold for the currency it issues
savings & loan association
type of financial intermediary that accepts long-term deposits & specializes in making long-term loans for real estate purchases
credit union
type of financial intermediary that only accepts deposits from and only makes loans to certain types of workers
thrift
type of financial intermediary that uses depositors' funds to make loans; credit union & saving & loan associations are types of thrifts
repurchase agreement
type of loan bank receives from its customers
The Phillips curve illustrates the tradeoff between ________ and ________.
unemployment; inflation
when is monetary policy most effective?
when money demand is inelastic & investment demand is elastic
when will a small change in the money supply have the biggest effect on interest rates?
when the money demand curve is steep
when do people have the transaction motive to hold money?
when they want to buy goods & services