Macro Exam 4

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The main policy making body of the Federal Reserve System is the

Federal Open Market Committee

Open market operations are when the Fed buys or sells

government securities from banks or some other business.

The currency drain ratio is 0.2 and the desired reserve ratio is 0.4. What is the money​ multiplier?

(1​ + 0.2​)÷​(0.4+0.2​) =2

What is the fraction of a​ bank's total deposits that it holds in​ reserve? What is the ratio of reserves to deposits that a bank wants to​ hold? What is the effect of a larger desired reserve​ ratio? (a)The fraction of a​ bank's total deposits that it holds in reserve is the​ _______, and the ratio of reserves to deposits that a bank wants to hold is its​ _______. (b)The greater the desired reserve​ ratio, _______.

(a)actual reserve​ ratio; desired reserve ratio (b)the smaller the money multiplier

If the quantity of money is​ $6 billion and nominal GDP is​ $9 billion, the velocity of circulation is

1.5

Sally has a credit card balance of ​$1,000. The credit card company charges a nominal interest rate of 14 percent a year on unpaid balances. The inflation rate is 5 percent a year. Calculate the real interest rate that Sally pays the credit card company. The real interest rate that Sally pays the credit card company is ______percent a year.

14-5 9 percent a year

Suppose the nominal interest rate on a savings bond is 7 percent a year and the inflation rate is 4.5 percent a year. How much is the real interest​ rate?

2.5 percent

Which of the following statements about inflation is​ true?

Inflation is a tax on holding money.

Sara withdraws ​$1,500 from her checking account at Bank of​ America, keeps ​$200 in​ cash, and deposits the balance in her small time deposit account at Citibank. What is the immediate change in M1 and​ M2?

M1 decreases by $1,300 and there is no change in M2.

Philip takes ​$900 from his checking account and deposits the ​$900 in his savings account. What is the immediate change in M1 and​ M2?

M1 decreases by $900 and M2 does not change.

Pam buys​ $1,000 worth of American Express​ traveler's checks and pays for her purchase using funds from her savings account. What is the immediate change in M1 and​ M2? The immediate effect on M1 and M2 is​ _______.

M1 increases by​ $1,000 and M2 does not change

Which of the following statements about the Fed is​ correct?

The FOMC meets approximately every six weeks to review the state of the economy.

The table gives information about items on a​ bank's balance sheet. Calculate the​ bank's deposits that are part of​ M1, deposits that are part of​ M2, and the​ bank's loans,​ securities, and reserves. Checkable deposits=400 Savings deposits=500 Small time deposits=720 Loans to businesses=950 Government securities=600 Currency=30 Reserves at the Fed=40 The​ bank's deposits that are part of M1 equal ______ The​ bank's deposits that are part of M2 equal ______ The​ bank's loans are $____million and the​ bank's securities are $____million. The bank has reserves of $____ million.

The​ bank's deposits that are part of M1 equal ​$400 million.(checkable deposits) The​ bank's deposits that are part of M2 equal ​$1620 million.(checkable deposits plus savings deposits plus small time deposits) The​ bank's loans are $950 million and the​ bank's securities are $600 million. The bank has reserves of $70 million.(currency plus reserves at the fed)

The demand for money increases if​ _______.

banks increase the interest rate on deposits

Holding money provides a benefit​ _______.

because it is a means of payment

Because the Federal Reserve System is a central​ bank, it provides banking services to

commercial banks.

What are the institutions that make up the banking​ system? The institutions that make up the banking system are​ _______.

commercial banks​, money market funds​, thrift institutions​, and the Federal Reserve

Which of the following is an example of​ money?

currency in your wallet

All else the​ same, when real GDP increases the

demand for money increases.

The opportunity cost of holding money​ _______.

equals the nominal interest rate on bonds

Barter requires the

exchange of goods and services directly for other goods and services

A commodity or token is money if it is​ _______.

generally accepted as means of payment

One effect of inflation is that it is a tax that redistributes goods and services from

households and businesses to the government.

If the money multiplier is​ 3.0, a​ $1,000 increase in the monetary base

increases quantity of money by​ $3,000.

The opportunity cost of holding money

is fixed at all interest rates.

How does a bank maximize its​ stockholders' wealth? A bank maximizes its​ stockholders' wealth by​ _______.

lending for long terms at high interest rates and borrowing from depositors and others

Commercial​ banks' assets include​ _______.

loans to individuals and businesses and government securities

The largest category of commercial​ banks' assets is

loans.

High inflation

makes money function less well as a store of value.

Banks create money by

making loans and creating deposits, a process that is limited by the size of banks' excess reserves.

Banks earn a profit by

making loans at a higher interest rate than the rates that they offer on their deposits.

The functions of money are

medium of​ exchange, unit of​ account, and store of value.

The proposition that in the long run when real GDP equals potential​ GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of

money.

What is a​ bank's balancing​ act? A bank must balance​ _______ against​ _______.

security for​ depositors; profit for stockholders

What is an open market​ operation? An open market operation is​ _______.

the purchase or sale of government securities by the Federal Reserve System in the open market

Which of the following are examples of money in the United States​ today? In the United States​ today, money includes​ _______.

the quarters inside public phones and the funds in a student's checking account

The word​ "fiat" is

used to describe​ today's money because it is money set by law.

The average number of times in a year each dollar is used to buy goods and service is called

velocity of circulation.

The supply of money curve is

vertical because the quantity of money is fixed at any one moment

The​ People's Bank of​ China, China's​ central, conducted an open market operation that injected 270 billion yuan into​ China's banking system. In the open market operation described in the news​ clip, explain whether the​ People's Bank of China buys or sells securities. The​ People's Bank of China​ _______ securities because​ _______. Suppose​ People's Bank of China buys 20 billion yuan of government securities from ICBC. Show how the transaction changes the balance sheets by filling in the numbers.

​buys; money is being injected into the banking system Securities=20 Reserves of ICBC=20 Securities=−20 Reserves=20

What is the monetary​ base? The monetary base is the sum of​ _______.

​coins, Federal Reserve​ notes, and​ banks' reserves at the Fed

Does an increase in real GDP change the demand for​ money? Do changes in financial technology change the demand for​ money? An increase in real GDP​ _______ the demand for money and changes in financial technology​ _______.

​increases; can increase the demand for money or decrease the demand for money

In the 2000s and​ 2010s, the quantity theory of money did a​ ________ job of predicting changes in the inflation rate because​ ________.

​poor; velocity of circulation plunged

The table shows the quantities of​ M1, M2, and their components in September 2020. M2=18,648.1 Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 M1=5,502.4 Checkable deposits=3,571.3 Currency and​ traveler's checks=1,931.1 (a)What is the largest component of​ M1? (b)What is the largest component of​ M2?

(a)Checkable deposits (b)Savings deposits

The velocity of circulation is​ constant, real GDP is growing at 4 percent a​ year, the real interest rate is 2 percent a​ year, and the nominal interest rate is 4 percent a year. Calculate the inflation​ rate, the growth rate of​ money, and the growth rate of nominal GDP. (a)The inflation rate is ______percent a year. (b)The growth rate of money is _____ percent a year. (c)The growth rate of nominal GDP is ______ percent a year.

(a)The inflation rate is 2 percent a year. (nominal interest rate-real interest rate) (b)The growth rate of money is 6 percent a year.(nominal interest rate+real gdp-real interest rate) (c)The growth rate of nominal GDP is 6 percent a year.(real gdp+inflation rate)

What is the effect of an open market sale of​ $1 million of securities by the​ Fed? (a)The quantity of money​ _______ by​ $1 million multiplied by​ _______. (b)Desired reserve ratio​ = ​R/D​; Currency drain ratio​ = ​C/D​; Monetary base​ = MB​; Quantity of money​ = M. The formula used to calculate the money multiplier is​ _______. (c)The sign of the money multiplier is​ _______. (d)The quantity of money​ _______.

(a)decreases​;the money multiplier (b)​(1 + C/D​)/(​R/D)+ (C/D​) (c)positive (d)decreases

What is the demand for​ money? When the nominal interest rate​ rises, does the opportunity cost of holding money increase or​ decrease? Does the quantity of money demanded increase or​ decrease? (a)The demand for money is the relationship between the quantity of money demanded and the​ _______ when all other influences on the amount of money that people wish to hold remain the same. (b)When the nominal interest rate​ rises, the opportunity cost of holding money​ _______ and the quantity of money demanded​ _______.

(a)nominal interest rate (b)rises; decreases

If the Fed wants to increase the quantity of​ money, what actions does it​ take? What is the effect on reserves in the banking​ system, loans, bank​ deposits, and the quantity of​ money? (a)If the Fed wants to increase the quantity of​ money, it makes an open market​ _______. (b)Reserves in the banking system​ _______. Banks​ _______ loans. (c)Bank deposits​ _______ and the quantity of money​ _______.

(a)purchase (b)increase​;make more (c)increase​;increase

​People's Bank of China boosts liquidity with open market operations ​People's Bank of​ China, China's​ central, conducted an open market operation that injected 270 billion yuan into​ China's banking system. Explain how the open market operation described in the news clip will change the quantity of money in China. (a)The Bank of China makes an open market​ _______. (b)Reserves in the banking system​ _______. Banks​ _______ loans. (c)Bank deposits​ _______ and the quantity of money​ _______.

(a)purchase (b)​increase; make more (c)​increase; increases

f the Fed wants to decrease the quantity of​ money, what actions does it​ take? What is the effect on reserves in the banking​ system, loans, bank​ deposits, and the quantity of​ money? (a)If the Fed wants to decrease the quantity of​ money, it makes an open market​ _______. (b)Reserves in the banking system​ _______. Banks​ _______ loans. (c)Bank deposits​ _______ and the quantity of money​ _______.

(a)sale (b)decrease;call in (c)decreases;decreases

If the Fed doubled the quantity of money and nothing else​ changed, what would happen to the price level in the short run and the long​ run? What would happen to the inflation​ rate? (a)If the Fed doubled the quantity of money and nothing else​ changed, the price level would​ _______ in the short run. (b)In the long​ run, the price level would​ _______ and the inflation rate would be​ _______ percent.

(a)start to rise (b)double; 100

Cash is more popular than bonds Money in the bank earns almost nothing. Even​ so, in the second half of 2015 an additional​ $208 billion was added to bank deposits and money market funds and billions of dollars were moved from bonds. What is the opportunity cost of holding​ money? If people move out of bonds and into​ money, how will the demand for money and the interest rate​ change? (a)The opportunity cost of holding money is​ _______ (b)When people move out of bonds and into​ money, the demand for money​ _______ and the interest rate on bonds​ _______.

(a)the interest rate forgone on an alternative asset (b)increases; rises

What to do with​ $50,000 now A good​ strategy: Put about​ two-thirds of the money into bonds of developed nations and the rest into riskier​ emerging- market bonds. What is the opportunity cost of holding​ money? If lots of people put their money into​ bonds, how will the demand for money and the interest rate​ change? (a)The opportunity cost of holding money is​ _______. (b)When lots of people followed this advice and put their money into​ bonds, the demand for money​ _______ and the interest rate on bonds​ _______.

(a)the interest rate forgone on an alternative asset (b)​decreases; falls

Annualized inflation in Venezuela soars to​ 1,000 percent Inflation in Venezuela hit a monthly rate of 23.3 percent in June and it was feared that it would soon move into unstoppable hyperinflation. The country faced constant looting and social unrest. ​What is​ hyperinflation? Is Venezuela in a​ hyperinflation? Hyperinflation is an inflation rate that exceeds​ _______. In​ 2016, Venezuela is​ _______ a hyperinflation.

50 percent a​ month; not in

The above table has the demand and supply schedules for money. What is the equilibrium nominal interest​ rate?

9 percent

The table shows the quantities of​ M1, M2, and their components in September 2020 but with two items missing. What are the missing​ items? M2=18,648.1 Money market funds=1,100.5 A=345.3 Savings deposits=11,699.9 M1=5,502.4 B=3,571.3 Currency and traveler's checks=1,931.1

A is Small time deposits B is Checkable deposits

Businesses paid workers twice a day during the hyperinflation in Germany after World War I and workers spent their incomes as soon as they were paid. Which statement explains these​ facts?

Businesses paid workers twice a day so that employees would not leave their jobs and search for employment elsewhere. Workers spent their incomes as soon as they were paid to minimize the loss in value of their income.

Draw a demand for money curve. Label it MD0. Draw a demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of new financial technology that decreases the demand for money and that follows the decrease in real GDP. Label it MD2. What is the effect in the money market of a decrease in real​ GDP? When real GDP​ decreases, _______.

Draw line MD0 as a normal negative line Draw line MD1 directly under MD0 Draw line MD2 under MD1 a decrease in the demand for money occurs

The graph shows a demand for money curve. Draw a new demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of a decrease in the number of families that have a credit card. Draw this demand for money curve in relation to the original demand for money​ curve, MD0. Label the new curve MD2.

Draw line MD1 under the line already there. Draw line MD2 over the line already there.

In October 2020​, the quantity of M2 was ​$18,812 billion and the nominal interest rate was 0.10 percent. In the graph to the​ right, draw a point that shows the money market in October 2020 and label it A. Draw and label the M2 demand curve in October 2020. Draw and label the M2 supply curve in October 2020.

Draw line MS straight up and down on 18,812. Plot point A at the intersection, that corresponds to 10% Draw line MD at a negative slope going through the point

Which of the following describe the​ "invention" of​ banking?

Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand.

Suppose that potential GDP and the velocity of circulation are constant. What is the change in the price level in the long run if the quantity of money increases by 3 percent a​ year? If the quantity of money increases by 3 percent a​ year, the change in the price level is ______ percent a year in the long run.

If the quantity of money increases by 3 percent a​ year, the change in the price level is 3 percent a year in the long run.

The table shows the quantities of the components of M1 and M2 in September 2020. In September 2020​, M1 was ​$_____ billion. Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 Checkable deposits=3,571.3 Currency and​ traveler's checks=1,931.1 In September 2020​, M1 was ​$_____ billion. In September 2020​, M2 was $______ billion

In September 2020​, M1 was ​$5502.4 billion.(add checkable deposits and currency and​ traveler's checks) In September 2020​, M2 was ​$18,648.1 billion.( add everything)

The figure shows the demand for money curve. Draw the supply of money curve if the quantity of money is ​$5.9 trillion. Label it MS. Draw a point at the equilibrium quantity of money and nominal interest rate. What is the equilibrium nominal interest​ rate?

Plot a line downwards on 5.9 and plot a point on the intersection. The equilibrium nominal interest rate is 6 percent a year. (whatever number is on the left at the intersection)

Which statement most accurately describes the effect financial technology has had on the demand for money in the United​ States?

Some advances in financial technology have increased the demand for money while others have decreased it.

What is the Fed and what is the​ FOMC?

The Fed provides banking services to banks and governments and the FOMC meets approximately every six weeks to review the state of the economy.

The table shows the quantities of​ M1, M2, and the monetary base in October 2020. What are the values of the M1 money multiplier and the M2 money multiplier in October 2020​? M1=5,579.9 M2=18,811.6 Monetary base=3,115.6 The M1 money multiplier is ______ The M2 money multiplier is _____

The M1 money multiplier is 1.8(5,579.9/3,115.6) The M2 money multiplier is 6(18,811.6/3,115.6)

If the quantity of money grows at 14 percent a​ year, the velocity of circulation is constant​, and potential GDP grows at 4 percent a​ year, what is the inflation rate in the long​ run?

The inflation rate in the long run is 10 percent a year. (14-4)

The economy is at full employment. The quantity of money grows at a rate of 14 percent a​ year, real GDP grows at 4 percent a year in the long​ run, and the velocity of circulation increases at 1 percent a year. What is the inflation rate in the long​ run?

The inflation rate in the long run is 11 percent a year. (14+1-4)

GDP is $20 billion and the velocity of circulation is 5. What is the quantity of money​?

The quantity of money is $4 billion (20/5)

The rate of increase in velocity is 0 percent a​ year, the money growth rate is 18 percent a​ year, and the inflation rate is 16 percent a year. What is the real GDP growth rate​?

The real GDP growth rate is 2 percent a year. (money growth rate-inflation rate + rate of increase in velocity)

The money multiplier is 2.0 and the currency drain ratio is 0.2. What is the desired reserve​ ratio?

[(1​ + 0.2​)÷​(2.0​)]−0.2​, =0.4.

In 2007​, the United States was at full employment. The quantity of money was growing at 6.4 percent a​ year, the nominal interest rate was 4.4 percent a​ year, real GDP grew at 1.9 percent a​ year, and the inflation rate was 2.9 percent a year. Calculate the real interest rate.

The real interest rate was 1.5 percent a year. 4.4-2.9=1.5

The table shows the amounts held as the various components of M1 and M2. Calculate the value of M1 and M2. Savings deposits=400 Checking deposits=150 Small time deposits=220 Money market funds and other deposits=280 Currency and​ traveler's checks=140

The value of M1 is ​$290 billion. (add checking deposits and currency and travelers checks) The value of M2 is ​$1190 billion.(add all together)

In the fourth quarter of 2020​, M2 was ​$18,322.1 ​billion, real GDP was ​$18,584.0 ​billion, and the price level was 113.8. What was the velocity of circulation of M2 in the fourth quarter of 2020​? The velocity of circulation of M2 was ______

The velocity of circulation of M2 was 1.2

The table gives information from a​ bank's balance sheet. Calculate the​ bank's loans,​ securities, and reserves. Checkable deposits=300 Savings deposits=400 Small time deposits=1240 Loans to businesses=1,150 Government securities=700 Currency=40 Reserves at the Fed=50

The​ bank's loans are ​$1150 million. The​ bank's securities are ​$700 million. The​ bank's reserves are ​$90 million. (currency plus reserves at the fed)

Which countries have experienced a hyperinflation during recent​ times?

Zimbabwe

Your bank manager tells you that she does not create​ money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because​ _______.

a bank that has excess reserves can make loans. When a bank creates a​ loan, the bank increases the balance of the​ borrower's account and that increase in deposits is new money

Pam buys​ $1,000 worth of American Express​ traveler's checks and charges the purchase to her American Express card. What is the immediate change in M1 and​ M2? The immediate effect on M1 and M2 is​ _______.

both M1 and M2 increase by $1,000

If you deposit​ $1,000 in cash in your checkable deposit at your​ bank, the quantity of M1 immediately

does not change in size.

What is the effect of the spread of ATMs and the increased use of debit cards on the money​ market? The spread of ATMs and the increased use of debit cards​ _______ money. Everything else remaining the​ same, the nominal interest rate​ _______.

increase the demand​ for; rises

Phyllis transfers ​$3​,000 from her savings account at the Bank of Idaho to her checking account. What is the immediate change in M1 and​ M2?

increases by $3,000​; does not change

Hyperinflation is defined as periods of

inflation over 50 percent per month.

If the quantity theory of money is correct and other things remain the​ same, an increase in the quantity of money increases​ _______.

nominal GDP and the price level

During the past five​ years, the quantity theory of money has been a​ _____ predictor of changes in the inflation rate because changes in the velocity of ciruclation have been​ ______ in comparison to changes in the quantity of money.

poor​;large

When a commercial bank receives a​ deposit, it must keep part of the deposit as cash reserves to satisfy its

required reserves.

In order to influence the interest​ rate, the Federal Reserve System can immediately adjust the

reserves of the banking system.

What is the role of the central bank of the United​ States? The central bank of the United States is​ _______.

the bank that provides services to commercial banks and governments and that regulates the banking system

The "shoe−leather costs" of inflation are the costs from

time spent trying to spend money quickly.

Suppose that banks launch an aggressive marketing campaign to get everyone to use debit cards for every conceivable transaction. They offer prizes to new debit card holders and introduce a charge on using a credit card. How would the demand for money and the nominal interest rate​ change? The demand for money​ _______ and the nominal interest rate​ _______.

​increases; rises


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