Macro Final Exam

If the required reserve ratio is 10%, how much can a bank lend out if its deposits total $2 million?

$1.8 million

By how much does the money supply increase if the Federal Reserve injects $5 million into the system and the required reserve ratio is .2?

$25 million

If the required reserve ratio is 10%, the increase in the money supply that results from $500,000 of new deposits equals:

$5,000,000.

What is the total change in the money supply if the reserve requirement is 10% and deposits rise by $5,000?

$50,000

Suppose that the Fed sets the required reserve ratio at 12%. First Bank has $1,000,000 in deposits. How much is First Bank able to lend to its customers?

$880,000

How many Federal Reserve districts are there in the U.S.?

12

If First Bank has $1,000,000 in deposits and is able to lend up to $860,000, what is the required reserve ratio?

14%

If the nominal interest rate is 6% and the inflation rate is 3%, the real interest rate is:

3%

Which of the following statements about the business cycle is true?

A recession occurs when real GDP falls for two consecutive quarters.

Which of the following is an additional role of the Fed?

All of these choices are additional roles of the Fed a. Maintaining the Fed wire b. Clearing checks c. Providing emergency loans

Which of the following is a component of GDP?

All of these choices are components of GDP. a. Consumption b. Investment c. Government spending

The microeconomic demand curve:

All of these choices are correct. a. shows how the substitution effect causes a decrease in quantity demanded as a result of increasing prices. b. shows how the income effect causes a decrease in quantity demanded as a result of increasing prices. c. measures the effect of nominal variables on other nominal variables.

Which of the following serves as a store of value?

All of these choices serve as a store of value. a. A dollar bill b. A Treasury bond c. Microsoft stock

Which of the following costs of inflation shrink consumer wealth?

All of these choices shrink consumer wealth. a. Shoe-leather costs b. Menu costs c. Misallocation of resources

Which of the following individuals would be harmed the most by an unanticipated change in the rate of inflation?

Bankers who lend money at fixed interest rates.

Changes in the business cycle correspond with changes in which of the following?

Business conditions

n the diagram of the business cycle, the trough of the business cycle is at point ________.

C

The required reserve ratio covers which of the following types of deposits?

Checking accounts only

Which of the following statements about commodity money is true?

Commodity money has intrinsic value.

Which of the following statements is true?

If the price level or real GDP changes, the money demand curve will shift.

Which of the following best explains why the Federal Reserve reduced the required reserve ratio in the 1990s?

It wanted to stimulate the economy, which was in a recession.

Which of the following regarding money is not true?

Money is backed by gold.

In practice, which tool does the Federal Reserve use most often to increase or decrease the money supply?

Open market operations

Which of the following will occur during a recession?

Personal income falls; investment spending falls; corporate profits fall.

Which of the following is a phase of the stylized business cycle?

Recession

Which of the following statements regarding the aggregate demand (AD) curve is correct?

The AD curve represents the inverse relationship between the expenditures of households, businesses, government, and foreigners and the aggregate price level.

Which of the following statements describes what happens to a bank's balance sheet when a customer opens up a checking account?

The checking account appears as a liability, which is balanced on the asset side by the required reserves and the loan made with the depositor's funds.

What happens to the money supply if the Federal Reserve reduces the required reserve ratio?

The money supply increases.

The money multiplier:

The only correct choices are: is the reciprocal of the required reserve ratio and is used to calculate the net change in the money supply.

Which of the following ideas can we infer about the market for loanable funds as depicted in the graph? (Downward sloping D(P,Y) showing excess supply of money)

The price of the bond will be bid upward.

Which of the following is most likely to result from an increase in the money supply?

The prices of bonds will increase.

Which of the following is not a monetary policy tool of the Fed?

The prime rate

Which of the following is not a tool used by the Federal Reserve to increase or decrease the money supply?

The prime rate

Which of the following would increase the money supply?

The purchase of government securities by the Federal Reserve

Which of the following groups makes up the Federal Open Market Committee (FOMC)?

The seven-member Board of Governors plus five presidents of the twelve district banks

Which of the following is true about the unemployment rate at the end of a recession?

The unemployment rate will gradually fall

Which of the following is not a role of the Federal Reserve Bank?

To insure depository institutions

On the Fed's balance sheet:

Treasury securities appear as assets, and U.S. dollars appear as liabilities.

Businesses cut back spending when the price level rises, because the resulting increased demand for money drives the interest rate upward.

True

The purchase of Treasury securities by the Fed will increase the money supply

True

Which of the following equations accurately represents the macroeconomic equilibrium in an open economy?

Y = C + I + G + NX

An economy that does not have enough money in circulation might experience ________, and too much money in an economy might cause ________.

a recession; inflation

An increasing price level will cause:

a reduction in the overall quantity of goods and services demanded.

An inflation tax is:

a tax on people who hold money.

The aggregate demand (AD) curve graphically illustrates the inverse relationship between:

aggregate expenditures and the price level.

Characteristics of money include:

all of these choices a. durability. b. ability to be standardized. c. divisibility.

M1 includes

all of these choices. a. cash. b. coins. c. travelers' checks.

M2 includes:

all of these choices. a. coins. b. small time deposits. c. money market mutual funds.

Printing money to finance a government program:

all of these choices. a. imposes a tax on everyone who holds money. b. reduces the opportunity cost of the program. c. is exactly like imposing an income tax to pay for the project.

The aggregate demand curve measures:

all of these choices. a. the real value of nominal variables. b. aggregate expenditures as a function of the price level. c. the aggregate price level across the economy and real GDP, or income.

In the real business cycle theory, if long-run aggregate supply increases, then long-run aggregate demand increases by:

an equal amount, so that real output increases and the price level remains unchanged.

An interest rate above the market equilibrium indicates:

an excess supply of money.

Suppose that over the past six months, the unemployment rate has fallen from 5.0% to 4.5%, and real GDP has increased by:

an expansionary phase of the business cycle is in progress.

The aggregate demand curve slopes downward because:

an increase in the aggregate price level reduces the quantity of goods and services demanded.

Increasing the money supply in an expanding economy will most likely cause:

an increase in the price level.

When the U.S. price level rises, we expect foreigners to:

buy less U.S. goods and services.

Changes in the price level affect:

consumption, investment, and foreign spending.

During a recession one would expect the price level to ________ and unemployment to ________.

decrease, increase

The Fed can increase the money supply by:

decreasing the required reserve ratio.

To avoid the inflation tax, people:

do not hold money.

A recession occurs when real GDP falls for two consecutive months.

false

The Fed can directly control the money supply.

false

The Federal Reserve Bank is a type of commercial bank.

false

The fluctuations of an economy are regular and can be predicted.

false

The quantity equation is written as M x Y = V x P.

false

The widely held belief that when the central bank creates money, prices rise is called:

he quantity theory of money.

Recessions often have benefits associated with them. All of the following are examples of benefits provided by recessions excessive:

increases in investment.

The supply curve of money ________, while the demand curve for money ________.

is a vertical line; slopes downward

If the money supply increases by 10% and real GDP increases by 3%, prices will increase by:

less than 10%.

f Emily writes a check for her groceries, she is using money as a:

medium of exchange.

The idea that inflation results in businesses having to change price tags and listings often is called the ________ of inflation.

menu cost

Suppose you have a business selling wholesale auto parts to dealers and car repair shops. Because of inflation you must print and mail out new price lists every month. The costs would be an example of:

menu costs.

The quantity theory of money can explain:

moderate inflation, hyperinflation, and deflation.

Which of the following correctly expresses the quantity theory of money?

money x velocity = price level x real output

The Fed's most commonly used tool of monetary policy is:

open market operations.

Assume the velocity of money is held constant. According to the classical view of money:

output is fixed in the long run, so changes in the money supply will only affect the price level.

In the graph shown, an increase in government spending will cause the equilibrium to move from:

point A to point B

In the graph shown, an increase in the money supply will cause the equilibrium to move from:

point A to point B

Study the graphs. (Two graphs, two red lines parallel to one another (D and D1) and excess demand is from A to C) Supposing the aggregate price level has increased, we can predict a movement from:

point A to point C.

Government spending depends on:

policymakers.

From the microeconomic perspective, the income effect occurs when:

rising prices decrease consumer wealth and demand.

Suppose that Bolivia is experiencing hyperinflation and people go to the bank every day to get cash and then buy their daily needs immediately. This would be an example of:

shoe-leather costs.

If Jim puts $1.00 into his piggy bank every day, he is using money as a:

store of value.

The velocity of money is defined as:

the average number of times per year a dollar changes hands.

When prices rise:

the demand for money increases.

If the Federal Reserve purchases government bonds, all of the following will occur except:

the discount rate will be forced up.

If the Fed decides to increase the required reserve ratio:

the money supply will decrease.

In the quantity theory of money, velocity means:

the rate at which the money supply turns over.

The business cycle can generally be described as:

the short-run upward and downward movements in total output.

Shoe-leather costs of inflation refer to:

the waste of resources as people attempt to minimize their holdings of money.

1. The free interaction of borrowers and lenders as well as the forces of supply and demand are two determinants of the interest rate for loanable funds.

true

An increase in the price level will increase the demand for money.

true

An increase in the price level will raise the demand for money and shift the demand curve for money outward.

true

Because changing the required reserve ratio can have drastic effects on the economy, the Fed rarely exercises this tool of monetary policy

true

Government policy can shift the aggregate demand curve either inward or outward.

true

Keynes's circular flow model illustrates the flow of real variables while holding nominal variables constant.

true

Lowering the discount will increase the money supply.

true

Suppose the U.S. economy is experiencing a recession. Increasing the money supply will provoke an expansion.

true

The primary role of the Fed is to control inflation through monetary policy set by the Federal Open Market Committee

true

When the government raises revenue by printing money, it is said to have imposed an inflation tax.

true