Macro Homework 4 and 5

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Suppose you deposit ​$500 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.1​0?

$5,000

Using the following information what is the velocity of​ money? The velocity of money is equal​ to _____________

(Real GDP/Money Supply) x Price Level = 6.05

If the money supply is growing at a rate of 4 percent per​ year, real GDP​ (real output) is growing at a rate of 2 percent per​ year, and velocity is​ constant, what will the inflation rate​ be?

2%

Suppose the economy is initially in​ long-run equilibrium. The Fed enacts a policy to decrease the discount ratedecrease the discount rate. In the​ short-run, this expansionary monetary policy will​ cause:

A shift from AD 1AD1 to AD 2AD2 and a movement to point​ B, with a higher price level and higher output.

Using the information below compute the M2 money supply.

All Assets = $13810

How Do Interest Rates Changes Affect Aggregate Demand?

Changes in interest rates will not affect government​ purchases, but they will affect the other three components of aggregate demand in the following​ ways: ​1) Consumption ​2) Investment ​3) Net exports

Using the information below compute the M1 money supply.

Currency and Coin Held by Public + Checking Account Balances + Traveler's Checks = $1410

The multiplier effect

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the multiplier effect.

What is the federal​ government's budget relationship between expenditures and tax revenue.

If the federal​ government's expenditures are greater than its tax​ revenue, a budget deficit results. If the federal​ government's expenditures are less than its tax​ revenue, a budget surplus results.

The Federal Reserve cannot affect the unemployment ratethe unemployment rate ​directly; therefore, the Fed typically uses the following as its policy​ target:

Interest Rates

What are the Goals of Monetary Policy?

The Fed has four monetary policy goals that are intended to promote a​ well-functioning economy: 1. Price stability 2. High employment 3. Stability of financial markets and institutions 4. Economic growth

Why might increasing taxesincreasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing​ inflation?

The legislative process experiences longer delays than monetary policy

12B. If the Fed wants to keep real GDP at its potential level in​ 2019, it should use ____________ policy. This means that the trading desk should be _________ Treasury bills.

a contractionary, selling

Excess reserves

are reserves banks keep above the legal requirement.

When the Fed conducts an open market​ purchase, the Fed _______________ and the money supply ______________.

buys securities from banks, increases

How Is Money Measured in the United States​ Today?

currency, checking account​ deposits, and​ traveler's checks.

When the Fed conducts an open market​ purchase, the interest rate should ______________

decrease

13B. Real GDP will be __________ it would have been if the Fed had taken no action.

higher than

13D. The inflation rate will be ______________ it would have been if the Fed had taken no action.

higher than

If government increases expenditure without raising taxes, this will

increase the budget deficit and require the government to borrow additional funds and cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector

13E. The unemployment rate will be ______________ it would have been if the Fed had taken no action.

lower than

What are required reserves

reserves that a bank is legally required to​ hold, based on its checking account deposits.

What are excess reserves?

reserves that banks hold over and above the legal requirement.

Expansionary monetary policy is

the Federal​ Reserve's decreasing interest rates to increase real GDP.

When the economy is experiencing a recessiona recession automatic stabilizers will​ cause:

transfer payments to increase and tax revenues to decrease

What are reserves

deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.

A policy of lowering the tax rate on dividends and capital gains to increase investment is intended to result in

Long run supply side effects. Explanation:- Lower tax rate on dividend and capital gain will result in long-run supply side effects causing increase in savings & investment in the economy and thus,the capital formation in the economy will increase in the long-run. Further, the real interest rate in the economy will also decrease as a result of this policy of government of lowering taxes.

M2 is a broader definition of money-what does it include?

M1 plus savings accounts balance, small denominations time deposits, balances in money market deposit accounts in banks and non-institutional money market fund shares.

Suppose that Deja owns a​ McDonald's franchise. She decides to move her​ restaurant's checking account to Wells​ Fargo, which causes the changes shown on the following​ T-account. If the required reserve ratio is 0.05​, or 5 ​percent, and Wells Fargo currently has no excess​ reserves, the maximum loan Wells Fargo can make as result of this transaction is ​$________

Take 5% of the reserves, and the answer is the remainder. $95,000

5B. The maximum amount by which the bank can expand its loans is $__________

The bank has an incentive to loan out all of its excess reserves. Excess reserves are the difference between what the bank is required to hold​ (RR) and the amount it actually holds. $3000

According to Lucas and​ Sargent, workers and firms have rational​ expectations, and therefore if the Fed pursues a contractionary monetary​ policy:

agents will immediately adjust their expectations of inflation downdown.

The hypothetical information in the following table shows what the situation will be in 2019 if the Fed does not use monetary policy. If the Fed wants to keep real GDP at its potential level in​ 2019, it should use _______________ policy.

an expansionary

13C. Full-employment real GDP will be ___________ it would have been if the Fed had taken no action.

the same as

If the required reserve ratio is 0.10​, the maximum increase in checking account deposits that will result from an increase in bank reserves of ​$10,000 is ​$________ ​(Enter your response as an​ integer.)

$100,000

Suppose you deposit ​$1,600 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.5​0?

$3,200

​M1: is the Narrowest Definition of the Money Supply, what does it include

1. ​Currency, which is all the paper money and coins that are in​ circulation, where​ "in circulation" means not held by banks or the government 2. The value of all checking account deposits at banks 3. The value of​ traveler's checks

12A. If the Fed does not take any policy​ action, in 2019 the level of real GDP will be ​$_________ trillion and the price level will be __________

18.5 , 118

If the money supply is growing at a rate of 4 percent per​ year, real GDP​ (real output) is growing at a rate of 2 percent per​ year, and velocity is growing at 1 percent per year instead of remaining​ constant, what will the inflation rate​ be?

3%

When the Federal Reserve increases the discount rateincreases the discount rate as a part of a contractionary monetary​ policy, there​ is:

A decrease in the money supply and an increase in the interest rate.

Suppose the economy is initially in​ long-run equilibrium. The government enacts a policy to decrease taxesdecrease taxes. In the​ short-run, this expansionary fiscal policy will​ cause:

A shift from AD 1AD1 to AD 2AD2 and a movement to point​ B, with a higher price level and higher output.

5A. If the required reserve ratio​ (RR) is 10​ percent, this bank currently holds $________ in excess reserves.

If the required reserve ratio is​ 10%, then the bank is only required to hold​ 10% of its deposits in reserve. $3000

Suppose the economy is initially in​ long-run equilibrium. The Fed decides to sell bondssell bonds. In the​ short-run, this contractionary monetary policy will​ cause:

Initially, the economy is in long-run equilibrium. Now, Fed decides to sell bonds. This means that Fed is undertaking contractionary monetary policy. Such policy results in decrease in money supply and increase in interest rate. Increase in interest rate raise the cost of borrowing and leads to fall in investment and consumption demand backed by credit which in result leads to decrease in aggregate demand. So, contractionary monetary policy leads to decrease in aggregate demand or leftward shift in aggregate demand curve. If we take AD1 as initial aggregate demand curve and it moves to AD2 then this resembles rightward shift of aggregate demand curve which is not possible. So, AD2 is the initial aggregate demand curve and it has moved leftward to AD1 as a result of contractionary monetary policy. It has been provided that initially economy is in long-run equilibrium. This means, initially, initial aggregate demand curve, initial short-run aggregate supply curve, and long-run aggregate supply curve are intersecting at one common point. With AD2 being the initial aggregate demand curve, the common point of intersection can only be point A as only at this point AD2 curve intersect with other two curves (LRAS and SRAS) at one common point (point A). Thus, initially, economy is at point A with initial aggregate demand curve being AD2, initial short-run aggregate supply curve being SRAS2, and long-run aggregate supply curve being LRAS. So, with aggregate demand curve shifting leftward from AD2 to AD1, the economy, in short-run, moves to point D. The point of intersection of short-run aggregate supply curve, SRAS2 and new aggregate demand curve, AD1. This movement of economy will result in lower price level and lower output. So, in short-run, contractionary monetary policy will cause a shift from AD2 to AD1 and a movement to point D, with lower price level and a lower output.

What Is Monetary​ Policy?

Monetary policy are the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals.

Suppose the required reserve ratio is 13​% and a bank has the following balance​ sheet: This bank keeps required reserves of ​$_______ and excess reserves of ​$_______

Required reserves are equal to the required reserve ratio multiplied by the amount of​ deposits 0.13 x 11,500 = $1495 Excess reserves are equal to total reserves minus required​ reserves 2300 - 1495 = $805

12D. If the Fed uses monetary policy to keep real GDP at its​ full-employment level, the inflation rate in 2019 will be ______%

With contractionary monetary​ policy, the inflation rate in 2019 will be the change in the price level ​(116−​114) divided by the​ "original" price level of 114. Multiply the result by 100 to express it as a percent. 0.018 ×100 ​= 1.8%.

12C. If the Fed takes no policy​ action, the inflation rate in 2019 will be ________%

Without contractionary monetary​ policy, the inflation rate in 2019 will be the change in the price level ​(118−​114) divided by the​ "original" price level of 114. Multiply the result by 100 to express it as a​ percent: 0.035 ×100 ​= 3.5%

13A. If the Fed wants to keep real GDP at its potential level in​ 2019, it should use _____________ policy. The trading desk should be _____________ ​T-bills.

an expansionary, buying

Contractionary monetary policy is the Federal​ Reserve's interest rates to reduce inflation.

the Federal​ Reserve's increasing interest rates to reduce inflation.

What is a required reserve ratio?

the minimum fraction of deposits banks are required by law to keep as reserves.


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