Macroeconomics Final Review

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves?

$375

Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is ___.

3.

If the reserve requirement is 20%, the money multiplier is:

5.

If the reserve requirement ratio is 20%, the money multiplier is:

5.

The _____ is the central bank of the United States.

Federal Reserve System

GDP

G x (1 / 1-MPC)

Real GDP

G(1 / 1-MPC)

Fiscal policy

Government policy Taxes Transfer payments

_____ occurs when a central bank sets a target inflation rate and adjusts monetary policy to keep inflation within that range.

Inflation targeting

Labor force

Labor force DIVIDED BY adult population

Expansionary policy

ONLY CREATES INFLATION

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then:

Q = $10 trillion.

Expanisionary monetary policy

Reserve requirement and discount rate decrease Fed BUYS bonds Increase AD. Fed buys bond to lower interest rate

Which action is the Fed most likely to take to curb inflation (decreaseAD)?

The Fed will sell securities in the open market

The use of money as a medium of exchange helps reduce the inefficiencies inherent in:

a barter economy.

Which of the following will increase aggregate demand?

a decrease in taxes

Which is NOT one of the three basic functions of money?

a unit of account a measure of value ***a means to collect taxes a medium of exchange

Quantitative easing refers to the process whereby the Federal Reserve:

buys securities to stimulate the economy.

Highest liquid

cash

M1 includes:

cash, demand deposits, and other checkable deposits.

In the short run, changes in the money supply will NOT change output according to:

classical economists.

Fiat money:

does not necessarily have any intrinsic value but has been declared by a government to be money.

Keynesian theory

expansionary policy could create more activity

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

expansionary; buying

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

falls to $875.

Institutions that acquire funds from savers and then lend those funds to borrowers are called:

financial intermediaries.

In counteracting a negative supply shock, the Fed could achieve ______ by using ______ monetary policy.

full employment but not price stability; expansionary

Least liquid

houses

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply:

increases by a maximum of $500,000.

Monetary policy involves all of these EXCEPT:

increases in personal taxes.

A lower reserve requirement:

increases the ability of banks to make loans.

All of these are considered monetary policy lags EXCEPT:

information lag. implementation lag. ***speculation lag. decision lag.

Yield

interest payment DIVIDED BY price of bond

Price of bond

interest payment DIVIDED BY yield or interest rate

Money:

is anything that is accepted in exchange for other goods and services or for payment of debt.

unemployment

labor force MINUS employed

The financial panic and credit freeze in late 2008 pointed to the Fed's important role as a:

lender of last resort.

In a liquidity trap:

monetary policy is ineffective in changing income and output.

The main tool of monetary policy is:

open market operations.

Tight monetary policy refers to the Federal Reserve:

raising interest rates, usually to fight inflation.

Financial institutions:

reduce information costs, reduce transaction costs, and diversify assets.

Contractionary monetary policy

reserve requirement and discount rate increase Fed SELLS bonds Decrease AD. Fed sells bonds to increase interest

A reduction in the interest rate causes consumption and investment to _____, which shifts the aggregate demand curve _____.

rise; rightward

NO SRAS effect when

the economy is in a recession or depression

When the long-run aggregate supply curve is drawn as a vertical line, the theorist is assuming that:

the economy tends to full employment in the long run.

In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:

the velocity of money (V) = 6.

What are the primary functions of money?

unit of account, medium of exchange, store of value

Classical theory

wages, prices and interest rate are FLEXIBLE

Sumit deposits $1,500 cash into his checking account. The reserve requirement ratio is 25%. What is the change in his bank's excess reserves?

$1,125

(Table: Money Measure Components, June 2010) Based on the table, M1 for June 2010 was: Money Measure Components, June 2010 | Amount ($ billions) Money Component Currency 883.6 Traveler's checks 4.8 Demand deposits 467.0 Savings deposits 5,086.1 Small-denomination time deposits 1,054.0 Other checkable deposits 382.0 Retail money funds* 746.6 *Includes money market accounts and money market mutual fund accounts.

$1737.4 billion.

Assume the reserve requirement ratio is 10% and all banks are fully loaned up. If a new deposit of $10,000 is made into Bank X, with this deposit Bank X can make new loans of:

$9,000.

Potential multiplier

1 DIVIDED BY reserve requirement

leakage multiplier

1 DIVIDED BY reserve+excess+cash

What is the yield on a bond sold for $1,850 and paying $25.50 in interest annually?

1.38%

Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is:

3.

Yolanda took $5,000 from her checking account and put the money in her savings account at the same bank. Based on that information, which of these is true?

M1 went down by $5,000, but M2 was unchanged.

(Figure: Market for Loanable Funds 2) If households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D0.

S0; S1; b

Expansionary fiscal policy

Taxes decrease Government spending increases Transfer payments increase Create more output to increase demand

Contractionary fiscal policy

Taxes increase Government spending decreases Transfer payment decreases Create less output to decrease demand

Which one of the following will cause the supply of loanable funds curve to shift leftward?

an increase in the government deficit

(Figure: Shifts in SRAS and AD) If the economy is at short-run equilibrium point b because of a negative supply shock, the Federal Reserve could enact an expansionary monetary policy, thus shifting the new equilibrium to point _____. As a result of this, the price level would _____ and real output would _____.

c; further increase; increase

Which of the following measures is an example of an expansionary fiscal policy?

increasing unemployment compensation

M2 is _____ in dollar value than M1; it also contains _____ assets.

larger; less liquid

Generally, economists believe that monetary policy should focus on price stability in the _____ run and output or income in the _____ run.

long; short

Which of the following is the LEAST liquid?

money in a savings account ***a Picasso painting a U.S. Treasury bond $100 in cash

Which of the following is NOT a policy tool of the Federal Reserve?

reserve requirement ratio the discount rate open market operations ***fiscal policy

When the Fed wants to decrease the money supply, it will:

sell bonds.

If the Fed wants to raise the interest rate, it will ______ bonds, which ________ bond prices.

sell; lowers

If there is a general rise in fear of the financial system:

the actual multiplier will fall.

When the long-run aggregate supply curve is drawn as a vertical line, the theorist is assuming that:

the economy tends to move toward full employment in the long run.

The lower the reserve requirement

the higher the money multiplier

(Figure: Market for Loanable Funds) The graph shows the supply and demand for loanable funds. If the market interest rate is 3%:

there will be an excess supply of funds.