chapter 13,14,15 ECON 2301
What is fiat money?
. money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
The simple deposit multiplier equals
All of the above.
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP.
In 2017, an article in the Wall Street Journal on the latest data on U.S. net exports noted that, along with other currencies: "The [the Chinese] yuan has risen this year against the dollar." The article also noted that there had been "Stronger [economic] growth in Asia and Europe..." Source: Josh Mitchell, "U.S. Trade Gap Shrinks as Exports Rise," Wall Street Journal, April 4, 2017. What does the article mean that the yuan had "risen" against the dollar?
It now takes more dollars to buy one yuan.
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
As output increases along the short-run aggregate supply curve, briefly explain what happens to the cyclical rate of unemployment.
The cyclical rate decreases because fewer workers will be laid off.
Why does the Fed's actions to increase or decrease the rate you identified above attract so much attention?
This rate ultimately has a substantial effect on many other interest rates.
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports
Increase, because U.S. exports are cheaper.
Could these firms have reduced their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages?
No, because workers would become disgruntled with wage cuts and reduce their productivity, resulting in higher production costs.
In November 2016 the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having "traded one customer a kilogram of potatoes, cauliflower and tomatoes for half a liter of honey. That was a good deal, he says. In normal times, the honey would be 120 rupees in the market (around $1.80) and the vegetables 70 rupees." Source: Raymond Zhong and Karan Deep Singh, "Barter Economy Is Reborn in Villages as India Cancels Cash," Wall Street Journal, November 18, 2016. Does the merchant's ability to arrange a barter deal with a customer indicate that the Indian economy doesn't actually require money to function efficiently? Briefly explain.
No, resorting to barter means that each trade required a double coincidence of wants for trade to occur.
In mid-2017, an article in the Wall Street Journal noted that: "The Federal Reserve's interest-rate increases aren't having the desired effect of cooling off Wall Street's hot streak...where stocks have rallied to records this year..." Source: David Harrison, "Fed's Effort to Guide Markets Falls," Wall Street Journal, June 11, 2017. Is cooling off rapid increases in stock prices part of the Fed's dual mandate?
No, this is not part of the Fed's dual mandate of price stability and high employment
Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is
different, because consumers can substitute between individual products.
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low; high
Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates.
sell; decreasing; increasing
If the required reserve ratio is 0.20, or 20 percent, and wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $ 80,000.
$ 80,000
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 $15,000 is $ 150,000.
$150,000
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves.
If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $10 ,000 is $ 66,667
10,000/0.15=66,667
What is a banking panic?
A situation in which many banks experience runs at the same time.
A newspaper article contains the statement: "Income is only one way of measuring wealth." Source: Sam Roberts, "As the Data Show, There's a Reason the Wall Street Protesters Chose New York," New York Times, October 25, 2011. Do you agree that income is a way of measuring wealth?
A. Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts.
Which of the following statements is correct?
All of the above are true.
Which of the following conditions make a good suitable for use as a medium of exchange?
All of the above conditions must be met.
The M1 measure of the money supply includes which of the following components?
All of the above.
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
All of the above.
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
All of the above.
(b) Suppose that Bank of America makes the maximum loan it can from the funds you deposited. Using the second T-account, show the initial impact of the loan on Bank of America's balance sheet. The funds will be deposited in another bank.
Assets Liabilities Reserves -$ 1,6000 Deposits $0 Loans +$1,600
Distinguish among money, income, and wealth.
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts.
Who is able to borrow and lend at that rate?
Banks are able to borrow and lend from each other at that rate.
Explain how each of the following events would affect the long-run aggregate supply curve LOADING.... a. The price level increases
Because this is a change in the price level , the LRAS curve will not change
b. The labor force increases.
Because this is a change in the productive capacity of the economy , the LRAS will shift to the right
c.There is an increase in the quantity of capital goods
Because this is a change in the productive capacity of the economy , the LRAS will shift to the right .
d. Technological change occurs.
Because this is a change in the productive capacity of the economy , the LRAS will shift to the right .
In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD1 to MD2?
Both (a) and (c).
The figure to the right shows a breakdown of the M1 definition LOADING... of the money supply in 2017. Which area corresponds to the amount of checking account deposits?
C
how does a decrease in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
(c) Show the effect of these transactions on the balance sheet for Citibank. Suppose you deposit $2000 in currency into your checking account at a branch of Bank of America, which we will assume has no reserves at the time you make your deposit. Also assume that the required reserve ratio is 20% (0.20).
Citibanklong dashstep (c) Assets Liabilities Reserves +$1,600 Deposits +$1,600
In the definition of the money supply, where do credit cards belong?
Credit cards are not included in the definition of the money supply.
Briefly explain whether you agree or disagree with the following statement: "Assets LOADING... are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts
An article in the Los Angeles Times about driver-less trucks states that "Trucking will likely be the first type of driving to be fully automatedlong dashmeaning there's no one at the wheel." The article adds that there is a financial incentive for automating trucks because "Trucking is a $700-billion industry, in which a third of costs go to compensating drivers." Source: Natalie Kitroeff, "Robots Could Replace 1.7 Million American Truckers in the Next Decade," Los Angeles Times, September 25, 2016. How are driver-less trucks likely to affect costs to businesses of transporting goods?
Driver-less trucks would decrease transportation costs by requiring less labor.
How are driver-less trucks likely to affect the short-run aggregate supply curve (SRAS)?
Driver-less trucks would shift the SRAS curve to the right due to a technological advance.
In 2017, one article in the Wall Street Journal had the headline: "Federal Reserve Expected to Deliver Rate Increase." Source: David Harrison, "Federal Reserve Expected to Deliver Rate," Wall Street Journal, June 14, 2017. What rate was the headline likely referring to?
Federal funds rate.
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. All of the following are correct except:
Firms lose since they don't have the convenience of credit cards
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 0.10, or 10 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $ 90,000.
Which of the following statements is correct if real GDP in the United States declined by more during the 2007minus2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1 to MD 2 (Point A to Point C)?
Increase in real GDP or increase in the price level
Which of the following is a monetary policy target used by the Fed?
Interest rate
Which of the following is a monetary policy target used by the Fed?
Interest rate.
In the late 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money LOADING... or a fiat money LOADING...?
It is a commodity money because it has value as recycled paper.
What do economists mean by the demand for money?
It is the amount of moneylong dashcurrency and checking account depositslong dashthat individuals hold.
What does the article mean by firms reducing the "cash value" of workers' wages?
It means firms found it difficult to cut nominal wages.
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1 LOADING...? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
What is the disadvantage of holding money?
Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest
What is the disadvantage of holding money?
Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.
Is this change likely to have much impact on the economy?
No
Does the Fed's dual mandate require it to attain a zero percent unemployment rate? Briefly explain.
No, because even when the economy is at full employment, there is still a natural rate of unemployment.
If online lenders find that borrowers are defaulting on loans at higher than expected rates, can they offset the problem by charging higher interest rates on the loans? Briefly explain.
No, because only the most high-risk borrowers will accept loans, meaning the borrower is more likely to default.
Does the Fed's dual mandate require it to attain a zero percent inflation rate? Briefly explain.
No, because price stability is sufficient.
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money LOADING...?
No. The goods are not a store of value.
Why would online lenders skip this step in the loan application process?
Online lenders skip this step because gathering and reviewing information on borrowers is costly.
Which one of the following is not a function of money?
Open market operation.
An article in the Wall Street Journal notes that online peer-to-peer lenders: "have automated the processes of checking borrowers' credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns." The article also notes that: "Charge-off rates, which reflect loans on which a lender doesn't expect to collect, have risen..." Source: Telis Demos and Peter Rudegeair, "Lending Club's Newest Problem: Its Borrowers," Wall Street Journal, July 12, 2016. Why do banks require borrowers to submit pay stubs and tax returns when applying for a loan?
Pay stubs and tax returns allow lenders to gauge a borrower's ability to pay back the loan.
Why does the short-run aggregate supply curve slope upward?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality.
Will the outcome you discussed above result in a movement along the U.S. aggregate demand curve or a shift of the aggregate demand curve? Briefly explain.
Shift of the U.S. aggregate demand curve, because this is not a change in the price level.
The formula for the simple deposit multiplier is
Simple Deposit Multiplier = 1/RR
A column in the Wall Street Journal referred to policy actions aimed at "fulfilling both sides of the Fed's dual mandate." Source: Steven Russolillo, "The Key to a More Hawkish Fed," Wall Street Journal, December 14, 2016. Which of the following gave the Fed a dual mandate?
The Employment Act of 1946.
Which of the following best explains how the Federal Reserve acts to help prevent banking panics?
The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.
In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS1 to MS2?
The Fed decreases the money supply by deciding to sell U.S. Treasury securities.
In response to the severity of the financial crisis, the Fed started to rapidly reduce the target range for the federal funds rate in September 2007 and, from December 2008 to December 2015, held the target range between 0% and 0.25%. Which of the following statements is true?
The Fed successfully held the actual federal funds rate within that target range over the seven-year period by conducting open market operations to increase or decrease bank reserves quickly.
Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true, will support Harry's view that aggregate output can increase in spite of domestic inflation?
The Milovian currency recently depreciated in the foreign exchange market.
The U.S. penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high and it has cost the U.S. Treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist François Velde of the Federal Reserve Bank of Chicago has proposed making the current penny worth 5 cents. Source: Austan Goolsbee, "Now That a Penny Isn't Worth Much, It's Time to Make It Worth 5 Cents," New York Times, February 1, 2007.
The effect of this proposal would cause an increase in the value of M1.
As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment.
The natural rate remains the same because it is not affected by the business cycle.
A student was asked to draw an aggregate demand and aggregate supply graph LOADING... to illustrate the effect of an increase in aggregate supply. The student drew the following graph: The student explained the graph as follows: "An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change
Dudley Jenkins runs a services swapping web site where people can trade services online. For instance, a user on the web site can offer babysitting services to another user in return for getting his house painted. Dudley had expected this to be a successful venture because swapping web sites seemed to work well for collectibles like stamps and antiques. Given the high levels of unemployment in the economy, he was convinced of the web site's success because it would allow people to exchange one service for another without the use of money. However, Dudley was unable to sustain the business for even a year. Which of the following, if true, is most likely to explain this outcome?
The web site did not attract a user base that was large enough to ensure that customer requirements matched.
In a newspaper column, author Delia Ephron described a conversation with a friend who had a large balance on her credit card on which the friend was being charged an interest rate of 18 percent per year. The friend was worried about ever being able to pay off the debt. Ephron was earning only 0.4 percent interest on her bank certificate of deposit (CD). She considered withdrawing the money from her CD and using it to make a loan to her friend so her friend could pay off her credit card balance: "So I was thinking that all of us earning 0.4 percent could instead loan money to our friends at 0.5 percent. ... [M]y friend would get out of debt [and] I would earn $5 a month instead of $4." Source: Delia Ephron, "Banks Taketh, but Don't Giveth," New York Times, January 27, 2012. Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest?
There is a risk that the borrower won't pay the money back.
The following is from an article on community banks: "Their commercial-lending businesses, funded by their stable deposit bases, make them steady earners." Source: Karen Richardson,"Clean Books Bolster Traditional Lenders," Wall Street Journal, April 30, 2007, p. C1. What is commercial lending?
This is when banks make loans to businesses.
In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." Source: Steven D. Levitt, "The Financial Meltdown Now and Then," New York Times, May 12, 2009. What is the relationship between the federal funds rate falling and the money supply increasing?
To decrease the federal funds rate, the Fed must increase the money supply
How does lowering the target for the federal funds rate "pour money" into the banking system?
To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
True
We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit.
True
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Are such increases a concern for the Fed? Briefly explain.
Yes, rapidly rising stock prices could be a concern for the Fed because it has a goal of stable financial markets.
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
.Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports.
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
A pro to a business of ditching cash is
a reduced risk of robbery.
Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? (Mark all that apply.)
a. interest rate effect B. Wealth effect
Consider each of the following events and then figure out how each of these events will affect the aggregate demand LOADING... curve. a. An increase in the price level will cause a b. An increase in government purchases will cause a c.An increase in state income taxes will cause a d. An increase in interest rates will cause a e.A faster income growth in other countries will cause a
a. movement up along the aggregate demand curve. b. rightward shift of the aggregate demand curve. c. leftward shift of d. leftward shift of e. rightward shift of
Consider the variables that shift long-run aggregate supply and the variables that shift short-run aggregate supply. Match each of the following scenarios with one of the following three graphs of long-run aggregate supply and short-run aggregate supply. a. A decrease in the expected future price level b.Workers and firms adjust to having previously underestimated the price level c.A positive technological change occurs
a.3 b.2 c.1
If something is to be considered as money, it has to fulfill all four functions .
all four functions
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right
uppose you deposit $2000 in currency into your checking account at a branch of Bank of America, which we will assume has no reserves LOADING... at the time you make your deposit. Also assume that the required reserve ratio LOADING... is 20% (0.20). (a) Complete the first T-account to the right to show the initial impact of this transaction on Bank of America's balance sheet.
bank of america-step (A) Assets liabilities change in change in Deposits +$2,000 Reserves +$2,000
The Fed now needs to rely on these two new policy tools to change the federal funds rate because
banks were not loaning out excess reserves
Technological changes that make it possible for businesses to ditch cash include all of the following except
barter.
The Fed uses policy targets of interest rate and/or money supply because
because
The article qualifies the observation as applying to the developed world. Using bitcoins may be more attractive to individuals and firms in developing countries, such as Brazil or India, than to individuals and firms in the United States because
bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries.
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to
buy U.S. Treasury securities.
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
A con to a business of ditching cash is
cash is the only medium of exchanged used by some
A movement from point A to point C could be the result of a
change in the expectations of households.
Consider the two aggregate demand curves in the graph at right. A movement from point A to point B on AD1 could be the result of a
change in the price level.
Consider the short-run aggregate supply curves in the graph at right. A movement from point A to point B on SRAS1 could be the result of a
change in the price level.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
B. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in consumption, it will cause a shift to the left in the aggregate demand curve.
consumption, shift to the left in
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 LOADING... definition of the money supply?
c & e
A higher required reserve ratio _________ the value of the simple deposit multiplier.
decreases
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier.
decreases
In the figure to the right, the opportunity cost LOADING... of holding money decreases when moving from Point A to Point B on the money demand curve.
decreases
Which of the following is the largest liability of a typical bank?
deposits
An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy." This statement is false because the aggregate demand curve is
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________.
expands; contracts
The interest rate that banks charge each other for overnight loans is called the
federal funds rate
An article in the New York Times in 1993 stated the following about Fed Chairman Alan Greenspan's decision to no longer announce targets for the money: "Since the late 1970's, the Federal Reserve has made many of its most important decisions by setting a specific target for growth in the money supply ... and often adjusted interest rates to meet them." Source: Steven Greenhouse, "Fed Abandons Policy Tied to Money Supply," New York Times, July 23, 1993. If the Fed would no longer have a specific target for the money supply, it would be targeting the
federal funds rate.
The interest rate that banks charge each other for overnight loans is called the
federal funds rate.
To affect economic variables such as real GDP or the price level, the monetary policy target the Federal Reserve has generally focused on is the
federal funds rate.
Give the three reasons the aggregate demand curve slopes downward. The U.S. aggregate demand curve slopes downward due to all of the following reasons except the
government-spending effect, where a change in the price level affects government purchases.
Since 1950, the annual inflation rate in the U.S.
has typically been positive, but it has also varied substantially, peaking around 1980, and becoming negative for several months in early 2009 due to the effects of the Great Recession.
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment.
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are
included only in M2.
An article in the Economist magazine noted that: "the economy's potential to supply goods and services [is] determined by such things as labour force and capital stock, as well as inflation expectations." Source:"Money's Muddled Message" Economist, May 19, 2009. This list of the determinants of potential GDP is
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.
Money is an imperfect standard of deferred payment because inflation causes the value of money to decrease over time.
inflation
Which of the following is a monetary policy target used by the Fed?
interest rate
A. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in investment, it will cause a shift to the right in the aggregate demand curve
investment, shift to the right in
The Fed uses policy targets of interest rate and/or money supply because
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
Following the financial crisis of 2007-2009, Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2016, regulators approved only five new banks, which was not enough to offset the closure of existing banks. According to the article, "Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses." Source: Rachel Witkowski, "Banks Are Finally Sprouting Anew in America," Wall Street Journal, February 8, 2017. Startups and small businesses might be more likely than large corporations to rely on banks for funding because
large corporations have more ways to obtain funding than do startups and small businesses.
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low; high
Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because
maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.
The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. This large amount of currency per person can be partially explained because
many U.S. dollars are held outside of the country by foreigners.
According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." Source: Peter Heather, The Fall of the Roman Empire: A New History of Rome and the Barbarians, New York:Oxford University Press, 2006, p. 89. When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange.
Based on a Survey of Consumer Payment Choice, researchers from the Federal Reserve Bank of Boston estimated that the average consumer, 18 years of age and older, held about $202 in currency. However, there is actually about $4,500 of currency in circulation for every person in the United States. Source: Claire Greene, Scott Schuh, and Joanna Stavins, "The 2015 Survey of Consumer Payment Choice," Federal Reserve Bank of Boston Research Data Report No. 17-3, August 8, 2017. The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because
more than half of the currency is held outside the borders of the United States
Figure C illustrates
more widespread use of mobile wallets.
A change in the price level will cause the long-run aggregate supply curve to
move along a stationary LRAS curve
Explain how each of the following events would affect the short-run aggregate supply curve LOADING.... a. An increase in the price level will not change the SRAS curve because this is a change in the price level
not change,the SRAS curve because this is a change in the price level
Which one of the following is not a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? Paper currency is a good medium of exchange because it is
not valuable.
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services.
The Fed's two new policy tools are
paying interest on bank reserve holdings and paying interest on repurchase and reverse repurchase agreements.
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants.
Consider the variables that shift money demand and money supply. Match each of the following scenarios with one of the four graphs of money demand and money supply. a. More widespread use of mobile wallets b. Fed decreases the required reserve ratio c. Fed sells Treasury securities d. Real GDP increases Figure A illustrates
real GDP increases.
With a __________, the Fed buys a security from a financial firm, which promises to buy it back from the Fed the next day.
repurchase agreement
An increase in the labor force or capital stock is illustrated as a ___. An increase in the expected price of an important natural resource is indicated by ___. An improvement in technology is shown as a ___. An increase in the expected future price level causes ___.
shift from A to B (line shifts to right) shift from B to A (line shifts to left) shift from A to B shift from B to A
The SRAS curve will shift to the left if there is an increase in expected future prices .
shift to the left; an increase in expected future prices
The SRAS curve will shift to the left if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level
shift to the left;an increase in the adjustment of workers' and firms' prior underestimation of the price level .
The SRAS curve will shift to the left if there is an increase in the expected price of an important natural resource
shift to the left;if there is an increase in the expected price of an important natural resource
The SRAS curve will shift to the right if there is an increase in productivity
shift to the right; an increase in productivity
Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will shift to the right if there is an increase in the labor force or capital accumulation
shift to the right; an increase in the labor force or capital accumulation
The SRAS curve will shift to the right if there is a technological change
shift to the right;if there is a technological change
When the Fed conducts monetary policy, the most relevant interest rate is the
short-term nominal interest rate.
A former Federal Reserve official argued that at the Fed, "the objectives of price stability and low long-term interest rates are essentially the same objective." Source:William Poole, "Understanding the Fed," Federal Reserve Bank of St. Louis Review, Vol. 89,No. 1, January/February 2007, p. 4. This is true because
stable prices make it easier to plan for the future, so expectations can be stable, which makes it less costly to make loans.
Congress broadened the Fed's responsibility since
the 1930s as a result of the Great Depression.
Figure D illustrates
the Fed decreasing the required reserve ratio.
Figure B illustrates
the Fed selling Treasury securities.
Because of this,
the M1 monetary aggregate is a poor measure of the U.S. money supply.
The source line for the Apply the Concept includes an article entitled "Why Your Business Should Ditch Cash." Source: Christopher Mims, Wall Street Journal, January 30, 2017. A business that "ditches cash" means
the business no longer accepts currency as payment.
If firms want to reduce workers wages over time, they have to reduce
the cash or nominal value, of wages.
Consider the following information about menu costs. Menu costs LOADING... are
the costs to firms of changing prices.
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
The federal funds rate is
the interest rate that banks charge each other for overnight loans.
A movement from point A to point C could be the result of a change in
the labor force.
If the price level decreases,
the money demand curve shifts to the left.
If real GDP increases,
the money demand curve shifts to the right.
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
If the FOMC orders the trading desk to sell Treasury securities,
the money supply curve will shift to the left, and the equilibrium interest rate will rise.
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
C. The U.S. economy experiences 4 percent inflation. Because this is a change in the price level, it will cause a movement along the aggregate demand curve.
the price level, movement along
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking acount balances.
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent.
The Fed gave up targeting the money supply because
the relationship between monetary aggregates and other economic variables was becoming unreliable.
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
An article in the Wall Street Journal discussing the relatively slow adoption of bitcoin by individuals and businesses notes that: "The vast majority of consumers, certainly in the developed world, simply don't care about the benefits of decentralization and anonymity." Source: Paul Vigna, "Bitcoin Still Not Ready for Prime Time, Citi Says" Wall Street Journal, June 30, 2016. All of the following may help explain the slow adoption of bitcoin except
the vast majority of consumers may not care that bitcoins provide no record of their transactions.
If the price level increases, then
there will be a movement up along a stationary aggregate demand curve
How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because
they often borrow short term, sometimes as short as overnight, and invest the funds in longer-term investments.
When Congress established the Federal Reserve in 1913, its main responsibility was
to make discount loans to banks suffering from large withdrawals by depositors.
increase in personal income taxes or business taxes will make the aggregate dmeand curve shift
to the left
increases in the growth rate of domestic GDP compared to the growth rate of foreign GDP will make the aggregate demand curve shift
to the left
Increases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift to the right
to the right
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Source: Mary C. Daly, Bart Hobijn, and Timothy Ni, "The Path of Wage Growth and Unemployment," Federal Reserve Bank of San Francisco Economic Letter, July 15, 2013. Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.
If menu costs were eliminated, the short-run aggregate supply curve will be upward sloping because of wage price stickiness and slow wage adjustment by firms .
upward sloping;wage price stickiness and slow wage adjustment by firms
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption.
An article in the Economist discussing the 2007-2009 recession states that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" Source: "Careful Now," Economist, April 11, 2015. During a recession, some firms lay off some of their workers, while not cutting the wages of the workers they continue to employ, because the workers they continue to employ
would likely react by becoming less productive if their wages are cut.
(d) What is the maximum increase in checking account deposits that can result from your $2000 deposit and what is the maximum increase in the money supply, respectively?
$10,000 and $8,000, respectively
Consider the following simplified balance sheet for a bank:
(a) If the required reserve ratio LOADING... (RR) is 10 percent, this bank currently holds $ 3,000 in excess reserves . (b) The maximum amount by which the bank can expand its loans is $3,000. Complete the following simplified bank balance sheet to show the immediate impact if the bank makes the loans in part (b) by creating deposit accounts for the borrowers within the the bank. ASSETS Liabilities RESERVES $10,000 deposits $73,000 Stockholders' equity $6,000 loans $ 69,000
How are driver-less trucks likely to affect the long-run aggregate supply curve (LRAS)?
Driver-less trucks would shift the LRAS curve to the right due to a technological advance.
When the Fed conducts monetary policy, the most relevant interest rate is the
short-term nominal interest rate.
