Econ 151 Final
M1 includes
Currency, demand deposits, other checkable deposits, traveler's checks
$1,500 balance on your credit card is catergorized as
Neither M1 nor M2
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
Buying government securities and lowering the discount rate.
In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPC is 0.75, then it could
Increase taxes by $16 billion
The federal reserve's purchase or sale of government securities to change the money supply
Open market operations
Three tools
Open market operations, RR, and discount rate
Which combination of fiscal policy actions would most likely offset each other?
an increase in taxes and an increase in government purchases
The fraction of checkable deposits the bank must keep on hand, either as currency or on deposit with the Federal Reserve
Reserve requirement
To decrease AD the fed should conduct an
open market sale
A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to
stimulate the economy.
Tax multiplier
=-MPC/MPS
The economy is in a recession. The government enacts a policy to increase purchases by $2 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government purchases at a given price level?
$10 billion
In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPC is 0.6, then it would increase government purchases by
$20 billion
MPC =
1-MPS
Expenditures multiplier
1/MPS
Money Multiplier =
1/Reserve Rate
$500 in your checking account is categorized as
Both M1 and M2
Why are deposits considered liabilities for a bank?
Deposits can be withdrawn at any time.
The interest rate at which banks can borrow money directly from the Federal Reserve
Discount rate
$4000 in your savings account is categorized as
M2 only
Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?
Selling government securities in the open market and decreasing government spending.
If the economy falls into a recession, automatic stabilizers will cause
Tax receipts to fall and government spending to rise
Which of the following statements best describes what occurs when monetary authorities sell government securities?
The size of commercial banks' excess reserves decreases, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP.
Recession:
Y down = G goes up, T goes down, Y will go up
Expansion:
Y up = G goes down, T goes up, Y will go down
Which of the following fiscal policy changes would be the most contractionary?
a $10 billion increase in taxes and a $30 billion cut in government purchases
The sale of government bonds by the Federal Reserve Banks to commercial banks will
decrease aggregate demand.
Fiscal policy is typically
difficult to implement quickly.
If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the
economy's MPC is large.
Congress controls
expansionary and contractionary policy
The interest rate that commercial banks charge each other for very short-term loans is called the
federal funds rate.
A contraction of the money supply
increases the interest rate and decreases aggregate demand.
If the Fed were to reduce the reserve requirement, we would expect
lower interest rates, an expanded GDP, and a higher rate of inflation.
Fisher equation: Nominal interest rate =
real + inflation
The goal of expansionary fiscal policy is to increase
real GDP
A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to
reduce inflationary pressures in the economy.
As the economy expands, tax revenues
rise and transfer payments fall, causing the economy to expand by less than it would in the absence of automatic stabilizers.
If the Fed wishes to increase nominal interest rates, it must engage in an open market ______ of bonds to ______ the money supply.
sale; decrease
The level of GDP, all else held constant, will tend to increase when
the Federal Reserve buys government securities in the open market.
As people desire to hold less money as an asset
the money demand curve will decrease, causing a surplus of money, which makes interest rates in the money market fall
When government purchases are increased, the amount of the increase in aggregate demand primarily depends on
the size of the multiplier.
Assume that there is a 25% reserve requirement and that the Federal Reserve buys $4 billion worth of government securities. This action has the potential to increase the money supply by a maximum of
$16 billion