ECON 205 Monetary Policy

Referring to the graph, if the Fed wants to raise the interest rate to 12%, and the reserve requirement is 0.25, how much will reserves need to change?

$10 billion decrease

According to the Federal Reserve, the money supply will need to decrease by $25 billion to return the economy to full employment. If the money multiplier is 10, what will be the required change in excess reserves?

$2.5 billion

An economy experiences a change in excess reserves of −$5 billion. If the money multiplier is 10, how much has the money supply changed?

$50 billion

The money multiplier equals:

1/reserve requirement.

Referring to the graph, if the Fed has determined that the interest rates need to fall to 6% and the reserve requirement is 0.2, what will be the change in reserves necessary to change the money supply by the correct amount? $ ____ billion

4

With an MPC of 0.75, the expenditures multiplier will equal

4

With an MPC of 0.8, the expenditures multiplier will equal

5

Which two items are closely related to the reserve requirement?

A bank's reserves and the money supply

_________ demand describes the overall or total demand for all final goods and services produced in an economy.

Aggregate

Which of the following does the Fed carefully monitor?

Bank reserves

If the Fed finds that a bank fails to maintain a required level of reserves, what can happen to the bank?

Banking inspectors will make an unwelcome appearance.

Banks can expand reserves, and make more loans by:

Borrowing from the federal reserve Attracting deposits and encouraging savings

In countering inflation,:

Contractionary monetary policy can raise interest rates, decrease gross investment and depress aggregate demand

__________ reserves are equal to total reserves minus required reserves.

Excess

_______ monetary policy is sometimes referred to as "easy money."

Expansionary

Monetary policy refers to the action of the __________ to influence the supply of money and credit in the U.S. economy.

Fed

When the money supply increases, what happens to the interest rate and quantity of investment?

Interest rate decreases and quantity of investment increases.

When the reserve requirement is set higher, what happens to the amount of money loaned and the amount of money created in the economy?

Less money is loaned, and less money is created in the economy

_________ policy affects interest rates charged on loans and paid on savings.

Monetary

Which of the following describes a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances?

Money market

Which of the following tools is most commonly used by the Fed to conduct monetary policy?

Open market operations

Suppose the Federal Reserve is planning to conduct expansionary monetary policy during a recession. Which of the following is a tool they may consider using?

Reducing the interest rate paid on excess reserves

________ reserves are equal to deposits times the reserve requirement.

Required

________ reserves are the fraction or portion of checkable deposits that a bank must keep on hand.

Required

How is a change in the money supply calculated when there is a change in excess reserves?

The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.

What is spread?

The difference between the interest rate a bank earns on a loan and the interest rate it pays.

Which three values are all related so that when one changes so do the others?

The dollar value of reserves held by banks, the reserve requirement, and the money supply.

What is the reserve requirement?

The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed.

Which of the following refers to cyclical asymmetry?

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy.

Which of the following refers to the implementation lag?

The time between when a policy is enacted and when it has its full effect on the economy.

A money market is:

a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

Which of the following refers to a liquidity trap?

a situation where increasing the money supply does not lower interest rates, due to a flattening of the money demand curve

When economists talk about "interest rates" or even "the interest rate," they mean:

all interest rates, since interest rates all tend to move in the same direction.

A(n) __________ is a financial instrument that obligates a borrower to repay money with interest to a lender (which may be a government municipality or corporation).

bond

The federal funds rate is determined by the supply and demand for _____ reserves.

borrowed

When the Fed _________ bonds, it creates new money and additional reserves which expands the money supply and _________ interest rates.

buys, lowers

Actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation is ________ monetary policy.

contractionary

When aggregate demand rises, to decrease aggregate demand, we can use a(n) ______ monetary policy.

contractionary

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy refers to _______ asymmetry.

cyclical

A decrease in aggregate demand will cause the price level to _______ and unemployment to _______ in the short run.

decrease, rise

To increase gross investment, the interest rate must:

decrease.

A bank can make loans depending on the value of ______ reserves.

excess

Actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is ________ monetary policy.

expansionary

An increase in the money supply designed to stimulate economic activity is called a(n) ________ monetary policy.

expansionary

In countering recession,:

expansionary monetary policy can lower interest rates, increase gross investments and increase aggregate demand

The actions taken by a country's central bank to expand the money supply and lower interest rates is called:

expansionary monetary policy.

A formal market for overnight loans of federal reserves is the:

federal funds market.

The market for borrowing and lending reserves between banks is the:

federal funds market.

Governments use ________ policy to keep prices stable and encourage economic growth.

fiscal

Banks can create money by making use of:

fractional reserve banking

The _______ the reserve requirement, the smaller the money multiplier.

higher

The time between when a policy is enacted and when it has its full effect on the economy is called the __ lag. The time between when an event affects an economy and the time when we recognize that effect in the data collected is called the __ lag.

implementation; recognition

The money multiplier is the amount by which a $1 change:

in reserves will change the money supply.

To minimize the effects of recession, the Fed needs to _______ the money supply.

increase

Banks allow households who are spending less than their total income to keep their unused income in a safe place while also earning

interest

Banks pay their expenses and hope to make a profit by charging:

interest on loans.

Changing the money supply can affect:

interest rates, thereby changing investment spending.

Monetary policy primarily affects an economy by either encouraging or discouraging ________ in new capital.

investment

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate describes:

investment demand.

The interest rate:

is the price of money.

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve refers to a(n) _____ trap.

liquidity

Governments use ________ ________ to keep prices stable and encourage economic growth.

monetary policy

A market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances is called a(n) _____ market.

money

The ______ multiplier is the amount by which a $1 change in reserves will change the money supply.

money

The _______ market is a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

money

Suppose the Federal Reserve has decided to increase the interest rate paid on reserves. As a result, the

money supply will decrease.

The _________ loans a bank makes, the more revenue it can generate.

more

When conducting monetary policy, the Fed most often uses:

open market operations

To minimize the effects of inflation, the Fed most often uses:

open market operations.

When aggregate demand falls, to avoid a(n) _______ and return to the long-run equilibrium, we must increase aggregate demand.

recession

The fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with the Federal Reserve is called the:

reserve requirement.

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve, is called the:

reserve requirement.

The federal funds rate is determined by the supply and demand for borrowed

reserves

The money multiplier is the amount by which a $1 change in _______ will change the money supply.

reserves

All else equal, when the money supply decreases, interest rates

rise

The _______ is the difference between the interest rate a bank earns on a loan and the interest rate it pays.

spread

An increase in the money _______ will cause the interest rate to fall.

supply

The two factors that affect whether or not a firm chooses to invest in new equipment machinery or facilities are:

the interest rate and the expected rate of return.

If an economy experiences a change in excess reserves, the change in money supply will also depend on

the money multiplier.

The money multiplier equals:

the overall change in the money supply/the initial change in reserves

The actions taken by a country's central bank to contract the money supply and raise interest rates is called:

tight money. contractionary monetary policy.

The Federal Reserve changes the amount of money in circulation by:

using open market operations to buy and sell government debt (U.S. Treasury bonds).

An economy experiences a change in excess reserves of $2 billion. If the money multiplier is 5, how much will the money supply change?

−$10 billion

The Federal Reserve has determined the money supply will need to increase by $100 billion in order to return the economy to full employment. If the money multiplier is 5, what is the required change in excess reserves?

−$20 billion

Suppose the Federal Reserve wants to decrease the money supply by $400 billion. If the reserve requirement (rr) is 0.2, calculate the change in reserves that the Federal Reserve must make. $ ______ billion

80

________ reserves (the amount the bank can lend out to earn interest) equal _________ reserves minus _________ reserves.

Excess, total, required

Which of the following is a monetary policy tool used by the Federal Reserve?

Paying interest on excess reserves

The actions taken by a country's central bank to contract the money supply and raise interest rates is called a(n) ________ monetary policy.

contractionary

The goal of a(n) _______ monetary policy is to reduce inflation.

contractionary

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy refers to:

cyclical asymmetry.

A(n) _______ in aggregate demand will cause the price level to fall and unemployment to rise in the short run.

decrease

Given the demand for money a(n) _______ in the money supply curve and lowers the interest rate.

decrease

If the Federal Reserve would like to increase the money supply, they should ________ (increase/decrease) the interest rate paid on reserves.

decrease

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, investment would need to:

decrease by $20 billion.

When banks borrow from the Fed, the interest rate they pay is set by the Fed, and it's called the _______ rate.

discount

The interest rate at which banks can borrow money directly from the Federal Reserve is called the:

discount rate.

The interest rate that banks pay in the formal market for overnight loans of federal reserves is called the:

federal funds rate.

The interest rate that helps determine the interest rates charged on other loans is called the:

federal funds rate.

The _______ rate is the payment made to agents that lend or save money, expressed as an annual percentage of the monetary amount lent or saved.

interest

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called the __ rate.

interest