Macro-Econ The federal Reserve, Monetary Policy, ECON 202: PCQ6, ILA #3 part 2 (1 of 2), ILA #3 part 2 (2 of 2), ILA #4 Part 2 (1 of 2), ILA #4 Part 2 (2 of 2), ILA #5 part 2of2, ILA #5 part 2 (1 of 2)
The Federal Reserve is Independent within Government but not independent of Government.
An act of Congress in 1913 created the Federal Reserve System, and President Wilson signed the act into law. That law specifies that the U.S. president nominates Federal Reserve Governors, whom the Senate either confirms or rejects. The president appoints the Federal Reserve chairperson from among the Fed's board of Governors, and the chairperson is required to testify before congress. Most importantly congress could decide to terminate the Federal Reserve System or increase scrutiny of the Fed's accounting records. For these reasons, the federal reserve is not independent of government. However, the Federal Open Market Committee meets behind closed doors. Its meetings are never broadcast. The president or Congress does not order the Federal Reserve to pursue some specific course of action. Once a Fed governor is confirmed by the Senate, a president cannot decide to remove the governor from his or her position. In this way, the Federal Reserve operates Independently with government.
Aggregate supply illustrates the relationship between the price level:
And the amount of real GDP supplied in the economy.
Institutions can make small transfers using:
Automated clearinghouse services
we often simply call the federal reserve system the ________, whereas the _______ us used as an abbreviation for federal bureau of investigation (FBI) officers or for agents
Fed, Feds
The Federal Reserve is independent of government because:
Federal Open Market Committee Meets behind closed doors. Once a FED governor is confirmed by the senate, a president cannot decide to remove the governor from his or her position.
The market for borrowing and lending reserves between banks is the:
Federal funds market
The interest rate that helps determine the interest rates charged on other loans called
Federal funds rate
the entity that determines and implements the nations monetary policy and controls the money supply to promote stable prices and economic growth in the US economy is the
Federal open market committee
Financial transactions can be processed much more quickly than in the past because:
Fewer payments involve checks. banking institutions allow customers to deposit checks with their smartphones. electronic images of checks are sent people increasingly rely on debit cards and credit cards.
Banks can create money by making use of:
Fractional reserve banking
A banking system in which only fraction of bank deposits are backed by actual cash on hand and are available for withdrawal is known as:
Fractional reserve banking.
Which of the following will cause investments to fall
Higher interest rates and lower expected returns
Which of the following will cause investments to rise
Improve in frastru
which of the following statements is true?
In a traditional demand model, we compare the quantity demand of a good to its price; in an aggregate demand model, we use a price index like the consumer price index to represent the overall price level, or average price of goods and services in the economy
Given the demand for money an _______ in the money supply curve and lowers the interest rate.
Increase
Banks allow households who are spending less than their total income to keep their unused income in a safe place while are also earning ________
Interest
Federal Deposit Insurance Corporation. This ___ part of the Federal Reserve System.
Is not.
General services Administration. This ____ part of the Federal Reserve System.
Is not.
If the federal reserve increase the discount rate there will be ______ borrowing from the federal reserve and banks will ____ lending. this will ______ the money supply and _____ interest rate
Less, Decreases, Decreases, Increases
_____ policy primarily affct the economy by either encouraging or discouraging investment in a new capital
Monetary
______ policy is the accretions of a contry central bank to influence the supply of money and credit in the economy.
Monetary
The _______ market is a market in which the demand for and supply of money determine as interest rate, or opportunity cost of holding money balances
Money
The _______ multiplier is the amount by which a $1 change in reserve will change the money supply
Money
When the bank issues you a long, it is essentially creating___.
Money
With monetary policy changes in the:
Money supply, the quantity of investment demand and real GDP all move in the same direction.
Office of Comptroller of the Currency apart of the Federal Reserve System?
No
U.S Treasury apart of the Federal Reserve System?
No
When conducting monetary policy, the fed most often uses:
Open market operations
The Federal Reserve Board of Governors:
Oversees research into domestic and international financial conditions. Investigates the health of the economy.
A Bank ______ occurs when several banks experience bank runs simultaneously
Panic
In the aggregate demand and supply model the:
Price level is on the vertical axis of the graph and real GDP is on the horizontal axis.
You decide a habit of saving 100 dollars per month for emergencies. The price level falls so you decide that your emergencies can be funded with only 80 dollars per month, leaving you 20 dollars more to spend each month. This is an example of the:
Real Balance affect.
The Fed provides banks with financial services by:
Receiving and delivering the currency. transferring funds.
The Federal Reserve:
Regulates member banks to promote stable prices and economic growth.
Federal Reserve Board
The governing organization of the Federal Reserve System; also known as the Board of Governors. The Board consists of seven members who are appointed by the president and confirmed by the Senate to serve 14-year terms of office.
The percentage increase in the overall price of goods and services in the economy from one time period to another is called
The inflation Rate
Discount rate
The interest rate at which banks can borrow money directly from the Federal Reserve.
Open Market operations
The purchase or sale of government securities by a central bank; a key tool of monetary policy used to influence the money supply and interest rates.
Every dollar bill has a few things in common. These include:
The words Federal Reserve Note are at the top. A circular emblem with a letter inside and the location of the issuing Federal Reserve Bank is on the left hand side.
The Federal Reserve is so powerful that statements made can affect stocks halfway around the world.
True
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)
Which of the following is true?
We use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy. We use demand to talk about the price and quantity of a single good or service produced in a specific market.
Which of the following statements are true?
We use demand to talk about the price and quantity of a single good or service produced in a specific market; we use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy
Federal Open Market Committee apart of the Federal Reserve System?
Yes
Is the Board of Governors part of the Federal reserve system.
Yes
You Have been wanting to purchase a new car but have not yet saved enough money to make the payments. The price level in the U,S falls.
You can expect that the interest rate will also fall, causing consumers, like yourself, to spend more on goods requiring financing. This is an example of the interest rate effect.
The price level in the U.S rises, but does not change in Japan.
You can expect that: More buyers will purchase Japanese cars, so: U.S Imports rise and exports fall, causing aggregate demand to: Decrease. This is an example of the: Foreign trade effect.
mathematically, the marginal propensity to consume is equal to
a change in consumption divided by the corresponding change in income
the expenditures multiplier times the initial change in expenditures equals
a change in real GDP
every dollar bill has a few things in common. these include
a circular emblem with a letter inside and the location of the issuing federal reserve bank is on the left-hand side; the word federal reserve note are at the top
in deriving demand curve from the aggregate expenditures model
a decrease in the price level shifts the aggregate expenditures schedule upward so that the new equilibrium GDP is higher than it was before the price changes
According to the foreign purchase effect, if prices in the united states rise and the prices in other countries remain stable, without a corresponding adjustment, in exchange rates:
a reduction of net exports causes reduction of real GDP demand if prices in united states rise, and prices in other countries remain stable (and without corresponding interest rates) consumer will buy more foreign goods and services (imports rise) also, foreigners will also buy fewer goods and services produced in the US (exports fall)
comparisons of the value of goods relative to everything else are easy when money is used as
a unit of account
when used as a unit of measurement that communicates the market value of goods and services money is
a unit of account
suppose there is a positive supply shock. In the short run, the economy moves to a new equilibrium where real GDP is
above the full-employment and unemployment is lower than the natural rate
the expected rate of return is the ____ profit the firms expects to earn for each dollar of physical ____ purchased, expressed as a percentage
additional; capital
___ demand can be interpreted as the overall demand for real GDP from four different sources
aggregate
___ demand relates the price level to real GDP
aggregate
_____demand describes the overall, or total demand for all final goods and services produced in an economy
aggregate
adding the given level of government purchases to consumption and gross investment increases ___ expenditures by the level of government purchases
aggregate
the equilibrium price level and real GDP are determined by the intersection of the
aggregate demand and short-run aggregate supply curves
the equilibrium condition of the aggregate expenditure model is
aggregate expenditure equals income
the equilibrium condition of the aggregate expenditures model is
aggregate expenditures equals income
the equilibrium level of real GDP is found at the intersection of the
aggregate expenditures schedule and the equilibrium line
just like traditional demand and supply, the ___ demand and supply model in a(n)___
aggregate; equilibrium
the long run aggregate supply curve is a vertical line originating at the full employment level of real GDP because
all input are flexible in the long run
The long-run aggregate supply curve is a vertical line originating at the full-employment level of real GDP because
all input prices are flexible in the long run
when economist talk about "interest rates" or even "the interest rate" they mean
all interest rate since interest rates all tend to move in the same direction
When economists talk about interest rates or even the interest rate they mean:
all interest rates since interest rate all tend to move in the same direction.
positive shocks or changes to aggregate supply include:
an abrupt decrease in oil prices; an unexpected increase in productivity
negative shocks or changes to aggregate supply include
an abrupt increase in oil prices; a natural disaster
negative shocks or changes to aggregate demand include
an increase in taxes; a decrease in consumer confidence
economic growth can be shown as
an outward shift of the production possibilities frontier
the ___ demand for money is sensitive to the prevailing interest rate
asset
loans are an ___ to a bank and a ___ to the person who borrowed the money
asset; liability
If someone deposits money into a checking account,
assets and liabilities both increase.
banks can expand reserve, and make more loans by
attracting deposits and encouraging saving; borrowing from the federal reserve
There is an ___ correction mechanism in our economy, which operates through the aggregate supply
automatic
aggregate expenditures equals
autonomous expenditure plus the marginal propensity to consume times income minus taxes plus gross investment plus government purchases plus net exports
___ are businesses that provide financial services to the marketplace and try to make profit along the way
banks
___ can affect the money supply by increasing or decreasing the number of loans they make
banks
in the real world, the actual money multiplier tends to be smaller than 1/rr because
banks do not loan out all of excess their reserves; people hold some loaned money as cash
with fractional reserve banking
banks have to keep a fraction of deposits on hand
if actual output is greater than the full-employment level, the current unemployment rate is ___ than the natural rate of unemployment
below
in the short run, the economy moves to a new equilibrium where real GDP is
below the full-employment level and unemployment is high than the natural rate
when firms consider investment, they compare the marginal ___ of the investment to the marginal ___
benefit; cost
A _______ is a financial instrument that obligates a borrower to repay money, with interest, to a lender.
bond
a ___ is a financial instrument that obligates a borrower to repay money, with interest to a lender
bond
When the federal government borrows money, it issues three different assets:
bonds notes and bills
Loans created from ______ reserved expands the money supply by creating excess reserve in the banking system.
borrowed
The federal funs rate is determined by the supply and demand for _______ reserve.
borrowed
loans created from ___ reserves expand the money supply by creating excess reserves in the banking system
borrowed
The federal funds rate is one of the "key" interest rate in the economy because:
by changing the federal funds rate the fed can change every other interest rate in an economy, it represents the interest rate for the least ricky loans in the market.
the federal reserve adopts a policy of lowering interest rates, some people
can stay in homes that they might otherwise have had to sell; can chose to refinance their loans; will continue to buy new homes despite the weak economy
economic investment takes place when a firm purchases ___ goods to replace worn-out equipment or to expand production
capital
high interest rates make firms' purchases of new ___ more expensive, reducing how much is purchase, so that, over time, the economy may become ___ productive
capital; less
an important role of ___ banks is to make loans to banks that fall short of funds
central
in the real world, exports and imports
change as income, or real GDP, changes
the peaks and troughs that we observe in the business cycle are the result of
changes in consumption, gross investment, government purchase, or net exports
assuming taxes are zero, changing disposable income in the aggregate expenditures model
changes the intercept of the consumption schedule
during the great depression, chronic unemployment challenged___ theories of labor market
classical
in ___ economic models, any surplus in the labor market, or unemployment, would be eliminated as workers competed for jobs and wages fell
classical
the fed provides banks with financial services by
clearing checks; receiving an delivering the currency; transferring funds
when a check ___ and money is transferred out of out of a checking account, it is the transfer of funds that constitutes the actual payment for the good and services
clears
the federal reserve is not independent of government because
congress can decide to terminate the federal reserve system; the chairperson of the federal reserve board of governors is required to testify before congress; the president appoints the federal reserve chairperson from among the federal reserve board of governors; the senate either confirms or rejects a nominated federal reserve governor
assuming taxes are zero, the equilibrium consumption and disposable income occur when the
consumed schedule, crosses the equilibrium line
the sum of the marginal propensities to consume and save equals 1, because a fraction of each additional dollar is ___, and the remaining fraction is
consumed; saved
if there is no taxes, the economy is in equilibrium when disposable income, equals ___
consumption
the ___ schedule is the first basic piece in the aggregate expenditures model
consumption
aggregate demand can be interpreted as the overall demand for real GDP, Y, from four different sources
consumption; gross investment; net exports; government purchases
in an economy where all spending is done by households and individuals, in equilibrium ___ equals disposable income, and ___ equals zero
consumption; saving
When aggregate demand rises too much, to decrease aggregate demand we can use ______ monetary policy
contractionary
a reduction in the money supply designed to slow down economic activity, is called ____ monetary policy
contractionary
tight money describes ___ monetary policy
contractionary
inflation that results from a decrease in aggregate supply is called ___ ___ inflation
cost push
If___ push inflation is occurring, it is because the aggregate ___ curve is shifting to the ___, resulting in lower output and higher prices
cost; supply; left
A(n) ___ in aggregate demand may lead to a recession
decrease
a decrease in consumer confidence cause aggregate demand to ___
decrease
given the demand for money, a(n) ___ in the money supply shifts the money supply curve and raises the interest
decrease
to increase gross investment, the interest rate must_______
decrease
to minimize the effects of inflation, the fed needs to ___ the money supply
decrease
when aggregate demand ___ there is higher inflation and lower unemployment
decrease
when the fed ___ the federal funds rate target, the money supply increases and interest rates fall
decrease
If consumers ___ the amount of goods and services they purchase, given constant prices, then aggregate ___ for real GDP increases
decrease, demand
Holding the price level constant, a(n) ___ in net exports reduces the aggregate ___ for real GDP
decrease; demand
if consumers ___ the amount of goods and services they purchase, given constant prices, then aggregate ___ shifts to the left, since ___ goods are being purchased at every price level
decrease; demand; fewer
Which of the following will cause government purchase to fall
decreased spending on airports; decreased spending on highways
during the great depression, the money multiplier greatly ___ resulting in a ___ of the money supply
decreased; contraction
if resource costs rise, output ___ at every price level
decreases
if the government ___ the amount of spending, aggregate demand shifts to the left
decreases
When foreign income rises, aggregate ___ shifts to the right
demand
a decrease in the money ____ all else equal cause the interest rate to fall
demand
an increase in the money ___ all else equal, causes the interest rate to rise
demand
Changes to government purchases and net exports directly affect the aggregate:
demand for real GDP
if an economy is experiencing _____ inflation an increase in interest rate will reduce consumption and investment and will cool the economy
demand-pull inflation
the argument can be made that demand-pull inflation is better than cost-push inflation because with
demand-pull inflation, there is a positive relationship between output and inflation
the investment ___ shows the level of investment for each level of real interest rates, whereas the investment ___ shows the level of investment for each level of real GDP
demand; schedule
banks can expand reserves and make more loans by attracting ___
deposites
the reserve requirement is the minimum % of _____ that banks must keep on hand
deposits
The interest rate at which banks can borrow money directly from the Federal Reserve is called the:
discount rate.
higher taxes mean less ___ income and fewer expenditures
disposable
the total demand for money is
downsloping as a result of asset demand
aggregate demand is
downward slope
monetary policy affects interest rates which in turn affect
economic growth; employment; investment; inflation
the ___ line represents the combination when aggregate expenditures and real GDP equal one another
equilibrium
when aggregate expenditures increases by the amount of government purchase
equilibrium real GDP increases
when aggregate expenditures increases by the amount of gross investment
equilibrium real GDP increases
you can measure the size of an economy by measuring
everyones income; the value of all the final goods and services that produced
___ reserves are equal to the total reserves minus required reserves
excess
______ reserve held as currency earn no interest
excess
a bank can make loans depending on the value of ___ reserves
excess
when ___ reserves are lent, new checkable deposits, and additional __ reserves are created
excess; excess
___ reserves, the amount the bank can lead out to earn interest, equal ___ reserves minus ___ reserves
excess; total; required
the two main determinates of net exports are
exchange rates; national income levels-- productivity, resource prices, social institutions
An increase in the money supply, designed to stimulate economic activity, is called _______ monetary policy.
expansionary
When the aggregate demand falls, to increase aggregate demand we cause use ______ monetary policy
expansionary
actions taken by a countrys 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
easy money describes ___ monetary policy
expansionary
in countering recession
expansionary monetary policy can lower interest rates, increase gross investments and increase aggregate demand
two variables that affect investment are the
expected rate of return; interest rate; opportunity cost investment
in the aggregate expenditures model, output, or real GDP, is driven by ___
expenditure
in the aggregate expenditures model, output, or real GDP, is driven by ____
expenditure
a change in real GDP equals the ___ multiplier times the initial change in expenditures
expenditures
the multiplier effect on real GDP from a change in expenditures, and its size, is determined by the ___ multiplier
expenditures
expenditures in an economy depend on
expenditures of house holds, firms, government, and buyers in other countries
suppose there is an increase in taxes of $20. If the MPC equals .75 consumption will __ fall by __
fall $15
suppose there is a positive supply shock. in the long run, wages and production costs:
fall, the short-run aggregate supply curve to shift to the right: the price level falls; real GDP rises, and eventually, the economy returns to its full-employment level of real GDP
suppose there is a negative shock. in the long run, wages and production costs:
fall, the short-run aggregate supply curve to shift to the right; the price level fails; real GDP rises, and eventually, the economy returns to its full-employment level of real GDP
suppose there is an increase in taxes $20. if the MPC equals .8, consumption will ___ by $___
fall; 16
if the purchasing power of the US dollar __ relative to other currencies, it is known as a depreciation of the US dollar
falls
the ___ can change the money supply by increasing or decreasing the amount of serves in the banking system
fed
the ___ removes unfit or worn currency from circulation, introducing new currency as needed
fed
the market for borrowing and lending reserves between banks is the
federal funds market
the interest rate that banks pay in the formal market for oversight loans
federal funds rate
the supply of money in an economy is largely determined by a central monetary authority. in the united states, that authority is the ___ ___
federal reserve
The supply curve for federal funds is ___
flat
the supply curve for federal funds is ___
flat
the substation effect for an individual good is similar to the
foreign purchases effect for the aggregate demand
A ____ of the money in an economy is issued by the Federal Reserve; the rest is created by banks.
fraction
a ___ of the money in an economy in an economy is issued by the federal reserve; the rest is created by banks
fraction
a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal is known as
fractional reserve banking
The long run aggregate supply curve is a vertical line originating at the:
full employment level of real GDP.
which of the following levels of output correspond to the long-run aggregate supply curve
full-employment real GDP; long-run level of output; natural rate of real GDP;;;;; potential output;;; full employment output;; full employment output;; long run real GDP
when the federal reserve wants to buy or sell US Treasury bonds, the Fed makes these transactions with the
general public
when disposable income is ___ than consumption, savings is positive, and people save the difference
greater
since 2009, the avg interest rate in saving accounts;
has decreased
many things affect productivity, including
health of workers; technology; education
at _____ interest rates the opportunit can cost of borrowing funds rises so banks will be less willing to borrow reserves
high
if output is higher than the full-employment level, expenditures are too___
high
___ resource costs will shift the aggregate supply curve to the left
higher
___ resources costs will shift the aggregate supply curve to the left
higher
the aggregate supply shock of the 70s, caused by oil embargoes and domestic economic policies, drove both inflation and unemployment__
higher
Which of the following will cause consumption to fall
higher taxes, repayment of loans, deteriorating expectations, falling wealth.
cause consumption to fall
higher taxes; falling wealth; deteriorating expectations
When aggregate demand increase, there is ___ inflation and ___ unemployment
higher; lower
lower US income to decrease US ____ and increase net ___
imports; exports
cause investment to rise
improved infrastructure; higher expected returns
which of the following will cause investment to rise
improved infrastructure; higher expected returns
intervening in the economy to help it recover does have a downside: when the government spends more or takes in less tax revenue, the deficit and dept
inceases
both consumption and savings increase with the increase in ____ of an individual
income
disposable income is
income minus taxes
all else equal, when the money supply ___ interest rate decrease
increase
all else equal, when the money supply decreases interest rates ___
increase
an ___ in taxes will reduce real GDP
increase
an ______ in aggregate demand will cause the price level to rise and unemployment to fall in the short run.
increase
for both households and firms a(n) ____ in interest rates will result fewer purchases of new goods and services
increase
suppose income rises in foreign countries this will:
increase US exports, net exports, and aggregate demand
in the short run, a shift of the aggregate supply curve to the right indicates ___ production at every price level
increased
cause consumption rise
increased borrowing; lower personal taxes; rising wealth
which of the following will cause government purchase to rise?
increased spending on airports; increased spending highways
which of the following will cause government purchase to rise
increased spending on defense; increased spending on highways;
When the fed ____ the federal funds rate target the money supply decrease and interest rates rise
increases
all else equals, when the money supply ______ interest rates decreases
increases
if consumers ___ the amount of goods and services they purchase, given constant prices, than aggregate ____ for real GDP increases
increases; demand
asset money demand is downsloping line because it is
independent of the interest rates
the fed operates
independently within the government, but not independent of it
Both recession and expansions can cause ___, or a general increase in the level of prices
inflation
When aggregate demand rises, to avoid _____ and return to the long run equilibrium we must decrease aggregate demand
inflation
demand pull ___ occurs as consumers compete with each other for goods and services, shifting aggregate demand to the right
inflation
monetary policy affects interest rates which in turn, affect
inflation; investment; economic growth ; employment
When aggregate demand decreases, there is lower ___ and higher ___
inflation; unemployment
in the long run as ___ prices adjust for all firms, ___ falls and the economy returns to the full-employment level of real GDP
input, output
Banks pay their expenses and hope to make a profit by charging _______ on loans
interest
banks allow households who are spending less than their total income to keep their unused income in a safe place while also earning ___
interest
the ___ rate is the payment made to agents that lend or save money, expressed as an annualized percentage of the monetary amount lent or saved
interest
the discount rate is the ___ rate at which banks can borrow money directly from the federal reserve
interest
Changing the money supply can affect
interest rate thereby changing investments spending
Depository Institutions. This ___ part of the Federal Reserve System.
is
if the short-run aggregate supply curve and the aggregate demand curve intersect at the full employment level of output the economy
is in its short and long run equilibrium
Federal Financing Bank. This ____ part of the Federal Reserve System.
is not.
The Financial Management Service. This ___ part of the Federal Reserve System.
is not.
The interest rate:
is the price of money
When the feds open market committee decides on a target for the federal fund rates:
it commits to buy and sell bonds through open market operations to maintain the target
identify the primary functions of money
it serves as a medium of exchange; it is used as a store of value; it is used as a unit of account
input prices tend to be sticky because
labor contracts might commit firms to paying a certain wage over multiple years
after analyzing the Great Depression, John Maynard Keynes concluded that because
labor is used to produce goods and services, the overall demand for labor depends on the overall demand for whats gets produced
the ______ the reserve requirement, the smaller the money multiplier
larger
if consumers decrease the amount of spending, aggregate demand shifts to the ___
left
When income decrease in foreign countries, foreigners may be ___ willing and able to purchase goods and services produced in the United States
less
the net exports schedule shows the
level of net exports at each level of real GDP
equilibrium in the aggregate demand and supply model consists of a price ___ and a quantity of ___ ___
level; real GDP
the ___ run aggregate supply curve is a vertical line originating at the full-employment level of real GDP
long
in the long run, the equilibrium price level is determined by the intersection of the
long-run aggregate supply curve and the aggregate demand curve
with a ___ expenditures multiplier, the swings in output will tend to be smaller
low
if the economy is producing above equilibrium, unemployment is very
low, wages will start to rise, which puts upward pressure on prices
___ interest rates make purchasing new capital less expensive, potentially increasing ___ spending and productivity over time
low; investment
which of the following will cause investment to fall
lower expected returns; higher interest rates
if someone deposite money into a checking account
m1 and the money supply both increase
the supply curve for an individual good or service is upward-slopping because
marginal costs are increasing
the fraction of each additional dollar of income spent on consumption is called the:
marginal propensity to consume
the federal reserve system is sometimes referred to as a quasi-governmental agency because
members of the board of governors are somewhat removed from the political process; it does not rely on the federal government for financial funding of its operations
___makes specialization and trade easier
money
as ___ evolves, so does our ability to specialize and trade
money
by facilitating trade ____ facilitates specialization
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
when the bank issues you a loan, it is essentially creating ___
money
For every dollar of bond the fed buys or sells the money supply will increase or decrease by an amount equal to the:
money multiplier
for every dollar of a bonds that fed buys or sells, the money supply will increase or decrease, by an amount equal to the
money multiplier
the difference between expenditures at the full-employment level of output and expenditures when output is ___ than the full-employment level is called an inflationary gap
more
economic expansions are beneficial since
more people will be working and saving money that can lead to more investment down the road
if consumption or gross investment is increasing because of the lower price level that's a
movement along the aggregate demand
if consumption or gross investment is increasing because of the lower price level, that's a:
movement along the aggregate demand
if firms are producing more output because of the higher price level that's a
movement along the aggregate supply
if firms are producing more output because of the higher price level, that's a
movement along the aggregate supply
net exports are
national income levels; exchange rates
a fully employed economy is one that is operating at what economists call the
natural rate of unemployment
suppose there is a negative demand shock; In the short run, the economy moves to a new equilibrium where real GDP is below the full employment level, and unemployment is high than the ____ rate. In the long run, wages and production costs ___. Firms produce more at every price level. The short-run aggregate supply curve shifts to the right moving the economy to a new high equilibrium. The price level __- and real GDP ___ . Eventually, the economy returns to its full-employment level of real GDP
natural; fall; falls;rises
suppose there is a negative demand shock;In the short run, the economy moves to a new equilibrium where real GDP is below the full employment level, and unemployment is high than the ____ rate.In the long run, wages and production costs ___. Firms produce more at every price level. The short-run aggregate supply curve shifts to the right moving the economy to a new high equilibrium. The price level __- and real GDP ___ . Eventually, the economy returns to its full-employment level of real GDP
natural; fall; falls;rises
expenditures on real GDP come from four sources
net exports; investment; government; consumption
when the fed buys or sells government securities in the open market to change the money supply is called
open market operations
To minimize the effect of recession the feds most often uses
open market operations.
the cost of keeping more reserves than the fraction required instead of lending out these funs, is the ______ cost of the forgone interest the funds would have earned
opportunity
when developing the aggregate expenditures model
other categories of expenditure in the model are independent of income, and are added to consumption, which depends on income
as wages rise, firms cut back production in the long run and ___ falls
output
the aggregate expenditures model assumes that
output can increase or decease without causing the price level to change; certain categories of expenditures are independent of real GDP
the aggregate expenditures model assumes that
output can increase or decrease without causing the price level to change; certain categories of expenditures are independent of real GDP
improved productivity means that we can produce more ___ with fewer ___
output, input
The Federal Reserve Board of Governors:
oversees research into domestic and international financial conditions. Investigates the effect of banking laws.
a "bank ___ " occurs when several banks experience bank runs simultaneously
panic
US treasury bills are
payable only at the end of the bills maturity date; issued for less than one year
US Treasury bonds and notes are
pays interest every six months until the end of the maturity date; specifies the amount of interest it will pay, frequently called the coupon rate; issued for more than one year
the money multiplier will equal 1/rr so long as
people can hold any loaned money as cash; banks loan out all of their excess reserves
financial transactions can be processed much more quickly than in the past because
people increasingly rely on debit cards and credit cards; electronic images of checks are sent; fewer payments involve checks; banking institutions allow customers to deposit checks with their smartphones
interest rate changes
play little, if any, role in government purchases
if the purpose of a tax cut is to increase consumption spending, we often see tax cuts for the ___ in times of economic hardship
poor
when there is a ___ supply shock, real GDP rises above the full-employment level, and unemployment is lower than the natural rate
positive
The Federal Open Market Committee include the Board of Governors, the ___ of the New York Fed, and ___ federal reserve bank presidents from other district banks, who serve on a rotating basis.
president, 4
aggregate demand relates the ___ level real GDP
price
aggregate supply illustrates how the total amount of goods and services produced in an ecoas nominomy relates to ___ level
price
in the short run, an increase in the ___ level will increase the quantity of real GDP supplied
price
the supply of money is not influence by its ___ in this case the interest rate
price
in the aggregate demand and supply model the
price level is on the vertical axis of the graph and real GDP is on the horizontal axis
a leftward shift of aggregate supply causes ___ to rise with ___
prices; unemployment
___ is defined as the total amount of output produced with a given level of inputs
productivity
social institutions include
property rights courts police protection government
investment demand slopes downward because the
quantity of investment demanded increases as interest rates fall
aggregate demand relates the price level to ___ GDP
real
the ___ interest rate is adjust for inflation
real
when the price level rises the real value of saving falls, and people are less willing or able to buy goods and services. As a result, consumption falls, and the quantity of real GDP demand decreases. This described
real balance effect
the income effect for an individual good is similar to the
real balance effect for the aggregate demand
a policy often during an economic ___ is to decrease taxes
recession
when aggregate demand falls to avoid a ___ and return to the long-run equilibrium. we must increase aggregate demand
recession
Holding the price level constant, a decrease in net exports ___ the aggregate demand for real GDP
reduces
holding the price level constant, a decrease in net exports ___ the aggregate demand for real GDP
reduces
___ reserves are equal to deposits times reserves requirement
required
___ reserves are the fraction, or portion, of checkable deposits that a bank must keep on hand
required
The _____ requirement is the fraction of checkable deposits that banks must keep on hand as reserve either as currency or on deposit with the federal reserve.
reserve
on any given day, while some banks come up short on their ___ holdings, other banks have more than they need
reserve
The fraction of checkable deposits that banks must keep on hand as reserve, 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 hanf reserve, wither as currency or on deposit with the federal reserve is called the:
reserve requirement
To make sure banks meet the daily needs of customers, the federal reserve enforces a:
reserve requirement
The federal funds rate is determined by the supply and demand for borrowed ________.
reserved
According to the interest rate effect, when the price level ___ people need more money to make the same number of purchases so the demand for money ___ . As a result, interest rates increase which lowers consumption and investment causing the quality of real ___ demand to ___
rises, rises, GDP, decrease
which of the following will cause consumption to rise?
rising wealth; increased borrowing; lower personal taxes
During the 1970s, the inflation ___ faster than the nominal interest rate, meaning real interest rates were___
rose, negative
a "bank ___" occurs when despositors rush, in mass, to withdraw funds from a bank
run
a "bank ____" occurs when depositors rush in mass to withdraw their funds form a bank
run
you can do two things with disposable income
save it or spend it on consumption
demand for money comes from two sources. the demand for money to be
saved for future use; used in daily transaction
when the fed decreases interest rates during tough economic times, it is hoping that investments spending and output in he economy will increase but _____ are negatively affected by this policy.
savers
greater capital formation and increased productivity in the future is made possible when there is
saving
when consumption is greater than disposable income, ___ is negative
saving
you can convert a ___ deposit to currency, but this usually takes time
savings
when the equilibrium is above potential output, the fed should ___ bonds equal to the needed decrease in reserve
sell
The federal reserves is concerned about accelerating inflation and wants the money supply to decrease by $20 billion. The FOMC should ______ bonds. With a reserve requirement of 10% the money multiplier is ______. If the money supply needs to decrease by $20 billion, the Fed must _______ in bonds.
sell, With the reserve requirement of 10%, the money multiplier is 1/rr=1/0.1=10, The FED must sell $20 billion/10=$2 billion in bonds.
when the fed ___ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest rates to ___
sells; rise
Changing one of the determinates of aggregate supply will cause the aggregate supply curve to___
shift
if the amount of output firms want to produce increases, but the price does not change, that's a
shift of the aggregate supply
An increase in investment will
shift the AE line upward and shift the AD curve to the right
changes in consumption and gross investment can
shift the aggregate demand curve
In the ___ run, the aggregate supply curve slopes upward
short
a ___ change in interest rates could have an enormous impact on employment output, and future economic growth
small
People in Japan tend to consume a much ___ proportion of additional income that do people in the US
smaller
people hold some of their savings as money instead of putting it all in stocks or bonds for two reasons
so they can purchase goods and services; money is a stable asset that you can hold on to and use for future expenses
aggregate supply
social institutions; productivity
formal rules, like minimum wage laws, insurance requirements, and worker safety requirements are examples of ___ institutions that influence the aggregate
social; supply
The _______ is the difference between the interest rate a bank earns in a loans and the interest rate it pays
spread
the ___ is the difference between the interest rate a bank earns on a loan and the interest rate it pays
spread
the government is often actively involved in ___ policy, trying to keep output near its long-run potential level
stabilization
The term ___ was coined in the 1970s during a period of high unemployment in the united states
stagflation
___ is used to describe an economy that is not growing but has rising inflation together with high unemployment
stagflation
aggregate ___ illustrates how the total amount of goods and services produced in an economy relates to the price level
supply
by changing the money ___ the federal reserve can influence real GDP
supply
generally, changes to social institutions that facilitate production shift aggregate ___ to the right
supply
suppose that the government increase paperwork and raises fees for stating a business. This will cause aggregate
supply to decrease, shifting to the left
the federal reserves can influence real GDP by changing the money ___ which will influence gross ___
supply; investment
traditional models of labor markets implied that if unemployment was very high, there was a ___ of labor and over time wages would ___ making firms ___ wiling to hire the unemployed
surplus; fall; more
a change in real GDP equals the ___ multiplier times the initial change in taxes
tax
a policy often used during an economic recession is to decrease ___
tax
the size of the multiplier effect caused by a change in taxes is determined by the ___ multiplier
tax
the long run equilibrium occurs when
the AD and AS and LRAS curve intersect
as nominal wages and the costs of other resources rise during an expansion
the aggregate supply curve shifts to the left, real output falls and the price level rises further
once a expansion occurs, as nominal wages and the costs of other resources rise, eventually
the aggregate supply curve to the left, the price level rises, and real GDP returns to the full employment level
a bank can find itself short of the reserve requirement at the end of the day and in a need to borrow reserve from another bank. this could happen
the bank allows its account-holders to withdraw their money at the same time.
the activity of investment can take a variety of forms
the construction of a ski lift; the purchase of real estate; the purchase of a highway convenience store
which three values are all related, so that when one changes, so do the others?
the dollar value of deposits held by banks, bank reserves, and the money supply
when a company borrows money by selling a bond, it specifies the term of the bond
the interest rate; the face value; term to maturity
if we increase our resources or productivity
the long run aggregate supply curve shifts to the right; the production possibilities frontier will shift out
in the absence of taxes, the slope of the savings schedule is equal to
the marginal propensity to save
when using the aggregate expenditures model, if expenditures change:
the model will move to a new equilibrium
The money multiplier equals
the overall change in the money supply/ the initial change in reserves
the money multiplier equals
the overall change in the money supply/the initial change in reserves
when we draw an aggregate demand curve we're assuming that the only thing that is changing as we move up and down the curve is:
the overall price level
The FED operates independently within the government, but not independent of it because new members are appointed by:
the president of the United States and confirmed by the Senate.
the federal reserve operates independently within the government because
the president or congress does not order the federal reserve to pursue some specific course of action; the federal reserve does not rely upon congress to fund its operations; once a fed governor is confirmed by the senate, a president cannot decide to remove the governor from his or her position
the activity of saving can take variety of forms
the purchase of individual stocks; money in savings account at the bank; the purchase of real estate
the nominal interest rate includes two components
the real interest rate; the expected rate of inflation
because the only category of spending that depends on income is consumption
the slope of the aggregate expenditures line is the same as the slope of the consumption schedule
banks don't perfectly hit their reserve requirement lending up to the maximum of their deposits because
they do not control hoe much is deposited or withdrawn in any particular day.
The fed used open market operations;
to keep the federal funds rates on target
because ___ checks are immediately convertible they are highly liquid and go into ___
travelers; m1
Every ___ years, a new member is appointed to the Federal Reserve Board of Governors.
two
In the short run, the aggregate supply curve slopes
upward
because transaction money demand is independent of the interest rate is a ___ line
vertical
when graphing the savings schedule, place savings on the ___ axis and disposable income on the ___ axis
vertical, horizontal
adding the given level of government purchases to consumption shifts the aggregate expenditure schedule
vertically, by an amount equal to government purchases
if gross investment increases, it will shift the aggregate expenditures schedule
vertically, by an amount equal to gross investment
investment, government spending, and net exports are affected by
very different economic variables, so any change to government policy will likely affect them differently
During the great depression
wages wee not falling, and high levels of unemployment persisted for years
Keynes reasoned that by understanding what determines expenditures on consumption, gross investment, government purchases, and net exports
we can explain the level of output in an economy
one of the challenges of using government expenditures to stimulate the economy is that
when spending needs to cut, it can cause a recession
Institutions can transfer large amounts of money in a timely and efficient way using
wire transfers
Today, the Federal Deposit Insurance Corporation insures accounts up to
$250,000
The money multipler will equal 1/rr as long as:
-banks loan out all their excess reserves -people can't hold any loaned money as cash
In the real world, the actual money multiplier tends to be smaller than 1/rr because
-people hold some loaned money as cash, -banks do not loans out of excess their reserves.
suppose you get $500 for your birthday and you spend $400 and save the remaining $100. The marginal propensity to save, or MPs, is equal to ___
.20
suppose you get $100 for your birthday and you spend 475 on a new smartphone and save the remaining $25. The marginal propensity to save, or MPS is equal to ___
.25 MPS= change in savings/change in income. A change in income of $100 changes savings by $25
as disposable income rises, so does consumption, but not by the full amount, because the marginal propensity to consume is less than ___
1
Which of the following will cause government purchases to rise.
1) Increase spending on airports 2) Increase spending on defense
mathematically, the expenditures multiplier equals
1/(1- MPC)
The money multiplier equals
1/reserve requirment
with an MPC of .6, the expenditures multiplier will equal
2.5
if the multiplier equals 4, an increase in investment spending of $5 billion will result in an overall increase in real GDP of $___ billion
20
the equilibrium line is sometimes called the
45-degree line
Central bank
A bank that provides financial services to a country's government and is responsible for the nation's monetary policy. The central bank of the United States is the Federal Reserve.
Fractional reserve banking
A banking system in which banks have to keep only a fraction of checkable deposits on hand and available for withdrawal.
Federal; Open Market Committee (FOMC)burn
A committee of the Federal Reserve System that is responsible for monetary policy decisions, specifically for open market operations for the Federal Reserve System. The FOMC consists of the Federal Reserve Board, the president of the New York Fed, and 4 of the 11 regional bank presidents.
The _________demand and supply model can be used to describe changes in an economy's price level and real GDP in the short and the long run.
Aggregate
______ demand describes the overall, or total, demand for all final goods and services produced in an economy
Aggregate
Positive shock or changes to aggregate supply include,
An unexpected increase in productivity an abrupt decrease in oil prices
The federal funds is the interest rates that banks pays when borrowing reserves from other ________
Banks
With fractional reserve banking
Banks have to keep a fraction of deposits on hand
A ______ is a financial instrument that obligates a borrower to repay money, with interest, to a lender.
Bond
Banks can expand reserves, and make more loans by:
Borrowing from the federal reserve Attracting deposits and encouraging savings
the aggregate expenditures model states that in equilibrium output, or real GDP, Y, will be equal to
C plus I plus G plus NX
Aggregate demand:
Can be interpreted as the overall demand for real GDP from four different sources.
The Federal Reserve is a Central Bank.
Central banks do not make loans to you, to households, or to businesses other than banks. Instead, and important role of central banks is to make loans to banks that fall short of funds.
As the bank for the federal government the FED:
Collects federal tax payments processes US savings bonds processes postal money orders.
______ monetary policy is sometimes referred to as "tight money'
Contractionary
In countering inflation:
Contractionary monetary policy can raise interest rates, decrease gross investment and depress aggregate demand
Holding the price level constant, a(n):
Decrease in net exports reduces the aggregated demand fir real GDP.
A decrease in aggregate demand will cause the price level to _______ and unemployment to _____ in the short run.
Decrease, Rise
The interest rate at which banks can borrow money directly from the federal reserve is called the:
Discount rate
______ reserve are equal to total minus required reserve.
Excess
______ reserves the amount the bank can lend out to earn interest equal _______ reserve minus ________ reserve.
Excess, total, required
______ monetary policy is sometimes referred to as easy money
Expansionary
The ___ serves as the bank for the federal government.
FED
we often simply call the federal reserve system the ___ whereas the ___ is used as an abbreviation for federal bureau of investigation officers or for agents
Fed; Feds
both the ___ and ___ can influence the money supply
Fed; banks
Monetary policy refers to the action of the ______ reserve to influence the supply of money and credit in the U.S economy
Federal
A formal market for overnight loans of federal reserves is the:
Federal funds market
On of the Keys interest rates in the economy is called the:
Federal funds rate
Deposits that automatically transfer money balances from savings accounts to checking accounts are part of ____
M1
When there are taxes, the initial change in consumption will equal the
MPC times the change in disposable income due to taxes
_____ reserves are equal to deposits times the reserve requirement
Required
Exports from the U.S will tend to rise when foreign incomes:
Rise
marginal propensity to save is equal to
S/Y
the slope of the savings schedule equals:
Savings/Disposable Income
When the Fed ____ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest to _____
Sells, Increases
An increase in the money _______ will cause interest rates to fall
Supply
By changing the money ____, the federal reserve can influence real GDP
Supply
Many things affect productivity, including
Technology Education Heath of workers
The Federal Reserve is not independent of government because:
The Senate either confirms or rejects a nominated Federal Reserve governor. Congress can decide to increase scrutiny FEDS accounting records. The chairperson of the Federal Reserve Board of governors is required to testify before congress. Congress can decide to terminate the Federal Reserve System.
Monetary Policy
The actions taken by a country's central bank to influence the supply of money and credit in the economy.
Federal Reserve System
The central bank of the United States, consisting of 12 regional banks and the Board of Governors. The Federal Reserve System conducts monetary policy, supervises and regulates banks, monitors the stability of the financial sector, and provides financial services to the U.S. government.
One of the Feds most important jobs is supervision and regulation of member banks to prevent banking panicks or distruptions. This is accomplished through:
The creation of regulations and guidelines. regular inspections
Which three values are all related, so that when one changes, so do the others.
The dollar value of deposits held by banks, baks reserve, and the money supply
Reserve Requirement (rr)
The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve.
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)
the tax multiplier times the initial change in taxes equals
a change in real GDP
mathematically, the expenditures multiplier is equal to
a change in real GDP divided by the corresponding change in aggregate expenditures
equilibrium in the aggregate demand and supply model consists of
a price level and a quantity of real GDP
negative shock or changes to aggregate supply include
an abrupt increase in oil prices; a natural disaster
The Federal Reserve is concerned that sluggish economic activity. It believes an increase in the money supply of $100 billion will be adequate to allay any fears of recession. The FOMC should _____ bonds. With a reserves requirement of 10% the money multiplier is _____. If the money supply needs to increase by $100 billion, the FED must ______ in bonds.
buy, 10, buy $10 billion
when the dollar ___ foreign goods and services become more expensive US consumers, and ___fall
depreciates; imports
the expected rate of return will fall for each additional purchase of capital because of _____ returns
diminishing marginal
there is a ___ relationship between disposable income and savings
direct
when banks borrow from the fed, the interest rate they pay is set by the fed, and its called the ___ rate
discount
assuming there are no taxes, income equals ___ income
disposable
exports from the US will tend to ___ when foreign income decrease
fall
when there is a recession, we often see taxes cut for the poor instead of he rich, because people with lower income tend to have a ___ MPC than the rich
higher
Which of the following will cause investments to rise
higher expected returns, improved infrastructure.
cause investment to fall
higher interest rates; to lower expected returns
will cause consumption to fall
higher taxes ; deteriorating expectations; falling wealth; repayments of loans
monetary policy affects
interest rates charged paid on savings; the price of goods, services and resources; interest rates charged on loand
changing the money supply can affect:
interest rates, thereby changing investment spending
economic ___ takes place when a firm purchases capital goods to replace worn-out equipment or to expand production
investment
Monetary policy affects interest rates which in turn, affects
investment, employment, economic growth, inflation.
Is office of Management and Budget apart of the Federal Reserve System?
no
the short-run equilibrium level of real GDP is
not necessarily the full-employment level of output that is consistent with the long run
to influence the money supply and interest rates the federal reserve buys or sells government debt. this is called
open market operations
to minimize the effects of inflation, the fed most often uses
open market operations
when conducting monetary policy, the fed most often uses
open market operations
when the money supply changes
people will rebalance their savings to maintain the level of risk versus return they prefer
The federal funds market is the market for borrowing and lending _____ between banks
reserves
if the bank keeps all of its deposits as ___ the bank wont make any money
reserves
the federal funds rate is determined by the supply and demand for borrowed ___
reserves
when a bank makes a loan, it hands over some of its ___ to the person who borrowed the money
reserves
if ___ costs rise, each additional unit of output will cost more to produce
resource
a shock to aggregate supply that affect the economy in a negative way include
rising oil changes
if consumption, gross investment, or net exports are increasing because of some non-price change, there will be
shift of the AD curve
if net exports are increasing because of some non-price change, there will be a
shift of the AD curve
if there is a dramatic reduction in electricity prices, there will be a
shift of the AS curve
as nominal wages and the costs of other resources fall during a recession
the aggregate supply curve shifts to the right, real output grows and the price level falls further
mathematically, the tax multiplier is equal to
the change in real GDP divided by the initial change in taxes
