Macro Homework 4 and 5
Suppose you deposit $500 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.10?
$5,000
Using the following information what is the velocity of money? The velocity of money is equal to _____________
(Real GDP/Money Supply) x Price Level = 6.05
If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is constant, what will the inflation rate be?
2%
Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the discount ratedecrease the discount rate. In the short-run, this expansionary monetary policy will cause:
A shift from AD 1AD1 to AD 2AD2 and a movement to point B, with a higher price level and higher output.
Using the information below compute the M2 money supply.
All Assets = $13810
How Do Interest Rates Changes Affect Aggregate Demand?
Changes in interest rates will not affect government purchases, but they will affect the other three components of aggregate demand in the following ways: 1) Consumption 2) Investment 3) Net exports
Using the information below compute the M1 money supply.
Currency and Coin Held by Public + Checking Account Balances + Traveler's Checks = $1410
The multiplier effect
Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the multiplier effect.
What is the federal government's budget relationship between expenditures and tax revenue.
If the federal government's expenditures are greater than its tax revenue, a budget deficit results. If the federal government's expenditures are less than its tax revenue, a budget surplus results.
The Federal Reserve cannot affect the unemployment ratethe unemployment rate directly; therefore, the Fed typically uses the following as its policy target:
Interest Rates
What are the Goals of Monetary Policy?
The Fed has four monetary policy goals that are intended to promote a well-functioning economy: 1. Price stability 2. High employment 3. Stability of financial markets and institutions 4. Economic growth
Why might increasing taxesincreasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
The legislative process experiences longer delays than monetary policy
12B. If the Fed wants to keep real GDP at its potential level in 2019, it should use ____________ policy. This means that the trading desk should be _________ Treasury bills.
a contractionary, selling
Excess reserves
are reserves banks keep above the legal requirement.
When the Fed conducts an open market purchase, the Fed _______________ and the money supply ______________.
buys securities from banks, increases
How Is Money Measured in the United States Today?
currency, checking account deposits, and traveler's checks.
When the Fed conducts an open market purchase, the interest rate should ______________
decrease
13B. Real GDP will be __________ it would have been if the Fed had taken no action.
higher than
13D. The inflation rate will be ______________ it would have been if the Fed had taken no action.
higher than
If government increases expenditure without raising taxes, this will
increase the budget deficit and require the government to borrow additional funds and cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector
13E. The unemployment rate will be ______________ it would have been if the Fed had taken no action.
lower than
What are required reserves
reserves that a bank is legally required to hold, based on its checking account deposits.
What are excess reserves?
reserves that banks hold over and above the legal requirement.
Expansionary monetary policy is
the Federal Reserve's decreasing interest rates to increase real GDP.
When the economy is experiencing a recessiona recession automatic stabilizers will cause:
transfer payments to increase and tax revenues to decrease
What are reserves
deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
A policy of lowering the tax rate on dividends and capital gains to increase investment is intended to result in
Long run supply side effects. Explanation:- Lower tax rate on dividend and capital gain will result in long-run supply side effects causing increase in savings & investment in the economy and thus,the capital formation in the economy will increase in the long-run. Further, the real interest rate in the economy will also decrease as a result of this policy of government of lowering taxes.
M2 is a broader definition of money-what does it include?
M1 plus savings accounts balance, small denominations time deposits, balances in money market deposit accounts in banks and non-institutional money market fund shares.
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 0.05, or 5 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $________
Take 5% of the reserves, and the answer is the remainder. $95,000
5B. The maximum amount by which the bank can expand its loans is $__________
The bank has an incentive to loan out all of its excess reserves. Excess reserves are the difference between what the bank is required to hold (RR) and the amount it actually holds. $3000
According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed pursues a contractionary monetary policy:
agents will immediately adjust their expectations of inflation downdown.
The hypothetical information in the following table shows what the situation will be in 2019 if the Fed does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should use _______________ policy.
an expansionary
13C. Full-employment real GDP will be ___________ it would have been if the Fed had taken no action.
the same as
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 $10,000 is $________ (Enter your response as an integer.)
$100,000
Suppose you deposit $1,600 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.50?
$3,200
M1: is the Narrowest Definition of the Money Supply, what does it include
1. Currency, which is all the paper money and coins that are in circulation, where "in circulation" means not held by banks or the government 2. The value of all checking account deposits at banks 3. The value of traveler's checks
12A. If the Fed does not take any policy action, in 2019 the level of real GDP will be $_________ trillion and the price level will be __________
18.5 , 118
If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is growing at 1 percent per year instead of remaining constant, what will the inflation rate be?
3%
When the Federal Reserve increases the discount rateincreases the discount rate as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
Suppose the economy is initially in long-run equilibrium. The government enacts a policy to decrease taxesdecrease taxes. In the short-run, this expansionary fiscal policy will cause:
A shift from AD 1AD1 to AD 2AD2 and a movement to point B, with a higher price level and higher output.
5A. If the required reserve ratio (RR) is 10 percent, this bank currently holds $________ in excess reserves.
If the required reserve ratio is 10%, then the bank is only required to hold 10% of its deposits in reserve. $3000
Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bondssell bonds. In the short-run, this contractionary monetary policy will cause:
Initially, the economy is in long-run equilibrium. Now, Fed decides to sell bonds. This means that Fed is undertaking contractionary monetary policy. Such policy results in decrease in money supply and increase in interest rate. Increase in interest rate raise the cost of borrowing and leads to fall in investment and consumption demand backed by credit which in result leads to decrease in aggregate demand. So, contractionary monetary policy leads to decrease in aggregate demand or leftward shift in aggregate demand curve. If we take AD1 as initial aggregate demand curve and it moves to AD2 then this resembles rightward shift of aggregate demand curve which is not possible. So, AD2 is the initial aggregate demand curve and it has moved leftward to AD1 as a result of contractionary monetary policy. It has been provided that initially economy is in long-run equilibrium. This means, initially, initial aggregate demand curve, initial short-run aggregate supply curve, and long-run aggregate supply curve are intersecting at one common point. With AD2 being the initial aggregate demand curve, the common point of intersection can only be point A as only at this point AD2 curve intersect with other two curves (LRAS and SRAS) at one common point (point A). Thus, initially, economy is at point A with initial aggregate demand curve being AD2, initial short-run aggregate supply curve being SRAS2, and long-run aggregate supply curve being LRAS. So, with aggregate demand curve shifting leftward from AD2 to AD1, the economy, in short-run, moves to point D. The point of intersection of short-run aggregate supply curve, SRAS2 and new aggregate demand curve, AD1. This movement of economy will result in lower price level and lower output. So, in short-run, contractionary monetary policy will cause a shift from AD2 to AD1 and a movement to point D, with lower price level and a lower output.
What Is Monetary Policy?
Monetary policy are the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals.
Suppose the required reserve ratio is 13% and a bank has the following balance sheet: This bank keeps required reserves of $_______ and excess reserves of $_______
Required reserves are equal to the required reserve ratio multiplied by the amount of deposits 0.13 x 11,500 = $1495 Excess reserves are equal to total reserves minus required reserves 2300 - 1495 = $805
12D. If the Fed uses monetary policy to keep real GDP at its full-employment level, the inflation rate in 2019 will be ______%
With contractionary monetary policy, the inflation rate in 2019 will be the change in the price level (116−114) divided by the "original" price level of 114. Multiply the result by 100 to express it as a percent. 0.018 ×100 = 1.8%.
12C. If the Fed takes no policy action, the inflation rate in 2019 will be ________%
Without contractionary monetary policy, the inflation rate in 2019 will be the change in the price level (118−114) divided by the "original" price level of 114. Multiply the result by 100 to express it as a percent: 0.035 ×100 = 3.5%
13A. If the Fed wants to keep real GDP at its potential level in 2019, it should use _____________ policy. The trading desk should be _____________ T-bills.
an expansionary, buying
Contractionary monetary policy is the Federal Reserve's interest rates to reduce inflation.
the Federal Reserve's increasing interest rates to reduce inflation.
What is a required reserve ratio?
the minimum fraction of deposits banks are required by law to keep as reserves.