Quiz 11

If the required reserve ratio is 10% and new money is deposited in Bank of America of $10,000, what is the maximum amount of money that can be created in the money supply (including the $10,000 new money)? 答案选项组 $19,000 $10,000 $100,000 $9,000 more than $1,000,000

$100,000 Well done! We can use the formula: final change in money supply = (initial change in money supply) * (simple money multiplier) where the multiplier = (1/rr) = (1/0.10) = 10. final change in money supply = $10,000 * 10 final change in money supply = $100,000

When an economist states that the monetarist transmission mechanism is "direct" it means that a change in the money supply creates a direct impact on the goods and services market.

True Well done! From the monetarist perspective, changes in the money supply directly impact the economy (goods and services markets) whereas the Keynesian perspective believe changes in the money supply are indirect, changing the interest rate which changes investment spending.

When an economist states that the monetarist transmission mechanism is "direct" it means that a change in the money supply creates a direct impact on the goods and services market.

True

The United States is divided into __________ Federal Reserve districts, each with a district bank.

twelve Good job. There are 12 Federal Reserve districts, each with a bank. Any paper bill issued by the Federal Reserve will have the corresponding number and letter to where that bank came from, up to a maximum of "12" or "L" (since L is the 12th letter in the alphabet).

If the Fed wants to increase interest rates, it should _____ government treasuries (e.g. government bonds, bills or notes), which will ____ the money supply. 答案选项组 buy; decrease buy; increase sell; increase sell; decrease

sell; decrease Well done! When the FED sells government treasuries, they are effectively giving a slip of paper to a bank with an "I-owe-you" on it, and the bank will give the FED money. When the FED takes this money from the bank, the bank has less to lend out, which will drive up interest rates.

3. The money supply curve is usually horizontal.

False

In the liquidity trap, the demand curve for investment is horizontal

False

Nonactivists argue against the use of discretionary monetary policy and rules-based monetary policy.

False

The discount rate is _____ and the federal funds rate is _____. 答案选项组 determined by market forces but manipulated by the FED; determined by market forces but manipulated by the FED set by the FED, set by the FED set by the FED, determined by market forces but manipulated by the FED determined by market forces but manipulated by the FED; set by the FED

Not quite. The discount rate is the rate banks can borrow from the FED, and this rate is just set directly by the FED. The federal funds rate is the rate banks borrow from each other, and though the FED manipulates this rate, it is effectively determined by the supply and demand of funds available for this borrowing.

1. The Keynesian transmission mechanism could be blocked by either interest-insensitive investment or by the liquidity

True

2. The price of old (or existing) bonds and interest rates have an inverse relationship.

True

One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at Natural Real GDP

True

People should buy bonds when they think that interest rates are as high as they will go.

True

Lowering the required reserve ratio raises the simple money multiplier.

True Well done. The simple money multiplier is defined as (1 /rr) where "rr = required reserve ratio." If the rr = 10% or 0.10, then the simple money multiplier is (1/0.10) = 10. If the rr is lowered to 5% or 0.05, then the simple money multiplier is (1/0.05) = 20.

A decrease in the money supply will shift the aggregate __________ curve to the __________. 答案选项组 supply; left demand; right demand; left supply; right

demand; left Well done! Decreasing the money supply should raise interest rates (banks have less to loan) which decreases investment spending, decreasing AD.

. Which of the following is not a major responsibility of the Fed?

determining tax rates Well done! The Federal Reserve's goals include: controlling the money supply, serving as the federal government's banker, and acting as a lender of last resort. Determining most tax rates is up to Congress and the President.

Compared to the Keynesian transmission mechanism, the monetarist transmission mechanism is 答案选项组 none of the answers is correct. indirect. inverse. direct.

direct. Well done! Monetarists believe in a more direct path from changes in the money supply to changes in AD, while Keynesians believe changes in the money supply impact investment spending which then changes AD.

According to the Keynesian transmission mechanism, an increase in the money supply will __________ the interest rate, causing a __________ in investment, which then __________ Real GDP. 答案选项组 lower; rise; raises raise; fall; lowers lower; fall; lowers raise; fall; raises raise; rise; lowers

lower; rise; raises Well done! The keynesian transmission mechanism is an indirect mechanism (using investment spending changes to change AD). An increase in the money supply increases the quantity of money able to be loaned, which decreases the interest rate and stimulates investment spending. Higher investment spending increases AD.