study plan macroecon chapters 7 and 8
A depository institution is a _______.
A depository institution is a financial firm that takes deposits from households and firms. These deposits are components of M1 and M2.
an open market operation is the
An open market operation is the purchase or sale of government securities —U.S. Treasury bills and bonds—by the Federal Reserve System in the loanable funds market. When the Fed conducts an open market operation, it makes a transaction with a bank or some other business but it does not transact with the federal government.
A lower required reserve ratio increases bank profits because ______.
banks hold fewer reserves
A type of _____ is a mortgage-backed security, which entitles _____ to the income from a package of mortgages.
bond ; its holder
First Call, Inc., a smartphone company, plans to build a factory—one that costs $12 million if the real interest rate is 3 percent a year; a larger factory that costs $14 million if the real interest rate is 2 percent a year; or a smaller one that costs $10 million if the real interest rate is 4 percent a year. Draw a graph of First Call's demand for loanable funds curve.
The demand for loanable funds curve shows the relationship between the quantity of loanable funds demanded and the real interest rate when all other influences on borrowing plans remain the same. The correct demand for loanable funds curve passes through the points ($10 million, 4), ($12 million, 3) and ($14 million, 2).
The demand for loanable funds is determined by ______. The demand for loanable funds changes when ______ changes.
The demand for loanable funds is determined by the real interest rate and expected profit. Firms invest in capital only if they expect to earn a profit and fewer projects are profitable at a high real interest rate than at a low real interest rate. When the expected profit changes, the demand for loanable funds changes. Other things remaining the same, the greater the expected profit from new capital, the greater is the amount of investment and the greater the demand for loanable funds.
The demand for money is the relationship between the quantity of money demanded and the _____, when all other influences on the amount of money that people wish to _____ remain the same.
The demand for money is the relationship between the quantity of money demanded and the nominal interest rate, when all other influences on the amount of money that people wish to hold remain the same.
Explain the flows of funds that finance business investment. Choose the correct statement
The funds for business investment come from three sources: 1. Household saving 2. Government budget surplus 3. Borrowing from the rest of the world These funds flow through financial markets and institutions to firms who borrow the funds for investment.
Something is money if it is a commodity or token that is generally acceptable as a ______. Money serves the functions of _______.
What makes something money is whether it serves as a generally acceptable means of payment. In addition to being a means of payment, money serves the functions of a medium of exchange, a unit of account, and a store of value.
A stock market is a financial market in which shares of stocks of _____ are traded.
corporations
In the long run, an increase in the quantity of money _______ the interest rate.
doesnt change
A bank manager tells you that she doesn't create money. She just lends the money that people deposit. Explain why she is wrong.
every new loan creates a new deposit, and a new deposit is new money
The loanable funds market is the aggregate of all the individual _____ markets.
financial
Lowering the required reserve ratio ______, which ______ the quantity of loans that China's banks can make and the quantity of money created.
increases unplanned reserves ; increases
Cash in Citibank's cash machines _____________ Coins inside a vending machine __________ Your Visa card ______________ Your loan to pay for school fees ________________
not money
Banks Ordered to Hold More Capital UK banks must hold more capital as their holdings of consumer debt soars. Source: The Guardian, June 27, 2017 What is the "capital" referred to in the news clip? How might the requirement to hold more capital make banks safer? The "capital" that is referred to in the news clip is _____ Requirements to hold more capital make banks safer because _______.
owners' investment in the bank the requirement to hold more capital makes the possibility of failure less likely
A stock is a certificate of _____ and claim to the _____ that a firm makes.
ownership ; deposits
A bond is a promise to pay _____ sums of money on _____ dates.
specified ; specified
The demand for loanable funds is the relationship between _____ demanded and the _____ when all other influences on borrowing plans remain the same.
the quantity of loanable funds; real interest rate
In June 2018, individuals and businesses held: $50 billion in currency and no traveler's checks $1,000 billion in checkable deposits $5,000 billion in savings deposits $500 billion in time deposits $250 billion in money market funds and other In June 2018, banks held: $450 billion in currency $100 billion in reserves at the central bank $800 billion in loans to households and businesses Calculate the M1 and M2 measures of money. calculate the monetary base calculate currency drain ratio and reserve ratio calculate m1m and m2m How is the money multiplier influenced by the banks' reserve ratio? An increase in banks' reserves with no change in deposits _____ banks' reserve ratio and _____ the money multiplier.
- M1 is the quantity of money held by individuals and businesses in the form of checkable deposits and currency. M1= 1050 ; M2 = 6800 monetary base=s the sum of bank reserves held at the central bank and currency issued by the central bank. Currency issued by the central bank is the currency held by individuals, businesses, and banks. Monetary base = $100 billion + $450 billion + $50 billion = $600 billion. CDR = currency drain ratio = (Currency held by individuals and businesses ÷ Checkable deposits)× 100. = 5% RRR= Bank reserves = Currency held by banks + reserves at the central bank = 55 The money multiplier is the number by which the monetary base is multiplied to equal the quantity of money. So the money multiplier = Quantity of money÷ Monetary base. m1m = 1.75 ; m2m = 11.33 money multiplier = (D + C)/(R + C) Dividing both the numerator and the denominator by D, the money multiplier = (1 + C/D) ÷ (R/D + C/D). The banks' reserve ratio is R/D. An increase in the banks' reserves increases the banks' reserve ratio and decreases the money multiplier.
Lori is a student who teaches golf on Saturdays. In a year she earns $35,000 after paying her taxes. At the beginning of 2017, Lori owned $3,500 worth of books, DVDs, and golf clubs and she had $6,000 in a savings account at the bank. During 2017, the interest on her savings account was $420 and she spent a total of $25,000 on consumption goods and services. There was no change in the market values of her books, DVDs, and golf clubs. 19500 How much did Lori save in 2017? What was her wealth at the end of 2017?
2017 saved = Saving is the amount of income that is not paid in taxes or spent on consumption goods and services. 35000 - 25000 + 420 = $10420 wealth at end of 2017 = Wealth is the value of all the things that people own. Lori's wealth is the value of her books, DVDs, and golf clubs plus the money that she has saved. Lori's wealth is $19,920.
Why are checks, debit cards, and credit cards not money? Choose the correct statement.
Checks and debit cards are not money. They are instructions to the bank to transfer money from one account to another. A credit card is not money. It is an ID card that allows you to take out a loan.
Minland when real GDP (Y0) is $10 billion. Columns A and C show the demand for money schedule when real GDP (Y1) is $20 billion. The graph shows the demand for money curve when real GDP is $10 billion. Draw the supply of money curve when the quantity of money is $3 billion. Label it. Draw a point to show the equilibrium in the money market. Label it 1. Draw the new demand curve for money if real GDP increases to $20 billion. Draw a point to show the new equilibrium in the money market. Label it 2. To move to the new money market equilibrium, the price of a bond ______, and the interest rate ______. When real GDP increases to $20 billion and before the money market moves to its new equilibrium, there is an excess ______ money in the short run
Equilibrium in the money market is determined at the intersection of the demand for money curve and the supply of money curve. When real GDP is $10 billion, the demand for money curve and the supply of money curve intersect at an interest rate of 3 percent a year. And when real GDP is $20 billion, the demand for money curve and the supply of money curve intersect at an interest rate of 4 percent a year. falls ; rises excess demand for
Excess reserves are a bank's _____ reserves minus its _____ reserves.
Excess reserves are a bank's actual reserves minus its desired reserves.
Banks create money by ______.
Most money is bank deposits, not currency. What banks create is deposits, and they do so by making loans.
Starting from a short-run equilibrium, when the Fed decreases the quantity of money, _______. The price of a bond ______ and the interest rate in the short run ______.
Starting from a short-run equilibrium, if the Fed decreases the quantity of money, people find themselves holding less money than the quantity demanded. With a shortage of money holding, people enter the loanable funds market and sell bonds. When people sell bonds, the decrease in demand for bonds lowers the price of a bond and raise the interest rate.
Both graphs show a demand for money curve. In the left graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in the nominal interest rate. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve. In the right graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in real GDP. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve
The interest rate is the opportunity cost of holding money. As the interest rate falls, the opportunity cost of holding money falls and the quantity of real money demanded increases. As the interest rate rises, the opportunity cost of holding money rises, and the quantity of real money demanded decreases. The demand for money curve shows the relationship between the quantity of real money demanded and the interest rate. The demand for money curve is a downward-sloping line. When real GDP increases, the demand for money increases and the demand for money curve shifts rightward. When real GDP decreases, the demand for money decreases and the demand for money curve shifts leftward.
If the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is _____.
The money multiplier is the ratio of the change in the quantity of money to the change in monetary base. If the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is $2.5 million/$1 million = 2.5.
The main influences on the quantity of real money that people and businesses plan to hold include the _______.
The quantity of money that people plan to hold depends on four main factors: the price level, the nominal interest rate, real GDP, and financial innovation. But the quantity of real money demanded is independent of the price level.
The quantity of money that the banking system can create is limited by _______.
The quantity of money that the banking system can create is limited by three factors: the monetary base, desired reserves, and desired currency holdings.
The Fed's three policy tools are _______.
The Fed's three policy tools are open market operations, last resort loans, and the required reserve ratio.
In the short run, ______ and ______ adjusts to achieve equilibrium.
real GDP determines the demand for money curve and the Fed determines the quantity of real money supplied; the nominal interest rate
The spreadsheet provides information about the demand for money in Minland. Column A is the nominal interest rate, r. Columns B and C show the quantity of money demanded at two different levels of real GDP: Y0 is $10 billion and Y1 is $20 billion. The quantity of money is $3 billion. Initially, real GDP is $20 billion. If the interest rate is greater than 4 percent a year, the price of a bond ______, and the interest rate ______. If the interest rate is less than 4 percent a year, the price of a bond ______, and the interest rate _____
rises; falls The graph shows the money market in Minland using the data given in the table. The equilibrium interest rate is 4 percent a year. When the interest rate is greater than 4 percent a year, people are holding more money than they want to hold. People buy bonds, the demand for bonds increases and the price of a bond rises. As the price of a bond rises, the interest rate starts to fall and will continue to rise until it is at its equilibrium rate of 4 percent a year. falls; rises The graph shows the money market in Minland using the data given in the table. The equilibrium interest rate is 4 percent a year. When the interest rate is less than 4 percent a year, people are holding less money than they want to hold. People sell bonds. The price of a bond falls.
Michael, an Internet service provider, bought an existing business worth $400,000 on December 31, 2017. During 2018, his business grew and he bought $200,000 of new servers. The market value of his older servers fell by $150,000. What was Michael's gross investment, depreciation and net investment during 2018?
2018 gross investment = Gross investment is the total amount spent on new capital. In 2008, Michael spent $200,000 on new servers. His gross investment is $200,000. 2018 depreciation = 150000 ; Depreciation is the decrease in the value of capital that results from its use and from obsolescence. During 2008, the market value of some of Michael's older servers fell by $150,000. Depreciation is $150,000. 2018 net investment = Net investment is the change in the quantity of capital. It equals gross investment minus depreciation. Michael's gross investment is $200,000. Michael's depreciation is $150,000. So net investment is $200,000−$150,000, which is $50,000.
Using a commodity as money creates problems because ______.
A commodity can be bulky and difficult to carry. And a commodity's value can change over time. So prices of goods and services would change because the value of the commodity changed.
A government budget deficit _______ loanable funds.
A government budget deficit increases the demand for loanable funds.
government budget surplus _______ loanable funds.
A government budget surplus increases the supply of loanable funds.
Explain the relationship between asset prices and the interest rate.
An asset price and the interest rate are inversely related. A rise in the interest rate lowers the asset price, and a fall in the interest rate raises the asset price.
The _______, the greater is the amount that a household decides to save.
A household's decision to save is influenced by many factors, but the chief factors are the real interest rate, disposable income, expected future income, wealth, and default risk. The greater a household's disposable income and the smaller a household's expected future income, the greater is the amount that a household decides to save. And the lower a household's wealth and the smaller the default risk, the greater is the amount that a household decides to save. Next question
Currency consists of _____.
Currency consists of notes (dollar bills) and coins.
The functions of depository institutions include _______.
Depository institutions 1. Create liquidity 2. Lower the cost of borrowing 3. Lower the cost of monitoring borrowers 4. Pool risk
A depository institution creates liquidity by ______. Depository institutions pool risk by using funds obtained from ______ depositors to make loans to ______ borrowers. Depository institutions minimize the cost of monitoring borrowers by ______.
Depository institutions create liquidity by borrowing short and lending long. many ; many A depository institution minimizes the cost of monitoring borrowers by using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually.
Which of the following is an example of financial capital?
Financial capital consists of the funds that firms use to buy physical capital and that households use to buy a home or to invest in human capital. "Rachel has taken a loan to buy a new home," is about a capital - that is used to make a real estate investment. So it is an example of financial capital.
Depository institutions have made innovations that have resulted in _______.
Financial innovation has brought changes in the composition of money. One of these changes is the increasing contribution of checking deposits at thrift institutions to M1.
Firms make investment decisions by _______.
Firms invest in capital only if they expect to earn a profit. So firms make investment decisions by comparing the expected profit with the real interest rate and making the investment if the project has a positive net present value.
Using a Federal grant of $150,000, a research lab buys equipment for $75,000 that has depreciated by $11,000 after two years. Calculate gross investment and net investment.
Gross investment is the total amount spent on new capital. Net investment is the change in the quantity of capital - equals gross investment minus depreciation. If a $150,000 Federal grant is used by a research lab to buy equipment for $75,000 that has depreciated by $11,000 after two years, this implies the total amount spent on the equipment (new capital) is $75,000, which is gross investment. Net investment is equal to gross investment minus depreciation ($75,000 - $11,000) or $64,000. So gross investment is $75,000 and net investment is $64,000.
During times of uncertainty, it might be necessary for a bank to hold large cash reserves and to have a large percentage of its assets purchased by its own capital because ______.
If depositors decide to make large withdrawals, the bank must have enough cash on hand to prevent panic. If the bank does not have a large percentage of its assets purchased by its own capital, it could face the problem of becoming illiquid.
The table shows the amounts held as the various components of M1 and M2. The value of M1 is $______billion. The value of M2 is $_____ billion
M1 consists of currency and traveler's checks plus checking deposits owned by individuals and businesses. Currency and traveler's checks are $50 billion and checking deposits are $200 billion, so M1 is equal to $50 billion + $200 billion, which is $250 billion. M2 consists of M1 plus savings deposits, time deposits, and money market mutual funds and other deposits. Savings deposits are $350 billion, time deposits are $200 billion, and money market mutual funds and other deposits are $180 billion. So M2 is equal to $250 billion + $350 billion + $200 billion +$180 billion, which is $980 billion.
M1 consists of currency held by _____ and _____, _____, and _____ owned by individuals and businesses.
M1 consists of currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses.
M2 consists of _____ plus _____ and _____ deposits, _____, and other deposits
M2 consists of M1 plus savings deposits and small time deposits, money market funds, and other deposits.
A means of payment is a method of _____ a debt.
Means of payment is a method of settling a debt.
Michael, an Internet service provider, bought an existing business worth $200,000 on December 31, 2017. During 2018, his business grew and he bought $400,000 of new servers. The market value of his older servers fell by $150,000. What is the value of Michael's capital at the end of 2018?
Michael's capital on December 31, 2018 equals the value of the servers and the building at the beginning of the year plus his net investment, which is $200,000 + $250,000 = $450,000.
In June 2018, individuals and businesses held: $50 billion in currency and no traveler's checks $1,000 billion in checkable deposits $5,000 billion in savings deposits $500 billion in time deposits $250 billion in money market funds and other In June 2018, banks held: $450 billion in currency $100 billion in reserves at the central bank $800 billion in loans to households and businesses ___________ monetary base was _______
Monetary base is the sum of bank reserves held at the central bank and currency issued by the central bank. Currency issued by the central bank is the currency held by individuals, businesses, and banks. =$600 billion
Choose the correct statements. 1. Gum does not serve as money because it is not a good store of value. 2. Most people know the price of gum, so it could serve as money because it is a unit of account. 3. Because most people buy gum, it can be used as money because it is a useful tool in barter. 4. Gum does not serve as money because it is not generally accepted in exchange for goods and services.
Money is any commodity or token that is generally acceptable as a means of payment. Gum is not generally accepted in exchange for goods and services. And money is a store of value in the sense that it can be held and exchanged later for goods and services. Gum is not a good store of value.
Which of the following is money?
Money is any commodity or token that is generally accepted as a means of payment. "Charlie's checking account deposit at the Bank of America," implies a commodity deposited in the bank that is accepted as a means of payment. So it is an example of money.
Net present value is the _______. State the financial decision rule: If the net present value is positive _______ and if the net present value is negative _______.
Net present value is the present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision. The financial decision rule is: If the net present value is positive, take the action. If the net present value is negative, do not take the action.
Net worth is the total market value of what a financial institution has _____ minus the market value of what it has _____.
Net worth is the total market value of what a financial institution has lent minus the market value of what it has borrowed. OK
Physical capital is ______. Financial capital is ______.
Physical capital is the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services. Financial capital is the funds that firms use to buy physical capital.
Examples of physical capital are ______. Examples of financial capital are ______
Physical capital is the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services. The ovens used by Pizza Hut and the lawn mowers used by Larry's Mowing Service are examples of physical capital. Financial capital is the funds that firms use to buy physical capital. The bonds issued by Wal-Mart and stocks issued by Boeing are examples of financial capital.
Reserves consist of the currency in the _____ plus the balance on its _____ account at _____.
Reserves consist of the currency in the bank's vaults plus the balance on its reserve account at a Federal Reserve Bank.
The table shows the balance sheets for the Federal Reserve Bank of New York and Wells Fargo. The FOMC buys $20 million of securities from Wells Fargo. Following the sale by the Fed, Wells Fargo has $20 million fewer and the fed has $20million more
The FOMC buys $20 million of securities from Wells Fargo. Wells Fargo has $20 million fewer securities and the Fed has $20 million more securities.
the Fed increased its assets to $2,600 billion in 2012 by _______. Between 2007 and 2012 the monetary base _______.
The Fed increased its assets to $2,600 billion in 2012 by purchasing long-term government securities and long-term private securities from banks. The Fed paid for some of its new assets by increasing the balances on reserve accounts held by banks. increased
The Fed is the lender of last resort, which means _______.
The Fed is the lender of last resort, which means if depository institutions are short of reserves, they can borrow from the Fed
The federal funds rate is the _____ rate on _____ loans.
The Federal funds rate is the interest rate on interbank loans (loans made in the federal funds market).
The G-20 aims to take stock of the economic recovery. One achievement in Pittsburgh could be a deal to require that financial institutions hold more capital. Source: USA Today, September 24, 2009 What are the financial institutions that the G-20 might require to hold more capital? What exactly is the "capital" referred to in the news clip? How might the requirement to hold more capital make financial institutions safer? The financial institutions that the G-20 might require to hold more capital are ______. The "capital" referred to in the news clip is ______. The requirement to hold more capital can make financial institutions safer because by holding more capital, a financial institution ______.
The financial institutions that the G-20 might require to hold more capital are banks and insurance companies. The "capital" referred to in the news clip is the institutions' own funds. The requirement to hold more capital can make financial institutions safer because by using more of its own funds and less borrowed funds, a financial institution decreases its risk of insolvency.
The loanable funds market is ______.
The loanable funds market is the aggregate of all the individual financial markets. The loanable funds market includes loan markets, bond markets, and stock markets.
The net present value is the _______ flows of money from a financial decision minus _____ .
The net present value is the value today of all the future flows of money that arise from a financial decision minus the initial cost of the decision.
Tom took out a $2,000 loan to buy a boat at an interest rate of 8 percent a year. He plans to repay the loan after 2 years. How much will he have to pay? Tom will have to pay $enter your response here
The present value of an amount of money n years in the future is calculated as Present value = Future value/(1+ r)n where r is the interest rate. Rearranging, Future value = Present value×(1+ r)n. When Tom pays back the loan in two years, he is paying the future value. The future value of $2,000 in two years when the interest rate is 8 percent equals $2,000×(1+ 0.08)2, which is $2,333.
Gross investment is ______. Net investment is ______.
The quantity of capital changes because of investment and depreciation. Investment increases the quantity of capital and depreciation decreases it. The total amount spent on new capital is called gross investment. The change in the value of capital is called net investment.
the quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio - the ratio of _____ to _____ that the _____ plan to hold.
The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio - the ratio of reserves to deposits that the banks plan to hold.
In 2005, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was $2.7 trillion and the government budget deficit was $0.5 trillion. • By 2009, the real interest rate had increased to 5 percent a year, but the nominal interest rate was unchanged at 5 percent a year. Investment had crashed to $1.8 trillion and the government budget deficit had climbed to $1.8 trillion. Assume that the private demand for and private supply of loanable funds did not change between 2005 and 2009. What was the inflation rate in 2005 and 2009? How do you know? The inflation rates in 2005 and 2009 were _____ because the inflation rate equals _____ . What happened to the price of a bond between 2005 and 2009? How do you know? The price of a bond _____ between 2005 and 2009 because the _____.
The real interest rate equals the nominal interest rate minus the inflation rate. So the inflation rate equals the nominal interest rate minus the real interest rate. In 2005, the nominal interest rate was 5 percent a year and the real interest rate was 2 percent a year, so the inflation rate was 3 percent a year. In 2009, the nominal interest rate was 5 percent a year and the real interest rate was 5 percent a year, so the inflation rate was zero. Key Point: The nominal interest rate minus the real interest rate equals the inflation rate ------- The price of a bond is inversely related to the nominal interest rate. Between 2005 and 2009, the nominal interest rate did not change—it remained at 5 percent a year. With the nominal interest rate unchanged, the price of a bond was also unchanged. Key Point: The price of a bond is inversely related to the nominal interest rate.
In 2005, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was $2.7 trillion and the government budget deficit was $0.5 trillion. • By 2009, the real interest rate had increased to 5 percent a year, but the nominal interest rate was unchanged at 5 percent a year. Investment had crashed to $1.8 trillion and the government budget deficit had climbed to $1.8 trillion. Assume that the private demand for and private supply of loanable funds did not change between 2005 and 2009 ----- What was the inflation rate in 2005 and 2009? How do you know? The inflation rates in 2005 and 2009 were _____ because the inflation rate equals _____ . ----- What happened to the price of a bond between 2005 and 2009? How do you know? The price of a bond _____ between 2005 and 2009 because the _____. --------- What happened to the demand for loanable funds between 2005 and 2009? How do you know? Between 2005 and 2009, the government budget deficit increased, so the demand for loanable funds _____ between 2005 and 2009. --------- Did the change in the government budget deficit crowd out some investment? The change in the government budget deficit _____ crowd out some investment because the _____ -------- What happened to the quantity of saving and investment? The quantity of saving _____ and the quantity of investment _____.
The real interest rate equals the nominal interest rate minus the inflation rate. So the inflation rate equals the nominal interest rate minus the real interest rate. In 2005, the nominal interest rate was 5 percent a year and the real interest rate was 2 percent a year, so the inflation rate was 3 percent a year. In 2009, the nominal interest rate was 5 percent a year and the real interest rate was 5 percent a year, so the inflation rate was zero. Key Point: The nominal interest rate minus the real interest rate equals the inflation rate. --------- remained unchanged; nominal interest rate remained unchanged -------- increased ------- The increase in the government budget deficit increased the demand for loanable funds. With no change in the supply of loanable funds, the real interest rate increases and investment decreases. Between 2005 and 2009, the real interest rate increased from 2 percent a year to 5 percent a year, and the quantity of loanable funds demanded by firms decreased from $2.7 trillion to $1.8 trillion. Crowding out occurred. Key Point: With a given supply of loanable funds, an increase in the government budget deficit increases the real interest rate and crowds out investment. --------- Saving and investment plans depend on the real interest rate. Between 2005 and 2009, the real interest rate increased, which increased saving and decreased investment. The increase saving increased the quantity supplied of loanable funds. The decrease in investment decreased the quantity demanded of loanable funds. Key Point: A change in the real interest rate does not change the supply of or demand for loanable funds: It changes the quantities supplied and demanded.
The table provides information about the nominal interest rate and the CPI inflation rate in the United States for the past five months. In March 2022, the real interest rate was Between November 2021 and March 2022, the real interest rate
The real interest rate is equal to the nominal interest rate minus the inflation rate, which, for Mar, 2022 is 3.43 percent−8.56 percent = −5.13percent The real interest rate in Nov, 2021 was 2.62 percent−6.83 percent = −4.21 percent. The real interest rate in Mar, 2022 is 3.43 percent−8.56 percent = −5.13 percent. So the real interest rate decreased.
The real interest rate is the opportunity cost of loanable funds because ______.
The real interest rate is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money. The real interest rate is the opportunity cost of loanable funds. The real interest paid on borrowed funds is the opportunity cost of borrowing. And the real interest rate forgone when funds are used either to buy consumption goods and services or to invest in new capital goods is the opportunity cost of not saving or not lending those funds.
The supply of loanable funds is determined by the _________. The supply of loanable funds changes when _______.
The supply of loanable funds is determined by the saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk. The supply of loanable funds changes whenever any of these factors changes.
The supply of loanable funds is the relationship between _____ supplied and the _____ when all other influences on lending plans remain the same.
The supply of loanable funds is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.
The table sets out the data for an economy when the government's budget is balanced. Suppose that the quantity of loanable funds demanded increases by $1.5 trillion at each real interest rate and the quantity of loanable funds supplied increases by $0.5 trillion at each real interest rate. If the government budget remains balanced, what are the real interest rate, investment, and private saving? Does any crowding out occur? The real interest rate is __________
The table shows the demand for loanable funds schedule and the new demand for loanable funds schedule following the increase in demand, and the supply of loanable funds schedule and the new supply of loanable funds schedule following the increase in supply. The government budget is balanced. In the table, find the equilibrium real interest rate.
The table sets out the data for an economy when the government's budget is balanced. Calculate the equilibrium real interest rate, investment, and private saving. If planned saving increases by $0.5 trillion at each real interest rate, explain the change in the real interest rate. If planned investment increases by $1 trillion at each real interest rate, explain the change in saving and the real interest rate. The real interest rate is ___ The quantity of investment is _____ and the quantity of private saving is ______ If planned saving increases by $0.5 trillion at each real interest rate, the real interest rate equals______ If planned investment increases by $1.0 trillion at each real interest rate, the real interest rate equals ____ % a year and the quantity of saving ________
The table shows the demand for loanable funds schedule and the supply of loanable funds schedule. The real interest rate is the real interest rate at which the quantity of loanable funds demanded equals the quantity of total loanable funds supplied. The equilibrium real interest rate is 6 percent a year. _____ The equilibrium real interest rate is 6 percent a year. When the real interest rate is 6 percent a year, the equilibrium quantity of loanable funds is $7.5 trillion. So investment and saving are both $7.5 trillion. ---- The real interest rate is the real interest rate at which the quantity of loanable funds demanded equals the quantity of new quantity of loanable funds supplied. The equilibrium real interest rate is 5.5 percent a year. ------ The table shows the demand for loanable funds schedule, the supply of loanable funds schedule, and the new demand for loanable funds schedule when investment increases by $1.0 trillion at each real interest rate. The real interest rate is the real interest rate at which the quantity of loanable funds demanded equals the quantity of new quantity of loanable funds supplied. The equilibrium real interest rate rises to 7 percent a year and the quantity of saving increases.
The table sets out the data for an economy when the government's budget is balanced. If the government's budget becomes a deficit of $2.0 trillion, what are the real interest rate and investment? Does crowding out occur? If the government's budget becomes a deficit of $2.0 trillion, the real interest rate is ______ percent a year and the quantity of investment is _______ There _____ crowding out in this situation because _____.
The table shows the demand for loanable funds schedule, the private supply of loanable funds, and the total demand for loanable funds schedule. To find total demand for loanable funds, we add the government budget deficit to the private demand for loanable funds. We have found that the new real interest rate is 8 percent a year. When the real interest rate is 8 percent a year, what is the quantity of investment? 4.5 is; the deficit increases the real interest rate, which decreases the quantity of loanable funds demanded
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced. What is the real interest rate, the quantity of investment, and the quantity of private saving if the government's budget becomes a surplus of $2.0 trillion? Is there any crowding out in this situation? ______ If the government budget surplus becomes $2.0 trillion, the real interest rate is_____ The quantity of investment is ______- and quantity of private saving is ________ There _____ crowding out in this situation because _____.
The table shows the demand for loanable funds schedule, the private supply of loanable funds, and the total supply of loanable funds schedule. To find total supply of loanable funds, we add the government budget surplus to the private supply of loanable funds. The real interest rate is the real interest rate at which the quantity of loanable funds demanded equals the quantity of total loanable funds supplied. The equilibrium real interest rate is 6 percent a year. ------ The table shows the demand for loanable funds schedule, the private supply of loanable funds, and the total supply of loanable funds schedule. To find total supply of loanable funds, we add the government budget surplus to the private supply of loanable funds. The equilibrium real interest rate is 6 percent a year. When the real interest rate is 6 percent a year, the equilibrium quantity of loanable funds is $7.0 trillion. When the real interest rate is 6 percent a year, the quantity of private loanable funds supplied is $5.0 trillion. _________ is no; the government surplus lowers the real interest rate and increases investment
The crowding-out effect is the tendency for a government budget deficit to ______ the real interest rate and decrease ______. A government budget deficit ______ the real interest rate because ___
The tendency for a government budget deficit to raise the real interest rate and decrease investment is called the crowding-out effect. The budget deficit crowds out investment by competing with businesses for scarce financial capital. raises; the demand for loanable funds increases
The three main types of markets for financial capital are _______.
The three main types of markets for financial capital are loan markets, bond markets, and stock markets.
The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
The two main official measures of money in the United States today are M1 and M2. The test of whether an asset is money is whether it serves as a means of payment. Currency passes the test. Checking deposits are money because they can be transferred from one person to another by writing a check or using a debit card. So M1 is really money. Some of the savings deposits in M2 are just as much a means of payment as M1. Some savings deposits are not a means of payment, and they are known as liquid assets—assets that can be easily converted into a means of payment without loss in value. Because the deposits in M2 that are not means of payment are quickly and easily converted into a means of payment, they are counted as money.
The monetary base is the sum of _______. The monetary base is equal to _______.
The Fed's liabilities together with coins issued by the Treasury make up the monetary base. The Fed's liabilities are the Federal Reserve notes and depository institution deposits. So the monetary base is the sum of Federal Reserve notes, coins, and depository institution deposits at the Fed.
The Fed's policy tools include _______. To increase its assets to $2.3 trillion in 2008, the Fed used ______
The Fed's policy tools are open market operations, last resort loans, and the required reserve ratio. In 2008, the Fed was especially active as a lender of last resort, and with the U.S. Treasury, created a number of new lending facilities and initiatives to prevent banks from failing.
The table sets out the data for an economy when the government's budget is balanced. If the Ricardo-Barro effect occurs, and if the government's budget balance becomes a deficit of $1.0 trillion, what is the real interest rate and the quantity of investment? Is there any crowding out in this situation? If the Ricardo-Barro effect occurs, and if the government's budget becomes a deficit of $1.0 trillion, the real interest rate is ----- percent a year and the quantity of investment is __________ There _____ crowding out in this situation because _____.
The Ricardo-Barro effect holds that the government budget deficit has no effect on the real interest rate or investment. So with a government budget deficit of $1.0 trillion, the real interest rate remains at 8.0 percent a year and the quantity of investment remains at $6.0 trillion. The Ricardo-Barro effect holds that the government budget deficit has no effect on the real interest rate or investment. So investment is the same no matter what the size of the deficit and there is no crowding out.
The crowding-out effect is the tendency for a government budget deficit to raise the _____ and _____ investment.
The crowding-out effect is the tendency for a government budget deficit to raise the real interest rate and decrease investment.
Define and distinguish between future value and present value. Choose the correct statement.
To compare current and future dollars, we convert future dollars, called "future value," to current dollars, called "present value." The present value of a future dollar is the amount that will grow to be as large as that future value when the interest that it will earn is considered. Next question
We call the leakage of bank reserves into currency the currency drain, and we call the ratio of _____ to _____ the currency drain ratio.
We call the leakage of bank reserves into currency the currency drain, and we call the ratio of currency to deposits the currency drain ratio.
U.S. household income has grown considerably since 1984. U.S. saving has ______ because wealth has ______. Households preferred to buy corporate equities rather than bonds because ______.
Wealth increases when the market value of assets rises—called capital gains. And the higher a household's wealth, other things remaining the same, the smaller is its saving. corporate equities deliver capital gains, which increases wealth
The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______. The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______.
When the demand for loanable funds increases, the demand curve shifts rightward and when the supply of loanable funds increases, the supply curve shifts rightward. The increase in demand increases the real interest rate, and the increase in supply decreases the real interest rate. So the equilibrium real interest rate rises, falls, or remains the same. The increase in demand increases the equilibrium quantity of loanable funds, and the increase in supply increases the equilibrium quantity of loanable funds. So the equilibrium quantity of loanable funds increases. ---- When the demand for loanable funds increases, the demand curve shifts rightward and when the supply of loanable funds decreases, the supply curve shifts leftward. The increase in demand increases the real interest rate, and the decrease in supply increases the real interest rate. So the equilibrium real interest rate rises. The increase in demand increases the equilibrium quantity of loanable funds, and the decrease in supply decreases the equilibrium quantity of loanable funds. So the equilibrium quantity of loanable funds increases, decreases, or remains the same.
First Call, Inc., a smartphone company, plans to build a factory—one that costs $10 million if the real interest rate is 4 percent a year; a larger factory that costs $12 million if the real interest rate is 3 percent a year; or a smaller one that costs $8 million if the real interest rate is 5 percent a year. First Call expects its profit to double next year. Explain how this increase in expected profit influence First Call's demand for loanable funds. This increase in expected profit _______ the demand for loanable funds and brings _______ the demand for loanable funds curve.
When the expected rate of profit rises, investment increases today. And when investment increases, the quantity of loanable funds demanded at each real interest rate increases. The demand for loanable funds curve shifts rightward.
A financial institution is a firm that operates on both sides of the markets for _____: It _____ in one market and _____ in another.
financial capital ; borrows; lends
Bonds issued by _____ are traded in the bond market.
firms and governments
What is the present value of $500, three years in the future if the interest rate is 5 percent? The present value of $500, three years in the future if the interest rate is 5 percent is $
he present value of an amount of money n years in the future is calculated as Present value = Future value/(1+ r)n where r is the interest rate. So the present value of $500, three years in the future if the interest rate is 5 percent equals $500/(1+ 0.05)3, which is $431.92.
A mortgage is a legal contract that gives ownership of a _____ to the _____ in the event that the _____ fails to meet the agreed loan payments (repayments and interest).
home ; lender ; borrower
A depository institution is a financial firm that takes deposits from ___
households and firms
Net worth is the total market value of what a financial institution has _____ minus the market value of what it has _____
lent ; borrowed
The main components of money in the United States today are ______.
in the United States today, money consists of currency and deposits at banks and other depository institutions. Deposits are money because they can be used to make payments. Deposits are the largest component of money in the United States today. The figure shows the relative magnitudes of the items that make up M1 and M2.
In 2005, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was $2.7 trillion and the government budget deficit was $0.5 trillion. • By 2009, the real interest rate had increased to 5 percent a year, but the nominal interest rate was unchanged at 5 percent a year. Investment had crashed to $1.8 trillion and the government budget deficit had climbed to $1.8 trillion. Assume that the private demand for and private supply of loanable funds did not change between 2005 and 2009. -------- What happened to the demand for loanable funds between 2005 and 2009? How do you know? Between 2005 and 2009, the government budget deficit increased, so the demand for loanable funds _____ between 2005 and 2009. ------ Did the change in the government budget deficit crowd out some investment? The change in the government budget deficit _____ crowd out some investment because the _____. -------- What happened to the quantity of saving and investment? The quantity of saving _____ and the quantity of investment _____. ------
increased --------- did; real interest rate rose -------- increased, decreased
An open market purchase ______ the monetary base. An open market sale ______ the monetary base.
increases ; decreases
A government budget surplus _______ the real interest rate, decreases ______.
lowers; private saving, and increases investment
The Federal Open Market Committee is the _______. The main functions of the Federal Open Market Committee are to _______. ------- Choose the correct statements. 1. The Vice-President of the United States is a member of the FOMC. 2. The president of the Federal Reserve Bank of New York is a member of the FOMC. 3. The FOMC meets approximately every six weeks. 4. The President of the United States is a member of the FOMC.
main policy-making organ of the Federal Reserve System review the state of the economy and determine the monetary policy actions to be taken by the N.Y. Fed ---- 2. The president of the Federal Reserve Bank of New York is a member of the FOMC. 3. The FOMC meets approximately every six weeks.
Suppose that banks' reserves at the Fed are $20 billion, Federal Reserve notes are $750 billion, and the quantity of coins is $15 billion. Calculate the monetary base in the United States
monetary based in US = The monetary base is the sum of coins and Federal Reserve notes held by households, businesses, and banks, and banks' reserves at the Fed. The question states that banks' reserves at the Fed are $20 billion, Federal Reserve notes are $750 billion, and the quantity of coins is $15 billion. So the monetary base equals $15 billion+$750 billion+$20 billion. The monetary base in the United States equals $785 billion.
the check you have just written to pay for your rent is ______. US dollar bills in your wallet are ______
not money; money
Saving is the amount of income that is _____ in net taxes or spent on _____ goods and services.
not paid ; consumption
Wealth is the value of all the things that people _____.
own
Depository institutions balance risk and return by _______.
placing some funds into safe low interest-earning assets and other funds into high-interest risky assets
the Federal Reserve (usually called the Fed) is the central bank of the United States, a _____ authority whose main role is the regulation of _____.
public ; banks and money
The risk that a borrower, also known as a creditor, might not _____ is called credit risk or default risk.
repay a loan
A bank's "balancing act" balances _______. The over-pursuit of profit or underestimation of risk can lead to bank failure because _____
return against risk; some borrowers default and never repay, which can lead to bank insolvency
According to the Ricardo-Barro effect, when a government budget deficit occurs today, ______.
saving increases, the supply of loanable funds increases, and the real interest rate does not change
the central bank of the United States is the ______. The central bank of the United States performs many functions, one of which is that it _______.
the federal reserve system A central bank is a bank's bank and a public authority that regulates a nation's depository institutions and conducts monetary policy, which means that it adjusts the quantity of money in circulation and influences interest rates.
If the annual interest paid on a $500 loan is $25, the nominal interest rate is _____ percent per year. If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a year, the real interest rate is _____ per year.
the nominal interest rate is the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent. So the nominal interest rate is ($25/$500)*100 = 5 percent a year. The real interest rate is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money. So the real interest rate is nominal interest rate minus inflation which is 5 minus 2 = 3 percent a year.
A government budget deficit _______ the real interest rate, increases _____
raises; private saving, and decreases investment
