WK 5 - PRACTICE: MONETARY POLICY PART I

Which two items are closely related to the reserve requirement?

A bank's reserves and the money supply Reason: These are closely related to the reserve requirement

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

Aggregate

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

Aggregate demand

Monetary policy refers to the action of the _______ Reserve to influence the supply of money and credit in the U.S. economy. (Enter one word in the blank.)

Federal

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

Federal Reserve

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

Interest rate decreases and quantity of investment increases. Reason: An increase in the money supply causes the money supply curve to shift right and the interest rate to decrease. The decrease in interest rate leads to a movement along the investment demand curve to a new higher quantity of investment.

_______ policy primarily affects the economy by either encouraging or discouraging investment in new capital.

Monetary

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

Open market operations Reason: This is the most commonly used tool the Fed uses to conduct monetary policy.

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

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

What is the reserve requirement?

The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed. Reason: This is the definition of the reserve requirement.

"Tight money" describes _______ monetary policy.

contractionary

A reduction in the money supply designed to slow down economic activity is called _______ monetary policy. (Enter one word in the blank.)

contractionary

Actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is _______ monetary policy. (Enter one word in the blank.)

expansionary

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

expansionary

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

in reserves will change the money supply.

Monetary policy affects _______ rates charged on loans and paid on savings.

interest

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

interest

A decrease in the supply of money will cause the:

interest rate to rise and the quantity of investment demanded to fall.

Changing the money supply can affect:

interest rates, thereby changing investment spending.

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

investment

The interest rate:

is the price of money.

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

money

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

money

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

money market

To influence the money supply and interest rates, the Federal Reserve buys or sells government debt. This is called:

open market operations.

When conducting monetary policy, the Fed most often uses:

open market operations.

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

reserve

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

reserve requirement.

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

reserve requirement.

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

supply

By changing the money _______, the Federal Reserve can influence real GDP.

supply

The Federal Reserve can influence real GDP by changing the money _______ which will influence gross _______.

supply, investment

The money multiplier equals:

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