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The quantity equation is: MxV=PxY where M is the money supply, V is the velocity of money, P is a price index for GDP, and y is real GDP
Rearranging for M yields: M =Nominal GDP/V
If nominal GDP increases, what might be the cause of this increase? If nominal GDP increases, this could be caused by: (Select all that apply.)
An increase in the price level An increase in real GDP
Click the following link to view M1 and Components data from FRED*. Then use that data to answer the following questions. The following series IDs correspond to M1 and its components, which are measured weekly and seasonally adjusted. For each series ID, enter the value for the most recent observation (01 April 2019): (Enter your responses exactly as they appear in FRED.) M1: $3708.6 billion. CURRENCY: $1641.0 billion. TCD: $2067.6 billion. WTCSL: $1.7 billion.
Based on the data above, Travellers' cheques outstanding is 0.05% of M1. Use the graph to determine which of the following statements is true: M1 fluctuates quite a bit from week to week, but is fairly stable month to month
Which of the following statements correctly describes the effects of price controls?
Imposing these in inflationary times is economically destructive.
If consumers were to shift funds from checking accounts to savings accounts, which of the following is true?
M1 decreases and M2 does not change.
If consumers were to shift funds from savings accounts to checking accounts, which of the following is true?
M1 increases and M2 does not change.
M1 =
M2 - total savings deposits, retail money funds, and small time deposits
to calculate value of money supply M*V=P*Y where M is the money supply, V is the velocity of money, P is a price index for GDP, and y is real GDP.
M= nominal GDP/V
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect?
No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant.
Almost every day, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these checks constitute money?
No, because checks simply represent a means of access to money, not money itself.
The following table shows the cost of producing dollar notes of various denominations. As you can see in the table, it costs only 12.7 cents to produce a $100 bill. Suppose the government decided that it will print new notes to fund its fiscal deficit as well as all its ongoing expenditure.
Printing paper money has a small direct cost and so gives the government money to spend.
Identify a possible problem with this policy.
Printing too much money may lead to a high rate of inflation, reducing the amount of goods and services that the government can purchase with the newly printed notes.
Suppose the government prints and spends new currency. Which of the following statements are true in this case? (Check all that apply).
Printing/spending a modest amount of new currency is socially beneficial. The citizens lose because the resulting inflation reduces the real value of the currency that they already hold. The citizens gain because their government has more money to spend.
What are the two models that are used to describe inflationary expectations? (Check only two.)
Rational expectations. Adaptive expectations.
What is the significance of the real wage as it relates to inflation?
Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
If the inflation rate is positive, what must be true?
The growth rate of real GDP less than the growth rate of money supply.
What are the costs associated with inflation? (Check all that apply.)
Uncertainty about the aggregate price level, which can distort prices and make planning difficult. Unproductive policies such as price controls, which may be due to voter dissatisfaction. Logistical costs related to the need to frequently change prices.
Hyperinflation is ____________.
a doubling of the price level within three years.
The factors that would shift the demand curve for reserves include ____________. (Check all that apply.)
anticipated liquidity shocks. a changing deposit base. an economic expansion or contraction.
The Federal Reserve is referred to as the "lender of last resort" because ____________.
banks borrow from the Fed's discount window when other banks won't lend to them.
Money functions as a medium of exchange when you ___________.
buy jeans at the mall.
The primary reason that people use money is to ____________.
conduct market transactions in a modern economy.
The M2 money supply is defined to include ___________.
currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts.
Convertibility is the ability to convert ____________.
fiat money into a physical commodity, such as gold.
Inflation is the ____________.
growth rate of the overall price level in the economy.
Nominal GDP can increase when prices ______, real GDP __________, or _______ increase.
increase, increases, both prices and real GDP
The functions of a central bank are to ____________. (Check all that apply.)
indirectly control the money supply. control certain key interest rates. monitor financial institutions.
The federal funds rate is the ____________.
interest rate in the federal funds market where banks obtain overnight loans of reserves from one another.
Money makes a variety of economic transactions possible. In the following three situations, determine whether money is involved in the transaction. In prison camps during World War II, and in some prisons today, cigarettes circulate among prisoners. For example, an iPod might cost two cartons of cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this case? (Check all that apply.)
medium of exchange, unit of account, store of value
The cost to a business from frequently changing its prices due to high inflation rates is called __________.
menu cost.
On the graph to the right, the velocity of M1 is the ______ curve and the velocity of M2 is the _________ curve.
red, blue
The funds that are lent in this market are ____________.
reserves at the Federal Reserve Bank.
With the quantitative easing policy, the supply curve for reserves_________, the overnight call rate _________, and the demand for reserves ____________.
shifts right, decreases, stays the same
nominal interest rate
taken as average of % rates
A central bank is the government institution ____________.
that runs a country's monetary system.
According to the quantity theory of money, the inflation rate is
the gap between the growth rate of money supply and the growth rate of real GDP.
Deflation is ____________.
the rate of decrease of the overall price level in the economy.
A dollar bill that is exchangeable for a certain amount of silver __________ be considered fiat currency. Fiat currency ________ all the required functions of money.
would not, meets
Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards money?
No, because you credit cards are not assets.
Growth rate of nominal GDP = Growth rate of prices + Growth rate of real GDP
So, to calculate the growth rate of nominal GDP, you must first calculate the other growth rates. To calculate growth rates as a percentage, you use the following formula: 100 * X1 - X0 / X0 Using this formula, the growth rate of prices is 100 * 140 - 125 / 125 = 12.00 % and the growth rate of real GDP is 100 * $1450 - $1400 / $ 1400 = 3.57 % Then, add these two rates together to get the growth rate of nominal GDP: Growth rate of nominal GDP equals 12.00 % plus 3.57 % equals 15.57 %
The real wage is the ____________.
inflation-adjusted wage.