Econ 110: Spring; Al Hamdi (Exam 3 HWs)
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives
The interest rate that banks charge other banks for overnight loans is the
federal funds rate
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.
The required reserves of a bank equal its ________ the required reserve ratio.
deposits multiplied by
A bank's largest liability is its
deposits of its customers.
Among potential stores of value, money
has the advantage of being the most liquid asset.
The unemployment rate equals the number of unemployed divided by the ________, all times 100.
labor force
The money demand curve has a negative slope because
lower interest rates cause households and firms to switch from financial assets to money.
Dollar bills in the modern economy serve as money because
people have confidence that others will accept them as money.
On the 45 degree line-diagram, for points that lie above the 45 degree line
planned aggregate expenditure is greater than GDP.
When the Federal Reserve System was established in 1913, its main policy goal was
preventing bank panics
The Federal Reserve System's four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions.
The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by
the level of aggregate expenditure
Assets. Liabilities Reserves Deposits +$7,000. +$50,000 Loans Net Worth +$46,000 +$3,000 Refer to Table above. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of
$2000
Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?
$27 million (planned investment+unplanned investment = total investment)
Given the following economic data, what is the value of investment in a closed economy? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion
$3 trillion
Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of
$5000
In a small economy, consumption spending is $6,000, government purchases are $1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product?
$9,700
Consumption Disposable Income $1,200 $3,000 $2,100 $4,000 $3,000 $5,000 Refer to Table above. Given the consumption schedule in the table above, the marginal propensity to save is
0.1 (Take difference between first and last consumptions and disposable income (3000-1200); (5000-3000) put into MPC equation = 0.9 and b/c MPC+MPS = 1, take 1 - 0.9)
An increase in the price level in the United States will shift the aggregate expenditure line upward.
False
Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.
False
If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits, the money multiplier will increase.
False
The Fed can directly lower the inflation rate.
False
The Fed has complete control over the money supply.
False
The main goal of monetary policy for recent Fed Chairmen has been to maintain high employment in labor markets.
False
The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time.
False
How does a decrease in government spending affect the aggregate expenditure line?
It shifts the aggregate expenditure line downward.
If inflation in the United States is lower than inflation in other countries, what will be the effect on net exports for the United States?
Net exports will rise as U.S. exports increase
If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.
increase; not change
When calculating GDP, the Bureau of Economic Analysis revises its quarterly data
many times over the nest several years
Rising prices erode the value of money as a ________ and as a ________.
medium of exchange; store of value
An increase in real GDP can shift
money demand to the right and increase the equilibrium interest rate
Credit card balances are
not part of the money supply
The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket.
not; overstate
When a financial asset is first sold, the sale takes place in the ________ market, and subsequent sales take place in the ________ market.
primary; secondary
The process of bundling loans together and buying and selling these bundles in a secondary financial market is called
securitization
If the Federal Open Market Committee wants to decrease the money supply through open market operations it will
sell U.S. Treasury Securities
Which of the following tools of monetary policy is used least often?
setting the required reserve ratio
If the best lawyer in town is also the best at operating a word processor, then according to the theory of comparative advantage, this person should
specialize in being a lawyer because its opportunity cost is lower
Actual investment spending does not include
spending on consumer durable goods
At macroeconomic equilibrium, total ________ equals total ________.
spending; production
The Federal Reserve was established in 1913 to
stop bank panics by acting as a lender of last resort.
Which of the following functions of money would be violated if inflation were high?
store of value
The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.
targets; goals
The slope of the consumption function is equal to
the change in consumption divided by the change in disposable income.
The CPI is also referred to as
the cost-of-living index
When the Fed increases the money supply
the interest rate falls and this stimulates investment spending
Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to pursue its economic objectives.
Which of the following is a true statement about the multiplier?
the multiplier rises as the MPC rises
Refer to Figure above. (graph where the money demand has shifted to the right) In the figure above, the money demand curve would move from Money demand1 to Money demand2 if
the price level increased.
When the Fed uses contractionary policy
the price level rises less than it would if the Fed did not pursue policy.
According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?
14 years
If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is
5
In economics, money is defined as
any asset people generally accept in exchange for goods and services
In the aggregate expenditure model, ________ has both an autonomous component and an induced component.
consumption spending
Investment spending ________ during a recession, and ________ during an expansion.
declines; increases
A student who just graduated from college but has not found a job would most likely be
frictionally unemployed
Most U.S. currency held outside the U.S. banking system is held by foreigners.
True
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP
Opportunity cost is defined as
The highest-valued alternative that must be given up to engage in an activity.
Which of the following could cause nominal GDP to increase next year, but real GDP to decrease?
The price level rises and the quantity of final goods and services produced falls.
Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.
True
If aggregate expenditure is more than GDP, then inventories fall and GDP rises
True
If planned aggregate expenditure equals GDP, the economy is in macroeconomic equilibrium.
True
In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services.
True
The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
a liquidity trap
A central bank can help stop a bank panic by
acting as a lender of last resort
All of the following are components of aggregate expenditure except
actual investment spending
Which of the following will cause a direct increase in consumption spending?
an increase in disposable income
If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?
an increase in wealth
Refer to Figure above. (Point A is shifting up to the left on the demand curve, increasing interest rate and lowering quantity of money) In the figure above, the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve.
If the marginal cost for the state of Montana to increase the speed limit on its interstate highways to 100 mph is estimated to be $500 per day, then Montana should increase the speed limit to 100 mph
as long as the marginal benefit received each day is just equal to or greater than $500.