Econ Third Exam

Ceteris paribus, suppose over some period of time the money supply grew at an average annual compounded rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory of Money, inflation averaged ___________ per annum, and the real interest rate was ___________>

5,4

Ceteris paribus, if the real interest rate is 6% and the price level is falling at a rate of 2 % , what is the nominal interest rate

8%

Suppose a bank loan XYZ Ice Cream Co. 25,000 to remodel one of its shop near campus. On their respective balance sheets, this loan is ______________, and, ceteris paribus, _________.

An asset for the bank and a liability for Greg's Ice Cream; the loan increases the money supply

If the Federal Open Market Committee (FOMC) decides to increase the money supply, then what that means in practice is the Federal Reserve:

Creates money and uses it to purchase various types of stocks and bonds "on the open market"- i.e from the public

When money is neutral, ceteris paribus, which of the following increases when the money supply growth rate increases and velocity is constant?

Inflation

Suppose Mr. X decides to forego a major purchase and save his money in an account that pay interest. As a result, he transfers 2,100 from his checking account to his money market mutual fund. Ceteris paribus, it follows that:

M1 decreases by 2,100 and M2 stays the same. M1 - checking accounts, currency M2 (includes everything in M1) - saving deposits, money market mutual funds, small time deposits

Which of the following actions would the Federal Reserve system be unlikely to perform as part of its regular responsibilities?

Make loans to qualified businesses that request them

Suppose the Fed decided to use its "discount rate", as an instrument of monetary policy; further suppose that the Fed cuts the discount rate. Ceteris paribus, it follows that banks would most likely borrow a.___________; and therefore, ____________.

More from the Fed and lend more to the public; the money supply would increase

Ceteris paribus, in which case below does a person's purchasing power from saving increase the most?

The nominal interest = 7% and inflation = 2%

Suppose banks decide to increase their holdings of excess reserves relative to deposits. Ceteris paribus, this action will cause the money supply to __________, and to reduce the impact of this the Fed could _______________.

decrease; decrease the discount rate

Suppose you were told that the Fed was following a Taylor-type rule in the conduct of monetary policy. Further suppose that you were told that inflation in the United States was currently running below the Fed's target rate of inflation, and read GDP had been growing at a rate below its long-run average. Ceteris paribus, it follows that you would predict the Fed would ____________ the _______________.

decrease; federal funds target rate

To ___________ the money supply and ___________ interest rates, the Fed could _____________.

decrease; increase; increase the required ratio When the Fed is purchasing securities, it is putting upward pressure on the money supply and downward pressure on interest rates.!! When the Fed is selling securities, it is putting downward pressure on the money supply and upward pressure on interest rates.!!

If the Fed is increasing the required reserve ratio, then on would expect, ceteris paribus, that this activity would: (1) put______________ pressure on the money supply; and (2) in the short run put ______________ pressure on interest rates.

downward; upward

Let M equal the money supply and P equal the price level. Now, suppose you were told that there is empirical evidence suggestion that the rate at which money changes hands increases during periods of hyperinflation (such as that which plagued Germany in the 1920s). Mathematically, this means that velocity __________, and if monetary neutrality holds, then the ___________.

increases; increase in velocity decreases the ratio M/P

Ceteris paribus, when the Fed conducts an "open-market sale"

it sells Treasury securities, which decreases the money supply

If the Fed is using the discount rate as an instrument of monetary policy, and if the rate is lowered, then commercial banks would be likely to borrow _____________, and bank reserves initially _____________ as a result of this policy.

more from the Fed; increase.

Suppose, as an instrument of monetary policy, the Fed increases the interest rate on commercial bank deposits held at the Fed. Ceteris paribus, it follows that the banks will want to hold __________ reserves at the Fed; and thus the money supply would ___________; and there would tend to be _________ pressure on interest rates.

more; decrease; upward When the Fed purchases bonds from banks, it is "bidding up" their price and putting downward pressure on yields, and thus interest rates. (Interest Rates Decrease)

Ceteris paribus, the supply of money increases when:

the Fed makes open-market purchases

Ceteris paribus, the money demand function depends on:

the interest rate but not the price level

Suppose monetary neutrality holds and velocity is constant. Ceteris paribus, it follows that a 4 % increase in the money supply will eventually increase __________.

the price level by 4 percent

If the velocity of money is constant, and if the money supply decreases while at the same time real GDP increases, then, ceteris paribus, it follows that in the long run:

the price level will decrease- i.e the economy will experience deflation

Suppose the U.S Congress decided to pay off its debt by revising the Federal Reserve Act and printing new money. Ceteris paribus, which of the following would most likely NOT happen?

the real value of the U.S national debt would increase

If the Fed is decreasing the required reserve ratio, then one would expect, ceteris paribus, that this activity would: (1) put ____________ pressure on the money supply; and (2) in the short run put ______________ pressure on interest rates

upwards; downward

Ceteris paribus, with the vaule of money, as measured by 1/P (where P is the price level), on the vertical axis, the money supply curve is typically:

vertical because we assume the central bank controls the money supply