Economic Exam 4
Which of the following is true with respect to hyperinflation?
In the presence of hyperinflation, firms and households avoid holding money. It can be hundreds - even thousands - of percentage points per year. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion?
$1,200 billion increase
How do investment banks differ from commercial banks? (Mark all that apply.)
- investment banks do not take deposits - investment banks generally do not lend to households
In a fractional reserve banking system what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
An initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves.
The U.S. dollar can best be described as
fiat money
The figure to the right shows a breakdown of the M1 definition LOADING... of the money supply in 2017. Which area corresponds to the amount of checking account deposits?
*Screenshot* Answer was C
The United States is divided into ______ Federal Reserve Districts.
12
According to the Taylor rule LOADING..., what is the federal funds target rate under the following conditions? followsEquilibrium real federal funds rate equals 3% followsTarget rate of inflation equals 3% followsCurrent inflation rate equals 2% followsReal GDP is 2% below potential real GDP The federal funds target rate equals ________________ (Enter your response rounded to one decimal place.)
3.5%
One of the board members is appointed to a _____ year, renewable term as the chairman.
4
The Federal Reserve Bank's Board of Governors consists of _____ members appointed by the president of the U.S. to 14-year, non-renewable terms.
7
Which of the following is NOT a function of money?
Acceptability
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.)
Business investment projects The value of the dollar Consumption of durable goods
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
Buying $500 million worth of government securities, such as Treasury bills. Decreasing the rate at which banks can borrow money from the Federal Reserve. Increasing the reserve requirement from 10 percent to 12.5 percent.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
Consider the figures below and determine which is the best description of what causes the shift from AD 1 to AD 2.
Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise.
The figure to the right illustrates a dynamic AD-AS model LOADING.... Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? ____________________________________________ If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: ___________________ Potential real GDP: _____________________ Price level: _________________ Unemployment: ___________________
Expansionary monetary policy increases does not change increases decreases
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Failure of Bear Stearns would lead to a larger investment bank failure. Commercial banks would be reluctant to lend to investment banks.
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1 to MD 2 (Point A to Point C)?
Increase in real GDP or increase in the price level
In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?
Increased demand for Treasury securities drives down their interest rate. Increased demand for Treasury securities drives up their prices. Initially, firms hold more money than they want relative to other financial assets.
In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?
Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?
Open market purchase of government securities.
If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?
Procyclical policy
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them.
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate *Screenshot*
According to the quantity theory of money, inflation results from which of the following?
The money supply grows faster than real GDP.
Which of the following is true with respect to Irving Fisher's quantity equation M x V = P x Y?
V = Average number of times a dollar is spent on goods and services V = P x Y / M P = the GDP deflator M = M1 definition of the money supply
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the Federal Reserve Bank to pursue ___________________________ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP ___________________ . Potential real GDP ____________________ . Price level ____________________ Unemployment ___________________
a contractionary decreases does not change decreases increases
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _______________ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ______________ U.S. Treasury securities.
buys; sells
In the figure to the right, the opportunity cost of holding money _______________________ when moving from Point A to Point B on the money demand curve.
decreases
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
The use of money
reduces the transaction costs of exchange. eliminates the double coincidence of wants. allows for greater specialization.
The __________________________________________ is considered the most relevant interest rate when conducting monetary policy.
short-term nominal interest rate
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.