macro
In the United States, the control of the money supply is the responsibility of the a. Federal Reserve System (the Fed). b. the president. c. the U.S. Treasury. d. the U.S. Congress.
A Federal Reserve System (the Fed).
Which of the following is the best definition of money? a. anything generally accepted as a payment for goods or repayment of debt b. anything that is a liability of the federal government c. anything that is a liability of a commercial bank d. the outstanding balances of households on credit cards
A anything generally accepted as a payment for goods or repayment of debt
CH 11: What is a budget deficit? How are budget deficits financed? Why do Keynesians believe that budget deficits will increase aggregate demand?
A budget deficit is when the total government spending exceeds the total government revenue during a year. Keynesians believe that large budget deficits will increase aggregate demand by government spending, which increases economic activity, which in turn decreases unemployment.
If the Federal Reserve wanted to expand the supply of money to head off a recession, it could a. decrease the reserve requirements. b. lower taxes. c. sell U.S. securities in the open market. d. increase the discount rate.
A decrease the reserve requirements.
First Bank of Mason City Assets ----------- Required Reserves $20.00 Loans $80.00 Liabilities ------------- Deposits $100.00 Refer to Table 13-1. The reserve ratio is a. 0 percent. b. 20 percent. c. 80 percent. d. 100 percent.
B 20 percent.
CH 13 Suppose that the Federal Reserve purchases a bond for $100,000 from Donald Truck, who deposits the proceeds in the Manufacturer's National Bank. A. What will be the impact of this transaction on the supply of money? B. If the reserve requirement ratio is 20 percent, what is the maximum amount of additional loans that the Manufacturer's Bank will be able to extend as the result of Truck's deposit? C. Given the 20 percent reserve requirement, what is the maximum increase in the quantity of checkable deposits that could result throughout the entire banking system because of the Fed's action? D. Would you expect this to happen? Why or why not? Explain.
A. Money supply increases by $100,000 B. $80,000 C. $500,000 D. no; there will be some leakage in the form of additional currency holdings by the public and additional excess reserve holdings by banks.
CH 13: Suppose that the reserve requirements are 10 percent and that the Federal Reserve purchases $2 billion in securities from a brokerage firm on a given day. A.How will this transaction affect the M1 money supply? B. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation's Bank, what is the maximum amount of additional loans that Nation's Bank will be able to extend as a result of this deposit? C. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation's Bank, what is the maximum amount of additional loans that Nation's Bank will be able to extend as a result of this deposit?
A. Money supply will increase by $2 billion B. $1.8 billion C. $20 billion.
CH 14 What is the opportunity cost of the following? A. purchasing a $100,000 house B. holding the house for one year C. obtaining $1,000 D. holding the $1,000 in your checking account for one year
A. The cost of obtaining the house is $100,000. B. The cost of holding it is the interest forgone on the $100,000 sales value of the house. C. The cost of obtaining $1,000 is the amount of goods one must give up in order to acquire the $1,000. For example, if a pound of sugar sells for 50 cents, the cost of obtaining $1,000 in terms of sugar is 2,000 pounds. D. As in the case of the house, the cost of holding $1,000 is the interest forgone.
CH 11: If uncertainty about the future causes households to increase their saving and reduce their consumption spending during a recession, how will this affect the economy? Explain. If households save little and spend most of their income on current consumption, how will this affect the economy? Explain.
Also known as the paradox of thrift this is the idea that when many households try to increase savings actual savings fail to increase because of reduction in consumption and AD will reduce income and employment.
CH 13 How will the following actions affect the money supply? A. a reduction in the discount rate B. an increase in the reserve requirements C. purchase by the Fed of $100 million in U.S. securities from a commercial bank D. sale by the U.S. Treasury of $100 million in newly issued bonds to a commercial bank E. an increase in the discount rate F. sale by the Fed of $200 million in U.S. securities to a private investor
Answers (b), (e), and (f) will reduce the money supply; (a) and (c) will increase it. If the Treasury's deposits (or the deposits of people who receive portions of the Treasury's spending) are considered part of the money supply, then (d) will leave the money supply unchanged.
CH 12: Marginal tax rates were cut substantially during the 1980s, and although rates were increased in the early 1990s, the marginal rates applicable in the highest income brackets were still well below the top rates of the 1960s and 1970s. How did the lower rates of the 1980s and 1990s affect the share of taxes paid by high-income taxpayers? Were the lower rates of the 1980s and 1990s good or bad for the economy? Discuss.
As lower rates pushed more people into top tax bracket the share paid by them declined causing increase in revenue from capital gain taxes and personal income taxes.
CH 11: What are automatic stabilizers? Explain their major advantage.
Automatic stabilizers help promote stability because they are able to add demand stimulus during a recession and restraint during an economic boom without legislative action. Unemployment compensation, corporate profit tax and income tax are a few examples.
Ted Harper's annual income increased from $20,000 to $25,000. If Ted faces a 40 percent effective marginal tax rate, the $5,000 increase in income will expand his disposable income by a. $2,000. b. $3,000. c. $3,600. d. $5,000.
B $3,000. (5,000x 40%= 2000) Leaving 3000 in disposable income.
Open-market purchases by the Fed make the money supply a. increase, which tends to increase the value of money. b. increase, which tends to decrease the value of money. c. decrease, which tends to decrease the value of money. d. decrease, which tends to increase the value of money.
B increase, which tends to decrease the value of money.
Which of the following is true? a. Modern forecasting methods make it relatively easy to time fiscal policy changes in a manner that will help stabilize the economy. b. Legislative action is necessary if automatic stabilizers are going to smooth the ups and downs of the business cycle. c. Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve. d. Both the crowding-out and new classical theories indicate that expansionary fiscal policy will exert a powerful impact on aggregate demand.
C Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve. Too much inflation, not enough unemployment
Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008? a. The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major cause of the recession. b. The Fed continued to focus only on price stability and therefore it expanded the money supply at a slow and steady rate throughout the recession. c. The Fed introduced several new procedures for the conduct of monetary policy and substantially increased bank reserves as the recession worsened. d. The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open market operations to control the money supply.
C The Fed introduced several new procedures for the conduct of monetary policy and substantially increased bank reserves as the recession worsened
The crowding-out effect suggests that a. expansionary fiscal policy causes inflation. b. restrictive fiscal policy is an effective weapon against inflation. c. a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. d. a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.
C a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a? a. a balanced budget b. restrictive fiscal policy c. expansionary fiscal policy d. continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)
C expansionary fiscal policy
Which one of the following factors would reduce the quantity of money balances that households would want to hold? a. higher prices b. a rise in inflation c. higher nominal interest rates d. an expansion in nominal income (nominal GDP)
C higher nominal interest rates
During the financial crisis of 2008-2010, the Fed increased its purchases of securities and extended more loans, which caused the monetary base to a. increase rapidly, but the M1 money supply declined because the banks loaned out most of the additional reserves to businesses. b. fall, but the M1 money supply still expanded rapidly because the banks increased their loans to businesses. c. increase rapidly, but the M1 money supply expanded at a much slower rate because the banks enlarged their excess reserves. d. fall, and this led to a sharp decline in the M1 money supply.
C increase rapidly, but the M1 money supply expanded at a much slower rate because the banks enlarged their excess reserves.
The supply-side effects of a reduction in taxes are the result of a. increases in the disposable income of households accompanying reductions in tax rates. b. the stimulus effects of increases in government expenditures. c. increased attractiveness of productive activity relative to leisure and tax avoidance. d. reductions in interest rates that generally accompany expansionary fiscal policy.
C increased attractiveness of productive activity relative to leisure and tax avoidance.
The modern synthesis view of fiscal policy stresses a. how easy it is to time fiscal policy changes so they exert a stabilizing influence on the economy. b. the ineffectiveness of fiscal policy, even during periods of widespread unemployment. c. the difficulties involved in timing fiscal policy changes so they will exert a stabilizing impact on the economy. d. that automatic stabilizers do not help smooth fluctuations in the economy.
C the difficulties involved in timing fiscal policy changes so they will exert a stabilizing impact on the economy.
When the tax rates imposed on the rich are high, a reduction in these rates a. will always lead to a reduction in the tax revenue collected from the rich. b. will not affect the tax revenue collected from the rich. c. will increase the reported incomes of the rich and it may also lead to an increase in tax revenue collected from them. d. will decrease the reported incomes of the rich, and thereby reduce the tax revenue collected from them.
C will increase the reported incomes of the rich and it may also lead to an increase in tax revenue collected from them. d.
CH 11: From a stabilization standpoint, why is proper timing of a change in fiscal policy important? Is it easy to time fiscal policy changes properly? Why or why not?
Changes in fiscal policy must be properly timed if they are going to work. The ability to time policy is difficult due to (1) the inability for the political process to happen rapidly (2) lag time between policy instituted and the effects on the economy and (3) the inability to predict the direction of the economy.
CH 14 How would each of the following influence the quantity of M1 money you would want to hold? A. a decrease in the interest rate earned on savings deposits B. an increase in the expected rate of inflation C. an increase in income
Choices (a) and (c) would increase your incentive to hold money deposits; (b) would reduce your incentive to hold money.
Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a a. $100 million decrease in the money supply. b. $100 million increase in the money supply. c. $200 million increase in the money supply. d. $500 million increase in the money supply.
D $500 million increase in the money supply.
Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies? a. M1 and M2 are both unchanged. b. M1 falls by $1,000, and M2 rises by $1,000. c. M1 is unchanged, and M2 rises by $1,000. d. M1 falls by $1,000, and M2 is unchanged.
D M1 falls by $1,000, and M2 is unchanged.
Which of the following actions of the Fed would increase the money supply? a. the purchase of U.S. government securities. b. a reduction in the discount rate. c. a reduction in the required reserve ratio. d. all of the above are correct.
D all of the above are correct.
In the short run, an unanticipated shift to a more expansionary monetary policy is most likely to result in a. an increase in short-term interest rates. b. a reduction in aggregate demand. c. a reduction in the inflation rate. d. an increase in employment.
D an increase in employment.
Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a? a. a tax increase to balance the budget b. restrictive fiscal policy c. expansionary fiscal policy d. continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)
D continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)
Shifts in monetary policy will a. stimulate output and employment almost immediately, and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. b. stimulate output and employment almost immediately, and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. c. stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. d. stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
D stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
Which of the following contributed to the strong auto sales and soaring housing prices during 2002-2004? a. the Fed's high-interest rate policy during the period b. the tightening of loan standards by commercial lenders c. the increasing popularity of fixed-rate, long-term loans to lock in low interest rates d. the Fed's low-interest rate policy during the period
D the Fed's low-interest rate policy during the period
CH 11: Are discretionary changes in fiscal policy likely to be instituted in a manner that will help smooth theups and downs of the business cycle? Why or why not?
Discretionary policy refers to policy that is implemented by the legislative process. This hard to time and slow. It would be difficult to smooth out the business cycle this way.
CH 11: According to the Keynesian view, what fiscal policy actions should be taken if the unemployment rate is high and current GDP is well below potential output?
Either an increase in government expenditures or a reduction in taxes should be employed to shift the budget toward a larger deficit (or smaller surplus).
CH 11: "An increase in aggregate demand will tend to increase real output by a larger amount when unemployment is widespread than when the economy is operating at or near full employment." Is this statement true? Explain.
Expansionary policy works best when we are in a deep recession and crowding out is less.
CH 13 Are the following statements true or false? A. "You can never have too much money." B. "When you deposit currency in a commercial bank, cash goes out of circulation and the money supply declines." C. "If the Fed would create more money, Americans would achieve a higher standard of living."
False, False, False.
CH 12: "In the early stages of the Keynesian revolution, macroeconomists emphasized fiscal policy as the most powerful and balanced remedy for demand management. Gradually, shortcomings of fiscal policy became apparent. The shortcomings stem from timing, politics, macroeconomic theory, and the deficit itself." What is the meaning of this statement by Nobel Laureate Paul Samuelson? Is the statement true?
Fiscal policy can be helpful in a deep recession most new classical economist argue due to the timing and the ineffectivness of the macroeconmoic policy fiscal policy should not be the primary tool. The new classical economists stress that debt financing simply substitutes higher future taxes for lower current taxes. Thus, budget deficits affect the timing of the taxes but not their magnitude.
CH 12: Does fiscal policy have a strong impact on aggregate demand? Did the shift of the federal budget from deficit to surplus during the 1990s weaken aggregate demand? Did the government spending increases and large budget deficits of 2008-2011 strengthen aggregate demand? Discuss.
Fiscal policy is most effective in deep recessions. Changes in government expenditures and shifts in the federal budget are indicative of the direction of fiscal policy. Increases in government spending financed by borrowing will shift the budget toward a deficit. In contrast, reductions in government spending and shifts in the federal budget toward surplus are indicative of a move toward a more restrictive fiscal policy. The large government spending and budget deficits of 8-11 did strengthen AD in all three models.
CH 11: What do Keynesians think cause fluctuations in output? What must be done to maintain full-employment capacity?
Fluctuations in output are caused by the total amount of spending or AD. According to Keynes in order to maintain full employment capacity spending on consumption, investment, government purchases, and net exports should be equal to total output
CH 12: Will the current high level of government debt pose a serious problem for the U.S. economy in the future? Why or why not?
High levels of debt as a share of the economy pose a potential danger in a vicious cycle of rising interest costs, higher taxes, and slower economic growth. As long as worldwide interest rates remain low, the current levels of debt present in the United States are unlikely to result in serious problems. However, if interest rates rise in the future, the situation could change.
CH 13 The excess reserves of the banking system were quite large during mid-year 2016. If the banks use these excess reserves to extend additional loans, what will happen to the money supply? Explain. Is this a potential problem? Why or why not?
If banks choose to create additional loans from excess reserves they will create a larger potential expansion in the money supply.
CH 13 Why is the actual money deposit multiplier generally less than the potential multiplier?
If people choose not to spend entirety of loan and opt to save than actual deposit multiplier is less than potential.
CH 14 What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.
If people do not anticipate the increase in aggregate demand accompanying an expansionary monetary policy, the prices of products will rise more quickly than the costs of producing them in the short run. As a result, the profit margins of businesses will improve, and they will respond by expanding their output. Short run: Expansionary monetary policy will lower interest rates and increase aggregate demand long run: If demand is unchanged, reductions in real interest rates and resource prices will eventually direct the economy back to full employment
CH 12: If the government becomes more heavily involved in subsidizing some businesses and sectors of the economy while levying higher taxes on others, how will this influence the quantity of rent seeking? How will this affect long-term growth? Explain your response.
If the government is spending a lot of special projects firms will spend more on lobbying and rent seeking than creating productive goods and services to attract consumers.
CH 14 Many economists believe that there is a "long and variable time lag" between the time a change in monetary policy is instituted and the time its primary impact on output, employment, and prices is felt. If true, how does this long and variable time lag affect the ability of policy-makers to use monetary policy as a stabilization tool?
If the time lag is long and variable (rather than short and highly predictable), it is less likely that policy makers will be able to time changes in monetary policy so that they will exert a countercyclical effect on the economy. The policy makers will be more likely to make mistakes and thereby exert a destabilizing influence.
CH 12: How do persistently large budget deficits affect capital formation and the long-run rate of economic growth? Do the proponents of the Keynesian, crowding-out, and new classical theories agree on the answer to this question? Discuss.
In the Keynesian model, investment is determined by factors other than the interest rate. Thus, budget deficits would not exert much effect on capital formation. In the crowding-out model, capital formation would be reduced because the budget deficits would lead to higher interest rates, which would crowd out private investment. In the new classical model, households will save more, and, as a result, budget deficits could be financed without either an increase in the interest rate or a reduction in capital formation.
CH 12: What impact will budget deficits have on the exchange rate value of the dollar? How will this impact net exports and aggregate demand? Explain.
Increase in budget deficit will cause higher real interest rates, causing more foreign investment, which appreciate the dollar and declines net exports.As net export declines the expansionary impact of a budget deficit weakens.
CH 14 What is the quantity theory of money? Is the theory valid?
Increase in money supply predicts increase in prices.
CH 11: When output and employment slowed in early 2008, the Bush Administration and the Democratic Congress passed legislation sending households a check for $600 for each adult (and $300 per child). These checks were financed by borrowing. Would a Keynesian favor this action? Why or why not?
Keynesians favor fiscal policy to stimulate economy.
CH 13 What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills are not?
M1 is the category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts. All money that is either in physical form or can be quickly converted to cash is categorized as M1, part of the money supply. Checkable deposits are funds deposited in accounts that people can quickly access without any restrictions or limitations. Savings accounts are included in this making them highly liquid and included in M1. Interest savings accounts and Treasury bills are not included as they do not have a time duration.
CH 14 Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Should monetary policy-makers try to shift monetary policy in a manner that will smooth the ups and downs of the business cycle? Explain your responses.
Maintenance of price stability is the essence of sound monetary policy; price stability provides the foundation for both economic stability and the efficient operation of markets. While shifts to a more expansionary monetary policy can promote real output and employment in the short run, they cannot do so in the long run. Moreover, constant shifts in monetary policy will result in policy errors and generate uncertainty. If investors and other business decision makers can count on monetary policy-makers to maintain price stability, a potential source of uncertainty is reduced. This will encourage investment and other business activities and thereby promote a high level of employment and strong economic growth.
CH 13 What makes money valuable? Does money perform an economic service? Explain. Could money perform its function better if there were twice as much of it? Why or why not?
Money is valuable because of its scarcity relative to the availability of goods and services. The use of money facilitates (reduces the cost of) exchange transactions. Money also serves as a store of value and a unit of account. Doubling the supply of money while holding output constant would simply cause its purchasing power to fall without enhancing the services that it performs. In fact, fluctuations in the money supply generally create uncertainty about the future value of money and thereby reduce its ability to serve as a reliable store of value, accurate unit of account, and medium of exchange for time-dimension contracting.
CH 12: Will increases in government spending financed by borrowing help promote a strong recovery from a severe recession? Why or why not?
Non-Keynesian economists argue that Keynesian policies will lead to higher future interest rates and taxes, inefficient use of resources, and wasteful rent-seeking that will both hinder recovery and slow future economic growth. Keynesian economists believe that increases in government spending financed by borrowing will increase aggregate demand and help promote recovery from a serious recession like that of 2008-2009.
CH 12: Outline the supply-side view of fiscal policy. How does this view differ from the various demand-side theories? Would a supply-side economist be more likely to favor a $1,000 rebate to all taxpayers or an equivalent reduction in marginal tax rates? Why?
On the supply side, lower tax rates increase the incentive of people to work, supply resources, and use them more efficiently and thereby increase aggregate supply. A supply side economist would favor the reduction in marginal tax rate as they believe they exert important effects on AD.
CH 12: What is the crowding-out effect? How does it modify the implications of the basic Keynesian model with regard to fiscal policy? How does the new classical theory of fiscal policy differ from the crowding-out model?
The crowding-out effect is the theory that budget deficits will lead to higher real interest rates, which retard private spending. The crowding-out effect indicates that fiscal policy will not be nearly as potent as the simple Keynesian model implies. The new classical theory indicates that anticipation of higher future taxes (rather than higher interest rates) will reduce private spending when government expenditures are financed by debt.
CH 13 What is the federal funds interest rate? If the Fed wants to use open market operations to lower the federal funds rate, what action should it take? Explain.
The fed fund interest rate is the interest paid on excess reserves, If feds lower interest rate banks will hold less and loan more. If fed increase interest rates banks will hold more and loan less. If the Fed wants to lower the federal funds interest rate, it will purchase government securities or other financial assets and thereby inject additional reserves into the banking system.
CH 13 "People are poor because they don't have very much money. Yet, central bankers keep money scarce. If people had more money, poverty could be eliminated." Evaluate this view. Do you think it reflects sound economics?
The more money in circulation the lower the purchasing power, When government authorities rapidly expand the supply of money, it becomes less valuable in exchange and is virtually useless as a store of value. Think Germany post WWI
CH 11: What is the multiplier principle? What determines the size of the multiplier? Does the multiplier make it more or less difficult to stabilize the economy? Explain.
The multiplier principle is the concept that a change in one of the components of aggregate demand—investment, for example—will lead to a far greater change in the equilibrium level of income. Because the multiplier equals 1/(1 - MPC), its size is determined by the marginal propensity to consume. The multiplier makes stabilizing the economy more difficult, because relatively small changes in aggregate demand have a much greater effect on equilibrium income
CH 13 If the Fed wants to expand the money supply, why is it more likely to do so by purchasing bonds and other financial assets rather than by lowering reserve requirements?
There are two major reasons. First, the money supply can be altered quietly via open market operations, whereas a reserve requirement change focuses attention on Fed policy. Second, open market operations are a fine-tuning method, whereas a reserve requirement change is a blunt instrument. Generally, the Fed prefers quiet, marginal changes to headline-grabbing, blunt changes that are more likely to disrupt markets.
CH 13 If the Federal Reserve does not take any offsetting action, what would happen to the supply of money if the general public decided to increase its holdings of currency and decrease its checking deposits by an equal amount?
Whereas the transformation of deposits into currency does not directly affect the money supply, it does reduce the excess reserves of banks. The reduction in excess reserves will cause banks to reduce their outstanding loans and thereby shrink the money supply. Therefore, an increase in the holding of currency relative to deposits will tend to reduce the supply of money.
CH 12: If the impact on tax revenues is the same, does it make any difference whether the government cuts taxes by (a) reducing marginal tax rates or (b) increasing the personal exemption allowance? Explain.
Yes. Only the lower rates would increase the incentive to earn marginal income and thereby stimulate aggregate supply.
CH 13 ASSETS: Vault cash $ 20,000 Deposits at Fed 30,000 Securities 45,000 Loans 120,000 LIABILITIES: Checking deposits $200,000 Net worth 15,000 Suppose that the reserve requirement is 10 percent and the balance sheet of the People's National Bank looks like the accompanying example. a. What are the required reserves of People's National Bank? Does the bank have any excess reserves? b. What is the maximum loan that the bank could extend? c. Indicate how the bank's balance sheet would be altered if it extended this loan. d. Suppose that the required reserves were 20 percent. If this were the case, would the bank be in a position to extend any additional loans? Explain.
a. $20,000 in required reserve $30,000 in excess reserve b. if 200,000 is deposited, 20,000 is reserved and 180,000 can be loaned
CH 13 Suppose you withdraw $100 from your checking account. How does this transaction affect (a)the supply of money, (b)the reserves of your bank, (c)the excess reserves of your bank?
a. There is no change; currency held by the public increases, but checking deposits decrease by an equal amount. b. Bank reserves decrease by $100. c. Excess reserves decrease by $100, minus $100 multiplied by the required reserve ratio.
CH 14 If the Fed shifts to a more restrictive monetary policy, it will generally sell some of its current holdings of bonds in the open market. How will this action influence each of the following? Briefly explain each of your answers. A. the reserves available to banks B. real interest rates C.household spending on consumer durables D. the exchange rate value of the dollar E. net exports F. the prices of stocks and real assets like apartment or office buildings G. real GDP
a. reserves decrease as bonds are bought. b. feds sell bonds in open market, reduce in bank reserves reduce supply in loanable funds and raise interest rates. c. interest rates increase so households spend less on investments d. interest rates are high so foreign investments are more appealing e. dollar appreciates, imports become cheaper, decrease in export, net exports decline. f. fall in demand of real assets because of high interest rates.
CH 14 Why do people hold money? How will an increase in the interest rate influence the amount of money that people will want to hold?
we hold money to buy things, and for unexpected expenses. Higher interest rates make it more costly to hold money.
