macro-econ, ch.26

velocity of money

A measure of how frequently money is turned over.

Quantity theory of money and prices

A theory of the connection between the money supply and the price level when the velocity of money is constant.

Federal reserve Board of Governors

- controls major policy decisions -appointed by the president of the United States

The Fed can do 3 things to reduce the money supply or reduce the rate of growth in the money supply:

1) Sell bonds 2) raise reserve requirements 3)raise the discount rate

The Fed's 3 major methods by which to control the supply of money:

1) it can engage in open market operations 2) change reserve requirements 3) change its discount rate

Fed increases the money supply:

1)buy bonds 2) lower reserve requirements 3) lower the discount rate

If nominal GDP is $3,200 billion and M1 is $800 billion, then velocity is....

4

In order to increase the rate of growth of the money supply, the Fed can...

Buy U.S. gov't bonds on the open market.

If the Fed wishes to decrease the money supply, it...

Can sell gov't bonds to the public nation's bond market.

Contractionary monetary policy will tend to have what effect?...

Decrease money supply and increase interest rates.

Which of the following statements is true?...

For government policy makers to be sure of doing more good than harm, they need far more accurate and timely information than experts can give them.

In the long run, a sustained increase in growth of the money supply relative to the growth rate of potential real output will most likely...

Increase real output growth.

When money demand increases, the Fed can choose between...

Increasing interest rates or increasing the supply of money.

discount rate

Interest rate that the Fed charges commercial banks for the loans it extends to them.

An important limitation of monetary policy is that...

It must be conducted through the commercial banking system, and the Fed cannot always make banks do what it wants them to do.

What will happen to the demand for money if the real GDP rises?...

It will increase.

the equation of exchange can be written as...

M x V = P x Q

Federal Open Market Committee

Many of the key policy decisions by the federal reserve are actually made by its...

Federal Funds market

Market in which banks provide short-term loans to other banks that need cash to meet reserve requirements.

Money market

Market in which money demand and money supply determine the equilibrium interest rate.

The Fed is institutionally independent. A major advantage of this is that...

Monetary policy is not subject to control by politicians.

Open market operations

Purchase and sale of U.S. gov't bonds by the Federal Reserve System.

If a reduction in the money supply were desired in order to slow inflation, the Federal Reserve might...

Raise the discount rate.

Which of the following is not a function of the Federal Reserve System?

Setting currency exchange rates.

How to INCREASE the money supply:....

The FOMC tells the trading desk at the Fed Reserve Bank in N.Y. to BUY U.S. gov't bonds from the public in the nation's bond market. The seller of teh bonds will likely deposit their new funds in teh bank, increasing excess reserves. The new reserves would lead to new loans and checking account deposits, putting the money multiplier in motion and ultimatley increasing the money supply.

How to DECREASE the money supply...

The FOMC would tell the trading desk to SELL gov't bonds to the public in the nation's bond market.

Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?....

The Fed sells gov't bonds to the public in the nation's bond market.

Who are the primary decision makers for U.S. monetary policy?

The Federal Reserve Board of Governors & the Federal Open Market Committee (FOMC).

If the Fed sells U.S. gov't bonds to the public in the nation's bond market...

The banking system has fewer reserves, and the money supply tends to fall.

Compared to fiscal policy, which of the following is an advantage of using monetary policy to attain macroeconomic goals?...

The implementation of monetary policy is not slowed down by the same budgetary process as fiscal policy.

If the Fed lowers the discount rate, what will be the effect on the money supply?...

The money supply will tend to increase.

Which of the following Federal Reserve actions would most likely help counteract an oncoming recession?...

The purchase of gov't bonds and a reduction in the discount rate.

The money demand curve shows...

The various amounts of money that individuals will hold at diff interest rates.

According to the simple quantity theory of money, a change in the money supply of 6.5 percent would, holding velocity constant, lead to...

a 6.5 percent change in nominal GDP.

Which of the following statements is true?....

a) the fed can change the environment in which banks act, but the banks themselves must take the steps necessary to increase or decrease the supply of money. b) banks maintaining excess reserves hinder attempts by the fed to induce monetary expansion. c)the fed may be able to predict the impact of its monetary policies on loans by member banks, but the actions of global and nonbanking institutions can serve to offset, at least in part, the impact of monetary policies adopted by the fed on the money and loanable funds market. d) given the difficulties of timing stabilization policy, an expansionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating.

Reducing reserve requirements, other things being equal, would tend to...

a)increase the dollar volume of loans made by the banking system b) increase the money supply c)increase agg demand

The P in the equation of exchange represents the...

average level of prices of final goods and services in teh economy.

In a recession, appropriate monetary policy would tend to be for the Fed to ____ bonds to _____ agg demand...

buy; increase

Which interest rate does the Fed target?

federal funds rate.

To offset an inflationary boom, appropriate Fed policy could be to ____ reserve requirements to ____ agg demand...

increase; decrease

commercial banks

is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products.

Monetary Policy

is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow.

If M increases and V increases,...

nominal GDP increases.

Why can't the Fed in a fractional reserve banking system precisely control the money supply?:

people and banks.

The most important role of the Federal Reserve System is..

regulating the supply of money.

What can the Fed control in the short-run?:

the nominal interest rate & the real interest rate.