macro final
The GDP price index:
identifies the level of prices relative to a base year.
Tight money policy (economic boom)
AD decreases
Easy money policy (recession)
AD increases
largest liability of the fed
Federal Reserve Notes
Federal funds market
Federal funds is another word for reserves
The economy is in a recession. To stimulate the economy the federal government increases spending (G) by $5 billion. Assume the crowding-out effect equals $20 billion and the MPC = 0.75. Predict the anticipated impact of these changes in economic circumstance on the economy.
GDP will not change
Negative GDP gap or recession
High unemployment, Actual GDP < potential real GDP, Unemployment rate > natural rate
Tight money policy (economic boom)
higher cost of borrowing
A media report states, "The Federal Reserve will lower the federal funds rate for the fourth time this year." This means that the Fed is most likely trying to _____________________.
increase agg demand
Negative GDP gap or recession solution
increase aggregate demand, purchase bonds, decrease everything
Checkable deposits are:
liabilities of commercial banks.
Four Tools of Monetary Policy
open market operations, reserve ratio, discount rate, interest on reserves
Tight money policy (economic boom)
price of bonds decrease
Easy money policy (recession)
price of bonds increase
When the Fed engages in a restrictive monetary policy the price of marketable government bonds will ____, assuming all other factors influencing the bond market remain the same.
decrease
The asset demand for money is downward sloping because people tend to hold less money at a higher price level.
false
The federal funds rate is the interest rate the federal government pays on federally-insured bonds.
false
The goal of a tight money policy is to decrease short-run aggregate supply.
false
The most frequently used monetary tool for achieving price stability is raising taxes.
false
The primary goal of the Federal Reserve Banks is to make a profit.
false
The primary purpose of the legal reserve requirement is to provide commercial banks with funds to protect depositors against losses.
false
Total demand for money
graphs as a downward-sloping line
Easy money policy (recession)
interest rates decrease
Tight money policy (economic boom)
interest rates increase
bond prices and the interest rate are
inversely related
Which of the following, cetreis paribus, would increase the money supply?
Commercial banks sell government bonds to the public.
GDP is 5% below potential real GDP. Prices are virtually unchanged from last year. Unemployment is 9% of the civilian labor force. In this situation proper and well-coordinated counter-cyclical fiscal and monetary policy would involve:
Congress increasing the budget deficit and the Fed purchasing government securities in the open market.
Positive GDP gap or economic boom solution
Decrease aggregate demand, sell bonds, increase everything
Positive GDP gap or economic boom
Demand-pull inflation, actual GDP > potential real GDP, Unemployment rate < natural rate
Disadvantages of holding money as an asset:
Earns very little, if any, interest, Over time its purchasing power falls when inflation occurs.
Characteristics of a bond:
Face value, coupon, maturity
Advantages of holding money as an asset:
Most liquid of all assets, Held as an asset when the prices of common stocks and bonds are expected to fall.
Decrease in the money supply
Shift the supply of money to the left, Interest rate rises
Increase in the money supply
Shift the supply of money to the right, interest rate falls
increase money supply (shifts right) causing interest rates to fall
With a surplus of money people buy bonds
Decrease in the money supply (shift left) causing interest rate to rise
With shortage of money people sell bonds
Asset demand for money graphs as
a downward-sloping line
Transactions demand for money does not depend on the rate of interest therefore it graphs as
a vertical line
Which of the following changes in economic circumstance will decrease short-run aggregate supply?
an increase in wages.
Fed alters the nation's money supply by
changing the level of reserves held by commercial banks in order to influence their lending ability (or money-creating ability)
When the Fed increases the money supply, we would anticipate a(n) ____ in the equilibrium interest rate, a(n) ____ in spending on capital goods and resident and non-resident structures, and a(n) ____ in aggregate demand.
decrease . . . increase . . . increase
size of money balances held by the public ------- when the interest rate rises and vice versa
decreases
An outward shift of a nation's production possibilities curve:
does not ensure the nation of an increase in real GDP.
If an economy is operating efficiently:
it is not possible to produce more of one good without less of another good.
If your nominal income increases by 5% and the price index rises from 125 to 130, then your real income will:
increase by 1%.
The economy is initially operating at its potential real GDP. Because of a deteriorating international political situation the federal government decides to increase military spending by $21 billion. At the same time policymakers decide to change the level of taxes to maintain full-employment, non-inflationary real GDP. Assume the MPC = 0.75 and the full multiplier effect is in effect. The level of taxes should be:
increased by $28 billion.
In the consolidated balance sheet of the Federal Reserve Banks, commercial bank reserves held by the Federal Reserve are a(n) _______________ of the Federal Reserve Banks and a(n) _______________ for commercial banks.
liability, asset
Easy money policy (recession)
lower cost of borrowing
Objective of monetary policy is to
maintain price-level stability and to assist the economy achieve its potential level of output
Transactions demand for money arises because money is a
medium of exchange
Tight money policy (economic boom)
money supply decreases
Easy money policy (recession)
money supply increases
During an economic crisis or the Christmas shopping season the demand for money increases significantly. If the Fed wants interest rates to remain unchanged which of the following policy actions would be the most appropriate?
purchase government securities in the open market
According to national income accounting, which of the following is included in the personal consumption expenditures component of GDP?
rental payment of $5,000 for a two-bedroom condo during a one-month vacation
The commercial banking system can lend by a multiple of its excess reserves because:
reserves lost by one bank will be gained by some other bank.
Liabilities
reserves of commercial banks, treasury deposits, federal reserve notes
A wave of consumer and business optimism stimulates the economy. As a result GDP exceeds the economy's full-employment real GDP and the unemployment rate falls to 3%. The economic boom causes demand-pull inflation. In this situation proper counter-cyclical discretionary fiscal policy would involve:
running a budget surplus.
assets
securities, loans to commercial banks
An effective price ceiling creates a:
shortage.
The aggregate demand curve:
slopes downward because of the real-balances, interest-rate, and foreign-purchases effects.
advantages of monetary policy over fiscal policy
speed and flexibility, isolation from political pressure
Tight money policy (economic boom)
spending falls
Easy money policy (recession)
spending rises
Asset demand for money arises because money is a
store of value
open market operations
the buying and selling of government securities to alter the supply of money
Which of the following circumstances, ceteris paribus, will NOT increase the demand for new homes in Southwest Florida?
the expectation of higher new home prices in the near future
if Nominal GDP ↑ then
transactions demand shifts right
if price level ↑ then
transactions demand shifts right
real GDP ↑ then
transactions demand shifts right
largest assets of the fed
treasury securities owned
Federal Reserve Notes in circulation constitute claims against the assets of the Federal Reserve Banks.
true
Lowering the reserve ratio changes required reserves into excess reserves.
true
The Fed selling government bonds on the open market would be effective in reducing inflation.
true
The primary purpose of the Fed Reserve buying government securities in the open market is to allow banks to increase their lending.
true
When the Fed raises the federal funds rate commercial banks will increase the prime rate.
true
Appreciation of the dollar:
will increase the prices of American exports and decrease the prices of American imports.
