macro unit 4
money multiplier
1 / reserve requirement ratio
1 "The price for a ticket to the Super Bowl is $500". This statement best illustrates money used as a... A Illiquid asset B Liquid asset C Unit of account D Medium of exchange E Store of value
C
Which of the following is not a function of fiat money? A. standard of deferred payment B. A unit of account C. a source of intrinsic value D. A store value E. A medium of exchange
C
Money demand shifters
Changes in price level Changes in income Changes in technology
M1
Currency in circulation Checkable bank deposits (checking accounts) Traveler's check
what happens when the fed increases money supply to stimulate the economy
Interest rates decreases Investment increases AD, GDP, and PL increases
A store of value
Money allows you to store purchasing power for the future
rate of return
amount paid back - amount of loan / amount of loan x 100
excess reserves
the amount that the bank can loan out amount deposited - (reserve requirement (%) x amount deposited)
Money supply shifters (vertical line)
the fed When supply increases, demand increases
Loanable funds market demand shifters:
Changes in borrowing by consumers Changes in borrowing by businesses (investment spending) Changes in borrowing by the government (ex. Deficit spending)
loanable funds supply shifters:
Changes in private savings behavior Changes in public savings Changes in foreign investment (ex. More inflow of foreign financial capital)
13 Which if the following is described as consumers holding money rather than bonds because they expect the interest rate to increase in the future? A Transactions B Liquidity C A medium of exchange D Asset demand for money E The money multiplier
D
The government increases deficit spending. what happens to supply
decreases
If there's political instability...
demand and supply both shift price is indeterminate
what is included in liabilities
demand deposits owner's equity checkable deposits
a low interest rate will increase/decrease investment
increase
Are demand deposits in a bank an asset or a liability?
liability for the bank, asset to the depositor
nation savings
public + private saving
federal funds rate
the interest rate that banks charge one another for one-day loans of reserves
What makes money effective?
Generally accepted Scarce Portable and dividable
net capital inflow
capital inflow - capital outflow
liability
to pay money in the future
fractional reserve banking
when banks hold a portion of deposits to cover potential withdrawals and then loans the rest of the money out
rule of 72
72 divided by your interest rate is how many years your money will be doubled
10 To eliminate an inflationary gap, the Federal Reserve might... A Sell bonds on the open market B Increase in the money supply C Decrease the federal funds rate D Buy bonds on the open market E Increase personal income taxes
A
15 Assume the required reserve ratio is 0.2. If a bank initially has no Excess Reserves and $100,000 cash is deposited in the bank, the maximum amount by which this bank may initially increase its loans is... A$80,000 B$20,000 C$100,000 D$200,000 E$500,000
A
18 The Federal Reserve can change the US money supply by changing... A Discount rate B The prime rate C Velocity of money D Putting more gold in circulation E Price level
A
22 If the Fed institutes a policy to reduce inflation, which of the following is most likely to increase? A Interest rates B Investment C Government deficits D Tax rates E Real GDP
A
24 Suppose business are fearful that there will be a recession on the near future. Which of the following best describes the impact of this belief on demand for loanable funds and interest rate? Demand for Loanable Funds / Interest Rate A Decrease / decrease B Decrease / no change C Increase / no change D Increase / decrease E Increase / Increase
A
4 Which of the following will most likely occur in an economy if more money is demanded than is supplied? A Interest rates will increase B The amount of investment spending will increase C The supply of money will decrease D Deflation E The aggregate demand will increase
A
11 The Federal Reserve can increase the money supply by... A Buying financial capital from foreign governments B Buying bonds on the open market C Selling government bonds on the open market D Selling foreign currency in the exchange market E Selling gold on the open market
B
19 Open market operations refer to which of the following activities? A The buying and selling of gold in the New York stock Market B The buying and selling of government securities by the Federal Reserve C The loans paid by the Fed to member commercial banks D The government's purchases and sales of municipal bonds for K-12 education E The government's contribution to social security
B
6 Fractional reserve banking means that banks are required to... A Charge the same interest rate on all their loans B Keep part of their demand deposits as reserves C Insure their deposits against losses and bank runs D Pay a fraction of their interest income in taxes E Expand the money supply when requested by the central bank
B
2 If you use money as a store of value, you would be... A Buying a new watch B Searching the Internet for a deal on a new car C Putting money into a savings account D Lending money to friend E Paying for gas on your credit card
C
21 The federal funds rate is the interest rate that... A The Fed charges the federal government on its loans B Banks charge their best customers C Banks charge one another for short-term loans D Equalizes the yield on corporate bonds and municipal bonds E Is equal to the nominal rate of inflation minus the real rate of inflation
C
23 If the supply for loanable funds increases, what will happen to real interest rates and investment? Real Interest Rates / Investment A No change / no change B Decrease / Decrease C Decrease / Increase D Increase / Decrease E Increase / Increase
C
7 Banks may not be able to create the maximum amount of money from a new deposit as a result of... A Government banking regulation B Increased demand for investment C Individuals holding a larger portion of their assets as cash D The banks can only make a set number of loans E Decrease in required reserve ratio
C
14 After receiving a deposit of $500 a bank's excess reserves increased by $400, the required reserve must be: A10% B15% C25% D20% E80%
D
3 Which of the following is NOT part of M1? A Travelers checks B Checkable deposits C Coins D Savings deposits E Currency
D
5 Which if the following is true for the money market graph? A The demand for money is vertical because of autonomous spending B The supply of money is downward sloping C There is no relationship between the nominal interest rate and the quantity of money demanded in the long-run D There is an inverse relationship between the nominal interest rate and the quantity of money demanded E An increase in the nominal interest rate will shift the money supply to the right
D
9 If the Federal Reserve raises the discount rate, how are interest rates and real GDP affected? Interest Rates / Real GDP A Decrease / Decrease B Increase / Increase C Decrease / Increase D Increase / Decrease E Decrease / No change
D
The transaction demand for money is very closely associated with money's use as a... A. store of value B. standard unit of account C. measure of value D. medium of exchange E. standard of deferred payment
D
If there is a recession, what could the Fed do to the reserve requirement?
Decrease the reserve ratio
17 If required reserves is 10% and that bank receives a new demand deposit of $300. Which of the following will most likely occur in the bank's balance sheet? Liabilities / Required Reserves A Increase by $300 / Increase by $270 B Decrease by $30 / Decrease by $270 C Increase by $30 / No Change D Decrease by $300 / Decrease by $30 E Increase by $300 / Increase by $30
E
20 An open market purchase of bonds by the Fed will most likely change the money supply, the interest rate,and the unemployment rate in which of the following ways? Money Supply / Interest Rate / Unemployment Rate A Decrease / Increase / Decrease B Increase / Decrease / Increase C Decrease / Decrease / Decrease D Decrease / Increase / Increase E Increase / Decrease / Decrease
E
8 When an economy is at full employment, an expansionary monetary policy will lead to... A Higher interest rates and lower price levels B Lower interest rates and less investment C Higher interest rates and lower prices D Higher interest rates and higher prices E Lower interest rates and more investment
E
What happens to the quantity demanded of money when interest rates increase?
It decreases because people would prefer to have interest-earning assets instead
M2
M1 plus... Savings deposits (money market accounts) Time deposits (CDs = certificates of deposit) Money market funds
A medium of exchange
Money can easily be used to buy goods and services with no complications of barter system
A unit of account (measure of value)
Money measures the value of all goods and services. Money acts as a measurement of value
real interest rate equation
Real = nominal interest rate - expected inflation(actual) (NEAR)
maximum change in money supply
change in excess reserves x money multiplier
To increase the money supply, the fed should...
decrease the discount rate (closed) or buy government securities (open)
There is an inverse/direct relationship between interest rate and the quantity of money demanded
inverse
what is included in assets
required reserves excess reserves customer loans government securities (bonds) building and fixtures
To decrease the money supply, the fed should...
sell government securities
discount rate
the minimum interest rate set by the Federal Reserve for lending to other banks
if the demand for a bond increases, what happens to the price of the bond and the interest rate
the price of the bond increases while the interest rate decreases
monetary base
the sum of currency in circulation and bank reserves