MACROECONOMICS 201: WEEK 4

If the required reserve ratio is 10%, how much can a bank lend out if its deposits total $2 million?

$1.8 million

By how much does the money supply increase if the Federal Reserve injects $5 million into the system and the required reserve ratio is .2?

$25 million

Calculate the present value of $10,000 invested at 12% for 10 years.

$3,219.73

If the required reserve ratio is 10%, the increase in the money supply that results from $500,000 of new deposits equals

$5,000,000.

What is the total change in the money supply if the reserve requirement is 10% and deposits rise by $5,000?

$50,000

If the face value of a bond is $1,000 and the coupon rate is 8%, the annual interest payment is ______.

$80

Suppose that the Fed sets the required reserve ratio at 12%. First Bank has $1,000,000 in deposits. How much is First Bank able to lend to its customers?

$880,000

If Val invested $2,500 in the year 2000 at an interest rate of 11% annually, how much will she have in the year 2035?

$96,437.13

If First Bank has $1,000,000 in deposits and is able to lend up to $860,000, what is the required reserve ratio?

14%

If Andy receives $150 in annual interest payments on a bond with a $1,000 face value, we know that the coupon rate on his bond is ______.

15%

Suppose you invest $1,000 at 12%, and the rate of inflation is 4% annually. Based on the Fisher equation, what is the increase or decrease in your real purchasing power?

8% increase

Which of the following factors can cause a decline in aggregate demand?

A decrease in consumer spending

Based on the graph below, which of the following can we conclude about the economy?

A supply shock has probably occurred.

Which of the following factors would be likely to increase households' supply of loanable funds at every interest rate?

A tax credit on savings

Which of the following correctly expresses the labor supply equation?

L = f (P − Pe )

Which of the following represents a way in which the Fed can expand the money supply?

Lowering the discount rate

Which of the following best describes how Keynesians view the effect of monetary policy on the economy?

Monetary policy can cause the economy to expand.

Which of the following statements is not consistent with the monetarists' views of the economy?

Monetary policy should be used to stimulate demand.

Which of the following regarding money is not true?

Money is backed by gold.

Which of the following statements regarding municipal bonds is true?

Municipal bonds pay lower interest rates because of their tax advantages.

The money multiplier

Only A and B are correct.

In practice, which tool does the Federal Reserve use most often to increase or decrease the money supply?

Open market operations

What do most economists believe is the short-run effect on the real economy when the money supply increases?

Output increases, because interest rates fall.

According to monetarists, what is the effect of an increase in the money supply?

Output remains constant, and prices rise

Which of the following best describes stagflation?

Prices rise and output decreases.

What is the long-run effect on the real economy of an increase in the money supply?

Prices rise, and the level of output returns to its equilibrium level.

If expectations are fully rational, what will be the effect of an increase in the money supply?

Prices will rise, and output will remain unchanged.

The economist most associated with the new classical macroeconomic theory is

Robert Lucas.

The use of monetary policy as a means to prevent the crowding out that might occur from expansionary policy is a short-run strategy.

True

To protect financial security, people may choose to hold money instead of interest-bearing assets.

True

An investor receives _____________ when a stock is sold for more than the purchase price.

a capital gain

According to the graph, the movement from D to D′ represents

a change in a factor other than the interest rate that increased the demand for money at every interest rate.

Lenders with relatively small amounts of money and the desire to invest in a diverse portfolio of stocks and bonds should invest in

a mutual fund.

An economy that does not have enough money in circulation might experience ____________, and too much money in an economy might cause ___________.

a recession; inflation

A goldsmith need not keep all of the gold deposits people leave with him on hand in his vault, because

all depositors are not likely to demand their gold at once.

According to the transaction motive,

all of the above statements are true.

Characteristics of money include

all of the above.

M1 includes

all of the above.

M2 includes

all of the above.

An interest rate above the market equilibrium indicates

an excess supply of money.

The long-run effect of increasing the money supply is

an increase in the aggregate price level with no change in real output.

Increasing the money supply in an expanding economy will most likely cause

an increase in the price level.

According to the graph, the movement from i0 to i1 represents

an increase in the quantity of money demanded as a result of falling interest rates.

Large corporations, the federal government, or state and local governments usually issue __________ in order to finance their purchases.

bonds

The demand curve for loanable funds represents the behavior of

businesses.

"Near money"

can reduce the money multiplier effect.

The profits received from selling stock for more than the purchase price are called

capital gains.

A change in the interest rate will

cause a movement along the money demand curve.

Assume the velocity of money is held constant. According to the classical view of money

changes in the money supply will only affect prices.

Financial intermediaries are

financial institutions through which lenders can indirectly provide funds to borrowers.

Banks, mutual funds, insurance companies, and pension funds collectively make up the

financial system.

The widely held belief that when the central bank creates money, prices rise is called

the quantity theory of money.

In the quantity theory of money, velocity means

the rate at which the money supply turns over.

The determination of investment in an economy comes from the equality of

the three uses of income and aggregate expenditures.

Stocks are assets on a mutual fund's balance sheet, while the fund itself is the liability.

true

Suppose Maria, who produces telephones, works 9 hours per day and expects the price of her phones to be $35 each. According to new classical theory, if the actual price of her phones is $40 each, we would expect Maria to

work more than 9 hours per day.

In the financial market, a bond

is a debt contract that promises lenders a fixed interest payment in the future.

If the money supply increases by 10% and real GDP increases by 3%, prices will increase by

less than 10%

If Emily writes a check for her groceries, she is using money as a

medium of exchange.

The quantity theory of money can explain

moderate inflation, hyperinflation, and deflation.

Which of the following correctly expresses the quantity theory of money?

money × velocity = price level × real output

When real income increases,

people will demand more money to do more shopping.

Study the graph below. Supposing the aggregate price level has increased, we can predict a movement from

point A to point C.

Newly issued securities are sold on the

primary market.

Which of the following correctly expresses the Fisher equation?

real interest rate = nominal interest rate − inflation rate

The practice of fractional reserve banking

requires banks to hold a fraction of their liabilities in reserves.

Compared to equity finance, debt finance offers

returns that are limited to the stated interest rate.

In the short run, when the government increases its spending, the demand for money

rises, because income rises as a result of the increase in aggregate demand.

If Jim puts $1.00 into his piggy bank every day, he is using money as a

store of value.

When the market interest rate is less than a bond's coupon rate,

the bond is trading at a premium.

The graph below shows an example of "bad deflation."

False

There is an inverse relationship between a country's standard of living and its rate of savings and investment.

False

Which of the following represents a form of commodity money?

Gold coins

Which of the following chains of events explains how government spending crowds out investment spending?

Government spending increases, raising output, raising prices, raising the demand for money, raising interest rates, lowering investment.

What would be the effect of an increase in the demand for loanable funds at every interest rate?

Interest rates would rise.

According to the new classical macroeconomists, how does an increase in the price level affect the level of output?

It increases output because firms initially mistake an increase in the overall price level with an increase in demand for their goods.

Which of the following is not a characteristic of gold?

It is indivisible.

Which of the following best explains why the Federal Reserve reduced the required reserve ratio in the 1990s?

It wanted to stimulate the economy, which was in a recession.

Why do producers work harder when they see prices rise?

They see the opportunity to make more money, because the prices of the goods they sell have risen.

An interest rate below the market equilibrium will

Trigger competition for loanable funds

According to the Fisher equation, when we hold inflation constant, the real and nominal interest rates move one for one.

True

According to the precautionary motive, people will choose to hold money instead of interest-bearing assets to protect their financial security.

True

An increase in the price level will raise the demand for money and shift the demand curve for money outward

True

Contractionary monetary policy will cause prices and output to decrease in the short-run.

True

Suppose the U.S. economy is experiencing a recession. Increasing the money supply will provoke an expansion in the short run.

True

In the short run, what is the effect on prices and output when the money supply increases?

Aggregate demand rises, pushing up prices and output.

Which of the following could cause a run on a goldsmith?

All of the above

Which of the following serves as a store of value?

All of the above serve as a store of value.

Which of the following will not cause a shift in the investment demand curve?

An increase in the interest rate

Which of following policy measures could prevent "crowding out" in the short run?

An increase in the money supply by the Federal Reserve

Which of the following statements about the long-run effect of an increase in the money supply is true?

As a result of lower interest rates, businesses may invest more, but the increase in the price level may reduce spending by foreigners and consumers.

What happens when interest rates are set higher than the equilibrium rate?

Because the supply of loanable funds exceeds demand, banks are unable to lend as much money as they would like.

_____________ are entitled to the first claim to returns on investments.

Bondholders

Which of the following statements is true?

Bonds are debt instruments, while stocks are equity instruments.

What is the effect on interest rates and the money supply when the Fed lowers the reserve requirement?

Interest rates fall, and the money supply increases.

Based on the graph below, which of the following monetary policies should the Fed implement to restore long-run equilibrium?

Buy Treasury securities

Which of the following tools can the Federal Reserve use to lower interest rates?

Buying Treasury bills

Which of the following is an example of equity finance?

Buying stock

The required reserve ratio covers which of the following types of deposits?

Checking accounts only

Which of the following statements about commodity money is true?

Commodity money has intrinsic value.

Under the Reagan Administration, businesses received tax incentives for investing. What effect did this policy have on the demand and supply of loanable funds?

Demand for loanable funds shifted to the right, and interest rates increased.

What is likely to be the effect of a government-imposed ceiling on interest rates below equilibrium?

Demand for loanable funds will exceed supply, and some businesses will be unable to borrow.

What is meant by the expression "In the long run, we're all dead"?

Deviations from long-run equilibrium can have significant consequences on people's lives.

According to the new Keynesians, which of the following does not explain why output can rise above the full-employment level in the short run?

Expectations are fully rational.

Which three factors define a bond?

Face value, coupon rate, maturity date

Economist Adam Smith proposed the theory that increasing the price level will increase productivity and output.

False

Excess supply of loanable funds causes an upward adjustment of the interest rate.

False

Households can choose to trade currency for gold.

False

If interest rates are expected to rise, the value of assets will expected to also rise.

False

New Keynesian and monetarist economists agree that the growth rate of the money supply should be set at a rate that reflects real output.

False

Suppose Bond A has a face value of $1,000, carries a coupon rate of 8%, and matures in one year. If the rate of return on Bond A is 10%, this bond is trading at a premium.

False

The Fed can directly control the money supply

False

The Federal Reserve Bank guarantees the value of a dollar bill.

False

The best measure of your increase or decrease in purchasing power as a result of an investment is the nominal interest rate.

False

Which of the following statements is true?

If the price level or real GDP changes, the money demand curve will shift.

In the long run, what is the effect of an increase in the money supply?

Inflation

What is the long-run effect of monetary policy accommodation by the Federal Reserve?

Inflation

What is the long-run effect on the short-run aggregate supply (SRAS) curve when the money supply increases?

The SRAS curve shifts inward as expectations catch up with actual movements in the price level.

What is the short-term effect of expanding the money supply?

The aggregate demand curve shifts outward.

Which of the following statements describes what happens to a bank's balance sheet when a customer opens up a checking account?

The checking account appears as a liability, which is balanced on the asset side by the required reserves and the loan made with the depositor's funds.

Which of the following is not a motive for holding money?

The depository motive

If the Federal Reserve purchases government bonds, all of the following will occur except

The discount rate will be forced up

Which of the following describes how goldsmiths create money?

The goldsmith issues deposit slips for the gold he holds for other people, which begin to be accepted as a medium of exchange.

What is the mechanism by which the economy returns to the full-employment level of output following an increase in aggregate demand?

The increase in the price level causes the short-run supply curve to shift to the left.

What happens to the money supply if the Federal Reserve reduces the required reserve ratio?

The money supply increases

Which of the following statements is not consistent with the new Keynesians' views of the economy?

The money supply should be kept stable.

If the Fed decides to increase the required reserve ratio,

The money supply will decrease

Suppose that the Fed lowers the required reserve ratio. Which of the following events will most likely occur?

The new long-run equilibrium at full employment will be at a higher aggregate price level.

Which of the following ideas can we infer about the market for loanable funds as depicted in the graph below?

The price of the bond will be bid upward.

Which of the following is most likely to result from an increase in the money supply?

The prices of bonds will increase

Which of the following is not a tool used by the Federal Reserve to increase or decrease the money supply?

The prime rate

Which of the following would increase the money supply?

The purchase of government securities by the Federal Reserve

Which of the following statements must be true if the Gross Domestic Product is greater than the money supply?

The velocity of money is greater than one.