Macroeconomics Test 2

How do banks "create money"

When there is an increase in deposits, banks gain reserves and make new loans so that money supply expands

An induced change

a change in aggregate expenditure caused by a change in income and does depend on the level of GDP

An autonomous change

a change in expenditure not caused by a change in income will cause rounds of induced changes in expenditure

If you withdraw money from a checking account, what happens to the bank's balance sheet

a decrease in reserves and deposits

The multiplier effect is the process by which

an increase in autonomous expenditure leads to a larger increase in real GDP

A central bank can "create" money by buying bonds because

by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply

M1 definition of money supply

cash, checking account, traveler's check not savings accounts or credit accounts

How do you calculate MPC?

change in C / change in Y

The most important determinant of consumption is

current disposable income

A higher required reserve ratio does what to the value of the simple deposit multiplier?

decreases

Autonomous expenditure

expenditure that does not depend on the level of GDP

When aggregate expenditure is greater than GDP, inventories will _____, and GDP and total employment will _______.

fall, increase

Fiat money

has no value except as money

Commodity money

has value independent of its use as money

A double coincidence of wants

in a barter trade, each person must want what the other one has

According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to what effects on short run and long run GDP?

lower real GDP in the short run but higher real GDP in the long run

When the Fed sells treasury securities in the open market,

the buyers of the securities pay for them with checks and bank reserves fall

The quantity theory of money is better able to explain what

the inflation rate in the long run

The simple deposit multiplier equals

the inverse of the required reserve ratio

When the Fed buys bonds through open market operations

the money supply will increase

When the Fed purchases treasury securities in the open market,

the sellers of the securities deposit the funds in their banks and bank reserves increase

The value of the multiplier is larger when the value of the MPC is what?

the value of the MPC is smaller

When is the economy in a recession?

when the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP

IF MPC is 0.9 how much consumption will result if disposable income is $100

$90

The formula for the multiplier

1/(1-MPC)

Would a larger multiplier lead to more severe recessions or less severe recessions

A larger multiplier means that small changes in spending lead to large changes in GDP, thus recessions would be more severe

How does the government create money?

By making loans or printing currency

What are the four main determinants of investment?

Expectations of future profitability interest rates taxes cash flow

The quantity theory's explanation about the cause of inflation

If the money supply grows faster than real GDP, then there will be inflation

What happened to interest rate if it caused savings to increase?

Interest rate increased

How would an increase in interest rates affect investment?

Interest rate increases raise the cost of borrowing, so real investment spending will decline

When a planned aggregate expenditure is less than real GDP, what happens to firms' inventories

Inventories accumulate if the production is not scaled back

Quantity theory of money formula

MxV = PxY

Which tool for policy is most important for the Fed's control of money supply?

Open market operations

What policy tools does the Fed use to control the money supply?

Open market operations, discount policy, and reserve requirements