Monetary policy

The money multiplier will equal 1/rr so long as

-People cant hold any loaned money as cash -Banks loan our all of their excess reserves.

Which three values are all related, so that when one changes, so do the others.

-The dollar value of deposits held by banks -banks reserve -the money supply

banks can expand reserves, and make more loans by

-attracting deposits and encouraging saving -borrowing from the reserve

the actions taken by a country's central bank to expand the money supply and lower the interest rates

-easy money -expansionary monetary policy

the money multiplier equals

1/reserve requirement

the Federal Reserve buys or sells government debt in the open market to influence the money supply and interest rates

In open market operations

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate

Investment Demand

Consider how the following scenario would affect the money supply and, as a result, interest rates in the economy. a. When the Federal Reserve increases the discount rate, banks will borrow: b. This causes the money supply to ___ and market interest rates to ___

a. fewer reserves and decrease lending b. -decrease -increase

which of the following does the fed heavily monitor

bank reserves

the federal funds rate is determined by the supply and demand for ___ reserves

borrowed

tight money describes ___ monetary policy

contractionary

when aggregate demand rises, to decrease aggregate demand we can use ___ monetary policy

contractionary

the interest rate that helps determine the interest rates charged on other loans is caleld the

federal funds rate

When the fed ___ the federal funds rate target, the money supply decreases and interest rate rises

increases

Changing the money supply can affect

interest rates, thereby changing investment spending

If your income increases from $10,000 per year to $14,000 per year and your tax payment increases from $2,000 to $2,840, the marginal tax rate

is 21%

the reserve requirement is the ___ percentage of deposits that banks must keep on hand as reserves

minimum

the ___ market is a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances

money

with monetary policy changes in the

money supply, the quantity of investment demanded and real GDP all move in the same direction

when excess reserves are lent, additional excess reserves are created which are then used to create additional loans, further increasing the money supply through the money ___ process

multiplier

when conducting monetary policy, the fed most often uses

open market operations

the ___ rate is generally equal to the federal funds rate plus .03

prime

the time between when an event effects an economy and the time when we recognize the effects in the data collected is called the ___ lag

recognition

the ___ requirement is the fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the federal reserve

reserve

the money multiplier is the amount by which a $1 charge in ___ will change the money supply

reserves

when the fed decreases interest rates during tough economic times, it is hoping that investment spending and output in the economy will increase but ___ are negatively affected by this

savers

when you believe the fed will soon ___ bonds, you should sell them soon

sell

the ___ is the difference between the interest rate a bank earns on a loan

spread

investment demand can be described as

the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate

the federal reserve acts independently of the rest of the federal government

true

the actions taken by the country's central bank to reduce the money supply and increase the interest rate is called

-tight money -contractionary monetary policy

US treasury bills are

-issued for less than a year -payable only at the end of the bills maturity date

the federal funds rate is one of the key interest rates in the economy because

-it represents the interest rate for the least-risky loans in the market -by changing the federal funds rate the fed can change every other interest rate in an economy

the time between when a policy is enacted and when it has its full effect on the economy is called the ___ lag

implementation

___ reserves, the amount the bank can lend out to earn interest, equal ___ reserves minus ___ reserves

-excess -total -required

Which of the following will cause investment to fall

-higher interest rates -lower expected returns

in the real world, the actual money multiplier tends to be smaller than 1/rr because

-banks do not loan out all of excess their reserves -people hold some loaned money as cash

if the federal reserve decreases the discount rate there will be ___ borrowing from the federal reserve and banks will ___ lending. this will ___ money supply and ___ interest rates

-more -increase -increase -decrease

required reserves

-the amount of reserve that a bank must keep on hand to meet regulatory requirements -equal to deposit times the reserve requirement

which of the following refers to a liquidity trap

a situation where increasing the money supply does not lower interest rates, due to a flattening of the money demand curve

The money market in the United States and the investment demand curve are as shown in the graphs below. Currently, the Federal Reserve has a money supply of $50 billion and the money market is in equilibrium. a. Suppose the Federal Reserve decreases the money supply by $10 billion. Use the money market and investment demand graphs to show the effects of the decrease in the money supply on interest rates, money demand, and investment. b. When the Federal Reserve wants to decrease the money supply, it uses ___ policy, which ___ interest rates and causes the amount of investment to ___ .

a. -supply shifts to the right to 50 -investment is at 8 and 6 (interest rate) b. -contractionary -raises -decrease .

Assume the reserve requirement is 10% and the MPC = 0.6 for the economy when a stock market downturn reduces aggregate demand by $100 billion. Instructions: Enter your answers as a whole number. a. Suppose the Federal Reserve wants to increase investment demand to offset the reduction in aggregate demand. To accomplish this goal, how much does investment demand need to increase? b. To increase investment demand by the desired amount, the Fed estimates that interest rates will need to ___ by 4% and the money supply will need to ___ by $200 billion. c. In order to achieve the $200 billion change in the money supply, the Fed will make an ___ of ___ billion.

a. 40 billion b. -decrease -increase c. -open market purchase -$ 20

Assume the economy is currently in equilibrium at its full-employment level of output, the money market is in equilibrium, and the MPC = 0.75. a. Suppose there is an increase in government spending that causes aggregate demand to increase by $16 billion. Show the increase in aggregate demand on the graph. Now suppose the Federal Reserve wants to keep inflation from hurting the economy and maintain output at the full-employment level. b. To restore this economy to its long-run equilibrium, the Federal Reserve needs to shift the aggregate demand curve to the ___ by ___ billion. c. If the Federal Reserve were to reduce investment demand to cause the shift in aggregate demand, with an MPC = 0.75, investment demand would need to decrease by ____ billion to achieve the needed change in aggregate demand. d. Use the money market and investment demand graphs to illustrate the monetary policy change the Federal Reserve would need to make in order to restore aggregate demand and real GDP back to the long-run equilibrium levels. e. For investment demand to decrease by the necessary amount, the Federal Reserve would need to cause interest rates to rise from 5% to ___%

a. AD1 shifts to the right spanning from 170 to 60 b. -left -16 c. 4 d. -investment demand at 7 and 5 (interest rate) -supply curve shifts to the left to 80 e. 7

The federal funds market is shown in the graph below. Assume the market is in equilibrium and that the Federal Reserve has established a 5% target for the federal funds rate. a. Suppose that banks are nervous about the next election and hold more excess reserves, causing the amount of reserves at banks to increase. Show this change in the demand for reserves in the federal funds market. In order to keep the federal funds rate at the target rate, the Fed will need to conduct an ___ so the quantity of reserves will ___ to meet the change in reserve demand

a. demand curve shifts to right b. -open market sale -decrease

___ demand describes the overall, or total, demand for all final goods and services produced in an economy

aggregate

the supply curve for federal funds is

horizontal

monetary policy affects interest rates which in turn, affect

inflation investment economic growth employment

the discount rate is the ___ rate at which banks can borrow money directly from the federal reserve

interest

a decrease in the supply of money will cause

interest rate to rise, and the quantity of investment demanded to fall

suppose the fed has just raised the federal funds rate. lending in the federal funds market may now provide a greater return to the bank relative to holding bonds in its portfolio. as a result the bank may choose to ___ bonds so they can have ___ reserves to lend. as the ___ bonds ___ the price of bond ___. therefore the change in bond prices push ___ the yield, or interest rate, the bond pays. so an increase in the federal funds rate will ___ other interest rates on short term assets

-sell -more -supply of -increases -falls -rise -up -increase

which of the following are also names for interest rate

-the price of money -nominal interest rate

graphically the federal funds market has the federal funds on the ___ axis and the quantity of reserves on the ___ axis

-y -x

For every dollar of bond the fed buys or sells the money supply will increase or decrease by an amount equal to the

money multiplier