ECON 202 Ch 13-17

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

"Fannie Mae" and "Freddie Mac"

Suppose the velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals

$1.8 billion

Suppose the reserve requirement is 15%. What is the effect of total checkable deposits in the economy if the bank reserves increases by $40 billion?

$333 billion increase.

According to the Taylor rule, what is the federal funds target rate under the following conditions? Equilibrium real federal funds rate equals 4%, target rate of inflation equals 4%, current inflation rate equals 3%, and real GDP is 1% below potential real GDP. The federal funds target rate equals ____%

6

There are _______________ members of the board of Governors, who the President of the United States appoints to _______________. One of the board members is appointed Chairman for _______________.

7; 14-year nonrenewable terms;a 4-year renewable term.

According to the dynamic AD-AS model, what is the most common cause of inflation?

A and B only (Total spending increases faster than total production and AD increases by more than LRAS).

Why did the Fed help JP Morgan Chase buy Bear​ Stearns?

A and C only (Failure of Bear Stearns would lead to a larger investment bank failure, and commercial banks would be reluctant to lend to investment banks).

In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic?"

A bank run involves one bank; a bank panic involves many banks.

A change in the price level causes a movement along the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point A to B.

A change in any other factor causes a shift in the SRAS curve. In the figure, this is shown by moving from point B to C.

Which of the following factors does not cause the aggregate demand curve to shift?

A change in the price level

In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS2?

All of the above (Increase interest rates, open market sale of government securities, and contractionary policy).

Which of the following is true with respect to Irving Fisher's quantity equation, MxV=PxY

All of the above (P=the GDP deflator, V=PxY/M, V=average number of times a dollar is spent on goods or services, and M=M1 definition of the money supply).

Consider the figure to the right. Why does the short-run aggregate supply curve (SRAS) slope upward?

All of the above (Prices of final goods rise more quickly than the prices of inputs, firms and workers fail to predict changes in the price level, and contracts keep wages "sticky")

Which of the following factors will cause the long-run aggregate supply curve to shift to the right?

All of the above (an increase in the number of workers in the economy, technological change, and the accumulation of more machinery and equipment).

An increase in the labor force or capital stock is illustrated as a shift from A to B. An increase in the expected price of an important natural resource is indicated by a shift from B to A.

An improvement in technology is shown as a shift from A to B. An increase in the expected future price level causes a shift from B to A.

Which of the following causes the short-run aggregate supply curve to shift to the left?

An increase in the expected price of an important natural resource.

Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2.

Both A and B (Example A shows a contractionary monetary policy. The price level and real GDP both fail. Example B shows an expansionary monetary policy. The price level and real GDP both rise.)

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?

Business investments projects, the value of the dollar, and consumption of durable goods.

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to

Buy U.S. Treasury securities from the public.

How can government policies shift the aggregate demand curve to the right?

By increasing government purchases.

How does the dynamic model of aggregate supply and aggregate demand explain inflation?

By showing that if total spending in the economy grows faster than total production, prices will rise.

The figure to the right shows a breakdown of the M1 definition of the money supply in 2017. Which area corresponds to the amount of checking account deposits?

C

How does an increase in the price level affect the quantity of real GDP supplied in the long run?

Changes in the price level do not affect the level of GDP in the long run.

What is inflation targeting?

Committing the central bank to achieve the announced level of inflation.

In the definition of the money supply, where do credit cards belong?

Credit cards are not included in the definition of the money supply.

An increase in the amount of excess reserves that banks keep _______________ the value of the real-world deposit multiplier.

Decreases

Which of the following is not a factor that helped lead to the financial crisis of 2007-2009?

Deposit insurance for commercial banks.

Which of the following is the largest liability of a typical bank?

Deposits

The Austrian school is best known for arguing the superiority of government economic planning over the market system.

False

The real business cycle model focuses on changes in the quantity of money to explain fluctuations in real GDP.

False

Evaluated the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

In addition the the Federal Reserve Bank, what other economic actors influence the money supply?

Households, firms, and banks.

Which of the following statements is true?

In the long run, changes in the price level do not affect the level of real GDP.

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MD2 (Point A to Point C)?

Increase in real GDP or increase in the price level.

Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)?

Interest rate effect and wealth effect.

In 2008, the required reserve ration for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ration is 1- percent on all deposits. Therefore, the simple deposit multiplier is 10. In the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.

Which of the following is NOT a monetary policy goal of the Federal Reserve Bank?

Low prices

Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C.

Lower taxes, increased consumer optimism, lower interest rates, and decrease in the U.S. exchange rate relative to other currencies.

Jill makes a deposit into her savings account at the lcal bank with $100 in cash. As a result of this transaction,

M1 will decrease by $100.

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets.

Milton Friedman argued that the Federal Reserve should adopt a _______________ to reduce the fluctuations in real GDP, employment, and inflation.

Monetary growth rule

What is flat money?

Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money.

Consider the figure to the right. Can the Fed achieve $900 billion money supply (MS) and a 5% interest rate (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

The United States is divided into 12 Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of 7 members appointed by the president of the U.S. to 14 year, non-renewable terms.

One of the board members is appointed to a 4 year, renewable term as chairman.

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likley pursue in order to move AD2 to AD2policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)

Open market purchases of government securities.

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severtiy of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?

Procyclical policy

Why does the short-run aggregate supply curve slope upward?

Profits rise when the price of goods and services firms sell rise more rapidly than the prices they pay for inputs.

The process of _______________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets.

Securitization

The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?

The Fed can only soften the magnitude of recessions, not eliminate them.

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.

As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rate in monetary policy more often than it does the money supply. Which interest rate does the Fed target?

The federal funds rate.

According to the quantity theory of money, inflation results from which of the following?

The money supply grows faster than real GDP.

Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from AD0 to AD1.

The new short-run macroeconomic equilibrium occurs at point B. Long-run adjustment will shift the SRAS curve from SRAS0 to SRAS1 as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at point C.

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?

The required reserve ratio.

Velocity is defined as

V=PxY/M

The international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports.

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _______________ in real GDP in the short run and ______________ in the price level in the long run.

an increase; an increase

An initial decrease in a bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserve.

A higher required reserve ration _______________ the value of the simple deposit multiplier.

decreases

In the figure to the right, the opportunity cost of holding money _______________ when moving from Point A to Point B on the money demand curve.

decreases

Whenever banks gain reserves and make new loans, the money supply _______________; and whenever banks lose reserves, and reduce their loans, the money supply _______________.

expands; contracts

By raising the discount rate, the Fed leads banks to make _______________ loans to households and firms, which will _______________ checking account deposits and the money supply.

fewer; decrease

The U.S. dollar can best be described as

flat money.

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment.

There is a strong link between changes in money supply and inflation

in the long run.

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

Savings account balances, small-denomination time deposits, and noninstitutional money market fund chares are

included only in M2.

If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:

inflation rate = growth rate of the money supply - growth rate of real output

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes

potential GDP increases continually, while the AS-AS model assumes the LRAS does not change.

Money serves as a unit of account when

prices of goods and services are stated in terms of money.

The _______________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

The 2007-2009 recession was a clear example of

the effect that a decrease in aggregate demand can have on the economy.

A double coincidence of wants refers to

the fact that for a barter trade to take places between two people, each person must want what the other one has.

If the price level increases, then

there will be a movement up along a stationary aggregate demand curve.

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption.

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ration is 10 percent. In this situation, American Bank has

$50 in required reserves.

What is the effect of an increase in the price level on the short-run aggregate supply curve?

A movement up along a stationary curve.

Which of the following causes the short-run aggregate supply curve to shift to the right?

A positive technological change.

Which of the following is usually the cause of stagflation?

A supply shock as a result of the unexpected increase in the price of a natural resource.

Which of the following is NOT a function of money?

Acceptability

The M1 measure of the money supply includes which of the following components?

All of the above (currency in circulation, holdings of traveler's checks, and checking account deposits in banks).

Which of the following is a monetary policy tool used by the Federal Reserve Bank?

All of the above (decreasing the rate at which banks can borrow money from the Federal Reserve, increasing the reserve requirement from 10 percent to 12.5 percent, and buying $500 million worth of government securities such as Treasury bills).

In the figure to the right, when the money supply increases from MS1 to MS2, the equilibrium interest rate fell from 4% to 3%. Why?

All of the above (increased demand for Treasury securities drives down their interest rate, increased demand for Treasury securities drives up their prices, and initially firms hold more money than they want relative to other financial assets).

Which of the following is true with respect to hyperinflation?

All of the above (it can be hundreds - even thousands - of percentage points per year, in the presence of hyperinflation firms and households avoid holding money, and it is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP).

In the diagram to the right, moving from point A to point B is called a movement along the AD curve.

Moving from point A to point C is referred to as a shift in the AD curve.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the Federal Reserve Bank to pursue a contractionary monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators?

Actual real GDP decreases, potential real GDP does not change, price level decreases, and unemployment increases.

Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?

All of the above (because contracts between workers and firms make some wages and prices "sticky", because menu costs make some prices "sticky", and because firms are often slow to adjust wages).

The use of money

All of the above (reduces the transaction costs of exchange, eliminates the double coincidence of wants, and allows for greater specialization).

The simple deposit multiplier equals

All of the above (the formula used to calculate the total increase in checking account deposits from an increase in bank reserves, the inverse or reciprocal of the required reserve ratio, and the ratio of the amount of deposits created by banks to the amount of new reserves).

Which of the following are views new classical macroeconomists hold?

All of the above (workers and firms have rational expectations, the economy will normally be at potential real GDP, and wage and price stickiness is not important for explaining fluctuations in real GDP).

Which of the following conditions make a good suitable for use as a medium of exchange?

All of the above conditions must be met (the good should be of standardized quality so that any two units are identical, the good should be durable valuable relative to its weight and divisible, and the good must be acceptable to most buyers and sellers).

_______________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of GDP.

Hyperinflation

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it buys U.S. Treasury securities.

If the FOMC wishes to decrease the money supply, it sells U.S. Treasury securities.

Consider the following table: What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? The Fed will pursue an expansionary monetary policy.

If the Fed's policy is successful, what is the effect of the following indicators? Actual real GDP increases, potential real GDP does not change, price level increases, and umemployment decreases.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD2 to AD2 policy and reach equlibrium (point C) in the second period? Expansionary monetary policy.

If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual Real GDP increases, potential real GDP does not change, price level increases, and unemployment decreases.

How do investment banks differ from commercial banks?

Investment banks generally do not lend to households, and they do not take deposits.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2policy and reach equilibrium (point C) in the second period?

Open market purchase of government securities.