Econ exam 2

Why does the Federal Reserve not have complete control over the size of the money supply? Give at least two reasons.

1.) the amount of currency the public chooses to hold relative to deposits. 2.) the amount of reserves that the banks choose to hold relative deposits. Both the banks and the public influence the size of money supply.

In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A) increase; increase

What is the implication of the differences in maximum leverage ratios for the stability of the banking system?

Economic systems or banks that have high leverage ratios are more susceptible to banks becoming insolvent when asset losses occur. Leverage ratios should not be too high in order to maintain bank stability.

Demand deposits are funds held in: a.) money markets. b.) currency. c.) checking accounts. d.) certificates of deposit.

c.) checking accounts.

Money that has no value other than as money is called ______ money. a.) commodity b.) government c.) fiat d.) intrinsic

c.) fiat

To increase the money multiplier, the Fed can: a.) raise the interest rate paid on reserves. b.) conduct open-market sales. c.) lower the interest rate paid on reserves. d.) conduct open-market purchases.

c.) lower the interest rate paid on reserves.

2. Assumptions: How do they differ from short-run analysis settings?

ii) In the long-run, output is determined by the factors of production and the available technology. In the short-run, output is not only determined by the factors of production but by the aggregate demand.

3. Assumptions: How do they differ from short-run analysis settings?

iii) In the long run, prices and monetary variables do not affect output. In the short run, monetary variables like price level and the money supply affect the output level.

In the Solow growth model of Chapter 8, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals: A) sy B) (1 - s)y C) (1 + s)y D) (1 - s)y - i

B) (1 - s)y

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is: A) 1. B) 2. C) 4. D) 9.

C) 4.

If the national saving rate increases, the: A) economy will grow at a faster rate forever. B) capital-labor ratio will increase forever. C) economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached. D) capital-labor ratio will eventually decline.

C) economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

The Solow growth model describes: A) how output is determined at a point in time. B) how output is determined with fixed amounts of capital and labor. C) how saving, population growth, and technological change affect output over time. D) the static allocation, production, and distribution of the economy's output.

C) how saving, population growth, and technological change affect output over time.

The Golden Rule level of capital accumulation is the steady state with the highest level of: A) output per worker. B) capital per worker. C) savings per worker. D) consumption per worker.

D) consumption per worker.

Consider a scenario where in addition to money supply changing the velocity changes. How is the inflation rate affected?

Inflation increases further when in addition to money supply changes the velocity of money changes. This happens assuming no change in the output.

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1. a. What is the money supply? b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply? c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

a.) $550 billion b.) $366.67 billion c.) $400 billion

Liabilities of banks include: a.) demand deposits. b.) reserves. c.) currency in the hands of the public. d.) loans to customers.

a.) demand deposits.

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase. a.) the money supply b.) the discount rate c.) reserve requirements d.) the reserve-deposit ratio

a.) the money supply

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then: a.) the two changes exactly offset each other. b.) the money supply decreases. c.) the money supply increases. d.) it cannot be determined whether the money supply increases or decreases.

c.) the money supply increases.

The value of banks' owners' equity is called bank: a.) reserves. b.) liquidity. c.) deposits. d.) capital.

d.) capital.

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply. a.) decrease; increase b.) decrease; decrease c.) increase; increase d.) increase; decrease

d.) increase; decrease

1. Assumptions: How do they differ from short-run analysis settings?

i) In the long-run, the prices are flexible. In the short-run, prices are fixed.

How do you think the check tax affected the currency- deposit ratio? Explain.

to avoid tax, people will hold larger amounts of currency instead of depositing with banks

Leverage ratio=

total assets/ banks capital example: #20

The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is: A) c* = f(k*) - δk*. B) c* = f(k*) + δk*. C) c* = f(k*) ÷ δk*. D) c* = k* - δf(k)*.

A) c* = f(k*) - δk*.

In the Solow growth model with no population growth and no technological progress, the higher the steady capital-per-worker ratio, the higher the steady-state: A) growth rate of total output. B) level of consumption per worker. C) growth rate of output per worker. D) level of output per worker. (note that consumption/worker depends on savings rate too that's why its D and not B)

D) level of output per worker. (note that consumption/worker depends on savings rate too that's why its D and not B)

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line denotes: A) output per worker. B) output per unit of capital. C) the marginal product of labor. D) the marginal product of capital.

D) the marginal product of capital.

Many economists believe that a falling money supply was in part responsible for the severity of the Great Depression of the 1930s. From this perspective, was the check tax a good policy to implement in the middle of the Great Depression?

The check tax was not a good policy to implement in the middle of the Great Depression because it did result in a decrease in the money supply as people preferred to pay in currency rather than write a check. Banks had fewer reserves and were able to make fewer loans.

Use the model of the money supply under fractional- reserve banking to discuss how this tax affected the money supply.

The money supply falls bc the money multiplier,(cr+1)/(cr+rr) , is decreasing in cr. the higher the currency-deposit ratio, the lower the proportion of the monetary base that is held by banks in the form of reserves and the less money banks can create.

The ratio of the money supply to the monetary base is called: a.) the currency-deposit ratio. b.) the reserve-deposit ratio. c.) the money multiplier. d.) high-powered money.

c.) the money multiplier.

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then: a.) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen. b.) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen. c.) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen. d.) it is impossible to be certain whether the money supply would fall or rise in this case.

a.) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen.

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: a.) $100 billion. b.) $600 billion. c.) $650 billion. d.) $150 billion.

b.) $600 billion.

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals: a.) $400 billion. b.) $800 billion. c.) $200 billion. d.) $1,000 billion.

b.) $800 billion.

Checking account balances that are linked to debit cards are included in: a.) neither M1 nor M2. b.) both M1 and M2. c.) M1. d.) M2 only.

b.) both M1 and M2.

In the United States, the money supply is determined: a.) only by the Fed. b.) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. c.) according to a constant-growth-rate rule. d.) only by the behavior of individuals who hold money and of banks in which money is held.

b.) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: a.) the money supply increases. b.) the money supply decreases. c.) it cannot be determined whether the money supply increases or decreases. d.) the money supply does not change.

b.) the money supply decreases.