Exam 3 practice notes #1

If the Fed wants to raise the federal funds rate, it will ______ bonds, which ________ bond prices.

sell; lowers

Money demand depends on

the price level and the interest rate

According to the rational expectations theory, if the Fed announces that it is going to decrease the money supply, output:

will remain unchanged, but the price level will fall immediately

True/False When the housing bubble collapsed, the Fed dramatically increased interest rates to stimulate employment.

False

The central bank of the United States is the:

Federal Reserve System

Which of the following statements concerning the function of money is INCORRECT?

Money does not lose value when inflation occurs

True or False Because of the compounding effect, a $7,500 loan at 12 percent interest can grow to $23,293.86 after 10 years.

True

Which of the following assets is included in M1?

checkable deposits

When the Federal Reserve increases excess reserves to reduce interest rates and stimulate spending, it is said to engage in:

expansionary monetary policy

M2 is ____ in dollar value than M1; it also contains ____ assets.

larger; less liquid

The functions of money include:

medium of exchange, store of value, unit of account

If the economy is facing inflationary pressures, the Fed will:

raise interest rates.

Suppose that banks desire to hold no excess reserves. If the reserve requirement is 5 percent and a bank receives a new deposit of $400, it

-must increase required reserves by $20. -will initially see reserves increase by $400. -will be able to use this deposit to make new loans amounting to $380.

A nominal GDP of $265 billion and an M1 of $12 billion result in a velocity of:

22.08

In the long run, changes in the money supply will NOT change output according to

Classical economists

The quantity theory equation of exchange states:

M × V = P × Q.

The graph that shows the tradeoff between inflation and money wages is called the

Phillips Curve

Which of the following statements lists contractionary policies?

The Fed sells bonds, raises the discount rate, and raises the reserve requirements.

True/False Members of the Federal Reserve Board serve 14-year terms and cannot be reappointed. These provisions help ensure that the Fed is free to take the long view and not be overly influenced by short-term political considerations.

True

Which of the following measures would increase the money supply?

buying government bonds

Which of the following does the Federal Reserve not do?

convert paper dollars into gold

One implication of the long-run Phillips curve is that:

economic policies to keep the unemployment rate below its natural rate will lead to accelerating inflation.

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

expansionary; buying

. The _____ rate is the rate at which banks charge each other for overnight loans, while the _____ rate is the rate at which regional Federal Reserve banks charge depository institutions for short-term loans.

federal funds; discount

Institutions that serve as the bridge between savers and borrowers are known as:

financial intermediaries

Money demand refers to

how much wealth people want to hold in liquid form

Some analysts blame the last economic crisis on Fed policy. They argue that:

low interest rates encouraged excessive mortgage borrowing, leading to the housing bubble.

The dramatic collapse in the price of technology stocks in 2001-2003, coupled with a short recession in 2001, caused the Fed to ____ interest rates to stimulate ____.

lower; employment

In which of the following sets of assets are the assets correctly ranked from most liquid to least liquid?

money, bonds, cars, houses

Bond prices and their yields are ____ because the bond's _________ can fall below its __________.

negatively related; sale price; face value

In the equation of exchange, the term P × Q is the same as:

nominal GDP

Unanticipated inflation results in:

real wages decreasing

A reduction in the interest rate causes consumption and investment to ____, which shifts the aggregate demand curve ____.

rise; rightward

The supply of loanable funds includes:

saving by the public. saving by government entities. saving by business firms

When the Fed wants to decrease the money supply, it will:

sell bonds

Dollar bills, rare paintings, and emerald necklaces are all

stores of value.

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called

the liquidity trap.

If policymakers attempt to reduce the rate of unemployment below its natural rate

they run the risk of inflation.

When the housing bubble collapsed in 2007, ____ rose significantly, and the Fed ____ interest rates.

unemployment; lowered