Macro Economics

Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate?

6% - 2% = 4%

Crowding out

A decrease in taxes increases interest rates, causing investment to fall.

Which of the following Fed actions would increase the money supply?

Buying Bonds

Which of the following describes monetary neutrality?

Changes in the supply of money affect nominal variables but not real ones.

Since money is the most liquid asset, most people seek to allocate all of their wealth towards currency.

False

The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system.

False: The Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks. This task is largely left to the regional Federal Reserve banks to carry out, not the FOMC.

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 3% but it actually turned to be only 2%.

Her real interest rate was higher than expected, and the real value of the loan is higher than expected.

Like real GDP, investment fluctuates, but it fluctuates ________ real GDP.

Much More

Which of the following explains why the supply curve for money is vertical?

The quantity of money supplied is fixed by the Federal Reserve.

Which of the following events would cause the Fed to stabilize output through decreasing the money suppl

an increase in net exports

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can

decrease the discount rate.

One of the key differences between a fractional-reserve banking system and a 100-percent-reserve banking system is

in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves

Recessions occur at ________ intervals and are ________ to predict with much accuracy.

irregular; almost impossible

Tax increases shift aggregate-demand curve to:

left while increases in government spending shift aggregate demand right. (When the government raises taxes, people cut back on their spending and the aggregate-demand curve shifts to the left. When the government increases spending, the aggregate-demand curve shifts to the right.)

As the price level decreases

the value of money increases

Which of the following events would cause the Fed to stabilize output through decreasing the money supply?

Increase in Net Exports

Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate?

Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 105)/105) = 1.9%.

Why do people believe in the inflation fallacy?

People tend to forget that inflation in prices goes hand in hand with inflation in incomes.

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease?

The Fed increases the interest rate on bank deposits held at the Fed.

As a result of sizable losses in 2008 and 2009, banks experienced a shortage of capital, which induced them to ____

decrease lending because they had to meet capital requirements.

In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would

decrease, but demand deposits would increase by the same amount and M1 would not change.

Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier

decreases from 20 to 10. The money multiplier is equal to 1/R, where R is the reserve ratio. Initially, if the reserve requirement is 5 percent, the money multiplier is 1/0.05 = 20. After the reserve requirement is increased to 10 percent, the money multiplier is 1/0.1 =10. Therefore, the money multiplier decreases from 20 to 10.

The money supply increases if

households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

If you want to measure and record economic value, you will primarily use which function of money?

money as a unit of account

Bertha owns a pastry shop and café in an economy that is prone to rapid inflation. If Bertha reprints her menu every month,

she bears a high menu cost but the relative price of her pastries is accurate.