Macro Exam 2
If the reserve ratio (rr) is 5% and the Fed conducts a $10,000,000 open market purchase, the money supply will increase by:
$200,000,000 A $10,000,000 open market purchase increases the monetary base by $10,000,000. Using the money supply equation, we can calculate: ΔMS = (1/rr) × ΔMB = (1/0.05) × $10,000,000 = 20 × $10,000,000 = $200,000,000.
Suppose real GDP growth is expected to be 2% per year and the velocity of money is expected to remain constant. To achieve price stability, the growth rate of the money supply should be:
2%. M→ + v→ = P→ + YR→. With velocity growth equal to zero and real GDP growth equal to 2% (as given in the question), the equation will be: M→ + 0% = P→ + 2%.Achieving "price stability" means an inflation rate (P→) of 0%. In order for inflation to be zero, money growth will have to be 2%, so that the equation will be:2% + 0% = 0% + 2%.Thus, the answer is money growth equal to 2%.
The Fed publicly states that it targets inflation at 2%. If velocity is constant and the economy is growing at 3% per year, then achieving the 2% inflation target requires money growth equal to ______.
5% You can use the M→ + v→ = P→ + YR→ identity to answer this question. Filling in the information given in the question (v→ = 0% and YR→ = 3%) gives M→ + 0% = P→ + 3%. To achieve P→ = 2%, we would need M→ = 5%.
According to the "rule of 70" what growth rate would a country have to achieve in order to double its living standard in 10 years?
7% According to the rule of 70, 10 = 70/x where x = 7 is the growth rate (in percentage terms) required to double living standards in 10 years.
Which of the following strategies should the Fed use to accomplish a decrease in the Fed Funds Rate?
A decrease in the discount rate. In general, to decrease the Fed Funds Rate the Fed would need to increase the money supply.
Which of the following is NOT included in any of the official definitions of the money supply (MB, M1, or M2)?
Gold reserves Gold in not part of any of the money supply definitions. Commercial bank reserves are in the MB. Checking deposits are in M1 and M2. Savings deposits are in M2.
Which of the following would increase the economy's ability to produce goods and services?
Investment, education, and the discovery of new technology all lead to the accumulation of important factors of production (physical capital, human capital, and technology) which increase productivity in an economy.
The "tool" that is most frequently used by the Fed to control the money supply in the U.S. economy is:
Open market operations
Which of the following is an important "institution" for promoting economic growth in a country?
Private property rights b. Political stability c. An efficient and dependable legal system d. Honest government
Which of the following statements BEST describes inflation?
Rising prices are the result of inflation. As explained in the notes, inflation is really a decline in the value of money which causes prices to rise. Therefore, rising prices are a result of the underlying problem of inflation, not the cause of it.
As the reserve ratio (rr) increases:
The "money multiplier" is the 1/rr term in the money supply equation. If rr increases, the money multiplier will decrease. The increase in rr also represents an increase in bank "reserve" holdings, which means fewer bank loans are made and therefore less money is created through bank lending. All of the answers are correct.
Which of the following is set directly by the Fed?
The discount rate The required reserve ratio (rrr) The interest rate paid on commercial bank reserves
Which of the following countries has recently experienced hyperinflation?
Zimbabwe Zimbabwe's hyperinflation during the 2000s is discussed in the notes. The other countries listed experienced hyperinflation after being defeated in World War I.
If the reserve ratio (rr) is currently 20% in a banking system with a required reserve ratio (rrr) of 10%, then the money multiplier is currently:
a. 10. b. 5. c. 0.2. d. 0.1. The money multiplier is 1/rr = 1/0.2 = 5. Note that it is the actual reserve ratio (rr) within the banking system that is used to calculate the money multiplier, not the required reserve ratio (rrr).
The Federal Open Market Committee (FOMC) is made up of:
a. 5 of the 12 presidents of the regional Federal Reserve Banks and the 7 members of the Board of Governors. b. 7 of the 12 presidents of the regional Federal Reserve Banks and the 5 members of the Board of Governors. c. the 12 presidents of the regional Federal Reserve Banks and the 7 members of the Board of Governors. d. the 12 presidents of the regional Federal Reserve Banks and the Chair of the Board of Governors.
China's economy has grown at about 10% per year, on average, in recent years. If China's growth continues at this rate, about how long will it take for China to double its living standard?
a. 60 years b. 70 years c. 7 years d. None of the above. According to the "rule of 70", 70/10 = 7 years to double living standards.
How much can a commercial bank legally loan out?
a. An amount equal to its required reserves. b. An amount equal to its total vault cash. c. An amount equal to its total net worth. d. An amount equal to its total reserves. e. An amount equal to its excess reserves. Commercial banks are legally required to hold a certain amount of reserves which are called "required reserves." Any reserves a bank has in excess of its required reserves, called "excess reserves," are available for loans.
Thinking about the growth process from its ultimate to its immediate causes, where would "investment, education, and R&D" appear in this process?
a. Before "institutions". b. After the "factors of production". c. Between "incentives" and the "factors of production". d. Between "institutions" and "incentives". Investment, education, and R&D are the activities that create the factors of production, so they would appear between incentives and the factors of production.
Which of the following is a "factor of production" that is important in determining an economy's living standard?
a. Human capital b. Physical capital c. Technology d. All of the above.
Which of the following best describes what economists mean by the "institutions" of an economy?
a. Institutions refer to both the formal and informal rules and customs of a society that affect the incentives for firms and individuals to behave in a productive manner. b. Institutions refer to only the informal, unwritten customs that affect behavior in a society. c. Institutions refer to only the official, formal laws and regulations put forth by a government. d. Institutions refer to only the government agencies that affect business activity.
Which of the following would NOT be included in the M1 money supply?
a. Paper money and coins b. Savings deposits c. Checking deposits d. All of the above would be included in M1. M1 includes currency (paper money and coins), checking deposits, and travelers checks.
A key reason South Korea has enjoyed far more economic progress than North Korea over the last 50 years is:
a. South Korea has more natural resources than North Korea. b. South Korea has institutions that are more conducive to growth than North Korea. c. South Korea was damaged less in the Korean War than North Korea. d. South Koreans are smarter than North Koreans. North and South Korea started from the same point when the country was divided. South Korea's success and North Korea's failure is attributable to the different institutions they adopted following the division.
Which of the following plays a role in determining the money supply in the economy?
a. The Fed. b. Commercial banks. c. The public. d. All of the above are correct.
Which of the following statements is TRUE?
a. There have always been some very rich countries. b. Growth disasters are always followed by growth miracles. c. Most people in the world live in poverty today. d. Living standards are about the same across countries. The only true statement is that most people in the world live in poverty today. This was discussed in class using the fact that 80% of the world's population lives below the world average income level of $9,133 (measured in 2000 dollars). This is also discussed in Figure 7.2 and discussed on p. 117 in the text.
In a 100% reserve banking system:
a. banks create money by lending out reserves. b. the Fed can increase the money supply with open market sales. c. banks hold all of their customers' deposits in reserves. d. banks can create money by issuing currency. In a 100% reserve banking system, banks hold all of their customers' deposits in reserves, which means no loans are made by banks.
One way to promote growth and, in the long run, raise an economy's standard of living is to encourage:
a. consumption. b. population growth. c. saving and investment. d. All of the above. Saving and investment are necessary to build the factors of production that an economy needs for production now and in the long run. Consumption diverts resources away from this use. Population growth decreases growth in real GDP per capita and therefore living standards.
Which of the following is the best measure of how much living standards have improved in an economy over time?
a. growth in real GDP per capita b. the level of real GDP per capita c. the level of real GDP d. growth in real GDP Growth rates are the best measure of progress or improvement over time and real GDP per capita is the best measure of living standards.
If the Fed wishes to increase the money supply by $1 million and the money multiplier is 10, they would need to conduct:
a. open market purchases of $1 million. b. open market sales of $1 million. c. open market sales of $100,000. d. open market purchases of $100,000. An increase in the money supply requires open market purchases, not sales. With a money multiplier of 10, it would only take $100,000 worth of open market purchases to increase the money supply by $1 million, since 10 x $100,000 = $1 million.
Which of the following moves by the Fed would increase the Federal Funds rate?
a. open market sales b. an increase in the discount rate c. an increase in the interest rate paid on bank reserves d. All of the answers are correct. Any Fed action (that is, any of the Fed's three "tools") that decreases the money supply would increase the Fed Funds rate by decreasing the supply of Federal Funds (and also possibly increasing the demand for Federal Funds). All of the answers here would have this effect because they all ultimately decrease the money supply.
To increase the money supply, the Fed could:
a. sell government bonds (called open-market sales). b. decrease the discount rate. c. increase the reserve requirement. d. None of the above. Selling bonds and increasing the reserve requirement would decrease the money supply. Decreasing the discount rate would increase bank borrowing from the Fed, thus increasing the monetary base and the money supply.
To decrease the money supply, the Fed could:
a. sell government bonds. b. increase the discount rate. c. increase the reserve requirement.
China's economic growth in recent years is largely attributable to:
a. strict communist rule. b. an abundance of natural resources. c. improved economic institutions. d. faster population growth. Adoption of more favorable institutions has improved economic incentives and allowed more growth in China. Population growth, communist rule, and an abundance of natural resources are generally not important in the growth process of any country.
The Federal Funds Rate is:
a. the interest rate on loans from the Fed to the Treasury. b. the interest rate the Fed pays commercial banks for holding reserves. c. the interest rate on overnight loans between commercial banks. d. the interest rate on loans from the Fed to commercial banks.
Human capital is:
a. the knowledge and skills that workers acquire through educat ion, training, and experience. b. the stock of structures and equipment that workers use to produce goods and services. c. the same thing as technology. d. the natural resources that humans use in production.
According to the Quantity Theory of Money, the ultimate cause of inflation is ______.
growth in the money supply The Quantity Theory of Money says that it is growth in the quantity or "supply" of money that causes money to lose its value—or, in other words, inflation.
Which of the following is TRUE in a fractional reserve banking system?
money supply > monetary base In a fractional reserve banking system, commercial bank lending creates new money and the money supply will exceed the monetary base.
In the M × v = P × YR identity, both sides of the equation represent:
nominal GDP. Each side of the M × v = P × YR identity is just a different way of representing nominal GDP. The left-hand side says that the available money supply (M) times the average number of times each dollar is spent (v) is total spending, which is just nominal GDP. The right-hand side says that the price level (P) times real GDP (YR) is nominal GDP.
The agency responsible for regulating the money supply in the U.S. is:
the Federal Reserve.
Physical capital is:
the stock of structures and equipment that workers use to produce goods and services.