Macro Exam #3

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of

$5 million

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

$5,000

As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of 6

$50,000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's excess reserves increase by

$8,000

Define Stagflation

A combination of inflation and recession, usually resulting from a supply shock

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run.

False

If the Fed wishes to decrease the supply of money and credit, it may sell government securities, raise the discount rate, or lower required reserve ratios.

False

Stagflation occurs when aggregate supply and aggregate demand both increase.

False

When potential GDP increases, short-run aggregate supply also increases, but long-run aggregate supply does not change.

False

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

They will shift the aggregate demand curve to the right.

A cash withdrawal reduces deposits, reserves and excess reserves in the banking system.

True

An increase in disposable income will shift the aggregate demand curve to the right.

True

An open market purchase of Treasury securities by the Federal Reserve causes the reserves of banks to rise.

True

Hyperinflations occur because governments want to spend more than they raise in taxes, and they pay for the extra purchases by printing money.

True

One factor which brought on the recession of 2007-2009 was the end of the housing bubble

True

Define Inflation

a general increase in prices and fall in the purchasing value of money.

Define Recession

a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

The sale of Treasury securities by the Federal Reserve will, in general,

decrease the quantity of reserves held by banks.

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S. aggregate demand.

decrease; decrease

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ________ and M2 will ________.

decrease; not change

The purchase of $1 million of Treasury securities by the Federal Reserve, if there is no change in the quantity of currency, will cause reserves at banks to

increase by $1 million

After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

increase; decreases

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is

less than 5

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

not change M1 and not change M2.

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could

sell Treasury securities.

If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?

store of value

The long-run aggregate supply curve will shift to the right if

the economy experiences technological change.