Macro Exam 3

capital requirement

A government regulation specifying a minimum amount of bank capital

Central bank

An institution designed to regulate the banking system and money supply

Monetary policy

Decisions by the central bank concerning the money supply

Reserves

Deposits that banks have received but have not lent out

Medium of exchange

The function of money when used to purchase foods and services

Store of value

The function of money when used to transfer purchasing power to the future

Federal funds rate

The interest rate at which banks make overnight loans to one another

Discount rate

The interest rate the Fed charges on loans to banks

reserve requirements

The minimum legal percent of deposits that banks must hold as reserves

Money supply

The quantity of money in the economy

Money

The set of assets generally accepted in trade for goods and services

Leverage

The use of borrowed money to supplement existing funds for purposes of investment

Which of the following events would shift money demand to the right?: a. an increase in the price level b. a decrease in the price level c. an increase in the interest rate d. a decrease in the interest rate

a. an increase in the price level

An increase in government purchases will: a. shift aggregate demand from AD1 to AD2. b. shift aggregate demand from AD1 to AD3. c. cause movement from point A to point B along AD1. d. have no effect on aggregate demand.

a. shift aggregate demand from AD1 to AD2.

To increase the money supply, the Fed could: a. sell government bonds. b. auction more loans to banks. c. increase the reserve requirement. d. None of the above is correct.

b. auction more loans to banks.

For a given real interest rate, an increase in inflation makes the after-tax real interest rate: a. decrease, which encourages savings. b. decrease, which discourages savings. c. increase, which encourages savings. d. increase, which discourages savings.

b. decrease, which discourages savings.

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?: a. $283 billion and $254.7 billion b. $283 billion and $283 billion c. $300 billion and $270 billion d. $300 billion and $300 billion

c. $300 billion and $270 billion

Which of the following shifts aggregate demand to the left?: a. The price level rises. b. Interest rates fall. c. The dollar depreciates for some reason other than a change in the price level. d. Stock prices fall for some reason other than a change in the price level.

d. Stock prices fall for some reason other than a change in the price level.

Fiat money

money without intrinsic value

Money multiplier

the amount of money the banking system generates from each dollar of reserves

Open-market operations

the purchase and sale of U.S. government bonds by the Fed

Leverage ratio

the ratio of assets to bank capital

Bank capital

the resources a bank's owners have out into the institution

Fractional-reserve banking

A banking system in which banks hold only a fraction of deposits as reserves

Demand deposits

Balances in bank accounts that can be accessed on demand by check

Currency

Paper bills and coins in the hands of the public

Federal Reserve (Fed)

The central bank of the United States

Liquidity

The ease with an asset can be converted into the economy's media of exchange

Reserve ratio

The fraction of deposits held as reserves

Unit of account

The function of money when used as a yardstick to post prices and record debts

Which of the following lists is included in what economists call "money"? a. cash b. cash and stocks and bonds c. cash and stocks and bonds and real estate d. cash and stocks and bonds and real estate and all other assets

a) cash

Which of the following is a store of value? a. cash and stocks b. cash but not stocks c. stocks but not cash d. neither cash nor stocks

a. cash and stocks

According to the quantity theory of money, a 3 percent increase in the money supply: a. causes the price level to rise by 3 percent. b. causes the price level to rise by less than 3 percent. c. leaves the price level unchanged. d. causes the price level to fall by 3 percent.

a. causes the price level to rise by 3 percent.

If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve: a. creates dollars and uses them to purchase government bonds from the public. b. sells government bonds from its portfolio to the public. c. creates dollars and uses them to purchase various types of stocks and bonds from the public. d. sells various types of stocks and bonds from its portfolio to the public.

a. creates dollars and uses them to purchase government bonds from the public.

When the Fed purchases $1000 worth of government bonds from the public, the U.S. money supply eventually increases by: a. more than $1000. b. exactly $1000. c. less than $1000. d. None of the above are correct.

a. more than $1000.

An economic expansion caused by a shift in aggregate demand causes prices to: a. rise in the short run, and rise even more in the long run. b. rise in the short run, and fall back to their original level in the long run. c. fall in the short run, and fall even more in the long run. d. fall in the short run, and rise back to their original level in the long run.

a. rise in the short run, and rise even more in the long run.

If the price level falls, the real value of a dollar: a. rises, so people will want to buy more. b. rises, so people will want to buy less. c. falls, so people will want to buy more. d. falls, so people will want to buy less.

a. rises, so people will want to buy more.

Fiscal policy is determined by: a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

a. the president and Congress and involves changing government spending and taxation.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if: a. the price level is higher than expected making production more profitable. b. the price level is higher than expected making production less profitable. c. the price level is lower than expected making production more profitable. d. the price level is higher than expected making production less profitable.

a. the price level is higher than expected making production more profitable.

The money multiplier equals: a. 1/R, where R represents the quantity of reserves in the economy. b. 1/R, where R represents the reserve ratio for all banks in the economy. c. 1/(1+R), where R represents the quantity of reserves in the economy. d. 1/(1+R), where R represents the reserve ratio for all banks in the economy.

b. 1/R, where R represents the reserve ratio for all banks in the economy.

An open-market purchase: a. increases the number of dollars and the number of bonds in the hands of the public. b. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public. c. decreases the number of dollars and the number of bonds in the hands of the public. d. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

b. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

When there is a reserve requirement, banks: a. must hold exactly the required quantity of reserves. b. may hold more than, but not less than, the required quantity of reserves. c. may hold less than, but not more than, the required quantity of reserves. d. must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

b. may hold more than, but not less than, the required quantity of reserves.

The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of: a. the Board of Governors. b. the FOMC. c. the regional Federal Reserve Bank presidents. d. the U.S. Treasury.

b. the FOMC.

The classical dichotomy argues that changes in the money supply: a. affect both nominal and real variables. b. affect neither nominal nor real variables. c. affect nominal variables, but not real variables. d. do not affect nominal variables, but do affect real variables.

c. affect nominal variables, but not real variables.

Which of the following would cause prices and real GDP to rise in the short run?: a. short-run aggregate supply shifts right b. short-run aggregate supply shifts left c. aggregate demand shifts right d. aggregate demand shifts left

c. aggregate demand shifts right

When the Fed decreases the money supply, we expect: a. interest rates and stock prices to rise. b. interest rates and stock prices to fall. c. interest rates to rise and stock prices to fall. d. interest rates to fall and stock prices to rise.

c. interest rates to rise and stock prices to fall.

Commodity money is: a. backed by gold. b. the principal type of money in use today. c. money with intrinsic value. d. receipts created in international trade that are used as a medium of exchange.

c. money with intrinsic value.

In the short-run an increase in the costs of production makes: a. output and prices rise. b. output rise and prices fall. c. output fall and prices rise. d. output and prices fall.

c. output fall and prices rise.

The discount rate is the interest rate that: a. banks charge one another for loans. b. banks charge the Fed for loans. c. the Fed charges banks for loans. d. the Fed charges Congress for loans.

c. the Fed charges banks for loans.

The long-run aggregate supply curve shifts right if: a. the price level rises. b. the price level falls. c. the capital stock increases. d. the capital stock decreases.

c. the capital stock increases.

The model of aggregate demand and aggregate supply explains the relationship between: a. the price and quantity of a particular good. b. unemployment and output. c. wages and employment. d. real GDP and the price level.

d. real GDP and the price level.

Monetary policy is determined by: a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

d. the Federal Reserve and involves changing the money supply.

The velocity of money is: a. the rate at which the Fed puts money into the economy. b. the same thing as the long-term growth rate of the money supply. c. the money supply divided by nominal GDP. d. the average number of times per year a dollar is spent.

d. the average number of times per year a dollar is spent.

People choose to hold a larger quantity of money if: a. the interest rate rises, which causes the opportunity cost of holding money to rise. b. the interest rate falls, which causes the opportunity cost of holding money to rise. c. the interest rate rises, which causes the opportunity cost of holding money to fall. d. the interest rate falls, which causes the opportunity cost of holding money to fall.

d. the interest rate falls, which causes the opportunity cost of holding money to fall.

Commodity money

money in the form of a commodity with intrinsic value