MACRO TEST 3

Ceteris paribus, suppose over some period of time the money supply grew at an average annual compounded rate of 8%, velocity was constant, the nominal interest rate averaged 9% and output grew at an average annual rate if 3%. According to the quantity theory of money, inflation averaged_____ per annum, and the real interest rate was ______

1%; 6%

Ceteris paribus, if the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?

8 percent

Suppose Mr. X decides to forego a major purchase and save his money in an account that pays interest. As a result, he transfers $2,100 from his checking account to his money market mutual fund. Ceteris paribus, it follows that:

M1 decreases by $2,100 and M2 increases by $2,100

Ceteris paribus, in which case below does a person's purchasing power from saving increase the most?

The nominal interest rate = 7% and inflation = 2%

Suppose a bank loans XYZ ice cream co. $250,000 to remodel one of its shops near campus. On their respective balance sheets, this loan is _______, and ceteris paribus, _______

an asset for the bank and a liability for Greg's Ice Cream; the loan increases the money supply

If the Federal Open Market Committee (FOMC) decides to increase the money supply, then what that means in practice is the Federal Reserve:

creates money and uses it to purchase various types of stocks and bonds "on the open market" -- I.e. from the public

Suppose banks decide to increase their holdings of excess reserves relative to deposits. Ceteris paribus, this action will cause the money supply to _____, and to reduce the impact of this the Fed could _________

decrease; decrease the discount rate

Suppose that you were told that the Fed was following a Taylor-type rule in the conduct of monetary policy. Further suppose that you were told that inflation in the United States was currently running below the Fed's target rate of inflation, and read GDP had been growing at a rate below its long-run average. Ceteris paribus, it follows that you would predict the Fed would ________ the ________

decrease; federal funds target rate

To _______ the money supply and _______ interest rates, the Fed could _________

decrease; increase; increase the required reserve ratio

If the Fed is increasing the required reserve ratio, then one would expect, ceteris paribus, that this activity would: (1) put _______ pressure on the money supply; and (2) in the short run put _______ pressure on interest rates

downward; upward

Let M equal the money supply and P equal the price level. Now suppose you were told that there is empirical evidence suggesting that the rate at which money changes hands increases during periods of hyperinflation (such as that which plagued Germany in the 1920s) Mathematically, this means that velocity _________, and if monetary neutrality holds, then the _________

increases; increase in velocity increases the ratio M/P

When money is neutral, ceteris paribus, which of the following increases when the money supply growth rate increases and velocity is constant?

inflation

Ceteris paribus, when the Fed conducts an "open-market sale,"

it sells Treasury securities, which decreases the money supply

Which of the following actions would the Federal Reserve system be unlikely to perform as part of its regular responsibilities?

make loans to qualified businesses that request them

Suppose the Fed decides to use its "discount rate," as an instrument of monetary policy; further suppose that the Fed cuts the discount rate. Ceteris paribus, it follows that banks would most likely borrow _______; and therefore, _______

more from the Fed and lend more to the public; the money supply would increase

If the Fed is using the discount rate as an instrument of monetary policy, and if the rate is lowered, then commercial banks would be likely to borrow ______, and bank reserves initially ________ as a result of this policy

more from the Fed; increase

Suppose, as an instrument of monetary policy, the Fed increases the interest rate on commercial bank deposits held at the Fed. Ceteris paribus, it follows that the banks will want to hold _______ reserves at the Fed; and thus the money supply would _______; and there would tend to be ________ pressure on interest rates

more; decrease; upward

Suppose the US congress decided to pay off its debt by revising the Federal Reserve Act and printing new money. Ceteris paribus, which of the following would most likely not happen?

people who had lent money at a fixed interest rate would be poorer

Ceteris paribus, the supply of money increases when:

the Fed makes open-market purchases

Ceteris paribus, the money demand function depends on:

the price level but not the interest rate

Suppose monetary neutrality holds and velocity is constant. Ceteris paribus, it follows that a 4.0 percent increase in the money supply will eventually increase ______

the price level by 4 percent

If the velocity of money is constant, and if the money supply decreases while at the same time real GDP increases, then, ceteris paribus, it follows that in the long run:

the price level will decrease -- I.e. the economy will experience deflation

If the Fed is decreasing the required reserve ratio, then one would expect, ceteris paribus, that this activity would (1) put _______ pressure on the money supply; and (2) in the short run put _______ pressure on interest rates

upward; downward

Ceteris paribus, with the value of money, as measured by 1/P (where P is the price level), on the vertical axis, the money supply curve is typically:

vertical because we assume the central bank controls the money supply