Macro unit 4
When the United States goes into recession, china's aggregate demand ____
Decreases and China's AD curve shifts leftward
When the economy starts to recover from recession and interest rates are low, there is a "threat of inflation" because the ________ in a recovery.
Demand for money increases
Banks are required to hold an amount equal to the required reserve ratio multiplied by _____
Deposits
When the quantity of money increases, the supply of money curve shifts rightward. And the nominal interest rate _____.
Falls
The Fed conducts an open market purchase of securities. In the short run, the nominal interest rate _______. In the long run, the value of money ______.
Falls ; falls
When the quantity of money increases the supply of money curve shifts rightward and the interest rate ____
Falls. The new interest rate is the intersection of the new MD curve and the new MS curve
Required reserve ratio
Fed requires the banks and thrifts to hold a minimum percentage of deposits as reserves. This minimum is know as the required reserve ratio
What is money in the United States called ?
Fiat money
Uncertainty costs of inflation cause people to
Focus on the short run, which decreases investment and slows growth
Over the business cycle factors such as quantity of capital, human capital and technology
Grow but do not fluctuate as much as the quantity of labor employed
As more people in India have access to higher education ________ and in the long run ______.
Human capital increases; both potential GDP and aggregate supply increase
Suppose the Fed makes an open Market purchase of $1 million of securities from a bank. The bank's reserves ________and its deposits _________, so it has excess reserves of $1 million.
Increase by $1 million; do not change
Commercial banks maximizes stockholders wealth by ______.
Lending for long terms at high interest rates and borrowing from depositors
When quantity of money increases people want to hold ____money so they ______bonds
Less; buy
What does the bank use its excess reserves to create?
Loans and new deposits Excess reserves= actual reserves- desired reserves The banks excess reserves depend on the banks desired reserve ratio and the currency drain ratio.
The increase in the quantity of money is determined by ...
The desired reserve ratio and currency drain ratio The larger the desired reserve ratio or currency drain ratio, the smaller is the increase in the quantity of money
A change in exports and imports decrease aggregate demand when
exports increase by less than imports increase
Money multiplier
(1+ currency drain ratio) divided by (desired reserve ratio+ the currency drain ratio)
A rise in minimum ________ aggregate supply because firm's costs increase
Decreases I'd there is a rise in minimum wage then potential GDP decreases and and aggregate supply decreases further
The bank system creates money because
A bank that has excess reserves can make loans. When a bank creates a loan, the bank increases the balance of the borrowers account and that increase in deposits is new money
Increase in money wage rates leads to
A leftward shift of AS curve
Money serves the function of being ..
A medium for exchange, which means that it is generally accepted in return for goods and services by
When the U.S. price levels rise
A movement up along the AD curve occurs and the quantity of U.S. real GDP demanded decreases
What is a work of art an example of ?
A store of value, not money
What is inflation ?
A tax on holding money When the government spends newly created money, the quantity of money increases and the price level rises. The inflation rate equals the growth rate of the quantity of money with other things remaining the same. The things the government buys with this money aren't free. They are paid for by people and business in proportion to the amount of money they hold- inflation tax.
The fraction of a banks total deposits that it holds in reserves is the_______, and the ratio of reserves to deposits that a bank wants to hold is________.
Actual reserve ratio; desired reserve ratio
Excess reserves are
Amount of reserves held over what is desired
If cost a or production decrease, there is
An increase in aggregate supply and the AS curve shifts rightward
When required reserves increase, excess reserves decrease and the quantity of loans _______
Decreases
As the central bank, the Federal Reserve System provides banking services to ____
Banks and regulates financial institutions and stock markets
If the Fed increases the discount rate,
Banks pay higher interest rate if they borrow from the Fed.
How does a bank make its profit ?
Borrowing from depositors at a low interest rate and lending at a high interest rate. The bank must hold enough reserves to meet depositors' withdrawals.
When the equilibrium interest rate on a bond exceeds the equilibrium interest rate people _____ bonds.
Buy
To increase the quantity of money in the economy, the federal reserve can ...
Buy government bonds in an open-market operation
When the Fed_______ securities in an open market operation, banks' reserves _______ Abe therefor lending _______
Buys; increase; increases
When the price level falls the demand for money ______
Decreases The demand for money curve shifts leftward and the nominal interest rate falls.
What changes aggregate supply and shifts AS curve
Change in price of a major resource Increase in amount of human capital
The monetary base is the sum of_____
Coins, Federal reserve notes, and banks reserves at the Fed.
What does the banking system consist of ?
Commercial banks ,thrift institutions, money market funds, Federal reserve In other words it consists of the federal reserve and the banks and other institutions that accept deposits and provide services that enable people and businesses to make and receive payments
In the United States today , money consists of ....
Currency and deposits at banks and other depository institutions
During inflation economic growth and investment both ______
Decrease
If the Fed makes an open market sale of $1 million of securities to a bank, the banks reserves_______. Excess reserves _______
Decrease; decrease (The bank pays for the securities with bank reserves) Since excess reserves have decreased, the bank calls in loans and makes fewer loans Bank deposits decrease and quantity of money decreases
In the short run, when fuel prices rose, India's aggregate supply ______
Decreased AS curve shifted leftward
In the short run, when price levels in India increased, India's aggregate supply _______.
Didn't change, but the quantity of real GDP supplied increased. Business became more profitable and increased the quantity of real GDP supplied along the AS curve. A movement occurred up along the AS curve— an increase in the quantity of real GDP supplied.
When the price level in Japan rises, Japans aggregate demand ________
Does not change, but the quantity of real GDP demanded decreases and a movement up along the AD curve occurs
The cost of inflation _____ when inflation is more rapid and _____ when inflation is more unpredictable
Increase; increase
When the Fed purchases government securities, bank reserves ______and bank deposits ______.
Increase; increase The quantity of money increases and the interest rate falls
When the Fed but treasury securities the reserves of the bank________. Banks now have excess reserves which they loan. The quantity of money ________.
Increase; increases
Bank deposits______ , the quantity of money ______.
Increase; increases When the Fed makes an open market purchase, bank deposits increase because loans increase, and the quantity of money increases.
Reserves in the banking system________. Banks ______ loans.
Increase; make more
The Fed must continually _______ the quantity of money to keep the nominal interest rate low. As a result I the inflation rate ______ in the long run.
Increase; rises
In the short run, when the U.S. firms moved their IT and data functions to India, India's aggregate supply ______.
Increased As U.S. firms moved their IT data and functions to India, real GDP supplied at the current price level increased. The AS curve shifted rightward.
When US businesses established branches in South Africa, in the short run, South Africa's aggregate supply _________. South Africa's supply ______ when money wage rates increased.
Increased ; decreased
Inflation ______the cost of holding money and _____ the after -tax real interest rate
Increases; decreases
The fed increases the quantity of money. In the short run, the quantity of money demanded_______ and the nominal interest rate _________.
Increases; falls
And increases in durable goods _______aggregate demand. The increases in new home sales ______ aggregate demand
Increases; increases (AD curve shifts right)
When the Fed purchases government securities, the Fed pays for the government securities by _______ increasing bank reserves.
Increasing With more reserves, the banks make more loans. Bank deposits increase and the quantity of money increases.
The uncertainty of inflation misallocates resources meaning ....
Instead of concentrating on activities in which they have a comparative advantage, people find it more profitable to search for ways of avoiding losses that inflation inflicts. As a result, inventive talent that might otherwise work on productive innovations works on finding ways of profiting from the inflation instead.
The discount rate is the ____
Interest rate at which The Fed will loan reserves to commercial banks
The policy tool used by fed to increase assets to $4 trillion
Large scale open-market operations called quantitative easing. These operations were conducted in burst know as QE1, QE2 and QE3
An increase in the quantity of money _______the nominal interest rate.
Lowers
The nominal interest rate is determined at the intersection of the ___ curve and ___ curve
MS (money supply); MD (money demand)
High inflation
Makes money function less well as a store of value
When Europe trades with Mexico and goes into expansion
Mexico's exports to Europe increase, Mexico's aggregate demand increases and AD curve shifts rightward
After a decrease in the quantity of money, people want to hold ______money so the ______ bonds.
More ; sell —>The price of a bond falls and the interest rate rises
Uncertainty cost arises from inflation because inflation makes long-term planning ______ so people respond by ______ investment
More difficult; decreasing
Are credit and debit cards examples of money?
No
Is money a completely stable store of value ?
No
If the Fed wants to increase the quantity of money it makes an open market_____
Purchase
What affects potential GDP
Quantity of land and natural resources The amount of entrepreneurial talent Quantity of labor employed Quantity of capital and human capital Quantity of money does NOT affect potential GDP
In order to influence the interest rate, the federal reserve system can immediately adjust the ____
Reserves of the banking system
When the Fed slows down the growth rate of the quantity of money, the nominal interest rate ______
Rises
The Fed conducts an open market purchase of securities. In the short run, the nominal interest rate ______. In the long run, the value of money ______ and the price level ______.
Rises Rises; falls
When people buy bonds the price of a bond _____and the interest rate ______
Rises; falls
The voting members of the The Federal Open Market Committee (FOMC) consists of the
Seven board of governor members and five federal reserve bank presidents
The board of governors in the Federal Reserve is a
Seven member board , each one serving a 14 year term
Increase in the money wage rate _____ and an increase in the money prices of raw materials _________.
Shifts AS curve leftward m; shifts AS curve leftward
If the Fed changes the quantity of money, the immediate effects are on _______ and the long-run effects are on _______.
Short term nominal interest rate; the price level and inflation rate In the long-run and with other things remaining the same, a given percentage change in the quantity of money brings an equal percentage change in the price level.
The _________the desired reserve ratio the ________the ________ in the quantity of money created from an initial increase of $100, 000 in monetary base
Smaller; larger; increase
The main policy making body of the Fed
The Federal Open Market Committee (FOMC)
What regulates the quality of money in the United States?
The Federal Reserve System
What are a that banks balancing act ?
The bank must balance the profits of stockholders (risk of loans) against security for depositors.
What is the federal reserve system ?
The central bank in the United States - the public authority that provides banking services to banks and governments and regulates financial institutions and markets. It is organized into 12 federal reserve districts.
The Feds chief executive is____ and the feds main policy tools are_____
The chairman of the board of governors; required reserve ratios, discount rate, and open market operations. In unusual times the extraordinary crisis measures are an additional tool.
The cost of inflation include ....
The cost of running around to compare prices at different outlets, an increased opportunity cost of holding money and the tax on money held by individuals and businesses. It does NOT include an increase in saving and investment
When the world economy goes into strong expansion
The demand for U.S. exports increases and the demand for U.S. real GDP increases
When congress raises income taxes
The demand for U.S. real GDP decreases and the AD curve shifts leftward
What is the FOMC ( federal open market committee) ?
The fed's main policy making committee that consists of 12 members: the chairman, and the other 6 members of the board of governors, the president of the fed reserve bank of NY. And 4 presidents of other regional fed reserve banks (on a yearly rotating basis) Meets every 6 weeks to review the state of the economy and decide the actions to be carried out by the NY fed
The aggregate supply curve shifts rightward when
The money wage rate falls
The open market operation is ___
The purchase or sale of government securities by the Federal Reserve System in an open market
When I price level rises ______
The quantity of real GDP demanded in Mexico decreases
Aggregate supply
The relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same.
The Fed's policy tools include...
The required reserve ratio, the discount rate, and open-market operations
The greater the desired reserve ratio.....
The smaller is the money multiplier
When the Fed engages in open market operations, it is buying or selling _______
U.S. government Securities
How do banks create new deposits by making loans, and what factors limit the amount of deposits and loans they can create ?
When a bank makes a loan, it creates a new deposit for the person who receives the loan. The amount of loans the bank can make, and therefor the amount of deposits, is limited by the quantity of excess reserves
Quantitative easing
When the Fed creates bank reserves by conducting a large-scale open market purchase at a low or possibly zero federal funds rate It is an extraordinary crisis measure
Is it true that the bank keeps only a small fraction of funds in reserves and lends the rest?
Yes
M1
checkable deposits + currency held by individuals and business and travelers checks
M2
contains M1, saving deposits,money market funds, other deposits and small time deposits (less than $100,000)