BYU Econ 381 Macroeconomics IS-LM, Monetary and Fiscal Policy
The money multipler will equal 1/rr as long as:
-banks loan out all their excess reserves -people can't hold any loaned money as cash
In the real world, the actual money multiplier tends to be smaller than 1/rr because
-people hold some loaned money as cash, -banks do not loans out of excess their reserves.
Contractionary fiscal policy (how & what happens?)
1. Less government spending on G&S ... 2. Less transfer payments ("political suicide" cutting social security, retirement/unemployment benefits, tanif)... 3. More taxes... use this when they think the economy is overheated and expecting inflation
The money multiplier equals
1/reserve requirment
Boom
A period of time during which sales of a product or business activity increases very rapidly.
Balanced budget
A situation in financial planning or the budgeting process where total revenues are equal to or greater than total expenses.
______ demand describes the overall, or total, demand for all final goods and services produced in an economy
Aggregate
The federal funds is the interest rates that banks pays when borrowing reserves from other ________
Banks
With fractional reserve banking
Banks have to keep a fraction of deposits on hand
A ______ is a financial instrument that obligates a borrower to repay money, with interest, to a lender.
Bond
Banks can expand reserves, and make more loans by:
Borrowing from the federal reserve Attracting deposits and encouraging savings
Government Spending > Tax Revenues
Budget Deficit
Tax Revenues > Government Spending
Budget Surplus
______ monetary policy is sometimes referred to as "tight money'
Contractionary
In countering inflation:
Contractionary monetary policy can raise interest rates, decrease gross investment and depress aggregate demand
A decrease in aggregate demand will cause the price level to _______ and unemployment to _____ in the short run.
Decrease, Rise
The interest rate at which banks can borrow money directly from the federal reserve is called the:
Discount rate
______ reserve are equal to total minus required reserve.
Excess
______ reserves the amount the bank can lend out to earn interest equal _______ reserve minus ________ reserve.
Excess, total, required
______ monetary policy is sometimes referred to as easy money
Expansionary
we often simply call the federal reserve system the ________, whereas the _______ us used as an abbreviation for federal bureau of investigation (FBI) officers or for agents
Fed, Feds
Monetary policy refers to the action of the ______ reserve to influence the supply of money and credit in the U.S economy
Federal
A formal market for overnight loans of federal reserves is the:
Federal funds market
The market for borrowing and lending reserves between banks is the:
Federal funds market
On of the Keys interest rates in the economy is called the:
Federal funds rate
The interest rate that helps determine the interest rates charged on other loans called
Federal funds rate
Banks can create money by making use of:
Fractional reserve banking
Which of the following will cause investments to fall
Higher interest rates and lower expected returns
Which of the following will cause investments to rise
Improve in frastru
Given the demand for money an _______ in the money supply curve and lowers the interest rate.
Increase
Banks allow households who are spending less than their total income to keep their unused income in a safe place while are also earning ________
Interest
If the federal reserve increase the discount rate there will be ______ borrowing from the federal reserve and banks will ____ lending. this will ______ the money supply and _____ interest rate
Less, Decreases, Decreases, Increases
_____ policy primarily affct the economy by either encouraging or discouraging investment in a new capital
Monetary
______ policy is the accretions of a contry central bank to influence the supply of money and credit in the economy.
Monetary
The _______ market is a market in which the demand for and supply of money determine as interest rate, or opportunity cost of holding money balances
Money
The _______ multiplier is the amount by which a $1 change in reserve will change the money supply
Money
With monetary policy changes in the:
Money supply, the quantity of investment demand and real GDP all move in the same direction.
When conducting monetary policy, the fed most often uses:
Open market operations
A Bank ______ occurs when several banks experience bank runs simultaneously
Panic
_____ reserves are equal to deposits times the reserve requirement
Required
When the Fed ____ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest to _____
Sells, Increases
An increase in the money _______ will cause interest rates to fall
Supply
By changing the money ____, the federal reserve can influence real GDP
Supply
Which three values are all related, so that when one changes, so do the others.
The dollar value of deposits held by banks, baks reserve, and the money supply
The federal reserve changes the amount of money in circulation by:
Using open market operations to buy and sell government Debt (U.S treasury Bonds)
Budget deficit
When government exceeds tax revenues - trying to get out of a contraction.
Budget surplus
When tax revenues are greater than government spending
Contraction
a phase of the business cycle in which the economoy as a whole is in decline
When economists talk about interest rates or even the interest rate they mean:
all interest rates since interest rate all tend to move in the same direction.
When the federal government borrows money, it issues three different assets:
bonds notes and bills
Loans created from ______ reserved expands the money supply by creating excess reserve in the banking system.
borrowed
The federal funs rate is determined by the supply and demand for _______ reserve.
borrowed
The federal funds rate is one of the "key" interest rate in the economy because:
by changing the federal funds rate the fed can change every other interest rate in an economy, it represents the interest rate for the least ricky loans in the market.
How can the government change aggregate demand?
by influencing investment spending through business taxes, indirectly affecting ___ through taxes and transfer programs.
Automatic Stabilizers
changes in government transfer payments or tax collections that automatically help counter business cycle fluctuations
When aggregate demand rises too much, to decrease aggregate demand we can use ______ monetary policy
contractionary
to increase gross investment, the interest rate must_______
decrease
A ___ in taxes and/or a ____ in transfer payments can increase disposable income and lead to an increase in consumer spending
decrease / increase
if an economy is experiencing _____ inflation an increase in interest rate will reduce consumption and investment and will cool the economy
demand-pull inflation
the reserve requirement is the minimum % of _____ that banks must keep on hand
deposits
______ reserve held as currency earn no interest
excess
When the aggregate demand falls, to increase aggregate demand we cause use ______ monetary policy
expansionary
in countering recession
expansionary monetary policy can lower interest rates, increase gross investments and increase aggregate demand
The supply curve for federal funds is ___
flat
since 2009, the avg interest rate in saving accounts;
has decreased
at _____ interest rates the opportunit can cost of borrowing funds rises so banks will be less willing to borrow reserves
high
Which of the following will cause investments to rise
higher expected returns, improved infrastructure.
Which of the following will cause consumption to fall
higher taxes, repayment of loans, deteriorating expectations, falling wealth.
an ______ in aggregate demand will cause the price level to rise and unemployment to fall in the short run.
increase
A ____ in taxes and/or a _____ in transfer payments can reduce disposable income and decrease consumer spending
increase / reduction
When the fed ____ the federal funds rate target the money supply decrease and interest rates rise
increases
all else equals, when the money supply ______ interest rates decreases
increases
When aggregate demand rises, to avoid _____ and return to the long run equilibrium we must decrease aggregate demand
inflation
Banks pay their expenses and hope to make a profit by charging _______ on loans
interest
Changing the money supply can affect
interest rate thereby changing investments spending
The interest rate:
is the price of money
When the feds open market committee decides on a target for the federal fund rates:
it commits to buy and sell bonds through open market operations to maintain the target
the ______ the reserve requirement, the smaller the money multiplier
larger
how does the dollar depreciate?
makes the US market more attractive to foreign buyers and foreign markets relatively less attractive to domestic buyers
For every dollar of bond the fed buys or sells the money supply will increase or decrease by an amount equal to the:
money multiplier
To minimize the effect of recession the feds most often uses
open market operations.
the cost of keeping more reserves than the fraction required instead of lending out these funs, is the ______ cost of the forgone interest the funds would have earned
opportunity
The _____ requirement is the fraction of checkable deposits that banks must keep on hand as reserve either as currency or on deposit with the federal reserve.
reserve
The fraction of checkable deposits that banks must keep on hand as reserve, either as currency or on deposit with the federal reserve is called the:
reserve requirement
The fraction of checkable deposits that banks must keep on hanf reserve, wither as currency or on deposit with the federal reserve is called the:
reserve requirement
To make sure banks meet the daily needs of customers, the federal reserve enforces a:
reserve requirement
The federal funds rate is determined by the supply and demand for borrowed ________.
reserved
The federal funds market is the market for borrowing and lending _____ between banks
reserves
a "bank ____" occurs when depositors rush in mass to withdraw their funds form a bank
run
when the fed decreases interest rates during tough economic times, it is hoping that investments spending and output in he economy will increase but _____ are negatively affected by this policy.
savers
The _______ is the difference between the interest rate a bank earns in a loans and the interest rate it pays
spread
a bank can find itself short of the reserve requirement at the end of the day and in a need to borrow reserve from another bank. this could happen
the bank allows its account-holders to withdraw their money at the same time.
The money multiplier equals
the overall change in the money supply/ the initial change in reserves
Automatic stabilizers
they come in two forms. 1. Increase or decrease in taxes... 2. Increase or decrease in income
banks don't perfectly hit their reserve requirement lending up to the maximum of their deposits because
they do not control hoe much is deposited or withdrawn in any particular day.
The fed used open market operations;
to keep the federal funds rates on target
(Decrease or increase of) aggregate demand:
what all the country is buying, just like GDP. Equal to consumer spending, investment spending, government purchases and net exports
Cross-purposes between fiscal and monetary policy:
what you're expecting is not what you're getting. Every now and then you'll see expansionary fiscal and contractionary monetary work together.
how does the dollar appreciate?
when the feds sells bonds on the open market, the immediate effect is it reduces the money supply and causes interest rates to rise; foreign investors will convert their currencies to dollars to take advantage of the relatively higher interest rates.
