Econ 110: Spring; Al Hamdi (Exam 3 HWs)

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

The interest rate that banks charge other banks for overnight loans is the

federal funds rate

An increase in interest rates

decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

A bank's largest liability is its

deposits of its customers.

Among potential stores of value, money

has the advantage of being the most liquid asset.

The unemployment rate equals the number of unemployed divided by the ________, all times 100.

labor force

The money demand curve has a negative slope because

lower interest rates cause households and firms to switch from financial assets to money.

Dollar bills in the modern economy serve as money because

people have confidence that others will accept them as money.

On the 45 degree line-diagram, for points that lie above the 45 degree line

planned aggregate expenditure is greater than GDP.

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics

The Federal Reserve System's four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions.

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure

Assets. Liabilities Reserves Deposits +$7,000. +$50,000 Loans Net Worth +$46,000 +$3,000 Refer to Table above. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of

$2000

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?

$27 million (planned investment+unplanned investment = total investment)

Given the following economic data, what is the value of investment in a closed economy? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion

$3 trillion

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

$5000

In a small economy, consumption spending is $6,000, government purchases are $1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product?

$9,700

Consumption Disposable Income $1,200 $3,000 $2,100 $4,000 $3,000 $5,000 Refer to Table above. Given the consumption schedule in the table above, the marginal propensity to save is

0.1 (Take difference between first and last consumptions and disposable income (3000-1200); (5000-3000) put into MPC equation = 0.9 and b/c MPC+MPS = 1, take 1 - 0.9)

An increase in the price level in the United States will shift the aggregate expenditure line upward.

False

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

False

If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits, the money multiplier will increase.

False

The Fed can directly lower the inflation rate.

False

The Fed has complete control over the money supply.

False

The main goal of monetary policy for recent Fed Chairmen has been to maintain high employment in labor markets.

False

The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time.

False

How does a decrease in government spending affect the aggregate expenditure line?

It shifts the aggregate expenditure line downward.

If inflation in the United States is lower than inflation in other countries, what will be the effect on net exports for the United States?

Net exports will rise as U.S. exports increase

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.

increase; not change

When calculating GDP, the Bureau of Economic Analysis revises its quarterly data

many times over the nest several years

Rising prices erode the value of money as a ________ and as a ________.

medium of exchange; store of value

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate

Credit card balances are

not part of the money supply

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket.

not; overstate

When a financial asset is first sold, the sale takes place in the ________ market, and subsequent sales take place in the ________ market.

primary; secondary

The process of bundling loans together and buying and selling these bundles in a secondary financial market is called

securitization

If the Federal Open Market Committee wants to decrease the money supply through open market operations it will

sell U.S. Treasury Securities

Which of the following tools of monetary policy is used least often?

setting the required reserve ratio

If the best lawyer in town is also the best at operating a word processor, then according to the theory of comparative advantage, this person should

specialize in being a lawyer because its opportunity cost is lower

Actual investment spending does not include

spending on consumer durable goods

At macroeconomic equilibrium, total ________ equals total ________.

spending; production

The Federal Reserve was established in 1913 to

stop bank panics by acting as a lender of last resort.

Which of the following functions of money would be violated if inflation were high?

store of value

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.

targets; goals

The slope of the consumption function is equal to

the change in consumption divided by the change in disposable income.

The CPI is also referred to as

the cost-of-living index

When the Fed increases the money supply

the interest rate falls and this stimulates investment spending

Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives.

Which of the following is a true statement about the multiplier?

the multiplier rises as the MPC rises

Refer to Figure above. (graph where the money demand has shifted to the right) In the figure above, the money demand curve would move from Money demand1 to Money demand2 if

the price level increased.

When the Fed uses contractionary policy

the price level rises less than it would if the Fed did not pursue policy.

According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?

14 years

If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is

5

In economics, money is defined as

any asset people generally accept in exchange for goods and services

In the aggregate expenditure model, ________ has both an autonomous component and an induced component.

consumption spending

Investment spending ________ during a recession, and ________ during an expansion.

declines; increases

A student who just graduated from college but has not found a job would most likely be

frictionally unemployed

Most U.S. currency held outside the U.S. banking system is held by foreigners.

True

Open market operations refer to the purchase or sale of ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP

Opportunity cost is defined as

The highest-valued alternative that must be given up to engage in an activity.

Which of the following could cause nominal GDP to increase next year, but real GDP to decrease?

The price level rises and the quantity of final goods and services produced falls.

Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.

True

If aggregate expenditure is more than GDP, then inventories fall and GDP rises

True

If planned aggregate expenditure equals GDP, the economy is in macroeconomic equilibrium.

True

In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services.

True

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

a liquidity trap

A central bank can help stop a bank panic by

acting as a lender of last resort

All of the following are components of aggregate expenditure except

actual investment spending

Which of the following will cause a direct increase in consumption spending?

an increase in disposable income

If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?

an increase in wealth

Refer to Figure above. (Point A is shifting up to the left on the demand curve, increasing interest rate and lowering quantity of money) In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve.

If the marginal cost for the state of Montana to increase the speed limit on its interstate highways to 100 mph is estimated to be $500 per day, then Montana should increase the speed limit to 100 mph

as long as the marginal benefit received each day is just equal to or greater than $500.