ECON 2 Chapter test
Reserves held at by banks at the Fed$120 billionCurrency $800 billionCheckable deposits $650 billionSavings deposits $375 billionSmall-time deposits $957 billionMoney market mutual funds $486 billion 42. (Table: Money Supply Components) According to the data in the money supply components table, the total amount of M2 equals:
$3,268 billion
Point A on this dynamic aggregate demand curve represents a real GDP growth rate of:
5%
f spending growth is 6% and inflation is also 6%, this means that:
A) real GDP did not increase.
If the excess reserve ratio is 5%, required reserve ratio is 10%, and the cash ratio is 10%, then an increase in bank deposits by $100,000 that resulted from a Fed purchase of securities from the public would expand M1 money supply by:
M1 would increase by $440,000 (M1 money multiplier is equal to (1 + .1)(1 / .25) = 4.4. and the change is M1 is 4.4 times $100,000)
Which is a limitation of monetary policy in stabilizing the economy?
Monetary policy is subject to uncertain lags.
If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, what is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation?
No monetary policy can achieve this goal.
What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?
The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.
(Figure: Monetary Policy and Demand Shocks) Suppose that the original real growth rate of the economy is 3% and that a negative aggregate demand shock causes a shift of the AD curve from AD1 to AD2. As a result of the Fed's policy response, the AD curve in the short run shifts to AD5. Which of the following is TRUE about the Fed's policy response?
The Fed responded too much to the shock.
If the average reserve ratio(combined excess and required) in the banking system is 20% and the Federal Reserve increases reserves by $50,000, what is the maximum amount the money supply can increase? Will the M1 money supply always increase by this maximum amount? If not, why not?
The maximum increase in the money supply is equal to the increase in reserves times the deposit multiplier (Md), where Md= 1/RR. With RR = 0.2, the maximum increase would be $50,000 × (1/0.20) = $250,000. The M1 money supply may not always increase by this much, however, if either (1) banks choose to hold more than 20% of their reserves on average or (2) all of the loans extended by banks are not redeposited (that is, some is held by the public as currency).
One of the Fed's greatest powers is its ability to:
boost market confidence.
A permanent increase in money growth, with all other things remaining the same, will cause the inflation rate to increase in:
both the short run and the long run.
How did the Fed encourage business confidence after the September 11 terrorist attacks?
by lending billions to banks
When the Fed reacts to a positive aggregate demand shock, which is likely to make the period of disinflation shorter?
credibility on the part of the Fed
The monetary base (MB) refers to:
currency plus total reserves held at the Fed.
When the Fed conducts open market operations to decrease the monetary base, real growth
decreases only in the short run
(Figure: Negative Real Shock) Assume that a negative real shock combines with sticky wages to take the economy to point C and considerable consumer pessimism sets in. Which of these choices is the Fed's best option in the short run?
do nothing
If the Fed increases M to fight slower real growth after a negative real shock, what should occur?
higher inflation
Suppose the reserve ratio (combined excess and required) is 20% for all banks and there is no cash held outside the banking system associated with deposits. If the Fed increases bank reserves by $200 by conducting an open market purchase of bonds, then the bank deposits will:
increase by $1,000.
If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:
increasing money supply, which will lower real interest rates and encourage borrowing.
The aggregate demand curve shows all the combinations of ______ that are consistent with a specified rate of spending growth.
inflation and real growth rates
Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:
inflation.
Monetary policy is:
less effective in dealing with real shocks than with aggregate demand shocks
The Fed will be most effective at changing the money supply when banks have ____ amounts of reserves and the money multiplier is ________ .
low; large
When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists.
moral hazard
An increase in spending growth will cause the dynamic aggregate demand curve to:
shift outward.
An increase in the growth rate of the money supply will cause the dynamic aggregate demand curve to:
shift outward.
Open market operations refer to:
the buying and selling of primarily government bonds by the Fed.
The economy is growing at its long-run potential growth rate of 3% with an inflation rate of 4%. If a positive aggregate demand shock occurs and the Fed responds by decreasing money growth, but fails to fully offset the aggregate demand shock, then in the short run:
the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.
"Systemic risk" is:
the risk of contagion that occurs when a failing financial institution owes significant sums of money to other financial institutions.
If the reserve ratio is 4% (sum of the excess reserve ratio and required reserve ratio) and the cash to deposit ratio is 0, then the deposit multiplier is:
25.
