Econ test 3

If the average reserve ratio in the banking system is 20 percent and the Fed increases bank reserves by $100,000, what will be the total potential increase in the money supply?

$500,000

Using the simple money multiplier assume that a bank keeps one-eighth (1/8) of their deposits in the form of reserves and the Fed credits Alex's bank account with $8,000, how much does the money supply increase?

$64,000

Faced with declining consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue?

%ΔV would fall

If the required reserve ratio is 25 percent, the money multiplier is

4

A decrease in money supply growth will cause the

AD curve to shift inward.

M2 includes: A) currency. B) currency plus deposits. C) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits. D) None of the above

C) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

Which of the following assets would you classify as being most liquid?

Currency and coins.

The Federal Reserve is the: A) federal government's bank. B) U.S. central bank. C) banker's bank in the U.S. D) All of the answers are correct.

D) All of the answers are correct.

Why are debit cards not listed as money?

Debit cards draw on checkable deposits, which are already counted as money.

Which of the following describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? A) The Open Market Committee needs two-thirds approval from the 12 regional banks before conducting monetary interventions. B) All monetary policies before being implemented are subject to approval by Congress. C) The Fed's control of the money supply is incomplete and subject to uncertain lags. D) The effects of monetary policy often offset those of fiscal policy. E) All of the above.

E) All of the above.

Quantitative easing occurs when the

Fed buys long-term securities.

______ is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.

Fiscal policy

The Federal Reserve's dual mandate refers to the Fed's main objectives I. to maintain price stability II. to maintain balanced budgets III. to oversee the Treasury IV. to maintain economic growth that is consistent with full-employment

I and IV are correct

The Federal Reserve's major tools to control the money supply are I. open market operations. II. discount rate lending and the term auction facility. III. required reserve ratio and payment of interest on reserves. IV. federal funds lending.

I, II, III, and IV

Which of the following tools can the Federal Reserve use to control the money supply? I. open market operations II. discount lending III. the term auction facility IV. paying interest on reserves

I, II, III, and IV

Consider the New Keynesian model that starts where the economy is initially in long-run equilibrium. If there is a temporary increase in investment spending, the increase in investment spending will likely cause: I. No increase in real growth rates in the long run. II. No increase in the inflation rate in the long run. III. an increase in both the inflation and real growth rates in the short run. IV. an increase in real growth rates in the long run.

I, II, and III

Examples of the Federal Reserve increasing the money supply to offset (potential) shifts in the dynamic aggregate demand schedule include I. because of fears of Y2K II. after 9/11/2001. III. after the collapse of subprime mortgage market and during the great recession

I, II, and III

The Federal Reserve I. clears all checks. II. makes monetary policy. III. supervises the banking sector.

I, II, and III

Which of the following is a tool that can be used by the Federal Reserve to change the money supply? I. open market operations II. lending to banks and other financial institutions III. interest on reserves

I, II, and III

Compared to fiscal policy, which type of lag tends to be shorter for monetary policy? I. Recognition lag II. Implementation lag III. Decision lag

II and III only

Consider the Real Business Cycle model, where prices are fully flexible. If we start at a point of long-run equilibrium, a decrease in the growth rate of the money supply will cause

Inflation to decrease and real growth to remain unchanged

In the model where prices are slow to adjust, if the Fed adheres to a strict "money growth rule" of 6 percent (that is, they keep %DM at 6 percent no matter what), what happens if there is an increase in consumer and business confidence?

Inflation, real growth, and employment all increase.

Most of the increase in planned spending over the next 50 years comes from

Medicare and Medicaid

An increase in the money supply will increase real GDP growth in the long run in

Neither the Real Business Cycle model nor the New Keynesian model.

Suppose the price of oil (gasoline) continued to increase and approached $100 per barrel ($4.00 per gallon). Using the New Keynesian model, where prices were slow to adjust we would expect I. Real GDP growth to decrease. II. the inflation rate to decrease III. the unemployment rate to increase.

Only I and III are correct

(Figure: Negative Supply Shock) In the New Keynesian model, where prices are slow to adjust, assume this economy initially begins at Point A and a negative supply shock takes it to Point Y. If the Fed reacts by increasing money growth by 3 percent, this would take the economy to

Point X.

If initially, %ΔM = 5%, %ΔV = 3%, %ΔP = 2%, and %ΔY = 6% and because of economic uncertainty %ΔV falls to 1%, what should the Fed do?

Raise %ΔM to keep %ΔM + %ΔV constant at 8%.

Which of the following is a reason it might be hard for the Fed to restore aggregate demand in the face of a shock to aggregate spending?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

The Fed uses each of the following to control the money supply EXCEPT

The Fed uses all of theses

What would be the likely outcome if the Federal Reserve decided to lower the required reserve ratio?

The money multiplier would increase and M1 would expand

Suppose the Federal Reserve's objective was to maintain price stability. In the Real Business Cycle Model, where prices are fully flexible, how would the Federal Reserve respond to a negative technology shock?

They conduct open market sales; that is they would sell bonds

Suppose the Federal Reserve's objective was to maintain price stability. In the Real Business Cycle Model, where prices are fully flexible, how would the Federal Reserve respond to a positive technology shock?

They would buy bonds

In the New Keynesian model which of the following answers is true in the long-run?

Unexpected inflation is absent

Why is monetary policy not fully effective in combating a negative supply shock?

When countering a negative supply shock, Fed action will raise inflation.

Consider the money multiplier that includes cash holding by the public and excess reserves held by the bank. An increase in the excess reserves, for a given monetary base, will result in

a decrease in M1.

When prices are slow to adjust to economic shocks, as in the New Keynesian model, people deciding to hold more cash because of a decrease in consumer confidence would cause in the short-run

a decrease in both the growth rate of output and inflation.

Which of the following shocks can the Fed deal with most effectively?

a shock to aggregate demand

Monetary policy is used to stabilize the economy by changing factors that shift the

aggregate demand curve

The money multiplier (MM) is the

amount that the money supply expands with each dollar increase in the monetary base.

In the New Keynesian model, suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock is most likely

an aggregate demand shock.

If the Federal Reserve wished to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be

an increase in money supply growth.

All of the following are examples of a positive DAD shock EXCEPT A) a faster than expected growth rate of the money supply. B) an unexpected increase in growth rate of government spending. C) an unexpected increase in productivity growth. D) an unexpected increase in export growth. E) All of the examples result in a positive DAD shocks.

an unexpected increase in productivity growth.

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of

both the real shock and the increased money supply growth

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of

both the real shock and the increased money supply growth.

If the Fed wants to increase the money supply, it will ______ Treasury securities

buy

The monetary base (MB) refers to:

currency plus (total) reserves.

When a negative shock to aggregate demand occurs, the inflation rate will

decrease

In response to a negative economic shock, we would expect banks to ____________reserves, the currency-to deposit ratio to __________ and M1 to ____________.

decrease, decrease, increase

During the Great Recession, banks increased their desire to hold excess reserves and individuals decided to hold more cash. As a result of this, the money multiplier ____________ and the Federal Reserve _________ the monetary base to increase in order to boost aggregate demand.

decrease, increased

Insolvent banks

have liabilities that are greater than their assets.

Suppose the central bank targets a low rate of unemployment. If a negative real shock occurs, the real growth rate will be

higher if the central bank counters the shock than if it does not react.

In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be

higher than the rate without responding to the negative shock

The goal of an open market purchase by the Federal Reserve is to

increase bank reserves and increase the money supply

To fight a recession, the federal government can

increase its spending

(Figure: Monetary Policy) Assume that the economy is initially at Point Y. In the best-case scenario, the Fed will

increase money supply to take the economy to Point X.

Suppose following the bombing at the Boston Marathon people decide to hold more currency. In particular, suppose individuals decide to hold more cash (and less checkable deposits) and banks decide to hold more excess reserves. In order to "offset" the economic impact, we might expect the Federal Reserve to

increase the monetary base.

To restore growth and reduce unemployment in the economy, the Federal Reserve would

increase the money growth rate, which will increase both the inflation rate and economic growth rate

In the case of a negative shock to aggregate demand, the central bank should

increase the rate of growth in the money supply to restore spending growth

Before the turn of the century, there was a concern about how computers would function in the next "century". In response to the heightened uncertainty surrounding Y2K, the Federal Reserve

increased its lending to banks

Shortly after September 11, 2011, the Federal Reserve

increased its lending to banks.

All else held equal, when the Federal Reserve makes an open market purchase, the money supply:

increases.

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:

increasing money supply, which may lower real interest rates and encourage borrowing.

The largest source of revenue for the federal government is the

individual income tax.

What are the three main sources of funds for the U.S. federal government?

individual income taxes, corporate income taxes, and Social Security and Medicare taxes

Beginning in equilibrium in the New Keynesian model, with the DAD, SGC and SRAS, an unexpected increase in the money supply growth will cause

inflation and real growth to increase in the short run.

In the Real Business Cycle model, where prices are fully flexible, an increase in technology will cause

inflation to decrease and real growth to increase in the short run.

In the Real Business Cycle model, where prices are fully flexible, an increase in the (growth rate of) investment spending will cause

inflation to increase and real growth to remain unchanged in the short run

In the real business cycle model, where prices adjust quickly to economic shocks, if there is a real economic shock that shifts the Solow growth curve to the right, the Federal Reserve will be able to maintain constant _________ by __________ the monetary base

inflation, increasing

When the Fed lowers the federal funds rate,

interest rates decrease and the money supply increases

A bank will become illiquid if

it has short-term liabilities that exceed its short-term assets.

Discount rate lending occurs when the Federal Reserve

lends reserves directly to banks

If the objective of the central bank is to maintain price stability and maximum real GDP growth, monetary policy is:

less effective in dealing with real shocks than with aggregate demand shocks.

Monetary policy is

less effective in dealing with real shocks than with aggregate demand shocks.

Which concept describes the ease with which an asset can be quickly converted into money without losing its value?

liquidity

Which of the following is not a duty performed by the Federal Reserve System?

manage the federal budget deficit

The dual mandate refers to the Fed's objective of ___________ and ____________.

maximum growth, low inflation

Beginning in equilibrium in an AD and SRAS model, an decrease in consumption growth will initially cause A) inflation and real growth to increase. B) inflation to increase and real growth to decrease. C) inflation to increase and real growth to remain unchanged. D) inflation and real growth to remain unchanged. E) None of the above.

none of the above

In the New Keynesian model, with the DAD, SGC and the SRAS curves, money is not neutral in the short run because

of sticky wages and prices

The tool the Federal Reserve uses most frequently to influence the money supply is

open market operations

The federal funds rate is the

overnight lending rate from one major bank to another.

The monetary base consists of currency

plus total reserves held at the Fed.

In both the Real Business Cycle and the New Keynesian models, an unexpected increase in export growth is a

positive DAD shock.

Which of the following is NOT one of the three major tools the Fed uses to control the money supply?

printing paper money

Which of the following is NOT a function of the Federal Reserve?

providing loans to small businesses

During the 1970s, the Fed often reacted to negative oil shocks by increasing the money supply and focusing on:

raising employment and short-run economic growth.

The reserve ratio (RR) is the

ratio of reserves to deposits.

Sometimes economists and analysts worry about the Federal Reserve over-stimulating the economy because such overstimulation will lead to

rising inflation.

When the Fed wants to increase interest rates, it:

sells bonds in the open market.

(Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend,

the Fed action would be partially effective and the economy would move to Point Z.

An open market operation occurs when:

the Fed buys or sells government bonds.

The Fed's job in manipulating monetary policy is made harder by the fact that:

the Fed has to operate in real time and information on recessions usually becomes available with a lag.

The group that formulates and implements monetary policy is _____________.

the Federal Reserve Operating Board.

The period of time from the early 1980s through the 2006 was a period when business cycle fluctuations were less extreme. During this time period, the Federal Reserve targeted the interest rate and, for the most part, fiscal policy did not attempt to offset economic shocks. This period is often referred to as

the Great Moderation.

Open market operations refer to

the buying and selling of government bonds by the Fed.

The Federal Reserve can influence the economy by shifting

the dynamic AD curve.

What part of the money pyramid does the Fed have direct control over?

the monetary base

The Federal Reserve has direct control over

the monetary base.

The economy is growing at the Solow growth rate of 3 percent with an inflation rate of 4 percent. If a positive aggregate demand shock occurs and the Fed responds by decreasing the money supply but fails to offset the aggregate demand shock, then in the short run

the real growth rate will be higher than 3 percent and the inflation rate will be higher than 4 percent

(Figure: Negative Supply Shock) This economy initially begins at Point A and a negative supply shock takes it to Point Y. If the Fed reacts by increasing money growth by 9 percent, this would take the economy

to Point V.

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between

too low a rate of growth or too high a rate of inflation.