Exam 3 Econ
The most common method employed by the Fed to increase the money supply is the
purchase of US government bonds
If congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the fed will
reduce interest rates by increasing money supply
An increase in the money supply will
reduce interest rates, increasing investment and aggregate demand
When a bank loans out $1,000 the money supply
increases
Aggregate quantity of goods and services demanded changes as the price level rises because
real wealth falls, interest rates rise, and the dollar appreciates
If price level falls, the real value of a dollar
rises, so people want to buy more
In recent years, the federal reserve has conducted policy by setting a target for
the federal funds rate
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by purchasing bonds.
If stock market booms, then
aggregate demand increases, which the Fed could offset by decreasing the money supply by selling bonds
The initial impact of an increase in an investment tax credit is to shift
aggregate demand right
In a fractional-reserve banking system, an increase in reserve requirements
decreases both the money multiplier and money supply
If the Fed conducts open-market sales, the money supply
decreases causing aggregate demand shift to the left
Other things the same, wehn price levels fall, interest rates
fall so firms increase investment
When price level increases, real value of money holdings
falls, so people buy less
Under a fractional-reserve banking system banks
generally lend out a majority of the funds deposited
If R represents the reserve ratio for all banks in the economy then the money multiplier is
1/R
Suppose that the Federal reserve is concerned about the effects of falling stock prices on the economy, what could it do?
Buy bonds, increasing money supply, to lower interest rate
List of assets from most to least liquid
Currency, demand deposits, money market mutual funds
Other things same, when government spends more, the initial effect is that
aggregate demand shifts right
The federal funds rate is the interest rate that
banks charge one another for loans
Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually
because unemployment is high, wages will be bid down and short-run aggregate supply will shift right
Suppose there were a large decline in net exports. If the fed wanted to stabilize output, it could
buy bonds to lower interest rates
The primary difference between commodity money and fiat money is that
commodity money has intrinsic value but fiat money does not
If an economy used gold as money, its money would be
commodity money, not fiat money
When the dollar depreciates, each dollar buys
less foreign currency, and so buys fewer foreign goods.
In the short-run an increase in the cost of production makes
output fall and prices rise
When in France you notice that prices are posted in euros, this best illustrates money's function as
unit of account
The aggregate supply curve is
vertical in the long run and slopes upward in the short run
When the Fed sells government bonds, the reserves of the banking system
decrease, so money supply decreases
In the short run, an increase in the money supply causes interest rates to _____ and shift the aggregate demand curve ______
Decrease, right
Suppose a stock market crash makes people feel poorer, the decrease in wealth would induce people to
decrease consumption, shifting aggregate demand to the left
Suppose there is a tax increase, to stabilize output the Federal Reserve will
increase the money supply
Aggregate demand shifts right when federal reserve
increases money supply
When the interest rate increases, the opportunity cost of holding money
increases, so quantity of money demanded decreases
Which of the following is not a tool of monetary policy
increasing the government budget deficit
To decrease the money supply, the Fed can
sell government bonds or increase the discount rate
Increase in taxes will
shift ad to the left
Short run aggregate _______ shifting ____ would cause prices to fall and output to rise.
supply, right
The rate at which the Fed lends money to banks is
the discount rate
