MacroEconomic

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10%. In this situation, American Bank has

$50 in required reserves

HW #22 Use the following information what is the velocity of money? Money supply $1800 Price level 1.49 Real GDP $15,000 The velocity of money is equal to ________

The velocity of money is equal to 12.42

HW #30 Suppose the government increases taxes by $30 billion and the marginal propensity to consume is 0.90. By how will equilibrium GDP change? The change in equilibrium GDP is $ ____ billion

-270 billion MPC/1-MPC IT*MPC

Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.

M1 remains unchanged.

In the graph of the money market shown, what could cause the money supply curve to shift from MS1 to Ms2? In the graph, what could cause the money demand curve to shift from MD1 to Md2?

The Fed decreases the money supply by deciding to sell US treasury securities. an increase in the price level & an increase in real GDP

An increase in interest rates affects aggregate demand by As the interest rate increases,

Shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level. consumption, investment, and net exports decrease; aggregate demand decreases.

The formula for the simple deposit multiplier is If the required reserve ratio is 0.20, the maximum increase in checking account deposits that will result from an increase in bank reserves of $15,000 is $

Simple Deposit Multiplier= (1/RR)* BR $75,000

The text explains that the US has a "fractional reserve banking system." Why do most depositors seem to be unworried that banks loan out most of the deposits they receive?

The FDIC insures deposits up to $250,000.

Suppose that during one period, the velocity of money is constant and during another period, it undergoes large fluctuations. During which period will the quantity theory of money be more useful in explaining changed in the inflation rate?

The period where velocity is constant because when velocity is constant the changed in the money supply can be shown to be the main cause of inflation.

How do the banks "create money"?

When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.

Zimbabwe's recent hyper-inflation can be explained by what theory

quantity theory of money

Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _______ treasury bills and other financial assets, thereby________ their prices, and ________ their interest rates.

sell; decreasing; increasing

If real GDP increases, If the price level decreases,

the money demand curve shifts to the right the money demand curve shifts to the left

Suppose that velocity is 3 and the money supply is $600 million. According the quantity theory of money, nominal output equal. Velocity is defined as

$1.8 Billion V= (P x Y)/M

Suppose you deposit $1,100 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.40? The change in checking deposits is equal to $____

$2,750

If the required reserve ratio is 0.05, or 5 %, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $______.

$95,000

HW #17 Consider the following simplified balance sheet for a bank. a.) If the required reserve ratio (RR) is 10%, this bank currently holds _______ in excess reserves. b.) The Maximum amount by which the bank can expand its loans is ________ Complete the following simplified bank balance sheet to show to the immediate impact if the bank makes the loans in part (b). Assets - Reserves______ - Loans________ Liabilities - Deposits_______ - Stockholders' equity _______

- $3000 -$3,000 -$10,000 -$69,000 -$73,000 -$6,000

Consider the following Assets - reserves - $10,000 -Loans- $66,000 Liabilities - Deposits- $70,000 - Stockholders' equity - $6,000 a) if the required reserve ratio (RR) is 10% percent, this bank currently holds $______in excess reserves. b) The maximum amount by which the bank can expand its loan is_________ c) Complete the following simplified bank balance sheet to show the immediate impact if the bank makes the loans in part

- $3000 -$3000 Assets - Reserves- $10,000 - Loans-$69,000 Liabilities - Deposits- $73,000 - Stockholder's equity- $6,000

Suppose that the Federal Reserve makes a $10 million discount loan to FNB by increasing FNB's account at the Fed. Assets - _____________ Liabilities - _____________ Assume that before receiving the discount loan, FNB had no excess reserves. The maximum amount of the $10 million that FNB can issue in loans is _____________. Assume that the required reserve ratio is 10%. The maximum total increase in the money supply that can result from the Fed's discount loan is

- Reserves $10 million - Discount loan $10 million -$10 million - $100 million

Which of the following is the largest liability of a typical bank? Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?

- deposits - the required reserve ratio.

When the People's Bank of China "cut the amount of cash that banks must set aside as reserves, "the monetary policy tool they used was a change in the How would this action "pump money into the financial system to support lending"?

- required reserve ratio. - Banks can make more loans.

The quantity theory of money is better able

to explain the inflation rate in the long run

If the money supply is growing at a rate of 4% per year, real GDP (real output) is growing at a rate of 2 % per year, and velocity is constant, what will the inflation rate be? If the money supply is growing at a rate of 4% per year, real GDP (real output) is growing at a rate of rate of 2% per year, and velocity is growing at 1% per year instead of remaining constant, what will the inflation rate be?

2% 3%

There are ______ members of the Board of Governors, who the President of the US appoints to __________. One of the Board members is appointed Chairman for ________.

7; 14-year nonrenewable terms; a 4-year renewable term.

HW#16 If the required reserve ratio is 0.15, or 15 %, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is _______.

85,000

HW #23 Suppose the economy is initially in long-run equilibrium. The FED enacts a policy to decrease the discount rate. In the short-run, this expansionary monetary policy will cause.

A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.

What is a banking panic? Which of the following best explains how the federal Reserve acts to help prevent banking panics?

A situation in which many banks experience runs at the same time The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

HW# 25 Refer to the diagram to the right. Suppose the economy is in a recession and the FED pursues an expansionary monetary policy. Using the Static AD-AS model, this would be depicted as ta movement from

A to B

Which of the following best explains the difference between commodity money and fiat money? a. Fiat money has no value except as money, whereas commodity money has value independent of its use as money b. Commodity money has no value except as money, whereas fiat money has value independent of its use as money. c. Commodity money is usually authorized by the central bank, whereas fiat money has to be exchanged for gold by the central bank. d. All money is commodity money, as it has to be exchanged for gold by the central bank.

A. Fiat money has no value except as money, whereas commodity money has value independent of its use as money.

Which one of the following is not one of the policy tools the Fed uses to control the money supply? a. Moral suasion b. Open market operations c. Reserve requirements d. Discount policy Which tool is the most important?

A. Moral Suasion. B. The Fed conducts monetary policy principally through open market operations.

Money serves as a unit of account when a. Prices of goods and services are stated in terms of money b. it can be easily stored and used for transactions in the future. C. sellers are willing to accept it in exchange for goods or services. D. All of the above are examples of money serving as a unit of account. Money serves as a standard of deferred payment when a. it can be easily store today and used for transaction in the future. b. sellers are willing to accept it in exchange for goods or services. c. Payments agreed to today but made in the future are in terms of money. D. all of the above are examples of money serving as a standard of deferred payment.

A. Prices of goods and services are stated in term of money. C. Payments agreed to today but made in the future are in terms of money.

A double coincidence of wants refers to a. the fact that for a barter trade to take place between two people, each person must want what the other one has. b. The situation where two parties are involved in a transaction where money is the medium of exchange. C. the idea that a barter economy is more efficient than an economy that uses money. D. The situation in which a good that is used as money also has value independent of its use as money.

A. The fact that for a barter trade to take place between two people, each person must want what the other one has.

Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10% to 12%. What actions would you need to take? As your actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up _________.

A. You would have to reduce loans to make up for the necessary increase in reserves. __Decreasing___

HW # 7 Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long- run equilibrium be? A. a B.b C.c D.d

A. a

Silver is an example of a A. commodity money B. barter money C. representative money D. fiat money

A. commodity money

Suppose you deposit $2000 in currency into your checking account at a branch of bank of america, which we will assume has no reserves at the time you make your deposit. Also assume that the required reserve ratio is 20% (0.20). D.) What is the maximum increase in checking account deposits that can result from you $2000 deposit and what is the maximum increase in the money supply, respectively?

A.)Assets - Change in Reserves- +$2,000 Liabilities - Change in Deposits- +$2,000 B.) Assets -Change in Reserves -$1600 - Change in Loans +$1600 Liabilities - Change in Deposits - $0 C.)Assets - Change in Reserves +$1600 Liabilities - Change in Deposits +$1600 D.) $10,000 and $8000, respectively.

Stock prices rapidly in 2005, as did housing prices in many parts of the country. By 2008, both stock prices and housing prices were declining sharply. Some economists have argues that rapid increases and decreases in the prices of assets such as shares of stock or houses can damage the economy. Currently, stabilizing asset prices is not one of the Federal reserve's policy goals. In what ways would a goal of stabilizing asset prices be different from the four goals listed in this chapter. T/F:Stabilizing asset prices should not be added to the list of the Fed's policy goals because they are more specific and deal mainly with individuals and firms. Each of these carry risk associated with them and the Fed should not be in the business of trying to make profit for individuals.

Asset prices deal with a specific type of wealth that carried risk associated with individuals firms. True

"The average Chinese trusts neither the Chinese banks nor the Communist party." If Schneider is correct, businesses and consumers might prefer to carry out transactions by using a. Credit cards b. cash C. bitcoins D. Linden dollars The Chinese government has refused to print currency in denominations higher than the 100-renminbi note, which is the equivalent of about $16. The US prints $100 bills and all other countries print currency in denominations that are at least that high. The Chinese government might be reluctant to print currency in high denominations. A. to fuel the growth of the paper industry B. because the Chinese typically rely on credit cards. C. to discourage corruption D. because 100 is considered to be a lucky number.

B. Cash C. to discourage corruption.

"Income is only one way of measuring wealth" Do you agree that income is a way of measuring wealth? a. Wealth is the stock of money and income adds to that stock. b. Income is yearly earnings and it doesn't measure which is the value of personal assets less all debts. c. Wealth can be measured by income since wealth individuals have high incomes. d. Income measures wealth because wealth is equal to the income that is not spent.

B. Income is yearly earning and it doesn't measure wealth which is the value of personal assets less all debts.

In the late 1940s the communists under Mao were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these years, Japan was still under military occupation by the US. Some US troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship is to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or fiat money? a. It is a fiat money because it has no value except as money. b. It is a commodity money because it has value as recycled paper. c. It is a fiat money because it has value as recycled paper. d. It is a commodity money because it has no value except as money.

B. It is a commodity money because it has value as recycled paper.

It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because. A. The exchange rate between the deutched mark and the euro is fixed. b. it is still accepted as legal tender for transactions. C. The government initially issued this currency D. Consumers are able to keep this a secret.

B. It is still accepted as legal tender for transactions.

What are the largest asset and the largest liability of a typically bank? A. Cash in its vault is the largest asset and bonds are the largest liability of a typical bank. B. Loans are the largest asset and deposits are the largest liability of a typical bank. C. Loans are the largest liability and deposits are the largest asset of a typical bank. D. Reserves are the largest asset and deposits are the largest liability of a typical bank.

B. Loans are the largest asset and deposits are the largest liability of typical bank.

The federal Reserve uses two definitions of the money supply, M1 and M2, because a. M2 is also known as cash and cash equivalent, whereas M1 represents the standard of deferred payment function. b. M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply. C. M2 satisfies the medium exchange function of money, whereas M1 satisfies the store of value function D. M2 is a narrow definition focusing more on liquidity, whereas M1 is a broader definition of the money supply.

B. M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.

Which of the following is not a correct statement about m2? a. M2 is a broader definition of money compared to M1 and currency. b. M2 is the best definition of money as a medium of exchange. c. M2 includes saving accounts, small-denomination time deposits, and money market mutual funds. d. M2 includes all of the assets in M1. If you move $100 from your saving account to your checking account, then M1 will __________ and M2 will __________

B. M2 is the best definition of money as a medium of exchange. __increase by $100__ __remain the same__

A baseball fan with a Mike Trout baseball card wants to trade it for a Miguel Cabrera baseball card, but everyone the fan knows who has a Cabrera card doesn't want a Trout card. - Economists characterize this problem as a failure of the a. irrational exuberance doctrine b. principle of a double coincidence of wants. c. market clearing mechanism d. theory of comparative advantage.

B. Principle of a double coincidence of wants.

Which of the following functions of money would be violated if inflation were high? A. unit of account B. Store of value C. Certificate of gold D. Medium of exchange

B. Store of value

"People lined up on the veranda of the American mission hospital here from miles around to barter for doctor visits and medicines, clutching scrawny chickens, squirming goats and buckets of maize. " The people buying medical services at this hospital could not use money to pay for the medical services they were buying because the a. government was not printing enough currencies. b. Zimbabwean currency was worthless. c. doctors were refusing to be paid in US dollars. d. Zimbabwean people preferred barter exchange.

B. Zimbabwean currency was worthless

If the reserve requirement ratio (rr) is 0.20, what does the FED have to do to increase the money supply in the economy by $200 million? a. sell $200 million in government bonds b. buy $40 million in government bonds c. sell $40 million in government bonds. d. Buy $200 million in government bonds.

B. buy $40 million in government bonds.

HW#27 The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can congress and the president take to move the economy back to potential GDP? a. Increase the money supply. b. increase government spending or decrease taxes. c. decrease government spending or increase taxes

B. increase government spending or increase taxes.

Suppose the reserve requirement ratio (rr) is 0.05. What happens to the money supply, if the FED sells $10 billion worth of government bonds? a. money supply goes down by $20 million b. money supply goes down by $200 billion c. money supply goes up by $10 billion d. money supply goes down by $10 billion

B. money supply goes down by $200 billion.

Which one of the following is NOT one of the monetary policy goals of the FED? a. Maintain price stability b. reduce income inequality c. Maintain stability of financial markets and institutions d. Maintain high employment

B. reduce income inequality

Suppose you have $ 2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of the money supply?

Both M1 and M2 will remain unchanged.

HW#26 Refer to the diagram. Suppose the economy is in short run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model, the correct FED policy for this situation would be depicted as a movement from

C to B

HW #3 Which of the points A, B, C, or D can represent a long-run equilibrium? A. B B.A, B, C, & D C. A & C D.A & B E. D F.B & D Suppose that initially the economy is a point A. Then aggregate demand increases from AD1 to AD2. The new short-run equilibrium will be at point____ The long-run equilibrium point will be at point___ Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point? A. Due to the higher price level, consumption and investment spending will decrease and the economy will be at B. B. Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C. C. Due to the recession, workers and firms will be willing to accept lower wages and prices and AD will shift to the left to point B. D. Due to the lower price level, firms and worker will be willing to accept lower wages and prices and SRAR will shift to the right further.

C. A & C _D_ _C_ B. Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.

"This printing of money 'will keep the [deflation] wolf from the door;." "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." What is price deflation? What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? Why would deflation cause"shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?

C. A fall in the price level C. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. B. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.

Distinguish among money, income, and wealth. a. A person's money is the currency plus all bank accounts owned, income is equal to the earning from work and wealth is equal to the profit from investment. b. A person's money is the currency in the pocket, income is the earning and wealth is equal to asset value. C. A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts. D. A person's money is the currency help and the earning from work, income is equal to the bank balance and wealth is equal to the profit from investment. The central bank of a country controls the money supply, which equals the currency held by A. the public plus their checking and saving account balances. B. banks C. the public. D. the public plus their checking account balances.

C. A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to values of assets minus all debts. D. the public plus their checking account balances.

Saving account balances, small-denomination time deposits, and non-institutional money market fund shares are A. financial assets that are not included in the money supply B. included only in M1 C. included only in M2 D. included in both M1 and M2 Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction. A. M1 will decrease by $100. B. both M1 and M2 will increase by $100. C. M2 will increase by $100 D. Both B & C are correct.

C. Included only in M2 A. M1 will decrease by $100.

Which one of the following is not a function of money? a. Unit of account B. store of value C. Open market operation D. Medium of exchange. If something is to be considered as money, it has to fulfill ___________

C. Open market operation ___all four functions__

Suppose there has been an increase in investment. As a result, real GDP will _____ in the short run, and _____ in the long run. a. increase; increase further. b. decrease; increase to its initial level c. increase; decrease to its initial value d. decrease; decrease further.

C. increase;decrease to its initial value

Interest rates in the economy have rise. How will this affect aggregate demand and equilibrium in the short run? A. aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. B.Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. C.aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. D.aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.

D. Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.

The M1 measure of the money supply includes which of the following components? A. currency in circulation B. holdings of traveler's checks C. Checking account deposits in banks D. All of the above

D. All of the Above

Why is price stability one of the Fed's monetary goals? a. Rising prices erode the value of money as a medium of exchange and store of value b. If inflation is low, the fed will have flexibility to lessen the impact of recessions. c.By achieving price stability, the fed also promotes economic growth. D. All of the Above Which of the following is NOT a problem of high inflation rates?

D. All of the Above High inflation helps to stabilize financial markets.

The simple deposit multiplier equals. a. the inverse, or reciprocal, of the required reserve ratio. b. The ratio of the amount of deposits created by banks to the amount of new reserves. c. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. D. All of the above. A higher required reserve ratio_______ the value of the simple deposit multiplier.

D. All of the above B. decreases.

Which of the following conditions make a good suitable for use as a medium of exchange? a. The goods should be of standardized quality, so that any two units are identical. b. The goods must be acceptable to (that is, usable by) most buyers and sellers. c. The good should be durable, valuable relative to its weight, and divisible. D. All of the above conditions must be met. What is fiat money? A. money issued by financial intermediaries, such as banks, but not the central bank. B. Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money. C. Money that has value independent of its use as money. D. an asset that has the ability to be easily converted into the medium of exchange.

D. All of the above conditions must be met. B. Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money

Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M! and M2 definitions of the money supply? a. M1 will decrease and M2 will increase. b. M1 will increase and M2 will decrease C. Both M1 and M2 will increase by$2000 D. Both M1 and M2 will remain unchanged

D. Both M1 and M2 will remain unchanged.

Look carefully at the following list. a. The coins in your pocket b. The funds in your checking account c. The funds in your savings account. d. The traveler's check that you have left over from a trip e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 Definition of the money supply? a. A & B b. B & E c. D & E D. C & E

D. C & E

In the definition of the money supply, where do credit cards belong? a. M1 b. both M1 and M2 c. M2 d. Credit cards are not included in the definition of the money supply.

D. Credit cards are not included in the definition of the money supply.

Which of the following os not the formula for the quantity theory of money? A. V= PxY/M B. M= 1/V x P x Y C. M x V = P x Y D. M x Y= P x V How does the quantity theory provide an explanation about the cause of inflation?

D. M x Y = P x V A. The Quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

"Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells, Germani of the Rhone region were using good-quality Roman silver coins for this purpose) When sellers are willing to accept money in exchange for goods and services, money is acting as a a. standard of deferred payments. b. unit of account c. store of value d. medium of exchange. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value a. True b. False.

D. Medium of exchange. & A. True

Which of the following is included in M2 but not M1? a. Checking account deposits at banks b. Currency c. Traveler's checks d. Money market deposit accounts in banks.

D. Money market deposit accounts in banks.

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as a. monetary policy b. "releasing sticky prices" c. fiscal policy d. an automatic mechanism

D. an automatic mechanism.

An increase in the amount of excess reserved that banks keep______ the value of the real-world deposit multiplier. Whenever banks gain reserves and make new loans, the money supply _______; and whenever banks lose reserves, and reduce their loans, the money supply___________.

D. decrease A. expands; contracts

Stagflation occurs when A. inflation falls and GDP falls B. inflation rises and GDP rises. C. inflation falls and GDP rises D. inflation rises and GDP falls.

D. inflation rises and GDP falls.

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur? a. the nominal interest rate will decrease. b. the discount rate will increase c. the price level will decrease d. nominal GDP will increase

D. nominal GDP will increase

A decrease in aggregate demand causes a decrease in _____ only in the short run, but causes a decrease in _____ in both the short run and long run. A. the price level; real GDP B. real GDP; Real GDP C. the price level; the price level D. real GDP; the price level.

D. real GDP; the price level.

When the Federal Reserve purchases Treasury securities in the open market, When the Federal Reserve sells Treasury securities in the open market,

D. the sellers of such securities deposit the funds in their banks and bank reserves increase. B. the buyers of these securities pay for them with checks and banks reserves fall.

According to an article in the Economist magazine, in 2013 the Japanese economy was experiencing falling prices"on everything from chocolate bars to salad." What is the term for a falling price level? The article also stated that Japanese Prime minister Shinzo Abe was pressuring the Bank of Japan, The Japanese central banks, to take steps to hit an inflation target of 2% Why would the Bank of Japan, the Japanese central banks, be reluctant to raise its target for short-term interest rates if the price level is falling? T/F: Central banks try to maintain price stability. This is typically assumed to refer to inflation. However, if prices are falling, this is undesirable as well because deflation also impacts price stability.

Deflation When the target rate increases, money growth slows down, and inflation should decrease. True

"Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."

Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.

"I recently read that more than half of the money issued by the government is actually help by people in foreign countries. If that's true, then the US is less than half as wealthy as the government statistics indicate."

Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

HW#28 Consider the figures: Determine which combination of fiscal policies shifted AD1 and AD2 in each figure and returned the economy to long-run macroeconomic equilibrium,

Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy

HW#24 Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2.

Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise.

An article in the Wall Street Journal notes that before the financial crisis of 2007-2009, the Fed" managed just one short-term interest rate and expected that to be enough to meet its goals for inflation ans unemployment" The short-term interest rate the article is referring to is the The Fed expects that controlling that one interest rate would allow it to meet its goals for inflation and unemployment because lower short-term interest rates. The article also notes that after the financial crisis, "the Fed is working through a broader spectrum of interest rates. " The reference to "a broader spectrum of interest rates"means the Fed began to focus on

Federal funds rate encourage lending and stimulate economic activity longer term Treasury rates and mortgage rates

What is the "shadow banking system"? The financial firms of the shadow banking system were

Financial firms that raise money from investors and provide it to borrowers. more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.

________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.

Hyperinflation

HW 15.2- #10 In the figure, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MDs (Point A to Point C)?

Increase in real GDP or increase in the price level

John Maynard Keynes is said to have remarked that using an expansionary monetary policy to pull an economy out of a deep recession can be like"pushing on a string." What is Keynes likely to have meant?

Increasing reserves and lowering interest rates may not stimulate economic activity if banks don't lend and businesses don't borrow.

If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:

Inflation rate= Growth rate of the money supply- Growth rate of real output.

Which of the following is a monetary policy target used by the Fed? The Fed uses policy targets of interest rate and/or money supply because.

Interest rate it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

What do economists mean by the demand for money? What is the advantage of holding money? What is the disadvantage of holding money?

It is the amount of money-currency and checking account deposits- that individuals hold. Money can be used to buy goods, services, or financial assets. Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

During the Civil War, the Confederate States of America printed lots of its own currency-Confederate dollars- to fund the war. By the end of the war, nearly 1.5 billion paper dollars had been printed by the Confederate government. How would such a large quantity of Confederate dollars have affected the value of the Confederate currency?

It would have generated high inflation and therefore decreased the value of the Confederate currency.

Why is the fed sometimes said to have a "dual mandate"? The Fed is said to have a "dual mandate" because

Maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment act of 1946

Which one of the following is not the formula for the quantity theory of money? How does the quantity theory provide an explanation about the cause of inflation?

MxT= PxV The quantity equation shows that if the money supply grows at a faster rate than read GDP, then there will be inflation.

HW #29 Suppose the government increases expenditure by $50 billion and the marginal propensity to consume is 0.90. By how will equilibrium GDP change? The change in equilibrium GDP is $_________

The change in equilibrium GDP is $500 Billion 1/1-MPC

In 2013, one article in the Wall Street Journal noted that : " The Fed's Board of Governors kept the discount rate unchanged at 0.75%, "while another article predicted that: "The Fed can be expected to state again that the target rate wont change until mid-2013." What is the name of the "target interest rate" mentioned in this article? Who borrows money and who lends money at this "target interest rate"? What is the discount rate?

The federal funds rate Banks borrow and banks lend The discount rate is the rate at which the Fed lends to banks

In a newspaper column, author Delia Ephron described a conversation with a friend who had a large balance on her credit card on which the friends was being charged an interest rate of 18% per year. The friend was worried about ever being able to pay off the debt. Ephron was earning only 0.4% interest on her bank certificate of deposit (CD) She considered withdrawing the money from her CD and using it to make a loan to her friend so her friend could pay off her credit card balance: "So i was thinking that all of us earning 0.4 percent could instead loan money to our friends at 0.5 percent....[M] friend would get out of debt [and] I would earn $5 a month instead of $4." Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest?

There is a risk that the borrower won't pay the money back.

An article on how the Zimbabwen economy had recovered after the end of the hyperinflation notes the following fact as being important: "Bank deposits increased by 31% last year, to $4.4 billion." Bank deposits are important to the Zimbabwean economy because

These funds enable banks to make loans.

How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because

They often borrow short term, sometimes as short as overnight, and invest the funds in longer-term investments.

"Their commercial- lending businesses, funded by their stable deposit bases, make them steady earners." What is commercial lending? We can say that loans are funded by deposits give banks financial capital, which can be loaned out so banks can make a profit. A. True B. False

This is when banks make loans to businesses. A. True

In response to problems in financial markets and a slowing economy, the Federal open Market Committee (FOMC) began lowering its target for the federal funds rate 5.25 % in September of 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 1 to 0.25 percent in December 2008." What is the relationship between the federal funds rate falling and the money supply increasing? How does lowering the target for the federal funds rate "pour money" into the banking system?

To decrease the federal funds rate, the FED must increase the money supply. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

When Congress established the Federal Reserve in 1913, its main responsibility was Congress broadened the Fed's responsibility since

To make discount loans to banks suffering from large withdrawals by depositors the 1930's as a result of the Great depression

Suppose that the federal Reserve engages in an open market sale of $19 million in US treasury bills to banks. In the T-accounts for the Fed and for the banking system shown here, fill in the missing information. Federal Reserve Assets __________ - $19 million Liabilities Reserves - $19 million Banking System Assets Treasury Bills $19 million __________ -$19 million

Treasury Bills Reserves

During the German hyperinflation of the 1920s many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation

True

"Federal Reserve Notes... shall be redeemed in lawful money on demand at the Treasury Department of the United states, in the city of Washington, District of Columbia, or at any other Federal Reserve bank." If you took a $20 bill to the Treasury Department or Federal Reserve bank, what will type of "lawful money" is the government likely to redeem it?

With another Reserve Note of equal value.

Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.

Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.

HW #4 Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from ____________ The new short-run macroeconomic equilibrium occurs at __________ Long-run adjustment will shift the SRAS curve from ______________ as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at ________

___AD0 to AD1___ __point B_ ____SRASo to SRAS1____ ___point C____

HW #1 Graph: At the new short run equilibrium, the unemployment rate will __________ compared to the unemployment rate at the initial equilibrium, prior to the increase in exports. Which of the following best explains how the economy will adjust back to long-run equilibrium? A. short-run aggregate supply will increase (shift rightward) as firms and workers adjust to the new price level. B. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. C. Aggregate demand will increase, restoring the original equilibrium price and quantity. D. Aggregate demand will decrease, restoring the original equilibrium price and quantity. At the new long-run equilibrium, a. real GDP and price level will be higher and the unemployment rate will be lower compared to the initial equilibrium, prior to the increase in exports. b. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports. C. real GDP, the unemployment rate and the price level all will remain the same compared to the initial equilibrium, prior to the increase in exports. D. Real GDP and the price level will be higher but the unemployment rate will remain the same compared to the initial equilibrium, prior to the increase in exports.

____be lower____ B. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. B. Real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.

The US penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high and it has cost the US treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist Francois Velde of the Federal Reserve Bank of Chicago has proposed making the current penny worth 5 cents. The effect of this proposal would cause __________ the value of M1. Is this change likely to have much impact on the economy? a. Yes b. No

__an increase in __ B. No

Which one of the following is not a function of money? a. Open market operation b. Medium of exchange c. Store of value d. Unit of account If something is to be considered as money, it has to fulfill ________________

a. Open market operation ___All four function____

Congress passed legislation to create the Federal Reserve System in order to .. The most important role of the Federal Reserve in today's US economy is

a. end the instability created by bank panics by acting asa a lender of last resort. c. controlling the money supply to pursue economic objectives.

In a speech delivered in June 2008, Timothy Geithner, then president of the Federal reserve Bank of New York and later US treasury secretary, said: a. ) What did Geithner mean by the "non-bank financial system"? b.) What is a "classic type of run"? c.) Why would deposit insurance provide the banking system with protection against runs?

a.) money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households b.) Many depositors simultaneously decide to withdraw their money from a bank. c. ) Since most depositors are insured, it is less likely that panicked buyers will simultaneously with draw funds.

A student says the following " I understand why the Fed uses expansionary policy but I don't understand why it would ever use contradictory policy but I don't understand why it would ever use contradictory policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is

above potential GDP and the price level is rising

If the Fed itself admits that there are many obstacles in the way of effective monetary policy, why does it still engage in active monetary policy rather than use a monetary growth rule, as suggested by Milton Friedman and his followers? Policy makers at the Fed believe that

although it is not perfect, active monetary policy is still a stabilizing force in the economy

"Despite recent major increases in the money supply, he said, the money stays in banks." In the quote, when the official says "the money stays in banks, "he is referring to _______ in the reserves in banks. But the real problem was that banks were not ________ the reserves. The reason for this may have been a lack of ________.

an increase lending borrowers

Which one of the following is not a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? - Paper currency is a good medium of exchange because it is a. universally acceptable b. not valuable c. divisible d. of standard quality e. durable

b. not valuable

In the securitization process,

banks grant loans to households and bundle the loans into securities that are then sold to investors.

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to By raising the discount rate, the Fed leads banks to make_______ loans to households and firms, which will _______ checking account deposits and the money supply.

buy US treasury securities from the public. fewer; decrease.

If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to If the FOMC orders the trading desk to sell Treasury securities,

buy US treasury securities. the money supply curve will shift to the left, and the equilibrium interest rate will rise

What is "quantitative easing"? Quantitative easing involved the Fed's What is "Operation Twist"? "Operation Twist" refers to Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"? a. to increase aggregate demand b. To keep interest rates on 10-year treasury notes low c. To keep interest rates on mortgages low. d. All of the Above

buying longer term Treasury securities that are not usually involved in open market operations. the Fed's program to purchase $400 billion in long-term treasury securities while selling an equal amount of shorter-term treasury securities. d. All of the above

Which of the following is NOT one of the monetary policy goals of the Federal Reserve ("the fed") a. high employment b. Stability of financial markets c. a high foreign exchange rate of the US dollar relative to other currencies d. price stability.

c. A high foreign exchange rate of the US dollar relative to other currencies.

Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. All of the following are correct except: a. Consumers gain because the volume of their loans decrease. b. Firms win since they don't have pay for credit card processing fees. c. Firms lose since they don't have the convenience of credit cards. d. There is substantial loss for the credit card companies as they lose business.

c. Firms lose since they don't have the convenience of credit cards.

The Federal Reserve acting as the lender of the last resort to prevent a bank panic

constitutes offering discount loans to distressed banks, but the "bail out of the banks" involved providing funds to the banks in exchange for ownership in those banks.

William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was quoted as saying, "The role of the Federal Reserve is to remove the punch bowl just as the party gets going." When he said "to remove the punch bow," he meant to engage in _________ policy In terms of the economy, "just as the party gets going"refers to a situation in which real GDP ________ potential GDP, which will result in _______ the inflation rate.

contractionary is greater than an increase in

The english economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit" Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money? a. Yes. The goods fulfill all four functions of money. b. NO. the goods are not a medium of exchange. c. No. the goods are only a medium of exchange and store a value. d. No. the goods are not a store of value.

d. No. The goods are not a store of value.

The process of ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets. Which of the following is NOT a factor that helped lead to the financial crisis of 2007-2009? a. high leverages of financial firms that purchased mortgage-backed securities b. deposit insurance for commercial banks. c. Falling housing prices. D. All of the above.

d. securitization b. deposit insurance for commercial banks.

To affect economic variables such as real GDP or the price level, the monetary policy target the Federal Reserve has generally focused on is the

federal funds rate

The interest rate that banks charge each other for overnight loans is called the Which of the following statements is correct? a. A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead b. Changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets. c. The effect of a change in the federal funds rate on long-term interest rates is usually smaller than it is on short- term interest rates. d. All of the above are true.

federal funds rate All of the above are true.

An article in the New York Times in 1993 states the following about Fed Chairman Alan Greenspan's decision to no longer announce targets for the money: " Since the late 1970's, the Federal reserve has made many of its most important decisions by setting a specific target for growth in the money supply... and often adjusted interest rates to meet them." If the Fed would no longer have a specific target for the money supply, it would be targeting the The Fed gave up targeting the money supply because

federal funds rate the relationship between monetary aggregates and other economic variables was becoming unreliable.

The interest rate that banks charge each other for overnight loans is called the As interest rates decline, stocks become a ______ attractive investment relative to bonds, which causes the demand for stocks and their prices to ________

federal funds rate. more; rise

Former president Reagan once stated that inflation "has one cause and one cause along: government spending more than government takes in." The statement is correct in that such expansionary________ policy is likely to stimulate aggregate ______, which can cause inflation . In addition, budget deficits can cause inflation if

fiscal; demand the central bank buys the bonds used to finance the deficits

An article in the Wall Street Journal referred to the chair of the Fed as "the nation's top economic position." This statement is true because the chairman of the fed.

has the ability to influence interest rates for the world's top reserve currency

When interest rates on Treasure bills and other financial assets are low, the opportunity cost of holding money is______, so the quantity of money demanded will be________.

low; high

HW #2 Graph In the new short-run equilibrium, the unemployment rate is ________ the unemployment rate in the initial equilibrium prior to the increase in the price of oil. Which of the following best explains how and why the economy will adjust back to long- run equilibrium? A. Aggregate demand will increase, restoring the original equilibrium price and quantity. B. Short-run aggregate supply will decrease(shift leftward) as firms and workers adjust to the new, higher price level. C. Aggregate demand will decrease, restoring the original equilibrium price and quantity. D. Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices. After the adjustment of aggregate supply is complete, the economy returns to equilibrium at A. in between points A & B B. A C. B. D. a point lower that (i.e., south-east of ) A When the economy returns to long-run equilibrium A. real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.

higher than D. Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and rices. B. A A. Real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.

Very high rates of inflation are called Governments sometimes allow hyperinflation to occur because

hyperinflation when governments wants to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.

Very high rates of inflation are called Government sometimes allow hyperinflation to occur because.

hyperinflation when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

There is a strong link between changes in the money supply and inflation

in the long run

" The fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount." The statement is ______ because an increase in the money supply ______ affect real GDP directly.

incorrect does not

If the Federal Reserve purchases $150 Million worth of US treasury bills from the public, the money supply will _______

increase`

The real-world money multiplier

is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash.

Which of these variables are the main monetary policy targets of the Fed?

money supply and the interest rate

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?

nominal GDP will increase.

The purchases Fed Chairman Bernanke is referring to are A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be

open market purchases of government securities contractionary, reducing lending and economic activity.

When the Fed conducts monetary policy, the most relevant interest rate is the

short-term nominal interest rate

"the objectives of price stability and long-term interest rates are essentially the same objective." This is true because

stable prices make it easier to plan for the so expectations can be stable, which makes it less costly to make loans.

The federal funds rate is Additionally, the federal funds rate is

the interest rate that banks charge each other for overnight loans. very important for the fed's monetary policy because the federal funds rate as a monetary policy target since it can control the rate through open market operations.

If the Fed believes the economy is about to fall into recession, it should If the Fed believes the inflation rate is about to increase, it should

use an expansionary monetary policy to lower the interest rate and AD to the right use a contradictory monetary policy to increase the interest rate and shift AD to the left.

According to an article in the Economist magazine, Senator Charles Schumer of New York claimed that Bitcoin is "just what drug dealers have been waiting for. " Drug dealers might find using a virtual currency like Bitcoin to be appealing because it can be a. printed by anyone b. used to make anonymous transactions c. exchanged for illegal, but not legal, drugs. d. traded in for true currency at most banks.

used to make anonymous transactions.