Macroeconomics Test 2
How do banks "create money"
When there is an increase in deposits, banks gain reserves and make new loans so that money supply expands
An induced change
a change in aggregate expenditure caused by a change in income and does depend on the level of GDP
An autonomous change
a change in expenditure not caused by a change in income will cause rounds of induced changes in expenditure
If you withdraw money from a checking account, what happens to the bank's balance sheet
a decrease in reserves and deposits
The multiplier effect is the process by which
an increase in autonomous expenditure leads to a larger increase in real GDP
A central bank can "create" money by buying bonds because
by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply
M1 definition of money supply
cash, checking account, traveler's check not savings accounts or credit accounts
How do you calculate MPC?
change in C / change in Y
The most important determinant of consumption is
current disposable income
A higher required reserve ratio does what to the value of the simple deposit multiplier?
decreases
Autonomous expenditure
expenditure that does not depend on the level of GDP
When aggregate expenditure is greater than GDP, inventories will _____, and GDP and total employment will _______.
fall, increase
Fiat money
has no value except as money
Commodity money
has value independent of its use as money
A double coincidence of wants
in a barter trade, each person must want what the other one has
According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to what effects on short run and long run GDP?
lower real GDP in the short run but higher real GDP in the long run
When the Fed sells treasury securities in the open market,
the buyers of the securities pay for them with checks and bank reserves fall
The quantity theory of money is better able to explain what
the inflation rate in the long run
The simple deposit multiplier equals
the inverse of the required reserve ratio
When the Fed buys bonds through open market operations
the money supply will increase
When the Fed purchases treasury securities in the open market,
the sellers of the securities deposit the funds in their banks and bank reserves increase
The value of the multiplier is larger when the value of the MPC is what?
the value of the MPC is smaller
When is the economy in a recession?
when the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP
IF MPC is 0.9 how much consumption will result if disposable income is $100
$90
The formula for the multiplier
1/(1-MPC)
Would a larger multiplier lead to more severe recessions or less severe recessions
A larger multiplier means that small changes in spending lead to large changes in GDP, thus recessions would be more severe
How does the government create money?
By making loans or printing currency
What are the four main determinants of investment?
Expectations of future profitability interest rates taxes cash flow
The quantity theory's explanation about the cause of inflation
If the money supply grows faster than real GDP, then there will be inflation
What happened to interest rate if it caused savings to increase?
Interest rate increased
How would an increase in interest rates affect investment?
Interest rate increases raise the cost of borrowing, so real investment spending will decline
When a planned aggregate expenditure is less than real GDP, what happens to firms' inventories
Inventories accumulate if the production is not scaled back
Quantity theory of money formula
MxV = PxY
Which tool for policy is most important for the Fed's control of money supply?
Open market operations
What policy tools does the Fed use to control the money supply?
Open market operations, discount policy, and reserve requirements
