Exam 5 Flashcards
chpt: 14, 15, 16
Purchasing groceries using a debit card best exemplifies money serving as a
medium of exchange
In the United States, the money supply (M1) includes
coins, paper currency, and checkable deposits
Most modern banking systems are based on
fractional reserves
In economics, money is defined as
any asset people generally accept in exchange for goods and services
Economies where goods and services are traded directly for other goods and services are called ________ economies
barter
Commodity money
has value independent of its use as money
The statement, “My iPhone is worth $700” represents money’s function as
a unit of account
The M1 measure of the money supply equals
currency plus checking account balances plus traveler’s checks
The M2 measure of the money supply equals
M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares
You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. Using the M1 measure of money, you have
money = $300, annual income = $6,000, and wealth = $4,300
Credit card balances are
not part of the money supply
Bank reserves include
vault cash and deposits with the Federal Reserve
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%
$2,000
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
Refer to Scenario 25-2. As a result of Kristy’s deposit, Bank A’s excess reserves increase by
$8,000
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%
Refer to Scenario 25-2. As a result of Kristy’s deposit, Bank A can make a maximum loan of
$8,000
In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in
bank deposits
If the required reserve ratio is RR, the simple deposit multiplier is defined as
1/(RR)
If banks do not loan out all their excess reserves, then the real world multiplier is
smaller than 1/RR
When banks gain ________, they can ________ their loans; and the money supply ________
reserves; increase; expands
The Federal Reserve was established in 1913 to
stop bank panics by acting as a lender of last resort
Which of the following is not a function of the Federal Reserve System, or the “Fed”?
insuring deposits in the banking system
Open market operations refer to the purchase or sale of ________ to control the money supply
U.S. Treasury securities by the Federal Reserve
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of
$5 million
The process of bundling loans together and buying and selling these bundles in a secondary financial market is called
securitization
One way investment banks differ from commercial banks is that investment banks
do not take in deposits
In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by
providing funds to banks in exchange for stock
Refer to the Article Summary. The CBR’s announcement in August 2017 of its intention to bail out Otkritie Bank raised fears of a nationwide banking crisis in Russia. Fears of a banking crisis have been known to lead to a bank run, a situation in which
many depositors simultaneously decide to withdraw money from a bank
Which of the following is not a tool the Fed uses to manage the money supply?
expanding and contracting deposit insurance
The discount rate is
the interest rate the Fed charges to banks for loans from the Fed
In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience
hyperinflation
The US Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?
monetary policy
Which of the following would reduce the money supply?
Commercial banks sell government bonds to the public
The securities held as assets by the Federal Reserve Banks consist mainly of
Treasury bills, Treasury notes, and Treasury bonds
Which of the following is a tool of monetary policy?
open-market operations
The interest rate that banks charge one another on overnight loans is called the
federal funds rate
If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time
low; lowers
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives
The Federal Reserve System’s four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions
Federal Reserve Board Chairmen Paul Volcker, as well as later Fed chairs, focused on which of the following as their main goal of monetary policy?
price stability
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded
The Fed’s two main monetary policy targets are
the money supply and the interest rate
An increase in the money supply will
decrease the interest rate
The money market model is concerned with ________ and the loanable funds market model is concerned with ________
short-term nominal interest rates; long-term real interest rates
The federal funds rate is
the interest rate banks charge each other for overnight loans
When the Fed buys a security from a financial firm and the financial firm agrees to buy back the security the next day, the transaction is known as
a repurchase agreement
When the Fed sells a security to a financial firm and the Fed agrees to buy back the security the next day, the transaction is known as
a reverse repurchase agreement
The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect
real interest rates
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports
In November 2008, the Fed began its first round of quantitative easing. In total, the Fed conducted ________ rounds of quantitative easing before ending the program in October 2014
3
Expansionary monetary policy refers to the ________ to increase real GDP
Federal Reserve’s increasing the money supply and decreasing interest rates
Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be an example of ________ monetary policy designed to ________ aggregate demand
expansionary; increase
Which of the following characterizes the Fed’s ability to prevent recessions?
The Fed is able to keep a recession shorter and milder than it would otherwise be
When the Fed increases the money supply
the interest rate falls and this stimulates investment spending
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________
lower; lower
Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________
monetary; publicly announced level of inflation
The Fed’s preferred measure of inflation is
the core personal consumption expenditures index
A monetary growth rule means that
the money supply should grow at a constant rate
The Taylor rule helps explain the relationship between the Fed’s ________ and ________
federal funds target; economic conditions
When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages
tightened; harder
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac
sell bonds to investors and use the funds to purchase mortgages from banks
By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes
sub-prime; “Alt-A”
In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock
Troubled Asset Relief Program (TARP)
The larger the fraction of an investment financed by borrowing
the greater the potential return and potential loss on that investment
Expansionary fiscal policy is so named because it
is designed to expand real GDP
The amount by which federal tax revenues exceed federal government expenditures during a particular year is the
budget surplus
Vulcan Materials stock price soared in the days following the election of President Trump. Vulcan’s products, such as asphalt and concrete, are used in construction and President Trump had pledged to bring about increased spending on infrastructure projects that would require such products. Spending on infrastructure projects is an example of ________ aimed at increasing real GDP and employment
discretionary fiscal policy
discretionary fiscal policy
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle
The largest and fastest-growing category of federal government expenditures is
transfer payments
From the 1960s to 2016, transfer payments
have risen from 25 percent to about 49 percent of federal government expenditures
The three categories of federal government expenditures, in addition to government purchases, are
interest on the national debt, grants to state and local governments, and transfer payments
Government transfer payments include which of the following?
Social Security and Medicare programs
President Trump’s proposed increase in spending on infrastructure projects is an example of discretionary fiscal policy aimed at increasing
real GDP and employment
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment
taxes; expenditures
Congress and the president carry out fiscal policy through changes in
government purchases and taxes
Fiscal policy is determined by
Congress and the president
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand
An increase in individual income taxes ________ disposable income, which ________ consumption spending
decreases; decreases
Tax cuts on business income ________ aggregate demand
would increase
Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect
multiplier
The government purchases multiplier equals the change in ________ divided by the change in ________
equilibrium real GDP; government purchases
A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect
increase; increase
Data indicates that recessions following financial crises ________ recessions which do not follow financial crises
are more severe than
Crowding out refers to a decline in ________ as a result of an increase in ________
private expenditures; government purchases
A tax rebate, like the one issued in 2008, is likely to ________ consumption spending ________ than would a permanent tax cut
increase; less
When President Obama took office in January 2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. The next month, Congress passed the American Recovery and Reinvestment Act of 2009, an $840 billion package of spending increases and tax cuts that was
the largest fiscal policy action in U.S. history
The federal government debt equals
the total value of U.S. Treasury bonds outstanding
If the federal government’s expenditures are less than its tax revenues, then
a budget surplus results
The cyclically adjusted budget deficit calculates the budget surplus or deficit at
potential GDP
Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________
aggregate supply; taxes
As the tax wedge associated with a given economic activity gets smaller, we would expect
more of that economic activity to occur
The growth rate of real GDP equals
the growth rate of hours worked plus the growth rate of labor productivity
The Trump administration’s policies to increase labor productivity growth include all of the following except
raising the federal minimum wage
Congress and the President carry out fiscal policy through changes in
government purchases and taxes
