Final Macro

Question 1

M1

Answer 1

Currency (bills and coins) (half)
Checking accounts (other half)

Most liquid part of the money supply

Question 2

Liquidity

Answer 2

determined by how fast, easily, and reliably it can be converted into cash

Question 3

Functions of Money

Answer 3

1. medium of exchange
2. unit of account
3. store of value

Question 4

Roles of Financial Institutions

Answer 4

• reducing info costs
• reducing transaction costs
• diversifying assets to reduce risk

Question 5

Bond Prices

Answer 5

Fluctuate in response to forces of the marketplace (market interest rates)

Question 6

Bond Prices and Interest Rates

Answer 6

• coupon rate
• maturity date of the bond
• face value of the bond

Question 7

Money Multiplier

Answer 7

measures the max amount the money supply can increase when new deposits enter the system

Question 8

Federal Funds Rate

Answer 8

the interest rate that financial charge each other for overnight loans used as reserves

Question 9

Tools of Monetary Policy

Answer 9

1. Interest on reserve balances
2. discount rate
3. open market operations
4. reserve requirement

Question 10

Goals of Monetary Policy

Answer 10

• economic growth with low employment
• stable prices with moderate long-term interest rates

Question 11

Expansionary Monetary Policy

Answer 11

• used in times of economic downturn to boost aggregate demand
• the fed purchases bonds to push the interest rate lower, leading to more spending and investment

Question 12

Contractionary Monetary Policy

Answer 12

• used when inflationary pressures build up in the economy
• the fed sells bonds to push the interest rate higher, slowing down or reducing aggregate demand

Question 13

Classical Monetary Theory

Answer 13

• focus on long run adjustments
• wages, prices, rates are flexible
• quantity theory of money

Question 14

Keynesian Monetary Theory

Answer 14

• could create more activity for an economy in the short-run
• would have no effect when an economy is in the midst of a deep recession or depression

Question 15

Monetarists Theory

Answer 15

believe that expansionary monetary policy only creates inflation

Question 16

Demand Shocks

Answer 16

can come from reductions in consumer demand, investment, gov spending, or net exports

Question 17

Supply Shocks

Answer 17

arise from changes in:
- resource cost
- inflationary expectations
- technology

Question 18

Fed purchases bonds to push interest rates lower…

Answer 18

leads to more spending and investing

Question 19

Fed sells bonds to push interest rate higher…

Answer 19

leads to slowing down and reducing aggregate demand

Question 20

Financial Intermediaries

Answer 20

Banks, mutual funds, insurance companies

Acquire funds from savers and then lend those funds to borrowers

Question 21

The main tool of monetary policy

Answer 21

interest on reserve balances

Question 22

Classical Economists

Answer 22

believe that in the short run, changes in the money supply will not change the output

Question 23

Equation of Exchange

Answer 23

M x V + P x Q