Lectures 22-24

Question 1

What is a reserve requirement?

Answer 1

The minimum fraction deposits that banks must hold as reserves?

Question 2

What happens when the reserve requirements increase?

Answer 2

Banks can make fewer loans
The money supply SHRINKS

Question 3

What kind of monetary policy is raising the reserve requirement?

Answer 3

Contractionary

Question 4

What happens when the reserve requirements decrease?

Answer 4

Banks can make more loans
Money supply GROWS

Question 5

What kind of monetary policy is lowering the reserve requirement?

Answer 5

Expansionary

Question 6

How do you calculate the money multiplier?

Answer 6

change money supply/change monetary base

Question 7

Is the change in money supply or monetary base greater?

Answer 7

The change in money supply is greater than the change in the monetary base

Question 8

How do you calculate the money multiplier assuming NO excess reserves?

Answer 8

1/reserve requirement

Question 9

How do you calculate the money multiplier assuming YES excess reserves?

Answer 9

1/fraction banks hold as reserves

Question 10

What line does open market purchases shift? And what way?

Answer 10

The supply line shifts to the right

Question 11

In the market for reserves (interbank lending), an open market purchase shifts the ___ line to the ____ and ____ the federal funds interest rate and _____ the quantity of reserves.

Answer 11

An open market purchase shifts the supply line to the right and decreases the federal funds interest rate and increases the quantity of reserves.

Question 12

In the market for reserves, what does the supply line represent?

Answer 12

The monetary base

Question 13

In the market for money, an open market purchase does what?

Answer 13

Shifts the supply line to the right which decreases the short term interest rate and increases the quantity of moneyWh

Question 14

What is the opportunity cost of holding money?

Answer 14

The short term interest rate of money

Question 15

In the market for loanable funds, what happens after an open market purchase?

Answer 15

The supply line shifts to the right, which decreases the REAL INTEREST RATE and increases the quantity of loanable funds.

Question 16

In the real economy, what happens after an open market purchase?

Answer 16

The aggregate demand line shifts to the right. The price level increases and the real GDP increases (meets potential GDP)

Question 17

What happens when a country’s currency appreciates?

Answer 17

The exchange rate increases

Question 18

In the market for USD, what happens as the exchange rate decreases?

Answer 18

US exports become more competitive. Foreign households want more US goods and demand more USD

Question 19

In the market for USD, what happens as the exchange rate decreases (pt 2)?

Answer 19

The demand for USD increases

Question 20

In the market for USD, what happens as the exchange rate increases?

Answer 20

American consumers are more likely to purchase foreign imports and supply their USD.

Question 21

What do currency traders do when the USD exchange rate is lower?

Answer 21

They purchase more USD

Question 22

What do currency traders to when the USD exchange rate is higher?

Answer 22

The sell more USD

Question 23

What are the demand shifters (USD)?

Answer 23

Change in the demand for US exports
rGDP growth in close trading partner countries
Changes to the real interest rate
Expected future exchange rate

Question 24

What relationship do the demand shifts have of USD?

Answer 24

POSITIVE

Question 25

What are the exchange rate policies?

Answer 25

Market rate (floating exchange rate) Managed Float Crawling peg Peg (fixed exchange rate)

Question 26

What is the least interventionist exchange rate policy?

Answer 26

Floating/market

Question 27

What is a managed float?

Answer 27

If a currency appreciates/depreciates past a certain amount, the central bank steps in

Question 28

What kind of countries usually use a peg exchange rate policy?

Answer 28

Countries reliant on trade or tourism

Question 29

How does a central bank appreciate its currency?

Answer 29

by buying their own currency using reserves of other countries

Question 30

What does purchasing its own currency do (in relations to supply and demand)

Answer 30

Increases demand for their currency

Question 31

When would a central bank want to appreciate its currency?

Answer 31

When the market rate falls below the target rate

Question 32

When would a central bank want to depreciate its currency?

Answer 32

When the market rate rises above the target rate

Question 33

How does a central bank depreciate its own currency?

Answer 33

By selling its own currency.

Question 34

What does the selling of a currency do (by the currency owner)

Answer 34

Increases the supply of their currency

Question 35

What does the balance of payments always have to equal?

Answer 35

0

Question 36

What are the 3 accounts in the balance of payments?

Answer 36

current account capital/financial account settlements account

Question 37

What does a positive number in the current/capital account mean?

Answer 37

Money is coming into the US

Question 38

How do you calculate the current/capital account?

Answer 38

Exports-imports Net interest income net transfers net investments

Question 39

What does net interest income show up as is it is coming INTO THE US?

Answer 39

Positive, negative if coming out of the US

Question 40

What do net transfers always show up as?

Answer 40

negative

Question 41

What does money from factories in foreign countries show up as in the capital account?

Answer 41

negative

Question 42

In the official settlements account, money coming into the country from other countries shows up as ____ and losing money shows up as _____

Answer 42

Negative, positive

Question 43

Remittances are part of what account?

Answer 43

The CURRENT account

Question 44

Purchasing a good from another country shows up as ___ in the ___ account?

Answer 44

A negative entry into the current account