Macroeconomic Principles

Question 1

What tools does the Federal Reserve have with regards to monetary control?

Answer 1

FOMC - Federal Open Market Committee and the open market operation, the purchase and sale of U.S. government bonds.

Question 2

What are open market operations?

Answer 2

The purchase and sale of U.S. government bonds.

Question 3

When the Fed buys bonds, what impact does this have on the money supply and aggregate demand?

Answer 3

After the purchase, these dollars are in the hands of the public. Thus, an open-market purchase of bonds by the Fed increases the money supply.

Question 4

When the Fed sells bonds, what impact does this have on the money supply and aggregate demand?

Answer 4

After the sale, the dollars the Fed receives for the bonds are out of the hands of the public. Thus, an open-market sale of bonds by the Fed decreases the money supply.

Question 5

What is a discount rate?

Answer 5

The interest rate banks pay when borrowing from the Federal Reserve.

Question 6

When the Fed reduces the discount rate, what impact will this have on the money supply and the aggregate demand?

Answer 6

A lower discount rate encourages banks to borrow from the Fed, increasing the quantity of reserves and the money supply.

Question 7

When the Fed increases the discount rate, what impact will this have on the money supply and the aggregate demand?

Answer 7

Higher discount rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves in the banking system, which in turn reduces the money supply.

Question 8

What is a reserve ratio?

Answer 8

The fraction of total deposits that a bank holds as reserves.

Question 9

What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy?

Answer 9

Decrease the reserve requirements; therefore lowering the reserve ratio.

Question 10

What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy?

Answer 10

Increase the reserve requirements; therefore raising the reserve ratio.

Question 11

If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)?

Answer 11

Interest rates lower and aggregate demand expands.

Question 12

If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand?

Answer 12

Raises interest rates and an increase in aggregate demand.

Question 13

If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand?

Answer 13

Raises interest rates and an increase in aggregate demand

Question 14

What is money

Answer 14

Requires 3 things to be money:

• store of value (holds value well)
• medium of exchange (used in exchange for goods and services)
• unit of account (be divisible- make change- etc)

Question 15

What is the difference between micro and macro economics

Answer 15

Macroeconomics is the big picture - unemployment inflation, etc.

Question 16

What does inflation attack

Answer 16

The value of money

Question 17

Historical money

Answer 17

Things that have been used as money in the past. Ex. Seashells, gold, teeth etc.

Question 18

What are the two types of currency

Answer 18

Fist and commodity

Question 19

Fiat currency

Answer 19

Currency whose value is set by the government or the market

Question 20

Commodity currency

Answer 20

Currency which is made of a valuable commodity (like gold or silver)

Question 21

What is printing money?

Answer 21

It is replacing older worn bills.

Question 22

What is M1

Answer 22

Physical money in peoples hands. Liquid assets

Question 23

What is M2

Answer 23

Total money in supply. Savings, funds, etc.

Not liquid. It would take an extra step such as going to the atm, closing a fund, etc.

Question 24

Is a credit card money

Answer 24

It is not money, it is debt

Question 25

At high interest rates, what is the demand of money.

Answer 25

Low demand of money

Question 26

If money demand rises, what happens to interest rates

Answer 26

Market interest rate rises

Question 27

What is monetary policy

Answer 27

Change of money supply controlled by the federal reserve.

Question 28

Who is the federal reserve

Answer 28

An independent institution that controls the money supply to attempt to control the interest rate in order to affect aggregate demand ultimately affect the GDP and unemployment.

Question 29

What are the 3 tools of the federal reserve?

Answer 29

Reserve requirement ratio
Open market operations
Discount window rate

Question 30

Reserve requirement ratio

Answer 30

How much the bank must keep as “reserves” at the federal reserve (our bankers bank)

Question 31

Open market operations

Answer 31

The buying and selling of US Government treasuries (bonds)

Question 32

Discount window rate

Answer 32

The rate of interest the Federal Reserve charges banks when banks borrow from the fed (to net their reserve requirements)

Question 33

If a reserve requirement is 10% how much of my $100 deposit will go into loans?

Answer 33

$90 goes into loans $10 goes into the reserve

Question 34

Bank loans and money supply

Answer 34

The process of loan to deposit to loan creates money

Question 35

What happened in 2008 with bank loans

Answer 35

Banks stopped lending and people stopped borrowing. Money stopped being created.

Question 36

What is fiscal policy

Answer 36

It is controlled by congress

It controls government expenditures and taxes

Question 37

Monetary policy

Answer 37

• Controlled by the federal reserve

- Controls the amount of money in the economy and thus the market interest rate.