Midterm 2

Question 1

How does the federal Reserve regulate the level of investment in an economy?

Answer 1

By modifying the interest rates (which affects the aggregate demand)

Question 1

When the interest rates go down, the money demand goes up

Answer 1

True

Question 2

What is a reserve ratio?

Answer 2

A share of deposits that the banks holds aside as “reserves” so they can give out cash deposits at any time.

Question 3

How does the federal reserve increase money supply?

Answer 3

By reserving the reserve ratio (how much they reserve for withdrawals)

Question 4

What is contractionary monetary policy?

Answer 4

aka decrease in money supply, a decrease of money in circulation because of a higher reserve ratio.

Question 5

What is expansionary monetary policy?

Answer 5

When the bank has more money in circulation, because of a lower reserve ratio

Question 6

What is “discount rate”?

Answer 6

The rate of interest that the federal reserve charges commercial banks when commercial banks borrow money from the federal reserve.

Question 7

What happens when there is a higher discount rate?

Answer 7

It’s harder for commercial banks to borrow money from the federal reserve, reducing the supply of money in the economy

Question 8

What happens when there is a lower discount rate?

Answer 8

Commercial banks can borrow money more easily, increasing the money supply

Question 9

What are open market operations?

Answer 9

Mechanism used by the feds to regulate money supply

Question 10

What are government bonds?

Answer 10

Loaning money to the government in which you will receive interest from the government, as well as the payment returned in full

Question 11

What happens when there’s more government bonds?

Answer 11

The level of money in circulation or “money supply” decreases

Question 12

What happens when the price of a bond goes up?

Answer 12

When the federal reserve buys it back, the value of the bond increases, money supply also increases. Because individuals hold more of their wealth in the form of money.

Question 13

What happens when a reserve requirement or discount rate decreases?

Answer 13

The money supply increases

Question 14

What happens when a reserve requirement or discount rate increases?

Answer 14

The money supply decreases

Question 15

What happens if the gov. gives out stimulus checks?

Answer 15

The aggregate demand for goods and services will raise via expansionary fiscal policy (taxes will have to increase eventually)

Question 16

What is investment demands?

Answer 16

The demand for goods and services by firms that are investments in their business. (I need to invest in the service of a plumber to fix the toilets, in order to make it better later on)

Question 17

If the interest rate is high?

Answer 17

Investment demand is low

Question 18

If the interest rate is low?

Answer 18

Investment/aggregate demand rises and businesses can recover from the recession

Question 19

Pitfalls of monetary policies

Answer 19

If the business has to raise their prices because of inflation, they also have to raise the prices enough to make a profit, which may upset consumers and in turn hurt the business

Question 20

Decline in money supply…

Answer 20

…will raise equilibrium interest rate

Question 21

If people cut down on their spending…

Answer 21

…aggregate demand declines and inflation falls

Question 22

What is commodity money?

Answer 22

Refers to any form of money with intrinsic value (valuable without being a medium of exchange) (gold/silver coins)

Question 23

What is fiat money?

Answer 23

Refers to money that has NO intrinsic value (not valuable and is not a medium of exchange)

Question 24

What are checkable deposits?

Answer 24

Money held in banks in the form of deposits that can easily be used for transactions

Question 25

What happens to velocity of money during a recession?

Answer 25

The velocity of money is lower.

Question 26

What is transaction demand?

Answer 26

We all need money to buy goods and services when individuals want to hold more money in the for of cash for everyday purchases

Question 27

what is precautionary demand?

Answer 27

When people want to save more money for future uncertainties (specifically in the form of cash)

Question 28

What is speculative demand?

Answer 28

If you own your wealth in real estate, and you speculate it's going to crash-you would rather hold your wealth in the form of money and not an asset

Question 29

Factors the shift the money demand curve:

Answer 29

changes in aggregate price level: when the price level rises, all goods and services are more valuable. That causes the money demand curve to shift right

Question 30

Changes in real GDP:

Answer 30

if GDP increases, that implies that the economy is growing and expanding. The money demand curve shifts right

Question 31

Due to an oil price shock, the price of gas increases which raises the autonomous component of consumption. How does this affect equilibrium GDP?

Answer 31

It increases?

Question 32

If the Government hands out stimulus checks, according to the Aggregate Expenditure Model, equilibrium GDP will...?

Answer 32

Increases

Question 33

If the Federal Reserve raises money supply by reducing the reserve requirement, how will this affect GDP in the Aggregate Expenditures Model

Answer 33

Increases

Question 34

A new social media trend emerges that encourages people to save more of their income leading to a lower Marginal Propensity to consume. How does this affect equilibrium GDP ?

Answer 34

Decreases

Question 35

Suppose American goods became very popular in Australia, thereby raises the exports of the US. How will this affect the equilibrium GDP under the Aggregate Expenditures Model?

Answer 35

Increases

Question 36

Which of these will cause the Aggregate Expenditure curve to shift upwards?

Answer 36

Increase in Government spending on highways, decrease in the reserve requirement set by the Federal Reserve, increase in exports overseas

Question 37

If Aggregate Expenditure fall short of output/GDP, this causes inventories to?

Answer 37

Increase

Question 38

American products become very popular in Cuba, how does this affect the GDP of the US according to the Aggregate Expenditures Model?

Answer 38

It increases

Question 39

When Aggregate Expenditure exceeds output...

Answer 39

Inventories decline

Question 40

Imagine a scenario of hyperinflation where the prices of all goods and services have skyrocketed. Which of these is a tool that the Government can use to reduce inflation?

Answer 40

The fed. reserve increases reserve requirement

Question 41

Which of these is an example of commodity money?

Answer 41

Using gold, titanium, chickens, etc. as a medium of exchange

Question 42

Which of these is an example of inelastic demand?

Answer 42

Addictive substances for someone with clinical addiction and essential medications

Question 43

Which of these is a disadvantage of the barter system?

Answer 43

Bartered goods cannot always be used as a medium of exchange as both parties may not always want each has to offer, Bartered goods cannot be divided into smaller units, Bartered goods may depreciate in value, which may make it harder to exchange in the future.

Question 44

The Federal Reserve has decided to reduce the reserve requirement for commercial banks. This will cause Aggregate Demand/Expenditure to...

Answer 44

Increase

Question 45

The Federal Reserve decides to sell more Government bonds in the open market to citizens. This causes investment demand to...

Answer 45

Decrease

Question 46

Facebook, Apple and Google all decide to open new offices in Bloomington-Normal leading to many workers from around the country relocating. How does this affect the Velocity of money in Bloomington-Normal, IL?

Answer 46

Velocity increases