Monetary and Fiscal Policy

Question 1

Money fulfills three important functions, it: (3)

Answer 1

■ acts as a medium of exchange;
■ provides individuals with a way of storing wealth; and
■ provides society with a convenient measure of value and unit of account

Question 2

This practice of lending
customers’ money to others on the assumption that not all customers will want all of
their money back at any one time is known as _____________ .

Answer 2

fractional reserve banking

Question 3

The amount of money that the banking system creates through the practice of
fractional reserve banking is a function of 1 divided by the reserve requirement, a
quantity known as the __________.

Answer 3

money multiplier

Question 4

The quantity equation

of exchange:

Answer 4

M × V = P × Y

Question 5

There

are three basic motives for holding money:

Answer 5

■ transactions- related;
■ precautionary; and
■ speculative.

Question 6

This phenomenon—whereby an increase in the money supply is thought in the
long run simply to lead to an increase in the price level while leaving real variables
like output and employment unaffected—is known as ________.

Answer 6

money neutrality

Question 7

___________ involve the purchase and sale of government bonds from and to commercial banks and/or designated market makers.

Answer 7

Open market operations

Question 8

To summarize, central banks can manipulate the money supply in one of three ways:

Answer 8

■ open market operations;
■ its official policy rate and associated actions in the repo market; and
■ manipulation of official reserve requirements.

Question 9

In very extreme instances, there may be occasions where the demand for money
becomes infinitely elastic—that is, where the demand curve is horizontal and individuals are willing to hold additional money balances without any change in the interest
rate—so that further injections of money into the economy will not serve to further
lower interest rates or affect real activity. This is known as a ________.

Answer 9

liquidity trap

Question 10

The money multiplier is equal to _______.

Answer 10

1 divided by the
reserve requirement.

There is an inverse relationship between the money multiplier and the reserve requirement.

Question 11

Precautionary balances tend to ____ with the

volume and value of transactions in the economy, and therefore _______.

Answer 11

rise, rise with GDP

Question 12

6 Monetarists are most likely to believe:
A there is a causal relationship running from inflation to money.
B inflation can be affected by changing the money supply growth rate.
C Rapid financial innovation in the market increases the effectiveness of monetary policy.

Answer 12

B