monetary policy test

Question 1

monetary policy limited reserves

Answer 1

change reserve rate
change discount rate
buy or sell bonds

Question 2

monetary policy ample reserves

Answer 2

change IOR and discount rate

Question 3

4 reasons why Money Demanded shifts

Answer 3

change in price level
change in Real GDP
change in technology
change in institutions (regulations on banks)

Question 4

simple interest formula

Answer 4

V = (1+r)^n * P

Question 5

compound interest formula

Answer 5

V = (1 + r/k)^nk * P

Question 6

monetary equation of exchange formula

Answer 6

MV = PQ
M = money supply
V = money’s velocity
P = price level
Q = real GDP
P*Q = nominal GDP or current output at current prices

Question 7

money multiplier formula

Answer 7

1/rr

Question 8

3 functions of money

Answer 8

medium of exchange
store of value
unit of account/standard of value

Question 9

medium of exchange

Answer 9

an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

Question 10

store of value

Answer 10

means holding purchasing power overtime or storing purchasing power for the future

Question 11

unit of account/standard of value

Answer 11

the commonly accepted measure individuals use to set prices and make economic calucations

Question 12

5 criteria for money

Answer 12

portable
durable
divisible
acceptable
stable

Question 13

physical assets

Answer 13

a claim on a tangible object that gives the owner the right to dispose of the object as they wish
ex) house or car

Question 14

financial assets

Answer 14

a paper claim that entitles the buyer to future income from the seller
ex) stocks, bonds, loans, bank deposits

Question 15

federal funds rate

Answer 15

bank to bank loans
the interest rate at which funds are borrowed and lent in the federal funds market

Question 16

increase of FF

Answer 16

contractionary monetary policy

Question 17

decrease FF

Answer 17

expansionary monetary policy

Question 18

discount rate

Answer 18

the interest rate banks pay the Fed for overnight loans (short term) in order to meet the required reserves

Question 19

decrease discount rate

Answer 19

lowerrs cost for borrowing = banks loan more = increase money supply
expansionary monetary policy

Question 20

increase discount rate

Answer 20

increase cost for borrowing = banks loan less = decrease money supply
contractionary monetary policy

Question 21

fiscal policy

Answer 21

change government spending
change transfer payments
change taxes

Question 22

who handles monetary policy

Answer 22

federal reserve bank

Question 23

who handles fiscal policy

Answer 23

congress

Question 24

bond prices and interest rate relationship

Answer 24

inversely related

Question 25

M1

Answer 25

serves primarily as a medium of exchange (very liquid)
currency
traveler’s check
checkable deposits (checking account)
savings
money market mutual funds
financial assets (near moneys)

Question 26

M2

Answer 26

serves as a store of value
M1
time deposits (certificate of deposits)
overnight eurodollars

Question 27

why SLF shifts

Answer 27

change in private savings behavior (consume more = less supply)
change in capital inflow (more foreign money = more supply)

Question 28

why DLF shifts

Answer 28

change in perceived business opportunities
(positive = more borrow)
change in government borrowing (budget deficit = more borrow/budget surplus = less borrow)

Question 29

commodity money

Answer 29

something that performs the function of money and has intrinsic value (gold, silver, cigarettes)

Question 30

fiat money

Answer 30

something that serves as money but has no other value or uses (paper money, coins)

Question 31

transaction demand

Answer 31

demand for money because it serves as a medium of exchange or to purchase goods and services (independent of interest rates)

Question 32

asset demand/speculative demand

Answer 32

demand for money because it serves as a store of value (dependent of interest rate)

Question 33

precautionary demand

Answer 33

demand for money to serve as protection against an unexpected need

Question 34

more MS

Answer 34

lower interest rates

Question 35

less mS

Answer 35

higher interest rates

Question 36

economic goals for federal reserve

Answer 36

promote full employment
maintain price stability
encourage economic growth

Question 37

how many federal reserves in nation

Answer 37

12

Question 38

board of governors

Answer 38

7
control reserve rate and discount rate
serve on Federal open market committee (buy or sell bonds)
serve 14 year terms

Question 39

Interest on reserves (IOR)

Answer 39

the interest rate that the federal reserve pays commerical banks to hold reserves
set by the Fed

Question 40

administered rate

Answer 40

set by the Fed
discount and IOR rates

Question 41

expansionary policy for ample reserves

Answer 41

decrease IOR and discount
FFR falls also

Question 42

contractionary policy

Answer 42

increase IOR and discount rate
FFR also increases

Question 43

demand of loanable funds

Answer 43

borrowing, supply of bonds

Question 44

supply of loanable funds

Answer 44

savings, the demand for bonds

Question 45

crowding out

Answer 45

an increase in government spending (deficit)
a negative effect on investment spending
expansionary fiscal policy

Question 46

crowding in

Answer 46

contractionary fiscal policy
a decrease in government spending (surplus)
a positive effect on investment spending