Review Flashcards
What is not included in M1 or M2?
credit cards
Real GDP =
C+I+G+(X-M)
consumption, investment, government spending
X-M is
exports minus imports
The discount rate is
the interest rate the Fed charges the bank
Money multiplier =
1/reserve ratio
If the reserve ratio is 5%, the money multiplier is
1/.05 or 20
What is not a function of money?
protection against inflation
If the money multiplier is 3, and the Fed wants to increase the money supply by $900,000 it could
buy $300,000 worth of bonds
If the Federal Open Market Committee decides to decrease the money supply, it will
sell government bonds
Calculate the money stock M1 if the entire economy has
$200 dollars kept in coffee cans and wallets
$400 in saving accounts
$300 in credit card limits
$250 in checking accounts
$500 in gold
$175 in time deposits
$375 in restricted retirement accounts
$800 in money market funds
M1 = 850
coffee cans and wallets, saving accounts, checking accounts (liquid)
Calculate the money stock M2 if the entire economy has
$200 dollars kept in coffee cans and wallets
$400 in saving accounts
$300 in credit card limits
$250 in checking accounts
$500 in gold
$175 in time deposits
$375 in restricted retirement accounts
$800 in money market funds
M1+175+800 = 1825
While cleaning his apartment, Hakeem finds a $50 bill under the
couch. He deposits the bill in his checking account at Wells Fargo
Bank. The reserve ratio is 10% of deposits. What is the maximum
amount that the money supply could increase?
If banks hold 10% in reserve, then money multiplier = 1/R = 1/0.1 = 10
* Maximum possible increase in deposits is 10 × $50 = $500
* But money supply also includes currency, which falls by $50
* Hence, maximum increase in money supply = $450
Maximum Possible Expansion of Deposits
1/% * initial deposit
U4 underutilized labor
(U+discouraged/LF+discouraged)*100
U5 underutilized labor
U+MAW/LF+MAW
Unemployment rate =
unemployed/labor force
The natural rate of unemployment includes:
both frictional and structural unemployment
In recent decades, Americans have increased their purchase of stocks
of foreign-based companies. The Americans who have bought these
stocks were engaged in:
foreign portfolio investment
Over the past century in the United States, real GDP per person has
grown, on average, by about:
2% per year
CPI =
(current basket cost/base basket cost)100
Inflation rate =
(current CPI-initial CPI/current CPI)100
If the marginal propensity to consume (MPC) is 0.5, then the
multiplier is:
1/(1-MPC) so 1/1-.5 = 2
An example of an automatic stabilizer is:
unemployment benefits
Which of the following properly describes the interest-rate effect that
helps explain the slope of the aggregate-demand curve?
As the price level increases, the interest rate rises, so spending falls
When the Fed sells government bonds, the reserves of the banking
system:
decrease, so the money supply decreases
Opponents of active stabilization policy:
believe that the political process creates lags in the implementation
of fiscal policy
Fiscal policy
Taxes and government spending
Monetary policy
interest rates and money supply
The classical dichotomy and monetary neutrality are represented
graphically by:
a vertical long-run aggregate-supply curve
Quantity Equation:
MV=PY
If Y and V are constant and M doubles, the quantity equation implies
that the price level:
doubles
Shoeleather costs arise when higher inflation rates induce people to:
hold less money
In the U.S., taxes are paid on one’s __________ gains/returns.
Therefore, a __________ inflation rate encourages more saving.
nominal, low
