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Chap 14 & 15 macroecon final exam review #2
Terms in this set (53)
Your roommate argues that he can think of no better situation than living in deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during deflation, people can be made worse off because
borrowers will have to pay increasing amounts in real terms over time
In economics, money is defined as
any asset people generally accept in exchange for goods and services
Economies where goods and services are traded directtly for other goods and services are called
The major shortcoming of a barter economy is
the requirement of a double coincidence of wants
has value independent of its use as moeny
Which of the following is one of the most important benefits of money in an economy?
Money makes exchange easier, leading to more specialization and higher productivity
In an economy with _______, there are more prices than in an economy with _________.
The statement, "My iPhone is worth $300" represents money's function as
a unit of account
Which of the following functions of money would be violated if inflation were high?
store of value
Fiat money has
little to no intrinsic value and is authorized by the central bank or government body.
Dollar bills in the modern economy serve as money because
people have confidence that others will accept them as money
an asset that people are willing to accept in exchange for goods and services
The federal reserve's narrowest definition of the money supply is
The largest proportion of M1 is made up of
Which of the following is not counted in M1?
credit card balnaces
If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1 or M2?
M1 would rise
The M2 measure of the money supply equals
M1 plus savings account balances plus small - denomination time deposits plus non institutional money market fund shares
You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings account, $3,000 worth of illiquid assets and $1,000 of debt. You have
money = $300, annual income = $6,000, and wealth = $5,000
If a person, withdraws $500 from his / her savings account and puts it in his / her checking account, then M1 will _______ and M2 will _________.
increase; not change
M1 is this simple economy
M2 in this simple economy equals
The major assets on a bank's balance sheet are its
reserves, loans, and holdings of securities
The largest liability on the balance sheet of most banks is its
checking account and savings account deposits of its customers
Bank reserves include
vault cash and deposits with the Federal Reserve
Consider the following simplified balance sheet for a bank: If the required reserve ratio is 10 percent, the bank can make a maximum loan of
The more excess reserves banks choose to keep
the smaller the deposit multiplier
In an attempt to bring lenders and borrowers together following the finiancial crisis of 2008, the Federal Reserce made a large amount of new funds abailable to financialmarkets. the Fed expected this to increase in the mony supply and the total amount of lending because of the multipliet effect, in which a given amount of new reserves results in a multiple increase in
The quantity equation states that the
money supply times the velocity of money equals the price level times real output
The velocity of money is defined as
the average number of times each dollar is used to purchase goods and services
According to the quantity theory of money, inflation is caused by
the money supply growing faster than real GDP
According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2% and the velocity of money is constant, then the inflation rate will be
Hyperinflation is caused by
a high rate of growth in the money supply
Monetary policy refers to the action the
Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy
The Federal Reserve System's four monetary policy goals are
price stability, high employment, economic growth, ans stability of financial markets and institutions
The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was
Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to pursue its economic objectives
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded
An increase in the interest rate
increases the opportunity cost of holding money
An increase in the interest rate causes
a movement up along the money demand curve
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should
Which of the following will lead to a decrease in the equilibrium interest rate int h economy?
a decrease in GDP
When the federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms, will now have
more money than they want to hold
Which of the following is true?
The money market model is essentially a model that determines the short-term nominal rate of interest
Refer to figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will
buy treasury bills
The interest rate that banks charge other banks for overnight loans is the
federal funds rate
The Fed can increase the federal funds rate by
selling Treasury bills, which decrease bank reserves.
If the Fed raises the interest rate, this will _______ inflation and _______ real GDP in the short run.
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
use open market operations to buy Treasury bills
Contractionary monetary policy on the part of the Fed results in
a decrease in the money supply, an increase in the interest rates, and a decrease in GDP
Which of the folowing would most likely indce the Federal Reserve to conduct expansionary monetary policy? A sginificant decrease in
Your roomate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe th mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply
lowers the interest rate, and firms increase investment spending.
When the fed embarked on a policy known as quantitive easing, they
bought longer-term securities than are usually bought in open market operations.
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