Macroeconomics Test Answers – Flashcards

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The three functions of money are:
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medium of exchange, measure of value, store of value
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When money is being used as a _______ ___ _______ it is being used in the buying and selling of goods and services.
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Medium of exchange
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Money is being used as a _______ ___ _______ when it is a yardstick for measuring the relative worth of heterogenous goods and services.
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Measure of value
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The existence of money enables us to avoid barter. In this capacity, money is functioning as a
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Medium of exchange
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Money makes it possible to easily compare the prices of different products with one another. In this capacity, money is functioning as a
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Measure of value
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Barter exchange:
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hinders specialization in the economy.
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The 3 major definitions of money are:
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M1, M2, and M3
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_______ is currency and checkable deposits.
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M1
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_______ is M1 + noncheckable savings deposits + small time deosits + money market deposit accounts + money market mutual funds
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M2
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______ is M2 + large time deposits
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M3
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______ is the most narrowly defined definition of money.
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M1
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Which official money aggregate shows the smallest money supply?
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M1
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The narrow definitions of money (M1) includes only:
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currency and checkable deposits
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What is the correct definition of the M1 money supply?
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checkable deposits, coins, and paper currency
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The M1 definition of money does not include
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savings deposits
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Passbook savings deposits are excluded from the M1 money supply because they
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are not accepted as a medium of exchange
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_____ and _____ are near monies. Near monies are certain highly liquid financial assets such as noncheckable savings accounts, time deposits and short term government securities which, although they do not directly function as a medium of exchange, can e readily and without risk of financial loss converted into currency or checkable deposits.
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M2 and M3
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Passbook savings accounts are
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near money
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True or False: Credit cards are included in the definition of money
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false
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Money has value because of the following three reasons:
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acceptability, legal tender, relatively scarce
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True or False: people accept paper money because they are confident that others will also be willing to accept it in exchange for goods and services.
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true
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True or False: People accept paper mone because it has been designated as legal tender by government.
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true
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True or False: Money derives its value from its scarcity relative to its usefulness
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true
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United States currency in the 1980's is:
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fiat money (money that is not backed by any commodity)
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The two types of demand for money:
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Asset demand and transaction demand
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The transactions motive for holding money referred to money held in order to
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pay regular expenses
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Changes in economic expectations about interest rates are most likely to affect the:
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asset demand for money
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True or False: The transactions demand for money varies indirectly with nominal GDP.
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false
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The _______ demand for money is being affected when money is being used as a medium of exchange.
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transactions
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Households and firms will want more money for transactions purposes if either ________ _______ or real output increases.
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prices rise
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True or False: The transactions demand for money is assumed to be dependent on interest rates
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false
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The advantages of holding money as an asset is that it is ______ and ______ ______.
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liquid and lacks risk
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The disadvantage of holding money as an asset is that it does not____ ______ ______
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earn interest income
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In models of the asset demand for money, assets can be held as ________ or _______.
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money or bonds
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Keynes described three motives for demanding or "holding" money. They include all of the following except
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The contributory motive
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True or False: As bond prices increases interest prices also increase.
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false
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The Board of Governors of the Federal Reserve System has _____ members.
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7
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Each member of the Board of Governors of the Federal Reserve System is appointed for _____ years.
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14
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True or False: The Federal Open Market Committee is made up of the 7 members of the Board of Governors and the 13 presidents of the regional banks.
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false
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The Federal Reserve System was established in
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1913
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Today there are ____ Federal Reserve banks, and ____ branches.
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12, 24
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The Board of Governors consists of
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7 members, appointed by the President of the United States.
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In the United States there is:
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one Federal Reserve Bank for each 10,000 customers.
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The Federal Advisory Council is composed of
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12 prominent commercial bankers
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The original purpose of the Federal Reserve was to
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act as a lender of last resort
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Today, the primary function of the Federal Reserve is to
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stabilize the economy by regulating the money supply
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The function of the Federal Reserve banks is to
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manage the money supply in accordance with the needs of the economy as a whole
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The policy making branch of the Federal Reserve is called
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the Board of Governors
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Gresham's Law states that:
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bad money drives out good money
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The use of a _______ _______ _______ ____ _______ makes it possible for banks to create money.
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Fractional reserve system of banking
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One of the problems with a fractional reserve system of banking is that banks are vulnerable to _______ or ______
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panics or runs
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Fractional reserve banking is a situation where banks
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hold only a fraction of their demand deposits as reserves
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According to the fractional reserve principle
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a bank only needs a fraction of a dollar in reserves for each dollar of demand deposits
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Banks can increase the money supply because they can
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loan out a portion of their reserves
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Money is created when banks make ______
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loans
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When banks use their excess reserves to grant loans to consumers, the money supply
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grows
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When loans are repaid _____ is destroyed
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money
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True or False: Money is created when people deposit money into a demand deposit in the bank
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false
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Banks create money by
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creating demand deposits
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The _____ _____ is an amount of funds equal to a specified percentage of its own deposit liabilities which a member bank must keep on deposit with the Federal Reserve Bank in its district or as vault cash
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legal reserve
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The reserve ratio is equal to ______ _____ ______ ________ divided by the ________ ________ __________ ________.
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commercial banks required reserves, commercial banks demand deposit liabilities
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The reserve requirement is the
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percentage of bank deposits that banks must hold as required reserves
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______ _______ are a means by which the Board of Governors can influence the lending ability of commercial banks.
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Legal reserves
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True or False: Commercial banks and other depository institutions are required to keep legal reserve deposits, or simply "reserves" equal to a specified percentage of their own deposit liabilities as cash, government securities, or on deposit with the Federal Reserve Bank of their district.
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false
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Bank reserves include
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vault cash plus funds on deposit with the Fed.
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A banks excess reserves are defined as
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total reserves minus required reserves
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The amount by which a banks actual reserves exceed its required reserves is the banks
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excess reserves
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Excess reserves for commercial banks are equal to
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actual reserves minus required reserves
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Whenever a check is drawn against a bank and deposited in another bank, the collection of that check will entail a loss of both ________ and _______ ______ by the bank upon which the check is drawn.
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reserves and demand deposits
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An increase in banks loans would tend to decrease
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banks excess reserves
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True or False: When a bank accepts deposits of cash, the composition of the money supply is changed, but the total supply of money is not directly altered.
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true
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True or False: When a commercial bank buys government bonds from the public, the effect is substantially the same as that of lending. New money is created.
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true
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The selling of government bonds to the public by a commercial bank will _____ the supply of money.
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decrease
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The potential money multiplier equals
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1/reserve requirements ratio
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The potential money multiplier determines the maximum supply of
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money that can be generated if banks hold no excess reserves and all private funds are deposited in banks
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1/required reserve ratio=
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money multiplier
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The _____ _____ tells us the maximum amount of new demand deposit money which can be created for a single dollar of excess reserves, given the value of R.
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money multiplier
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The entire banking system could increase total loans by an amount equal to
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a multiple of its excess reserves
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True or False: The banking system can lend by a multiple of its excess reserves, but each individual bank can only lend dollar four dollar with its excess reserves because reserves lost by a single bank are not lost to the banking system as a whole.
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true
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As the reserve requirements ratio increases
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the actual money multiplier would decrease
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Each bank must limit its loans to the amount of its excess reserves because
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when customers spend the money they have borrowed, the bank is likely to lose reserves to other banks.
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Although individual banks must limit their loans to the amount of their excess reserves, the banking system can make loans equal to a multiple of its excess reserves. The basic reason for this difference is that
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reserves lost by an individual bank are gained by other banks in the system.
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Two "leakages" which dampen the money-creating potential of the banking system are _____ _____ and bankers hold _____ _____.
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currency drains and excess reserves
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True or False: The fundamental objective of monetary policy is to assist the economy in achieving a full employment, noninflationary level of total output.
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true
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The 3 tools of monetary policy are:
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open market operations, changing the reserve ratio, and changing the discount rate
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Open market operations are:
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FED purchase or sale of government bonds on the open market.
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Open-market operations involve
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the buying and selling of government securities by the Federal Reserve
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The FED controls the money supply primarily through
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open-market operations
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If the Federal Reserve Bank ______ (buys,sells) government bonds in the open market commercial bank reserves will be increased.
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buys
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If the Federal Reserve desired to increase the lending ability of banks, it would
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buy government securities
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To reduce the supply of money, the Federal Reserve
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sells government securities on the open market
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When the FED buys government securities in the "open market"
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the money supply tends to expand
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True or False: Raising the reserve ratio changes required reserves to excess reserves, thereby enhancing the ability of banks to create new money by lending.
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false
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When the Federal Reserve increases the reserve requirement
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the lending ability of banks tends to contract.
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An increase in the reserve requirements ratio would
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decrease the potential money multiplier
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When the FED raises the reserve requirements ratio
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excess reserves are reduced
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True or False: The reserve requirements are very powerful tools, thus the federal reserve uses it frequently.
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flase
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The rate at which banks can borrow money from the FED is called
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the discount rate
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Monetary policy makers may expand the money supply by
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cutting the discount rate
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By ________ the discount rate the Federal Reserve makes it possible for banks to make more loans
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decreasing
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Changes in the discount rate
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are generally regarded as an ineffective policy tool
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Changes in the discount rate have little effect on the banking system's lending ability because
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banks are reluctant to borrow from the Federal Reserve
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One of the weaknesses of the discount rate is that the federal reserve _______ make banks borrow from it
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cannot
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True or False: The discount rate can have an announcement effect.
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true
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When the Federal Reserve makes loans to member banks it is referred to as a lender _____ ______ _______.
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of last resort
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The rate banks pay to borrow reserves from one another is called
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the federal funds rate
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What 3 things should the federal reserve do for an easy monetary policy?
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decrease the required reserve ratio, decrease the discount rate, buy government securities
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What 3 things should the federal reserve do for a tight monetary policy?
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increase the required reserve ratio, increase the discount rate, sell government securities
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3 minor controls that the federal reserve can use are:
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margin requirements, consumer credit, and moral suasion
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True or False: One of the weaknesses of monetary policy is that while the Federal Reserve can pursue an easy money policy, it cannot force banks to make loans to expand the money supply.
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true
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True or False: The flatter the demand for money curve the larger will be the effect of any given change in the money supply upon the equilibrium rate of interest.
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false
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True or False: A flat investment demand curve will mean that a change in the money supply will not elicit a very large change in investment.
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false
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A ______ _______ refers to the situation where an increase in the GDP which occurs because of an easy monetary policy will in turn increase the demand for money, tending to partially offset or blunt the interest reducing effect of the easy monetary policy
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feedback effect
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True or False: One of the weaknesses of monetary policy is that it is isolated from the political process.
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false
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True or False: While it is true that monetary policy can be altered very quickly, it can take a long time before the effects of monetary policy show up in the economy.
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true
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The equation of exchange is
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MV=PQ
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___ is the money supply in the equation of exchange.
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M
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___ is the velocity of money in the equation of exchange.
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V
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___ is the price level in the equation of exchange.
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P
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___ is the physical volume of goods and services produced in the equation of exchange.
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Q
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The algebraic statement of MV=PQ is known as
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the equation of exchange
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According to the quantity theory of money
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the velocity of money is constant
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True or False: Monetarists believe that although a change in M may cause short-run changes in real output and employment as market adjustment occur, the long-run impact of a change in M will be on the price level
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true
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If an economist believes that velocity is stable, this economist is probably a
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monetarist
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If an economist believes that velocity is unstable, this economist is probably a
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keynesian
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True or False: Monetarists hold that changes in the money supply are the single most important factor in determining the levels of output, employment, and prices.
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true
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Monetarists believe that the velocity of money is
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stable
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True or False: Keynesians argue that the government has contributed to the instability of the business cycle through its clumsy and mistaken attempts to achieve greater stability through discretionary fiscal and monetary policy.
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false
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True or False: Keynesians contend there are many loose links in the cause-effect chain or monetary policy with the result that monetary policy is an uncertain and relatively weak stabilization tool compared with fiscal policy.
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true
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According to Keynes, monetary policy affects the level of output and income
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by altering the rate of interest
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According to the Keynesian model, a reduction in the money supply will tend to
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reduce the level of investment spending
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According to the Keynesian model, which would be an appropriate monetary policy action for a period of unemployment?
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the purchase of government securities by the FED
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According to the Keynesian model, if the FED wanted to reduce inflationary pressures, which combinations of policies should it pursue?
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increase the reserve requirement, increase the discount rate, buy government securities
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Equilibrium GDP would tend to increase if
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the reserve requirement was lowered
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Monetary policy may be less effective in combating unemployment than it is in combating inflation because
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bankers may not use the additional reserves provided by the fed to make loans.
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According to the classical economists, if the money supply doubled
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the price level would tend to double.
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Monetarists contend that
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the economy is inherently stable
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Monetarists tend to support
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a fixed rate of growth in the money supply
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Monetarists support a "monetary rule." This means they would like to see
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the money supply increased at a constant annual rate
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According to the monetarists view, Keynesian monetary policy which attempts to stabilize the economy
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has tended to make the performance of the economy worse than it would otherwise have been
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According to monetarists, increases in government spending
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tend to crowd out investment spending
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Monetarists do not believe that monetary policy should be used to manipulate or micromanage the economy. Instead they believe that the proper money policy is:
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a slow growth of the money supply
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True or False: The monetarists believe that the monetary authorities should attempt to control interest rates
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false
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The ______ ______ theory think that people behave rationally as does all of economics. market participants gather information and process it intelligently to form expectations about things in which they have a monetary stake.
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rational expectations
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True or False: Rational expectations theory contends that the aggregate response of the public to its expectations will make discretionary stabilization policies very effective
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false
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The _________ ________ ______ contends that businesses, consumers, and workers generally understand how the economy functions and effectively use available information to protect or further their own self interests.
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Rational Expectations Theory
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The ______ ______ _____ assumes that people form their expectations of future inflation on the basis of previous and present rates of inflation and only gradually change their expectations as experience unfolds.
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Adaptive Expectations Theory
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Supporters of the theory of rational expectations believe that Keynesian monetary and fiscal policy
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tend to be ineffective or counterproductive
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Monetarists and rational expectations theorists both support
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a "monetary rule"
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Monetarists and rational expectations theorists believe that if policy makers would avoid intervening in the economy
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unemployment and inflation would tend to be minimized
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The ______ _____ shows that the greater the rate of growth of aggregate demand, the greater will be the resulting inflation and the greater the growth of real domestic output
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Phillips Curve
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Phillips curve suggests that goals may be in conflict between
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full employment and price level stability
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______ is when the economy is experiencing both inflation and unemplyment
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stagflation
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Stagflation may be defined as
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high inflation combined with high unemployment
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Stagflation presents problems for Keynesian monetary policy because
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it is impossible to increase and decrease spending at the same time
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Keynesian economists contend that ____ _____ _____ cause stagflation in the 1970's
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aggregate supply shocks
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The adaptive expectations theory distinguishes between a _____ ____ phillips curve and a _____ _____ Phillips Curve
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long run, short run
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The ______ ______ ______ concludes that the economy is stable in the long-run at the natural rate of unemployment
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Natural rate hypothesis
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According to the natural rate theory, one-shot expansionary macroeconomic policies can push unemployment below its natural rate
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in the short run, but it will return to the natural rate in the long-run
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According to natural rate theory, macropolicy cannot influence the rate of
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unemployment in the long-run
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_______ ______ economists contend that changes in aggregate supply-shifts in the long-run aggregate supply curve must be recognized as an "active" force in determining both the levels of inflation and unemployment
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Supply side
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Which policy would not be supported by a supply-side economist?
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an increase in marginal tax rates to help pay off the public debt
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Modern supply side policy stresses the idea that
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taxes and government spending critically affect aggregate supply
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Supply-side economists believe that
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lowering tax rates will increase the incentive to work
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The ______ curve shows the relationship between tax rates and tax revenue. As tax rates increase from 0 to 100 percent, tax revenue will increase from 0 to some maximum level and then decline to 0.
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Laffer
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The Laffer curve shows that
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higher tax rates boost tax revenue up to a point; after that, higher taxes lower tax revenue
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Tax rate reductions can yield more tax revenue if
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people respond by choosing much less leisure and more work
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