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macroeconomics

Questions and Answers of Macroeconomics

How is fine-tuning the economy like driving a car with an unpredictable steering lag on a winding road?
What are the arguments for and against having monetary policy more directly controlled by the political process?
If fiscal policy was expansionary, but the Fed wanted to counteract the fiscal policy effect on aggregate demand, what could it do?
How can the activities of global and nonbank institutions weaken the Fed’s influence on the money market?
Why would a banking system that wanted to keep some excess reserves rather than lending out all of them hinder the Fed’s ability to increase the money supply?
Why is the lag time for adopting policy changes shorter for monetary policy than for fiscal policy?
Which of the following statements is true?a. The Fed can change the environment in which banks act, but the banks themselves must take the steps necessary to increase or decrease the supply of
Which of the following statements is true?a. The FOMC of the Federal Reserve is unable to act quickly in emergencies.b. When the Fed is trying to constrain monetary expansion, it can be difficult to
An important limitation of monetary policy is thata. it is conducted by people in Congress who are under pressure to get reelected every 2 years.b. when the Fed tries to buy bonds, it is often unable
Compared to fiscal policy, which of the following is an advantage of using monetary policy to attain macroeconomic goals?a. It takes a long time for fiscal policy to have an effect on the economy,
What problems exist in coordinating monetary and fiscal policies?
What problems exist in implementing monetary policy?
If velocity is unstable, does stabilizing the money supply help stabilize the economy? Why or why not?
If the money supply increases and velocity does not change, what will happen to nominal GDP?
If nominal GDP is $200 billion and the money supply is $50 billion, what must velocity be?
If M1 is $10 billion and velocity is 4, what is the product of the price level and real output (nominal GDP)?If the price level is 2, what does the dollar value of output (nominal GDP) equal?
If M increases and V increases,a. nominal GDP increases.b. nominal GDP decreases.c. nominal GDP stays the same.d. the effect on nominal GDP is indeterminate.
According to the simple quantity theory of money, a change in the money supply of 6.5 percent would, holding velocity constant, lead to a 6.5 percent change ina. real GDP.b. nominal GDP.c.
If nominal GDP is $3,200 billion and M1 is $800 billion, then velocity isa. 0.5.b. 2.c. 4.d. 8.e. 400.
The P in the equation of exchange represents thea. profit earned in the economy.b. average level of prices of final goods and services in the economy or the price deflator.c. marginal level of
The equation of exchange can be written asa. M 3 P 5 V 3 Q.b. M 3 V 5 P 3 Q.c. M 3 Q 5 P 3 V.d. Q 3 M 5 P 3 V.
In the long run, a sustained increase in growth of the money supply relative to the growth rate of potential real output will most likelya. cause the nominal interest rate to fall.b. cause the real
What is the quantity theory of money and prices?
What is the velocity of money?
What is the equation of exchange?
How will a contractionary monetary policy affect RGDP and the price level at a point beyond full employment?
How will an expansionary monetary policy affect RGDP and the price level at less than full employment?
If a reduction in the money supply were desired in order to slow inflation, the Federal Reserve mighta. decrease reserve requirements.b. buy U.S. government bonds on the open market.c. raise the
Contractionary monetary policy will tend to have what effect?a. A higher nominal interest rateb. A decrease in aggregate demandc. A higher nominal interest rate and a decrease in the aggregate demand
Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?a. The Fed sells government bonds to the public in the
To offset an inflationary boom, appropriate Fed policy could be to _____________________ reserve requirements to _____________________ AD.a. increase; increaseb. increase; decreasec. decrease;
In a recession, appropriate monetary policy would tend to be for the Fed to _____________________ bonds to _____________________ AD.a. buy; increaseb. buy; decreasec. sell; increased. sell; decrease
Which of the following Federal Reserve actions would most likely help counteract an oncoming recession?a. An increase in reserve requirements and an increase in the discount rateb. The sale of
How does monetary policy impact real GDP and the price level?
How does monetary policy work in the open economy?
What is contractionary monetary policy?
What is expansionary monetary policy?
What is the relationship between interest rates and aggregate demand in monetary policy?
Will an increase in national income increase or decrease the short-run equilibrium nominal interest rate, other things being equal?
Will an increase in the money supply increase or decrease the short-run equilibrium nominal interest rate, other things being equal?
What Federal Reserve policies would shift the money supply curve to the left?
How does an increase in income or a decrease in the interest rate affect the demand for money?
Who controls the supply of money in the money market?
How is the money market equilibrium established?
For the economy as a whole, why would individuals want to hold more money as RGDP rises?
If the earnings available on other short-term liquid financial assets rose, would you want to hold more or less money? Why?
When money demand increases, the Fed can choose betweena. increasing interest rates or increasing the supply of money.b. increasing interest rates or decreasing the supply of money.c. decreasing
What will happen to the demand for money if real GDP rises?a. It will decrease.b. It will be unchanged.c. It will increase.d. It depends on what happens to interest rates.
The money demand curve showsa. the various amounts of money that individuals will hold at different price levels.b. the various amounts of money that individuals will spend at different levels of
How are the real and nominal interest rates connected in the short run?
Why does the Fed target the interest rate rather than the money supply?
What is the relationship between bond prices and the interest rate?
How does the Fed’s buying and selling bonds affect RGDP in the short run?
How do changes in income change the money market equilibrium?
What causes the demand for money to change?
In which direction would the money supply change ifa. the Fed raised the reserve requirement?b. the Fed conducted an open market sale of government bonds?c. the Fed raised the discount rate?d. the
Why would a reduction in the required reserve ratio not be a powerful tool when banks choose to hold substantial quantities of excess reserves?
Why is a reduction in the required reserve ratio such a powerful monetary policy tool? Why is it so seldom used?
Why would the Fed seldom do an open market purchase of government securities at the same time that it raises the discount rate or the required reserve ratio?
How does an open market purchase by the Fed increase bank reserves? How does it increase the money supply?
Why does the fact that the Fed finances its operations out of interest earned on its portfolio, with the excess returned to the U.S. Treasury, make it more independent of congressional pressure?
How is central bank independence related to average inflation rates across countries? How is the Fed insulated from executive branch pressures?
Why is the private ownership of the Federal Reserve System essentially meaningless?
Answer the following questions.a. If a bank had reserves of $30,000 and demand deposits of $200,000 (and no other deposits), how much could it lend out if it faced a required reserve ratio of 10
Calculate the magnitude of the money multiplier if banks were to hold 100 percent of deposits in reserve. Would banks be able to create money in such a case? Explain.
If the required reserve ratio is 10 percent, calculate the potential change in demand deposits under the following circumstances:a. You take $5,000 from under your mattress and deposit it in your
Assume there was a new $100,000 deposit into a checking account at a bank.a. What would be the resulting excess reserves created by that deposit if banks faced a reserve requirement of 10 percent?
What would the money multiplier be if the required reserve ratio were 5 percent? __________ 10 percent? __________ 20 percent? __________ 25 percent? __________ 50 percent? __________
Since the Fed has begun paying interest on bank reserves at the Fed, do banks still want to avoid holding excess reserves?
Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts,
Indicate whether each of the following belongs on the asset or liability side of a bank’s balance sheet.a. Loansb. Holdings of government securitiesc. Demand depositsd. Vault cashe. Deposits at the
Which one of each of the following pairs of assets is most liquid?a. Microsoft stock or a traveler’s checkb. A 30-year bond or a 6-month Treasury billc. A certificate of deposit or a demand
An alternative version of Gresham’s law is that “Bad money drives out good money.” Why is it true that, in choosing between different currencies to transact in, good money drives out bad money?
Why do people who live in countries experiencing rapid inflation often prefer to hold U.S. dollars rather than their own country’s currency? Explain.
Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.
If the price level falls, buyers will need _____________________ money to purchase their goods and services.
The quantity of money demanded varies _____________________ with the rate of interest.
When banks have short-term needs for cash to meet reserve requirements, they are more likely to take a short-term (often overnight) loan from other banks in the _____________________ market than to
If the Fed wants to expand the money supply, it will _____________________ the discount rate.
If the Fed raises the discount rate, it makes it _____________________ costly for banks to borrow funds from it to meet their reserve requirements, which will result in _____________________ new
Banks having trouble meeting their reserve requirement can borrow reserves directly from the Fed at an interest rate called the _____________________ rate.
Small reserve requirement changes have a(n)_____________________ impact on the potential supply of money.
An increase in the required reserve ratio would result in a(n) _____________________ in the money supply.
If the Fed _____________________ reserve requirements, other things being equal, it will create excess reserves in the banking system.
When the Fed sells a bond, the reserves of the bank where the bond buyer keeps his bank account will _____________________.
If the reserve requirement is 10 percent, a total of up to _____________________ in new money is potentially created by the purchase of $100,000 of government bonds by the Fed.
The most a bank can lend out at a given time is equal to its _____________________.
When the Fed buys government bonds in an open market operation, it __________________ the money supply.
Open market operations involve the purchase or sale of _____________________ by _____________________.
_____________________ are by far the most important devices used by the Fed to influence the money supply.
The Fed has three major methods that it can use to control the supply of money: It can engage in _____________________ operations, change _____________________ requirements, or change its
Perhaps the most important function of the Federal Reserve is its ability to regulate the _________________.
The _____________________ consists of the seven members of the Board of Governors, the president of the New York Federal Reserve Bank, and four other presidents of Federal Reserve banks, who serve on
The Federal Reserve was created in 1913 because the U.S. banking system had little _____________________ and no _____________________ direction.
Effective control of major monetary policy decisions rests with the _____________________ and the _____________________ of the Federal Reserve System.
In most countries, the job of manipulating the supply of money belongs to the _____________________.
When a person pays a loan back to a bank, demand deposits _____________________ and the money supply _____________________.
The actual monetary impact of an initial deposit created out of excess reserves within a short time period is __________________ indicated by the money multiplier.
Potential money creation from a cash deposit equals that initial deposit times _____________________.
The monetary expansion of an individual bank is limited to its _____________________ reserves.

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