This is Macroeconomics. rtbe Federa

Transcription

1 This is Macroeconomics -po\icj! rtbe Federa In this chapter we will explain why central banks that are independent from the government may bring about better economic performance, like the Federal Reserve System (FED) in America. We will examine the complexity of t he decisions facing the monetary policymakers who are given the independence to make policy decisions and also consider the three tools policymakers have at their disposal.

2 Monetary Policy: Demand-Side Policy Governments are interested in implementing policies to either help to resist recessions or minimize the impact of them. Monetary policymakers prefer to implement policies that minimize fl11co1atiaus jn real GOP (Y), thus lessening the chance of a recession occurring. Like fiscal policy, monetar y policy is used to stabilize an economy and to lessen the negative or excessively positive economic fluctuations that can weaken an economy, like employment, inflation, or real GDP that is too high or too low. Monetary policy is ref erred to as demand-side pojicy because it focuses on increasing longterm economic growth of aggregate demand/real GDP (AD/I). The primary tools that the FED uses to influence aggregate demand/real GDP are 1) bonds/securities, 2) the discount rate, and 3) the required reserve rate.

3 Monetary Policy: Demand-Side Policy (cont.) When the U.S. economy is in a recession/in contraction, the FED can use expansionary monetary policy to increase real GDP/real output by buying government bonds/securities from banks and/ or decreasing the discount rate or required reserve rate. These will increase the money supply, decrease interest rates, and build up the economy. Expansionary monetary policy increases the price level (PL) and real GDP(Y). When the U.S. economy is in expansion/with inflation, the FED can use contractionar y monetary policy to decrease real GDP/real output by selling government bonds/securities to banks and/or increasing the discount rate or required reserve rate. These will decrease the money supply, increase interest rates, and slow down the economy. Contractionary monetary policy decreases the price level and real GDP.

4 TheFED Governments, usually through a central bank, control the money supply. A central bank is the main bank to other banks in a country. America's central bank is the Federal Reserve, nicknamed the "FED." The FED was established as the central bank for the U.S. in 1913 and has over 15,000 employees spread all over the country. Those who direct the FED are ref erred to as the Federal Reserve Board, or Board of Governors. These seven people are appointed to nonrenewable fourteen year terms by the President and confirmed by the Senate. The Federal Reserve system includes not only the Federal Reserve Board in Washington but also twelve Federal Reserve Banks in different districts around the country. The term "FED" refers to the whole federal reserve system, including the Board of Governors of the twelve district banks.

5 The FED and the Banks A commercial bank, such as Bank of America or Chase, is a firm that channels funds from individual savers to investors by accepting deposits and making loans. The desire for loans is determined by the real interest rate. The lower th,e real interest rate, the more loans that will be requested by interest-sensitive customers (C, 1, and X). Banks are commonly referred to as financial intermediaries. Banks accept deposits and then lend the funds to others and earn profits by charging interest. Commercial banks, like Chase or TD, deposit funds at the central bank, and the central bank in turn makes loans to other commercial banks, like Bank of America.

6 Whl' Are Central Banks Independent? The most important feature of a central bank is the degree of independence from the government that the law gives it. FED officials are appointed to long terms that may span several different Presidents; the four-year term of the chair of the FED does not necessarily coincide with the term of any President. Therefore, like Supreme Court justices in the United States, FED officials develop an independence from governmental influence. The main rationale for central bank independence is that an independent central bank can prevent the government in power from using monetary policy in ways that appear beneficial in the short-run but that can harm the economy in the long-run. However, accountability is still critical when it comes to central banks to ensure that their actions aren't taken too far.

7 The Federal Open Market Committee (FOMC) The FED makes decisions about the money supply through a committee called the Federal Open Market Committee (FOMC). The FOMC meets in Washington eight times a year to decide how to implement monetary policy, such as deciding whether to raise, lower, or keep the nominal interest rate steady. When journalists in the press run a story about the FED, they usually talk as if the chair has complete power over FED decisions. Some view the chair of the FED as the most powerful person in America, after the President.

8 FED Regulation of Monetarl' Policy The FED regulates the money supply by changing any one of the fallowing: 1) open market operations by buying or selling government bonds (short-term loans) from/to banks, 2) lending money to banks at a higher or lower discount rate, and 3) setting the required reserve or reserve ratio higher or lower for banks

9 FED Regulation of Monetarl' Policy (cont.) The FED's primary monetary tool is used when either the FED buys government bonds/securities from banks or sells government bonds/securities to banks. This is ref erred to as open market operations. Think of all rates like a wall in your way; 1 is bad and J is good. When the U.S. economy is in a recession/in contraction, the goal of the FED is to increase the money supply. More money== more chance to spend money. To do this, the FED buys government bonds/securities from banks (buy== bigger). The FED then electronically pays the bank by increasing their reserves at the FED. Banks then have more money to loan to borrowers which influences banks to decrease the federal funds rate (the short-term interest rate that banks charge one another on overnight loans). This ultimately decreases the nominal interest rate (the interest rate when inflation is taken into account) and the real interest rate that borrowers pay. Interest-sensitive spending increases and so does aggregate demand/real GDP (AD/Y).

10 FED Regulation of Monetary Policy (cont.) Remember, think of all rates like a wall in your way; 1 is bad and tis good. When the U.S. economy is in expansion/with inflation, the goal of the FED is to decrease the money supply. Less money= less chance to spend money. To do this, the FED sells government bonds/securities to banks (sell =smaller). The FED then electronically receives payment from the banks by decreasing their reserves at the FED. Banks then have less money to loan to borrowers which influences banks to increase the federal funds rate. This ultimately increases the nominal interest rate and the real interest rate that borrowers pay. Interest-sensitive spending decreases and so does aggregate demand/real GDP (ADI Y). How unemplo yment, inflation, and interest rates impact an economy's real GDP/AD *an j in agg regate demand (AD)/real GDP (Y) the price level (PL)/intl atio n t aggregate supply (AS) j unemp loyment! the federal fund s rate t the nominal then real interest rate to t interest-sensitive spe nding to! a! in aggregate demand (AD)/real GDP (Y) *a! in aggregate demand (AD)/real GDP (Y) the price level (PL)/intlation! aggregate supply (AS)! unemplo yment j the federa l fund s rate! the nominal then real interest rate to! in terest-se nsitive spe nding to j an j in aggregate demand (AD)/real GDP (f)

11 FED Regulation of Monetarl' Policy (cont.) The 2nd instrument the FED uses to impact monetary policy is the discount rate. This is the interest rate that the FED charges commercial banks when loaning them money. For example, if Bank of America needs $10 million, BOA could borrow it from the U.S. Treasury (which the FED controls), but Bank of America must pay the loan back with interest. Remember, think of all rates like a wall in your way; f is bad and t is good. To increase the money supply and bulk up the economy, the FED decreases the discount rate, making it cheaper for banks to borrow money from them. To decrease the money supply and slow down the economy, the FED increases the discount rate to make it more expensive for banks to borrow from them. Remember,: more money== more chance to spend money and less money= less chance to spend money.

12 FED Regulation of Monetarl' Policy (cont.) The 3rd and last instrument the FED uses to impact the money supply is the required reserve or reserve ratio, This is the percent of customer deposits that banks must hold in reserve at the FED and cannot loan out. The FED sets the amount, the ratio, that banks must hold. Remember, think of all rates like a wall in your way; 1 is bad and J is good. If you have a bank account, where is your money? Only a small percent of your money is held in reserve. The rest of your money can be loaned out. This is called "Fractional Reserve Banking." When the FED wants to increase the money supply, the FED decreases the reserve requirement. Banks then loan out the excess reserves to make money. Excess reserves are simply extra bank reserves at the FED. This is also what happens when deposits are made at a bank.

13 FED Regulation of Monetarl' Policy (cont.) When the FED wants to decrease the money supply, the FED increases the required reserve. Banks then have less to loan out to borrowers. This is also what happens when deposits are made at a bank. Remember,: more money== more chance to spend money and less money== less chance to spend money.

14 FED Re2ulation of Monetary Policy-Questions 6. When a central bank conduct open-market bond ale, the money upply, intere t rate, and aggregate demand will change in which of the following ways in the hort run? Money Aggregate Supply Intere t Rate Demand (A) Decrease Increa e Decrea e (B) Decrea e Decrease Increa e (C Decrease Increa e Increa e (D) Increa e Decrease Increa e (E) Increa e Decrease Decrea e 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (A) Buying bond in the open market (B) Increasing the di count rate (C) Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending

15 FED Re2ulation of Monetary Policy-Questions 6. When a central bank conduct open-market bond ale, the money upply, intere t rate, and aggregate demand will change in which of the following ways in the hort run? Money Aggregate Supply Intere t Rate Demand (. ) Decrease Increa e Decrea e (B Decrease Decrease Increa e (C Decrease Increa e Increa e (D) Increa e Decrease Increa e (E) Increa e Decrea e Decrea e 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (e ) Buying bond in the open market (B) Increasing the di count rate (C) Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending

16 FED Re2ulation of Monetary Policy-Questions 38. If the central bank buys government bonds from individuals on the open market and bank do not loan out any exce s reserves created by the open market purcha e, which of the fallowing will happen? (A) The money upply will increa se. (B) The money upply will remain unchanged. (C) Loan to the private ector will increa e. (D) Demand deposit will decrea e. (E) The level of actual re erve will decrease. 2. Open market operation take place when the (A) central bank buy or ell tock (B) central bank buy or ell government bond (C) central bank increa e or decrea e the di count rate to monitor the money supply (D) central bank increase or decrea e re erve requirements for depo itory in titution (E commercial bank borrow re erve from the central bank

17 FED Re2ulation of Monetary Policy-Questions 38. If the central bank buys government bonds from individuals on the open market and bank do not loan out any exce s reserves created by the open market purcha e, which of the fallowing will happen? ce) The money upply will increa se. (B) The money upply will remain unchanged. (C) Loan to the private ector will increa e. (D) Demand deposit will decrea e. (E) The level of actual re erve will decrease. 2. Open market operation take place when the (A) central bank buy or ell tock e) central bank buy or ell government bond (C) central bank increa e or decrea e the di count rate to monitor the money supply (D) central bank increase or decrea e re erve requirements for depo itory in titution (E commercial bank borrow re erve from the central bank

18 FED Regulation of Monetarl' Policy-Questions 3 7. If the central bank conduct an open-market purcha e of bond, which of the following will occur? A The price of bond will increa e. (B The money upply will decrea e. (C Total bank re erve will decrea e. (D Con umption will decrea. E The go ernment will balance it budget 46. If aggregate demand i growing faster than longrun aggregate upply, the Federal Re erve i mo t likely to A ell ecuritie on the open market B increa e bond price C increa e income taxe D decrea e the di count rate E decrea e the required re erve ratio

19 FED Regulation of Monetarl' Policy-Questions 3 7. If the central bank conduct an open-market purcha e of bond, which of the following will occur? The price of bond will increa e. (B The money upply will decrea e. (C Total bank re erve will decrea e. (D Con umption will decrea. E The go ernment will balance it budget 46. If aggregate demand i growing faster than longrun aggregate upply, the Federal Re erve i mo t likely to ell ecuritie on the open market B increa e bond price C increa e income taxe D decrea e the di count rate E decrea e the required re erve ratio

20 FED Regulation of Monetarl' Policy-Questions 28. Which of the following combinations of policies i designed to decrease inflation? (A) An increa e in taxes and a decrease in the re erve requirement (B) An increa e in taxe and an open-market purchase of government ecurities (C) A decrease in taxes and an open-market purchase of government ecurities (D) An increa e in government pending and a decrea e in the discount rate (E) A decrease in government spending and an open-market ale of government securities 52. If the government implements an ex pan ionary fiscal policy, what action can the central bank take to maintain a table intere t rate? (A) Increase the required re erve ratio (B) Increase personal income tax rate (C) Decrease per onal income tax rates (D) Sell governm ent bond (E) Buy government bond

21 FED Regulation of Monetarl' Policy-Questions 28. Which of the following combinations of policies i designed to decrease inflation? (A) An increa e in taxes and a decrease in the re erve requirement (B) An increa e in taxe and an open-market purchase of government ecurities (C) A decrease in taxes and an open-market purchase of government ecurities (D) An increa e in government pending and a decrea e in the discount rate A decrease in government spending and an open-market ale of government securities 52. If the government implements an ex pan ionary fiscal policy, what action can the central bank take to maintain a table intere t rate? (A) Increase the required re erve ratio (B) Increase personal income tax rate (C) Decrease per onal income tax rates (. Sell governm ent bond (E) Buy government bond

22 FED Regulation of Monetarl' Policy-Questions 11. To reduce inflation.. the central bank would be mo t likely to A decrea e the re erve requirernent (B decrea e the income tax rate (C increa e the upply of rnoney (D) buy o-o ernment ecuritie E ell oovern1nent ecuritie

23 FED Regulation of Monetarl' Policy-Questions 11. To reduce inflation.. the central bank would be mo t likely to A decrea e the re erve requirernent (B decrea e the income tax rate (C increa e the upply of rnoney (D) buy o-o ernment ecuritie ell oovern1nent ecuritie

24 FED Regulation of Monetarl' Policy-Questions 24. Which of the following action by the Federal Re erve of the United tate increa e the money upply? (A Buying government bond on tl1e open market B Selling go ernment bond on the open market C Increa ing the re erve requirement D Increa ing the di count rate (E Increa ing the federal fund rate

25 FED Regulation of Monetarl' Policy-Questions 24. Which of the following action by the Federal Re erve of the United tate increa e the money upply? (e Buying government bond on tl1e open market B Selling go ernment bond on the open market C Increa ing the re erve requirement +--~:3 D Increa ing the di count rate (E Increa ing the federal fund rate these decrease the money supply

26 Monetary Policy: Demand-Side Policy Actions by the FED a n d increase GDP (cl that red uce unemployment B uy1ng bonds/securit ose a f rec ess10nary gap) Decreasing the d" ies rom banks D iscount r t ecreasing the r. a e Co m b" inations of equired the three reser ve rate/reserve ratio Actions by the FED that reduce inflation and decrease GDP ( close an inflationary gap) Selling bonds/securities to banks Increasing the discount rate Increasing the required reserve rate/reserve ratio Combinations of the three

27 Unemployment, Inflation, Interest Rates, and real GDPtd.U How unemployment, inflation, and interest rates impact an economy's real GDP/AD *an j in aggregate demand (AD)/real GDP (f) the price level (PL)/inflation j aggregate supply (AS) j unemployment J the federal funds rate j the nominal then real interest rate to j interest-sensitive spending to t a t in aggregate demand (AD)/real GDP (f) *at in aggregate demand (AD)/real GDP (Y) the price level (PL)/inflation t aggregate supply (AS) J unemployment j the federal funds rate t the nominal then real interest rate to t interest-sensitive spending to j an j in aggregate demand (AD)/real GDP (Y)

28 FED Regulation of Monetarl' Policy (cont.) Keeping inflation low and stable is another part of government policy to stimulate long-term economic growth. The government ( G) has an important role in determining the inflation rate, especially over the long-run (LR), because the inflation rate in the long term depends on the growth rate of the money supply. If there is a large money supply (supply of money) in an economy, nominal and real interest rates will be lower and interest-sensitive spending by C, 1, and X will increase, thus leading to increased inflation. If there is a smaller money supply in an economy, nominal and real interest rates will be higher and interest-sensitive spending by C, I, and X will decrease, thus leading to disinflation. To keep inflation low and stable, the Fed implements policies that impact consumer demand (D), depending on the inflation rate.

29 Monetary Policy: Demand-Side Policy (cont.) An increase in the money supply increases real GDP (Y) while a decrease decreases GDP. The aim if to keep the money supply equal to the rate of imports. A regular increase in the money supply leads to an increase in the price level (PL), but only a possible slight increase in real GDP since aggregate demand (AD) is the main determinant. A continuous expansion of the money supply causes hyperinflation. Finally, a decrease in the money supply decreases aggregate demand and the price level but doesn't change output in the short-run.

30 Monetary Policy: Demand-Side Policy-Questions 23. In the short run an expan ionary monetary policy would most likely re ult in which of the following change in the price level and real gro dome tic product (GDP? Price Level (A Decrease (B) No change (C) lncrea e (D) Increa e (E) Increa e Real GDP Increase Decrea e No change Decrea e Increa e

31 Monetary Policy: Demand-Side Policy-Questions 23. In the short run an expan ionary monetary policy would most likely re ult in which of the following change in the price level and real gro dome tic product (GDP? Price Level (A Decrease (B) No change (C) lncrea e (D) Increa e ce) Increa e Real GDP Increase Decrea e No change Decrea e Increa e

32 The Money Multiplier As more money flows into an economy and into banks, those banks are now able to make additional loans. Interest rates decrease due to the increase in the money supply and aggregate demand/real GDP (AD/Y) increases. This positive ripple effect on the economy is called the money multiplier, and it is the expansion of a country's money supply that results from banks being able to lend. This is also what happens when deposits are made at a bank.

33 The Money Multiplier (cont.) For example, if a $1 million increase in required reserves by the FED is combined with a 10% (.1) reserve ratio, the money multiplier is 10 and we get a $10 million increase in demand deposits and the money supply. A $1 million increase in reserves by the FED ultimately leads to a $10 million increase in available funds in the economy, funds that will available for banks to loan to customers. Situation: The Fed buys $1 million worth of bonds from banks and the reserve requirement in 10% 11 mr,, money _ reserve mult1pl1er ratio.1 10 x $1 million== $10 million increase in loans and the money supply

34 The Money Multiplier (cont.) The money multiplier can also be harmful to an economy. As fewer loans are created, less money flows into the economy and into other banks preventing those banks from making additional loans. Interest rates increase due to the decrease in the money supply and aggregate demand/real GDP (AD/Y) decreases. This ripple effect is negative. This is also what happens when withdrawals are made at a bank. For example, if a $1 million decrease in required reserves by the FED is combined with a 10% (.1) reserve ratio, the money multiplier is 10 and we get a $10 million decrease in demand deposits and the money supply. $10 million is now no longer available for banks to loan. Situation: The Fed sells $1 million worth of bonds to banks and the reserve requirement in 10 /o,, 11\f,, money _ reserve mult1pl1er ratio.1 10 x $1 million= $10 million decrease in loans and the money supply

35 The Money Multiplier (cont.) When using the money multiplier, the two determinations that have to be made are 1) is the impact on the economy a positive or negative one and 2) is the money being referred to that will impact the economy already in the money supply or not? For example, if Sally deposits $100 in cash in her bank, the money she is depositing is.already in the money supply, and we won't count it all twice. So, if Sally deposits $100 in cash in her bank and the required reserve is 20%, the money multiplier would be 5. But, the 5 would be multiplied by only $80 since $20 of the $100 (money already in the money supply) has to remain in reserve. Only $80 can be loaned out. If Sally withdrew $100, there would be a decrease in loans and the money supply.,, mr'',, mr'' 1 5 money = reserve multiplier ratio.2 x $SO= $400 increase 1n 5 loans and the money supply 1 5 money = reserve multiplier ratio.2 5 x $80= $400 decrease in loans and the money supply

36 The Money Multiplier (cont.) See in detail how bank deposits are multiplied. Banks are the lenders and businesses are the borrowers. There is a 10% reserve requirement or reserve ratio. 1. Bank of America lends 7-11 $1,000, who then pays a supplier, StrawCo 2. StrawCo the supplier then deposits the money in its own bank account 3. Chase (StrawCo's bank) can then lend out 90% of the deposit, or $ Chilis borrows $900 and puts it into its bank, First Fidelity 5. First Fidelity can now lend out 90% of the $900 deposited, or $810 This leads to the fallowing series of payments with a 10% reserve requirement or reserve ratio: 1. $1, $900 because the bank has to keep $100 in reserve 3. $810 because the bank has to keep $90 in reserve 4. $729 because the bank has to keep $81 in reserve 5. and so on

37 The Money Multiplier (cont.),, 1,, tnr money _ --- mu 1 tip. 11er. - reserve ratio 1. If the reserve requirement is 5% and the FED sells $10 million in bonds: 1) what is the multiplier, 2) will happen to the money supply, and 3) by how much? 1. multiplier= 20, 2. ms decreases, 3. $200 million I 2. If the reserve requirement is 10% and the FED buys $10 million in bonds: 1) what is the multiplier, 2) will happen to the money supply, and 3) by how much? 1. multiplier= 10, 2. ms increases, 3. $100 million I

38 The Money Multiplier (cont.),, 1,, tnr money _ --- mu 1 tip. 11er. - reserve ratio 3. If the FED decreases the reserve requirement from 50% to 20%, what will happen to the money multiplier and by how much? 1. multiplier gets bigger, from 2 to 5 4. If Sally deposits $100 in her bank and the reserve requirement is 10%, 1) what is the multiplier, 2) will happen to the money supply, and 3) by how much? 1. multiplier= 10, 2. ms increases, 3. $900 I

39 The Money Multiplier-Questions ~ C,I.,l {/) ~ ~~ S1 ~ z ~. ll S Money Demand QUANTITY OF MONEY 16. In the United States, which event would ha ve cau ed the hift of the money supply curve from S 1 to S 2 in the money market shown above? (A) The purch ase of gover nment bond on the open market by the Federal Re serve (B ) An incre ase in the required reserve ratio (C) A hort -run increa se in output, employment and income (D) An incre ase in general price level in the United State (E) An incre ase in the upply of dollar in foreign exchange market

40 The Money Multiplier-Questions ~ C,I.,l {/) ~ ~~ S1 ~ z ~. ll S Money Demand QUANTITY OF MONEY 16. In the United States, which event would ha ve cau ed the hift of the money supply curve from S 1 to S 2 in the money market shown above? The purch ase of gover nment bond on the open market by the Federal Re serve (B ) An incre ase in the required reserve ratio (C) A hort -run increa se in output, employment and income (D) An incre ase in general price level in the United State (E) An incre ase in the upply of dollar in foreign exchange market

41 The Money Multiplier-Questions 60. A ume that the re erve requirement for demand depo it i 20 percent that banks hold no exces re erve, and that the public hold no currency. If the central bank ells $10,000 worth of government securitie to commercial bank, the total money upply will (A) increa e by $ (B) increa e by $50,000 C) decrease by $ (D) decrease by $ (E notchange.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'? 48. If the re erve requirement i 10 percent and the central bank ell $ in government bonds on the open market the money upply will (A) increa e by a maximum of $9 000 (B) increa e by a maximum of $ (C) decrea e by a maximum of $9 000 (D) decrease by a maximum of $10,000 (E) decrease by a maximum of $100,000

42 The Money Multiplier-Questions 60. A ume that the re erve requirement for demand depo it i 20 percent that banks hold no exces re erve, and that the public hold no currency. If the central bank ells $10,000 worth of government securitie to commercial bank, the total money upply will (A) increa e by $ (B) increa e by $50,000 (C) decrease by $ decrease by $ (E notchange.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'? 48. If the re erve requirement i 10 percent and the central bank ell $ in government bonds on the open market the money upply will (A) increa e by a maximum of $9 000 (B) increa e by a maximum of $ (C) decrea e by a maximum of $9 000 (D) decrease by a maximum of $10,000 decrease by a maximum of $100,000

43 The Money Multiplier-Questions 40. A commercial bank' ability to create money depend on which of the following? (A) The exi tence of a central bank (B) A fractional reserve banking y tern (C) Gold or ilver re erve backing up the currency (D) A large national debt (E) The exi tence of both checking accounts and avings account 46. A ume that the required reserve ratio i 10 percent bank keep no exce s reserve and borrower depo it all loan made by bank. Suppose you have aved $100 in cash at home and decide to depo it it in your checking account. A a result of your deposit the money upply can increa e by a maximum of (A) $800 (B) $900 (C) $1,000 (D) $1 100 (E $1,200.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'?

44 The Money Multiplier-Questions 40. A commercial bank' ability to create money depend on which of the following? (A) The exi tence of a central bank A fractional reserve banking y tern (C) Gold or ilver re erve backing up the currency (D) A large national debt (E) The exi tence of both checking accounts and avings account 46. A ume that the required reserve ratio i 10 percent bank keep no exce s reserve and borrower depo it all loan made by bank. Suppose you have aved $100 in cash at home and decide to depo it it in your checking account. A a result of your deposit the money upply can increa e by a maximum of (A) $800 $900 (C) $1,000 (D) $1 100 (E $1,200.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'?

45 The Money Multinlier-Questions 40. If the central bank raises the required re erve ratio, the money multiplier and the money upply will change in which of the followin g way? Money Multiplier Money Supply (A) Increa e Increa e (B) Increa se Decre ase ( C) Increa se No change (D) Decrease No change (E) Decrease Decre ase.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'? 7. If the central bank hold interest rates con tant an autonomou decrea e of $10 million in investment pending! will most likely result in (A) a decrea e of exactly $10 million in gros domestic product (B) a decrease of more than $10 million in gross domestic product (C) an increase of $10 million in taxe to offset the decrea e in inve tment (D) an increase of $10 million in aggregate supply to offset the decrease in inve tment (E) an increase in the co t of loan for investment

46 The Money Multinlier-Questions 40. If the central bank raises the required re erve ratio, the money multiplier and the money upply will change in which of the followin g way? Money Multiplier Money Supply (A) Increa e Increa e (B) Increa se Decre ase ( C) Increa se No change (D) Decrease No change Decrease Decre ase.. or negative 1 ) positive. the money t and 2) is impac. the money a\ready in supply'? 7. If the central bank hold interest rates con tant an autonomou decrea e of $10 million in investment pending! will most likely result in (A) a decrea e of exactly $10 million in gros domestic product (. a decrease of more than $10 million in gross domestic product (C) an increase of $10 million in taxe to offset the decrea e in inve tment (D) an increase of $10 million in aggregate supply to offset the decrease in inve tment (E) an increase in the co t of loan for investment

47 The Money Multiplier- Questions 15. If the required re erve ratio i 0.2, a $1 billion l) positive or tsg:~: monej increa e in bank re erve can lead to an increa e impact a_ndt!/monej in M 1 of at mo t (A) $6 billion (B) $5 billion (C) $1 billion (D) $0.8 billion (E $0.2 billion 33. A ume that the re erve requirement i 10 percent. Marwa depo it $1 million in ca h into her checking account at Fir t Bank. The depo it will initially increa e exce re erve at First Bank by (A) $100,000 (B) $900,000 (C) $1 million (D) $9 million (E) $10 million a\ready?in SU\l\llY. ve

48 The Money Multiplier- Questions 15. If the required re erve ratio i 0.2, a $1 billion l) positive or tsg:~: monej increa e in bank re erve can lead to an increa e impact a_ndt!/monej in M 1 of at mo t (A) $6 billion (. $5 billion (C) $1 billion (D) $0.8 billion (E $0.2 billion 33. A ume that the re erve requirement i 10 percent. Marwa depo it $1 million in ca h into her checking account at Fir t Bank. The depo it will initially increa e exce re erve at First Bank by (A) $100,000. ) $900,000 (C) $1 million (D) $9 million (E) $10 million a\ready?in SU\l\llY. ve

49 The Money Multiplier-Questions 42. As ume that Atlantic National Bank has demand depo its of $100,000 and no exces re erve, and that the re erve requirement i 10 percent. A cu tomer withdraw $5 000 from the bank. To meet the reserve requirement, the bank rnu t increase its re erve by (A) $500 (B) $1 000 (C) $2,000 (D) $4 000 (E) $ As ume that Linda deposits in her checking account the $1,000 cash he was keeping at home for an emergency. If the required re erve ratio is 0.20 what i the maximum change in the money upply from her depo it? (A) $1,000 (B) $1 250 (C) $2 000 (D) $4 000 (E) $5,000.. or negative 1 ) positive. the rooney t and 2) is iropac. the rooney a\ready in supply'?

50 The Money Multiplier-Questions 42. As ume that Atlantic National Bank has demand depo its of $100,000 and no exces re erve, and that the re erve requirement i 10 percent. $100,000 - $5,000= $95,000 A cu tomer withdraw $5 000 from the bank. $95,000 / 10 /o = $9,500 To meet the reserve requirement, the bank rnu t $5 000 still in reserves = increa se its re erve by needed (A) $500 (B) $1 000 (C) $2,000 (D) $4 000 e) $ As ume that Linda deposits in her checking account the.$_!,000 cash he was keeping at home for an emergency. If the required re erve ratio is 0.20 what i the maximum chan_g~ in the money upply from her deeo ilj (A) $1,000 (B) $1 250 (C) $2 000 (. ) $4 000 (E) $5,000 $4:soo.ft 5000-\\ F>')O:: I ~'-"\,000