Macro Problem Set 3 Fall 2015

Transcription

1 Macro Problem Set 3 Fall 2015 Directions: The True/False and Multiple Choice questions do not have to be turned in for credit. It would be foolish, however, not to spend a great deal of time working on these questions. They are your best preparation for the next exam. Feel free to ask questions about these questions. We will go over the answers to all of the questions in class. The essay questions must be turned in for a grade. True/False 1) V2 is larger and more stable than V1. 2) Savings deposits are not subject to the reserve requirement. 3) When the Fed conducts expansionary monetary policy, this will increase the money supply and interest rates. 4) Contractionary monetary policy should lead to rising bond prices. 5) When consumers transfer funds from their checking account to their savings account, M2 doesn t change. 6) A contractionary monetary policy should increase the value of the dollar relative to other currencies. 7) The asset demand for money is vertical. 8) The oversimplified money multiplier increases when the Fed lowers the reserve requirement. 9) The reserves that a commercial bank holds at the Fed are a liability of the Federal Reserve. 10) A tight money policy is likely decrease bank reserves. 11) There will probably be little crowding out if the supply curve in the loanable funds market is relatively flat. 12) When banks raise their interest rates, this leads to more money creation in the economy. 13) The equation of exchange suggests that rising output leads to falling prices when velocity and the money supply are constant.

2 14) A bank whose liabilities are greater than its net worth will likely be taken over by the FDIC. 15) The Federal Reserve closely coordinates monetary policy with Congress. Multiple Choice 16) Which of the following is a true statement? a) Excess Reserves = Actual Reserves Required Reserves b) Excess Reserves = Deposits Required Reserves c) Excess Reserves = Deposits Loans d) Excess Reserves = Loans Required Reserves 17) If the Fed sells U.S. Treasury securities, this action a) increases reserves, encourages banks to make more loans, and increases the money supply. b) decreases reserves, causes banks to reduce lending, and decreases the money supply. c) decreases reserves, causes banks to increase lending, and increases the money supply. d) increases reserves, causes banks to reduce their loans, and increases the money supply. 18) The asset demand for money is most closely related to money functioning as a a) standard of deferred payment. b) unit of account. c) store of value. d) medium of exchange. 19) Other things being equal, we would expect a large decrease in the supply of money to: a) decrease the purchasing power of each dollar. b) increase the purchasing power of each dollar. c) have no impact upon the purchasing power of the dollar. d) cause the price level to rise. 20) If the Fed buys Treasury bills, this will a) shift the money demand curve to the right. b) shift the money demand curve to the left. c) shift the money supply curve to the right. d) shift the money supply curve to the left.

3 21) Government securities held by commercial banks are a) counted as part of the banks reserves. b) a liability of the commercial bank. c) counted as part of M1. d) an asset of the bank. 22) The asset demand for money can be represented by a) a line parallel to the horizontal axis. b) a downward sloping line. c) an upward sloping line. d) a vertical line. 23) Which of the following statements is correct? Other things being equal a) a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged. b) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. c) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. d) inflation will shift the transactions demand curve for money to the right, but leave the total money demand curve unchanged. 24) If real GDP is $800 billion, nominal GDP is $900 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes a) will be $300 billion. b) will be $100 billion. c) will be $1,700 billion. d) will be $2,700 billion. 25) If the Fed were to sell bonds to commercial banks, we would expect to see a) the dollar rise in value relative to other currencies. b) interest rates rise. c) net exports fall. d) bond prices to fall. e) all of the above. 26) If the quantity of money supplied exceeds the quantity demanded a) the interest rate will rise. b) the interest rate will fall. c) the money supply curve will shift to the left. d) the money demand curve will shift to the right.

4 27) If there is a decrease in nominal GDP, we would expect a) the demand for money to decrease. b) the interest rate to increase. c) bond prices to fall. d) all of the above to occur. 28) If banks become concerned about economic conditions and become less willing to lend to consumers and business, which of the following is least likely to occur? a) Reserves will rise. b) Bank holdings of government securities will rise. c) Interest rates will rise. d) The Fed Funds Rate will rise. 29) Banks create money when they a) add to their reserves in the Federal Reserve Bank. b) accept deposits of cash. c) sell government bonds. d) exchange demand deposits for the IOU's of businesses and individuals. 30) Suppose the ABC bank has excess reserves of $4,000 and outstanding demand deposits of $80,000. If the reserve requirement is 20 percent, what is the size of the bank's actual reserves? a) $20,000 b) $24,000 c) $84,000 d) $16,000 31) If a bank has liabilities which exceed its net worth a) it will not be able to meet the legal reserve ratio. b) it is considered to be insolvent. c) it most likely is a heavy borrower from its district Federal Reserve Bank. d) none of the above are necessarily true. 32) Which of the following will not decrease the quantity of reserves a bank is holding? a) A borrower defaults on a loan. b) A customer writes a check. c) The bank makes a loan to a new borrower. d) The bank buys government securities from the Fed.

5 33) Which one of the following is presently a major deterrent to bank panics in the United States? a) deposit insurance b) the fractional reserve system c) the gold standard d) the discount window The following balance sheet is for the ABC National Bank. Assume the required reserve ratio is 10 percent. Assets Liabilities and net worth Reserves... $28,000 Demand deposits... $110,000 Loans... $160,000 Savings deposits... $60,000 I Net Worth... $18,000 34) Refer to the above information. The largest new loan this bank could make is a) $5,000. b) $11,000. c) $17,000. d) $18,000. e) $23, ) The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of a) the required reserve ratio. b) the MPS. c) its actual reserves. d) its excess reserves. 36) Overnight loans from one commercial bank to another for reserve purposes entail an interest rate called a) the prime rate. b) the discount rate. c) the federal funds rate. d) LIBOR. 37) The Fed could decrease the Fed Funds Rate by a) selling Treasury securities. b) buying Treasury securities. c) raising the reserve requirement. d) raising the Discount rate.

6 38) A decrease in real GDP is likely to a) reduce the asset demand for money. b) increase the transactions demand for money. c) decrease the transactions demand for money. d) increase interest rates. 39) Which of the following best describes the Keynesian view of the cause and effect chain of an tight money policy? a) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. b) An increase in the money supply will lower the interest rate, increase investment spending, and increase GDP. c) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. d) A decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP. 40) Suppose the Fed conducts a contractionary monetary policy. Which of the following would be unlikely to happen? a) an increase in the value of the dollar with respect to other currencies b) an increase in investment c) an increase in interest rates d) a decrease in net exports 41) The Federal Reserve System regulates the money supply primarily by: a) controlling the production of coins at the United States mint. b) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. c) altering the reserves of commercial banks, largely through sales and purchases of government bonds. d) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. 42) If the Fed buys $80 million worth of government bonds directly from commercial banks and the reserve requirement is 25%, which of the following would you not expect to see? a) a full $320 million dollar increase in the money supply b) banks holding on to some of their new excess reserves c) individuals failing to redeposit some of portion of the loans they receive. d) a drop in the fed funds rate

7 43) If the Federal Reserve authorities were attempting to reduce demand-pull inflationary pressures, appropriate policies would be to a) buy government securities, lower reserve requirements, and lower the discount rate. b) buy government securities, raise reserve requirements, and raise the discount rate. c) sell government securities, raise reserve requirements, and lower the discount rate. d) sell government securities, raise reserve requirements, and raise the discount rate. 44) Think about the money market. (Drawing a graph of it may help.) Suppose that Real GDP decreases. The Fed could stabilize interest rates by a) lowering the reserve requirement. b) lowering the discount rate. c) buying government securities. d) selling government securities. 45) In the long run, an increase in the money supply will: a) reduce the interest rates and shift AD out. b) reduce the interest rate and the price level. c) increase interest rates and reduce the price level. d) increase the interest rate and shift AD out. 46) The statement A Dell laptop costs $2,500. illustrates which function of money? a) medium of exchange b) unit of account c) store of value d) standard of deferred payment 47) One fundamental policy dilemma facing the monetary authorities is that a) banks and thrift institutions which are not members of the Federal Reserve System are immune to monetary policy. c) reserve requirements and the discount rate cannot be changed simultaneously. c) interest rates and the money supply cannot be stabilized simultaneously. d) the discount rate and open market operations cannot be used simultaneously. 48) According to Monetarists a) changes in the money supply are the primary cause of changes in real output and the price level. b) an expansionary fiscal policy will lower interest rates and thereby tend to over stimulate the economy. c) changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change. d) the supply of money changes in response to changes in the levels of real output and prices.

8 49) If the discount rate is currently set at 5%, and the required reserve ratio is 8%, the money multiplier will be a) 3 b) 5 c) 8 d) 12.5 e) 20 50) Which of the following is not a contractionary fiscal policy? a) reducing taxes b) reducing government spending c) reducing transfer payments d) all of the above are contractionary Graded Essay Questions Directions: Answers to these questions do need to be turned in. Written answers must be neat, complete, coherent, and cogent. Any graphs must be fully labeled. Do not put your answers on this sheet; use a separate sheet, or sheets, of paper as needed. No fringes, and if you use multiple sheets of paper, staple them together. 1) Erewhon is a country that has been having a lot of trouble with inflation. For years they have struggled with very high rates of inflation. They are considering dumping their own currency, the rallod, and adopting the U.S. dollar as their official currency. This is known as dollarization. In what ways might adopting the dollar help Erewhon? Are there any potential problems or costs they should consider? 2) Why have open market operations historically been the Fed s favorite tool for conducting monetary policy?