Doblas HW8 review

Which of the following is NOT a function of money?

Total factor productivity.

Money ...

... is in most countries measured by a series of aggregates M0, M1, M2, etc. where M0 is part of M1, M1 is part of M2, etc.

When unemployment is ______ and inflation is _______, the Taylor rule clearly prescribes that the Fed should ______ interest rates.

low; high; raise

Real money demand ...

... is a decreasing function of the nominal interest rate.

The velocity of money is ... 

lower in low-inflation countries than in high-inflation countries

Increasing the money supply via open market purchases …

… quickly decreases interest rates. Open market purchases raise the price of bonds, thereby lowering the implied interest rate.

Fractional reserve banking ...

helps convert savings into investment

The Federal Reserve …

… makes monetary policy decisions pursuing price stability, as well as maximum employment.

If people decrease the fraction of their money that they keep in currency (and increase the fraction that they deposit in banks) and at the same time, the Fed lowers reserve requirements for banks, the monetary base ______ and the money multiplier _______.

stays unchanged; increases

In this economy, the money supply is created as follows:

The Fed buys bonds from Person 1 for $1000.
Person 1 keeps $200 in cash and deposits $800 at bank A.
* Bank A lends out $600 to Person 2 and keeps $200 as reserves.
* Person 2 keeps $200 at home and deposits $400 at Bank B.
* Bank B keeps $100 in its vaults as reserves and lends $300 to Person 3.
* Person 3 decides to keep the $300 entirely in physical currency.

The monetary base is ...  

$1000

In this economy, the money supply is created as follows:

The Fed buys bonds from Person 1 for $1000.
Person 1 keeps $200 in cash and deposits $800 at bank A.
* Bank A lends out $600 to Person 2 and keeps $200 as reserves.
* Person 2 keeps $200 at home and deposits $400 at Bank B.
* Bank B keeps $100 in its vaults as reserves and lends $300 to Person 3.
* Person 3 decides to keep the $300 entirely in physical currency.

The money supply is ... 

$1,900.

In this economy, the money supply is created as follows:

The Fed buys bonds from Person 1 for $1000.
Person 1 keeps $200 in cash and deposits $800 at bank A.
* Bank A lends out $600 to Person 2 and keeps $200 as reserves.
* Person 2 keeps $200 at home and deposits $400 at Bank B.
* Bank B keeps $100 in its vaults as reserves and lends $300 to Person 3.
* Person 3 decides to keep the $300 entirely in physical currency.

The money multiplier is ... 

1.9

How would the problem change if the minimum reserve/deposit ratio was 10 percent? Assuming that banks would lend as much as they legally could, and that Persons 1 and 2 would hold the same amounts of currency as before, what would be the effect of this?

The monetary base would stay unchanged. The money multiplier and the money supply would grow