Principles of Macroeconomics Final Exam Review

Flashcards for University of Arkansas Econ 2013 Final Exam Review covering Chapters 14, 15, and part of 16.

If a bank desires to hold no excess reserves, the reserve requirement is 8 percent, and it receives a new deposit of $500, what happens to its required reserves?

Its required reserves increase by $40.

M1 includes which type of deposits?

Other checkable deposits.

What is included in M2 money supply?

M2 includes M1 + savings deposits + small time deposits + money market mutual funds + miscellaneous categories of M2.

If the reserve ratio is 5 percent, then $600 of additional reserves can create up to how much new money?

$12,000 of new money.

When a grocery store accepts your $5 bill in exchange for bread and milk, what function does the $5 bill serve as?

A medium of exchange.

If credit card balances rise in the economy, what happens to M1 and M2?

M1 will not change and M2 will not change.

What are a bank's assets?

Things owned by or owed to the bank.

If the required reserve ratio is RR, how is the simple deposit multiplier defined?

1/RR.

What happens to money demand when there is an increase in the price level?

Money demand shifts to the right

What gives you the confidence that a retailer will accept dollars in exchange for goods?

Money being a medium of exchange.

You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money?

Medium of exchange.

Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

A.

If the central bank can act as a lender of last resort during a banking panic, what may banks do?

Satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.

The sale of Treasury securities by the Federal Reserve generally does what to the money supply?

Decrease the quantity of reserves held by banks.

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have how much in excess reserves?

$5 million.

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, what will the inflation rate be?

4%.

An increase in the interest rate causes what on the money demand curve?

A movement up along the money demand curve.

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, what happens to the equilibrium interest rate?

The equilibrium interest rate should increase.

The interest rate that banks charge other banks for overnight loans is called what?

The federal funds rate.

A decrease in interest rates can do what to the demand for stocks?

Increase the demand for stocks as stocks become relatively more attractive investments as compared to bonds.

When the Fed embarked on a policy known as quantitative easing, what did they do?

Bought longer-term securities than are usually bought in open market operations.

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of what?

Automatic stabilizers.

Which of the following is an example of discretionary fiscal policy?

The tax cuts passed by Congress in 2001 to combat the recession.

Tax increases on business income decrease aggregate demand by decreasing what?

Business investment spending.

The use of fiscal policy to stabilize the economy is limited because of what?

The legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.

Suppose Warren Buffet withdraws $1 million from his checking account at Chase Bank. If the required reserve ratio is 20 percent, what is the maximum change in deposits in the banking system?

-$5 million

Which of the following is not counted in M1?

Credit card balances.

The Fed's two main monetary policy targets are what?

The money supply and the interest rate.

Contractionary monetary policy causes what to happen?

Aggregate demand to fall and the price level to fall.

If the Fed's policy is contractionary, it will do what?

Use open market operations to sell Treasury bills.

From the 1960s to 2018, what happened with transfer payments?

Have risen from 25 percent to about 49 percent of federal government expenditures.

Decreasing government spending does what to the price level and to equilibrium real GDP?

Decreases the price level and decreases equilibrium real GDP.