ECON 410 TAMU Exam 2 Yuzhe Zhang

The supply of loanable funds comes from

Saving

The Demand for loanable funds

Comes from investments

Depends negatively on r

In equilibrium, total investment equals:

National Savings

The supply of loanable funds is equivalent to:

National Savings

According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount:

Consumption and investments both decrease

Crowding out occurs when an increase in government spending __ the interest rate and investment ____.

increase, decrease

A country that is on a gold standard primarily uses:

Commodity Money

Open-market operations are:

Federal Reserve purchases and sales of government bonds.

The money supply consists of

Currency plus demand deposits

In a fractional-reserve banking system, banks create money when they

make loans

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to __ divided by ____ multiplied by B.

(cr + 1) : (cr + rr)

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

$800 billion

Money supply = Monetary Base * m

When the Fed makes an open-market sale

decrease in the monetary base

When the Fed increases the discount rate it

is likely to decrease the monetary base (B)

Quantitative easing is most closely akin to

open market operations

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k

The income velocity of money increases and the money demand parameter k __ when people want to hold ____ money.

Decrease, less

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

the Fed

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have __ rates of inflation and decades of low money growth tended to have ____ rates of inflation.

high, low

During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level.

100

public savings formula

(T-G)

Private Savings Formula

(Y-T) - C

National savings

Private + Public savings

Total output is determined by

- economy's quantities of capital and labor

- level of technology

Competitive firms hire each factor until

its marginal product equals its price.

if the production function has a constant return to scale

then labor income + capital income = total income (output)

A closed economy's output is used for

consumption, investment, and government spending

Real interest rate adjusts to equate the demand for and supply of:

Goods and services

loanable funds

Money Definition

the stock of assets that can be readily used to make transactions

Store of value

transfers purchasing power from the present to the future

Unit of account

a common unit for measuring the value of each good or service

medium of exchange

anything that is used to determine value during the exchange of goods and services

we use money to buy goods and services

Double Coincidence of wants

Fiat money

money without intrinsic value that is used as money because of government decree

Commodity Money

has intrinsic value

Gold coins

intrinsic value

Intrinsic value is a measure of what an asset is worth.

Has value outside its use of money

Money Supply

the quantity of money available in the economy

Controlled by the central bank

Monetary policy

How is it conducted

is the control over the money supply

By a country's central bank (US FED)

To control the money supply, the Fed uses

Open market operations

Reserve Requirements

Discount Rate

Interest on Reserve

M1

currency

demand deposits

traveler's checks

other checkable deposits

M2

M1 plus retail money market mutual funds balances, savings deposits, and small-time deposits

Which of these are money?

Currency

Checks

Deposits in checking accounts (demand Deposits)

Credit Cards

Certificates of deposits (time deposits)

Currency (C)

Checks (NOT MONEY)

Demand Deposits (M1)

Credit Cards (NOT MONEY)

Certificates of deposits (M2)

Reserves (R)

the portion of deposits that banks have not lent

A bank's liabilities include

Deposits

Assets include loans and reserves

100 percent reserve banking

a system in which banks hold all deposits as reserves

fractional reserve banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

A fractional reserve banking system creates ?

money but not wealth

Bank loans give borrowers some new money and?

and equal amount of new debt

Monetary Base

B = C + R

reserve-deposit ratio

rr = R/D

currency-deposit ratio

cr = C/D

m is the money multiplier

the increase in the money supply resulting from a one dollar increase in the monetary base

The Fed can change the monetary base using

open market operations and the discount rate

Discount rate

The interest rate the fed charges on loan to banks

reserve requirement

Fed regulation that imposes a minimum reserve deposit ratio

interest on reserves

The Fed pays interest on bank reserves deposited with the Fed

Velocity

The rate at which money circulates

The number of times an average dollar bill changes hands in a given time period.

Real money balances

the purchasing power of the money supply

Two sources of income for the government

Tax

Printing Money

Seigniorage

revenue raised by printing money

Printing money imposes...

an inflation tax on the money holders

Hyperinflation is caused by

excessive money supply growth

Why governments create hyperinflation

When Gov't can't raise taxes or sell bonds, it must finance spending increases by printing money

Classical dichotomy

the theoretical separation of nominal and real variables

Neutrality of Money

changes in the money supply do not affect real variables

Quantity theory of money

Assumes velocity is constant

Concludes that the money growth rates determine the inflation rate

applies to the long run

consistent with cross-country and time series data

Nominal interest rate

= real interest rate + inflation rate

The opposite cost of holding money

Fisher effect

nominal interest rate moves one-for-one with expected inflation

Money Demand

Depends only on income in the quantity theory

Depends on the nominal interest rate

Hyperinflation

caused by rapid money supply growth when money printed to finance government budget deficits

stopping it requires fiscal reforms to eliminate gov't need for printing money