ECN 211 - Test 3

commodity money

objects that have value in themselves and that are also used as money

fiat money

money that has value because the government has ordered that it is an acceptable means to pay debts (paper money)

money stock

the quantity of money circulating in the economy

M1

currency

M2

M1 plus savings accounts

The Fed's jobs

regulate banks and ensure the health of the banking system; control the money supply

Federal Open Market Committee (FOMC)

Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply

If banks hold all deposits in reserve

banks do not influence the supply of money

when a bank holds only a fraction of deposits as reserves

banks create money

capital requirement

a government regulation specifying a minimum amount of bank capital

bank capital

the resources a bank's owners have put into the institution

leverage

the use of borrowed money to supplement existing funds for purposes of investment

leverage ratio

the ratio of assets to bank capital

open market operations

the purchase and sale of U.S. government bonds by the Fed

Fed lending to banks

when banks have low reserves

reserve requirement

the percentage of deposits that banking institutions must hold in reserve

Paying interest on reserves

if Fed wants lower money supply

The rate charged at the Fed's "discount window" is known as the

discount rate

The two primary tasks of the Federal Reserve are

monetary policy and bank regulation

Suppose the banking system currently has $100 billion in reserves

the reserve requirement is 10 percent

Under what system do banks generally lend out the majority of the funds deposited?

fractional reserve banking

Suppose the money multiplier has increased. Which of the following is the most likely cause?

the reserve ratio decreases

money multiplier formula

1/reserve requirement

To increase the money supply the Fed can conduct open-market purchases. Alternatively

the Fed can

Which of the following assets is most liquid?

money

Which of the following will make banks want to hold more reserves at the Fed

causing the money multiplier to decrease?

Which of the following are used to defer payments and are therefore not money?

credit cards

A store of value is

an item that people can use to transfer purchasing power from the present to the future

When the Fed buys U.S. government bonds

it has conducted

Economic fluctuations are

irregular

as output falls

unemployment rises

wealth effect

the change in the quantity of aggregate demand that results from wealth changes due to price-level changes

the interest rate effect

occurs when a change in the price level leads to a change in interest rates and

the exchange rate effect

a lower price level causes the real exchange rate to depreciate

Shifts arising from changes in consumption

if consumers save more

shifts arising from changes in investment

if firms become optimistic about the future and decide to buy new equipment

shifts arising from changes in net exports

if foreign countries have a recession or if the dollar rises in value

shifts arising from changes in government purchases

if governments increase spending

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices were flexible

Shifts arising from changes in labor

immigration or lower natural unemployment shifts LRAS right

Shifts arising from changes in capital

more human or physical capital shifts LRAS right

Shifts arising from changes in natural resources

discovery of resources or better weather shifts LRAS right

shifts arising from changes in technical knowledge

new technology or trade shifts LRAS right

short-run aggregate supply curve

shows the relationship in the short run between price level and quantity of real GDP supplied

sticky wage theory

nominal wages are slow to adjust to changing economic conditions

sticky price theory

some prices adjust sluggishly in response to changing economic conditions

the misperceptions theory

unexpected price changes mislead suppliers

quantity of output supplied equation

natural level of output + a(actual price level - expected price level)

federal funds rate

the interest rate at which banks make overnight loans to one another

quantitative easing

Federal Reserve buying securities to stimulate the economy

the multiplier effect

the total increase in GDP from an initial increase in spending

Marginal Propensity to Consume (MPC)

the fraction of additional income spent on consumption

investment accelerator

increased demand leads to increased investment

crowding-out effect

when government borrowing raises interest rates and reduces private investment

supply siders

favor tax cuts and deregulation to increase supply and control inflation

M1 equation

currency held outside banks + demand deposits + traveler’s checks + other checkable deposits

M2 equation

M1 + savings accounts + money market accounts + other near monies

Banks earn a profit by

charging more interest on loans than they pay on deposits

MPC =

change in consumption/change in income

The decline in investment spending accounts for approximately how much of the decline in output during a recession?

two-thirds

In a 100-percent-reserve banking system

if an individual deposits money in their checking account

Which of the following both shift aggregate-demand curve to the left?

net exports fall and government purchases fall

In the model of aggregate demand and aggregate supply

the GDP deflator measures the

Which of the following decrease when the Fed makes open market purchases?

neither currency nor reserves

the multiplier =

1/(1 - MPC)

Which of the following is an example of an automatic stabilizer?

the unemployment compensation system

Which of the following is/are considered an asset of a bank?

reserves and government securities

If the Fed wants to lower the federal funds interest rate

it will

If the Fed wants to raise the Federal Funds rate it will

sell government securities to decrease reserves

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

medium of exchange

When in France you notice that prices are posted in euros

this best illustrates money's function as

Consumer confidence indexes suggest that households and firms have become more optimistic about future income. This leads to a

rightward shift in the aggregate demand curve

In 2008

households and firms became pessimistic about future income and employment in the U.S. economy. All else constant

Which of the following shifts both the short run and long run aggregate supply right?

an increase in the capital stock

Which of the following shifts both short run and long run aggregate supply left?

a decrease in the capital stock

If costs of production or input price increase

the short-run aggregate supply curve shifts to the left

stagflation is

a combination of high inflation and high unemployment

If the economy falls into a recession

what response constitutes the use of automatic fiscal policy?

when the price level falls

investment spending rises

fiscal policy is determined by

the president and Congress and involves changes to spending and taxation

the federal funds rate decreases when

the quantity of bank reserves increases

Suppose the economy is producing above the natural rate of output. What describes the automatic adjustment to the long run?

wages and input prices increase and SRAS decreases

What would cause a shift in the short run aggregate supply curve but no change in the long run aggregate supply curve?

an increase in the wage rate or expected price level

What shifts both the short run and long-run aggregate supply right?

an increase in the capital stock

What shifts the short run aggregate supply right?

a decrease in the price of oil

Critics of stabilization policy argue that

lags in implementation can worsen economic fluctuations

What shifts aggregate demand left?

a decrease in the money supply

If the government buys bonds

interest rates decrease