78
Monetary Policy Monetary Policy Alan Greenspan Alan Greenspan the the “ “ Fed Fed ” ”
Monetary PolicyMonetary Policy
Alan GreenspanAlan Greenspan
thethe “ “FedFed””
RRRR Excess ReservesExcess Reserves
Total(Actual) ReservesTotal(Actual) Reserves
PMC = M x ER, so 5 x .80 = $4PMC = M x ER, so 5 x .80 = $4TMS = PMC[$4] + DD[$1] = $5TMS = PMC[$4] + DD[$1] = $5
[MS = Currency + DD of public][MS = Currency + DD of public]
Jennifer Garner deposits $1 with A 20% RRJennifer Garner deposits $1 with A 20% RR
.2020 80 cents80 cents
One DollarOne Dollar
Jen Garner’sJen Garner’s
Excess ReservesExcess Reserves
Total(Actual) ReservesTotal(Actual) Reserves
PMC = M x ER, so 5 x $1 = $5PMC = M x ER, so 5 x $1 = $5TMS [$5] = PMC [$5]TMS [$5] = PMC [$5]
[MS = currency + DD of public][MS = currency + DD of public]
Jennifer’s Bank Borrows $1 From The Fed Jennifer’s Bank Borrows $1 From The Fed [20% RR][20% RR]
00 One DollarOne Dollar
RRRR
One DollarOne Dollar
Jen Garner’sJen Garner’s FedFed
Beating the Inflation DragonBeating the Inflation Dragon
If The Economy Is Exceeding If The Economy Is Exceeding The FE GDP Speed Limit Of 4% -The FE GDP Speed Limit Of 4% -
““When the party gets too good, it’s the job When the party gets too good, it’s the job
of the Fed to take away the punch bowl.”of the Fed to take away the punch bowl.”
The Fed’s policy is “If you see inflation, its The Fed’s policy is “If you see inflation, its too late. Whip it before it gets out of the box.”too late. Whip it before it gets out of the box.”
During a recession, the Fed is happy to During a recession, the Fed is happy to “spike the punch.”“spike the punch.”
Should The Fed Chairman Show His Hand?Should The Fed Chairman Show His Hand?
““For Richer For Richer oror For PoorerFor Poorer””
For For Andrea, Andrea, it tookit took 12 years 12 years to get ato get a marriage proposal marriage proposal she could understand. she could understand. [She got 3, but didn’t understand [She got 3, but didn’t understand what he was saying]what he was saying]
GGreenspan reenspan SSworn in for aworn in for a 5 5thth 4 4-year-year T Termerm
Last PLast Paragraph of aragraph of Mr. Greenspan’s Marriage ProposalMr. Greenspan’s Marriage Proposal “Despite these concerns, and in the final analysis, the more preponderous weight of evidence
considered in these deliberations falls on the side of a matrimonial rapproachement. I am prepared to act on these conclusions where warranted, with your consent, in a way that is consistent with my role as chairman of the Federal Reserve.”
This was Fedspeak for, This was Fedspeak for, “Will You Marry Me?”“Will You Marry Me?”
Monetary PolicyMonetary Policy – America’s Main Stabilization Tool
Monetary Policy ToolsMonetary Policy Tools1.1. Discount RateDiscount Rate – – when when banks borrow banks borrow from thefrom the Fed Fed2.2. Reserve Ratio Reserve Ratio – currently 10%; the most powerful tool– currently 10%; the most powerful tool3.3. Buying [recession]Buying [recession] && selling [inflation] selling [inflation] of bondsof bonds
RecessionRecession
InflationInflation
NominalNominalInterestInterest
RateRate
CONSOLIDATED BALANCE SHEET OF FED BANKS
ASSETSASSETS•Securities [90%]Securities [90%]•Loans to Commercial BanksLoans to Commercial Banks
LIABILITIESLIABILITIES•Reserves of Commercial Reserves of Commercial
BanksBanks•Treasury DepositsTreasury Deposits•Federal Reserve Notes Federal Reserve Notes
[90%][90%]
GOALS OF MONETARY POLICY
…to assist the economy in achieving a full-employment, noninflationary level of total output
TOOLS OF MONETARY POLICY
Open-Market OperationsBuying Securities (Bonds of Course)
From commercial banks...• Bank gives up securities• FED pays bank• Banks have increased reserves
From the public...• Public gives up securities• Public deposits check in bank• Banks have increased reserves
TOOLS OF MONETARY POLICY
Open-Market OperationsSelling Securities To commercial banks...
• FED gives up securities• Bank pays for securities• Banks have decreased reserves
To the public...• FED gives up securities• Public pays by check from bank• Banks have decreased reserves
New reservesNew reserves$1,000$1,000Excess
Reserves
$$5,0005,000PMC thru Bank System Lending
FedFed buys a $ buys a $1,000 1,000 Bond from aBond from a BankBank
TMS is is $5000$5000
20% RR20% RRFedFed
Interest Rates
Going Up and Up
Recent GDPRecent GDP
Current U.E., GDP Rates
5.1 % - March 08 0.6% GDP – 4th Quarter 2007
New reserves$800
ExcessReserves
$4000Bank System Lending
FEDERAL RESERVEPURCHASE OF BONDS
Purchase of a$1000 bondfrom the public
$200Requiredreserves
$1000Initial
Deposit
Total Increase in Money Supply ($5000)
New reserves$800$800
ExcessExcessReservesReserves
$$40004000PMCPMC thru Bank Lending
Mischa Barton Mischa Barton DepositsDeposits $1,000$1,000 In Her In Her BankBank[[RR is 20RR is 20%%]]
$$200200
RRRR
$$10001000Initial
Deposit
TMSTMS is $$5,0005,000
Mischa fromMischa fromthe the O.C.O.C. [member [memberof the public]of the public]
Mischa Barton’sMischa Barton’s
TOOLS OF MONETARY POLICY
Open-Market Operations
The Reserve RatioRaising the Reserve Ratio
• Banks must hold more reserves• Banks decrease lending• Money supply decreases
Lowering the Reserve Ratio• Banks may hold less reserves• Banks increase lending• Money supply increases
TOOLS OF MONETARY POLICY
Open-Market Operations
The Reserve Ratio
The Discount RateEasy Money Policy• Buy Securities• Decrease Reserve Ratio• Lower Discount Rate
TOOLS OF MONETARY POLICY
Open-Market Operations
The Reserve Ratio
The Discount RateEasy Money PolicyTight Money Policy• Sell Securities• Increase Reserve Ratio• Raise Discount Rate
TOOLS OF MONETARY POLICY
Open-Market Operations
The Reserve Ratio
The Discount RateEasy Money PolicyTight Money Policy• Sell Securities• Increase Reserve Ratio• Raise Discount Rate
MONETARY POLICY, REAL GDP,AND THE PRICE LEVEL
Cause-Effect Chain• Money supply impacts interest
rates• Interest rates affect investment• Investment is a component of
AD• Equilibrium GDP is changed
Real domestic output, GDP
Dm
InvestmentDemand
Rea
l rat
e of
inte
rest
, i
10
8
6
0Quantity of money demanded and supplied Amount of investment, i
MONETARY POLICY AND EQUILIBRIUM GDPSm1
AS
AD1(I=$15)
P1
10
8
6
0
Sm2
AD3(I=$25)
P2
If the Money SupplyIncreases to Stimulatethe Economy…Interest Rate DecreasesInvestment IncreasesAD & GDP Increases with slight inflation
Pri
ce le
vel
AD2(I=$20)
P3
Sm3
Increasing money supply continues the growth – but, watch Price Level.
MONETARY POLICY IN ACTIONStrengths of monetary policy• Speed and flexibility• Isolation from political
pressureFocus on the Federal Funds Rate
The Federal Funds Rate
The Prime Interest Rate
Recent Monetary Policy
RecessionRecession
LowerLowerLowerLowerBuyBuy
InflationInflationRaiseRaiseRaiseRaiseSellSell
YYR R YY**
ADADASAS
LRASLRASASASADAD
YY**YYII
1. 1. Discount RateDiscount Rate – banks borrow from the Fed (symbolic)
2. 2. Required ReserveRequired Reserve - % of DD which cannot be loaned.3. BuyBuy//SellSell BondsBonds – government debt T-billsT-bills–3 mo., 6 mo., & 1 year; purchase price: $10,000$10,000 T-notesT-notes - 2 yr., 3 yr., 5 yr.,($5,000)($5,000), & 10 yr., ($10,000)($10,000) T-bondsT-bonds – 30 years with purchase of $1,000$1,000
Prime RatePrime Rate – loan rate to the best (prime) customers
Federal Funds Target RateFederal Funds Target Rate – banks borrow from one another
3 Tools 3 Tools of of Monetary PolicyMonetary Policy
3.53.5%%11 decreases11 decreases
Aug 05Aug 05
YYRR Real GDP
DDMM
InvestmentDemand
Rea
ll I
nte
res
t R
ate 10
8
6
0Money Market QID1QID1
“ “Easy Money” During RecessionsEasy Money” During RecessionsMSMS11
ASADAD11
P1
10
8
6
0
MSMS22
P2
Pri
ce le
vel
BuyBuy
If there is If there is RECESSIONRECESSIONMS will beMS will beincreased.increased.
QID2QID2
DDII
Y*Y*
““Easy Money” Easy Money” – – ((Buy/Sell) Buy/Sell) bonds,bonds,whichwhich (increase/decrease)(increase/decrease) MS, MS, which which (increase/decrease) interest rates, (increase/decrease) interest rates, which (appreciate/depreciate)which (appreciate/depreciate)the the dollar, dollar, whichwhich (increase/decrease)(increase/decrease)C, Ig,C, Ig, & & Xn, Xn, whichwhich (increase/decrease (increase/decrease))AD & therefore, PL, GDP, & emp. AD & therefore, PL, GDP, & emp. EE11
EE22
ADAD22
““Students, should the Fed Students, should the Fed buybuy or or sell sell bonds to bonds to jumpstart this economy?”jumpstart this economy?”
Jobs are Jobs are tough to get.tough to get.
LRASLRAS
Illustrate the monetarist viewIllustrate the monetarist view
DDII
ADAD11
YYII
Dm
InvestmentDemand
Rea
ll I
nte
res
t R
ate 10
8
6
0Money MarketQID2 AS
10
8
6
0
P2
MS1
P1
MSMS22
If there isIf there isINFLATIONINFLATION,,MS will beMS will bedecreased.decreased.
SellSell
QIDQID11
YY**
““Tight Money” during InflationTight Money” during Inflation
““Tight Money”Tight Money” – (Buy/Sell) – (Buy/Sell)bonds, bonds, whichwhich (incr/decr) the MS,(incr/decr) the MS,whichwhich (incr/decr) in. rates, (incr/decr) in. rates, whichwhich (apprec/deprec) the dollar,(apprec/deprec) the dollar,which (incr/decr) C, Ig, & Xn,which (incr/decr) C, Ig, & Xn,whichwhich (incr/decr) AD, PL, (incr/decr) AD, PL,&& GDP. GDP.
EE11
EE22
ADAD22
““Now, should Now, should I I buybuy or or sellsell?”?”
““I’ll get rid of I’ll get rid of some money.”some money.”
LRASLRAS
YYRR YY** Investment Demand
99%%
6%6%
33%%
0
Money MarketMoney Market $50$50 $60$60
AS
ADAD11
PLPL11
99%%
66%%
33%%
00
MSMS22ADAD22
PLPL22
$70$70 YYII
ADAD33DI
DDmm
PLPL33
MSMS11 MSMS33
$100$100 120120 140140 QQIIDD
II=$50]=$50] II=$60=$60
II=$70=$70
RDORDO
The ideal economy is ADAD22, with I.R. at 6%6% & Ig at $60$60 billion billion.
YYRR YY** Investment Demand
99%%
6%6%
0
Money MarketMoney Market $50$50 $60$60
AS
ADAD11
PLPL11
99%%
66%%
00
MSMS22ADAD22
PLPL22
DI
DDmm
MSMS11
$100$100 120120 QQIIDD
II=$50]=$50] II=$60=$60
RDORDO
Recessionary GapRecessionary GapIncrease MS from $100$100 to $120$120, which lowers the I.R. from 9%9% to 6%6%,, which increases QID from $50$50 to $60$60, which increases AD from ADAD11 to ADAD22.
Real GDP Q
PL SRASSRASADAD22
YYRR YYFF
Expansionary Fiscal PolicyExpansionary Fiscal Policy
[[Incr GIncr G; ; Decr TDecr T]]
PPL1L1
ADAD11
PLPL22
GG ADAD Y/Empl./PL;Y/Empl./PL; GG LFMLFM II.R..R.
TT DDII CC ADAD Y/Emp/PL;Y/Emp/PL; TT LFMLFM IIRR
Start from a Start from a Balanced BudgetBalanced BudgetG & T = $2 TrillionG & T = $2 Trillion
$$2 T 2 T $2 T$2 T
““I can’t I can’t get a job.”get a job.”
““Now, this is better.”Now, this is better.”
GG TT EE11EE22
LRASLRAS
YY** Investment Demand
6%6%
33%%
0
Money MarketMoney Market $60$60
AS
66%%
33%%
00
MSMS22ADAD22
PLPL22
$70$70 YYII
ADAD33DI
DDmm
PLPL33
MSMS33
$$120120 140140 QQIIDD
II=$60=$60
II=$70=$70
RDORDO
Inflationary GapInflationary GapDecrease MS from $140$140 to $120$120, which increases the I.R. from 3%3% to 6%6%.. which decreases QID from $70$70 to $60$60, which decreases AD from AD3AD3 to AD2AD2.
GOALS OF MONETARY POLICYGOALS OF MONETARY POLICY
…to assist the economy in achieving a full employment,
non-inflationary level of output
1. 1. Open Market OperationsOpen Market Operations - - “nuts and bolts” of Monetary Policy [main tool]
- $60-$70 billion every day
Three Tools Of Monetary PolicyThree Tools Of Monetary Policy
2. 2. Reserve RequirementReserve Requirement - - most powerful (seldom used) - affects money creation by changing ER and the multiplier - an increase ofincrease of ½ of 1½ of 1%% would increaseincrease bank reservesbank reserves by by over $5 over $5 billionbillion
- RR was 20%20% from 1937-19581937-1958 Sledgehammer Sledgehammer of of MMonetaryonetary P Policyolicy
RR - RR - Atomic Bomb of Monetary PolicyAtomic Bomb of Monetary Policy
Reserve Requirement ExampleReserve Requirement ExampleSuppose the banking system has $500 billion in DD.The RR is 12% RR is 12% & TR are $60 billion$60 billion, which is 12%12% of the $500 bilion$500 bilion DDDD. So, there are no ERno ER.
Now, the Fed lowers the RR to 10%lowers the RR to 10%. Now banks arerequired required to to keep only $50 bilkeep only $50 bil. in RR. So, $10 billion $10 billion more ERmore ER is available to loan out.$10 billion X 10 = $100 billion in new DD$10 billion X 10 = $100 billion in new DD.So, 20% increase MS [DD]20% increase MS [DD] from $500 to $600$500 to $600 billion.
Atomic Bomb of Monetary PolicyAtomic Bomb of Monetary Policy
$10,000$10,000[$9,000+$1,000][$9,000+$1,000]
[In [In 19801980, , the the RR RR was set atwas set at 12%12%; stayed ; stayed there untilthere until 19921992; ; went towent to 10%10%]]
““EEasy asy MMoneyoney””
ASAS
ADAD11ADAD22
YYR R YY**
PLPL
$1,000$1,000InitialInitial
depositdeposit
$900$900[$900x10][$900x10]
$1,000$1,000
$810$810
$729$729
Monetary ExpansionMonetary Expansion[10% RR] [1/.10=10][10% RR] [1/.10=10]
““Easy Money”Easy Money”
The Reserve RequirementThe Reserve Requirement
““Easy Money”Easy Money” – increase the money supply – increase the money supply
$5,000$5,000[$4,000+$1,000][$4,000+$1,000]
““Tight Money”Tight Money” -- decrease the money suplydecrease the money suply
RR at 20% - Tight MoneyRR at 20% - Tight MoneyMonetary ExpansionMonetary Expansion
(20% RR) [1/.20=M(20% RR) [1/.20=MDD of 5] of 5]
““Tight Money”Tight Money”
$1,000$1,000Initial Initial
depositdeposit
$800$800$640$640
$512$512
3. Discount Rate Discount Rate - - emergency Fed loansemergency Fed loans to to banksbanks- - symbolic (raises Prime RatePrime Rate)- Discount Rate was 1% from 1934-46 and the prime rate was 1.5% HurricaneHurricane
EarthQuakeEarthQuake
FL borrowed $99million In 1991
The Fed tends to change the D.R. inThe Fed tends to change the D.R. inlockstep with the fed funds target rate.lockstep with the fed funds target rate.
Part of Uncle Sam’s MenuPart of Uncle Sam’s Menu
Monetary Policy At WorkMonetary Policy At Work
During this period, 1990-1992, the During this period, 1990-1992, the Fed did 4 thingsFed did 4 things::1. 1. Decreased discount rateDecreased discount rate from 10% to 3%; from 10% to 3%; 2. 2. DecreasedDecreased the the RRRR from from 12% to 10%; 12% to 10%; 3. 3. Decreased the Fed Funds Rate Decreased the Fed Funds Rate 24 times, and24 times, and 4. 4. Bought bondsBought bonds
Fed Funds Rate 1993-2004Fed Funds Rate 1993-2004
3%3%May, 2005
Relative Importance of Monetary PolicyRelative Importance of Monetary Policy
Relative Importance of Monetary PolicyRelative Importance of Monetary PolicyA. WWIIWWII--19791979–Fed targeted the interest rateinterest rate not the growth of MS.B. 1979-19821979-1982 – Fed targeted the growth of the MSgrowth of the MS not the in. rate.C. 1982-Present1982-Present-Fed targets the interest rateinterest rate, not the MS. 1. Discount RateDiscount Rate – not a primary tool of monetary policy. It does have an “announcement effect.” 2. Reserve RequirementReserve Requirement (1010%)-has changed one time in 2 decades (12% to 10% in 1992). It would affect bank profits so is seldom usedseldom used. 3. Open-market operationsOpen-market operations – evolved as the most effectivemost effective tool of monetary policy because of flexibilityflexibility. Securities can be bought or sold in large amounts & their impact on reserves is very prompt.
Effectiveness of Monetary PolicyEffectiveness of Monetary PolicyStrengths of Monetary PolicyStrengths of Monetary Policy 1. Speed and flexibilitySpeed and flexibility –can quickly be altered (compared to fiscal policy). This can occur on a daily basis and influence interest ratesinfluence interest rates and the MS. 2. Isolation Isolation from from political pressurespolitical pressures – because of the 14 year terms. They can enact unpopular policiesunpopular policies which might be best for our economy’s healthbest for our economy’s health.
Also, the Keynesians Keynesians don’t think the the lower interest ratelower interest rate is asis as important important as as “profit expectations.”“profit expectations.”
YR YY**
DDm(K)m(K)
InvestmentDemand
10%
88%%
66%%
0Money MarketMoney Market QID1 QID2
MMonetarist onetarist VViewiew of of Transmission MechanismTransmission Mechanism v.v. K Keynesian eynesian VViewiew
AS
AD1
PL1
10
88%%
66%%
0
MSMS22 AD2
PLPL22
YYIIDDmm is more inelastic is more inelastic[I.R. moreI.R. more sensitivesensitive]
QIDQID22
DDII is more elastic is more elastic[or moreor more responsiveresponsive]
ADAD2(M)2(M)DI(K)
DDI(M)I(M)
DDm(Mm(M)) (K)(K)
PLPL22
Mainly, we end up just Mainly, we end up just getting inflation. getting inflation.
MSMS11
KKeynesian vieweynesian view is that DI is rather steepsteep so monetary policy is not that strong. F Fiscal policy iscal policy is “top banana.”“top banana.”
ASASADAD11
ADAD22
Cyclical AsymmetryCyclical Asymmetry (lack of balancelack of balance) – “Tight money during inflations is more effective than easy money policy during a depressions.” a. An easy money policy during depressioneasy money policy during depression does not guarantee that people will take out loans if they don’t have jobs. [“You can lead a horse to[“You can lead a horse to water, but you can’t make him drink.”]water, but you can’t make him drink.”] b. The cyclical asymmetry has not created a majornot created a major difficultydifficulty for monetary policy except during times of depressionexcept during times of depression. c. Velocity of money may increaseVelocity of money may increase during inflationduring inflation when the fed is trying towhen the fed is trying to decrease the MSdecrease the MS & decrease during recession when the Fed is trying to increase MS. d. The lower interest rates during recessionlower interest rates during recession & depreciationdepreciation of the dollar may cause foreign investors to pull their money out of the U.S.foreign investors to pull their money out of the U.S. and reduce the MSreduce the MS. e. Banks may hold their ERBanks may hold their ER or the public may hold too much currencypublic may hold too much currency.
f. DDm curve may be more flatm curve may be more flat so that interest rate will not drop as muchso that interest rate will not drop as much, or the
DDI I curve may be more vertical so that investment will not increase ascurve may be more vertical so that investment will not increase as muchmuch.
Shortcomings and Problems of Monetary PolicyShortcomings and Problems of Monetary PolicyBut – I will eat But – I will eat spiked brownies.spiked brownies.
Strengths of Monetary PolicyStrengths of Monetary Policy
•Speed and flexibility• Isolation from political pressure•Successes in the 1980s & 1990sShortcomings and problems
[better at fighting inflationfighting inflation than fighting depressionsfighting depressions]
Only “fiscal or monetary Only “fiscal or monetary policy” can get me back policy” can get me back on my feet and allow on my feet and allow “Sam” to get back up.“Sam” to get back up.
““Help”Help”
Fiscal PolicyFiscal PolicyRecessionRecession InflationInflationIncrease GIncrease G Decrease GDecrease GDecrease TDecrease T Increase T Increase T
Monetary PolicyMonetary PolicyRecessionRecession InflationInflationLower D. RateLower D. Rate Raise D. RateRaise D. RateLower R. RateLower R. Rate Raise R. RRaise R. RatioatioBuy BondsBuy Bonds Sell BondsSell Bonds
““Easy Money”Easy Money” “Tight M“Tight Moneyoney””
Monetary and Fiscal PolicyMonetary and Fiscal Policy
Presidents try to put a positivePresidents try to put a positivespin on a struggling spin on a struggling
economyeconomy
TOOLS OF MONETARY POLICYTOOLS OF MONETARY POLICYDiscount RateDiscount RateThe Reserve RatioThe Reserve RatioOpen Market OperationsOpen Market Operations
Easy Money PolicyEasy Money Policy• LowerLower Discount Rate• LowerLower Reserve Ratio• BuyBuy Bonds
““Easy Money”Easy Money”
FedFed
TOOLS OF MONETARY POLICYTOOLS OF MONETARY POLICY
Discount RateDiscount Rate
The Reserve RatioThe Reserve RatioOpen Market OperationsOpen Market Operations
Tight Money PolicyTight Money Policy• RaiseRaise Discount Rate• RaiseRaise Reserve Ratio• SellSell Bonds
““Got to Got to decrease decrease the MS.”the MS.”
FedFed
48. The 3 tools of monetary policy3 tools of monetary policy are open market operations, changes in RR, & (changes in T/changes in G/ changes in discount rate).
49. The main toolmain tool of theof the Fed Fed in regulating the MS is (open-market operations/DR/RR).
50. When the FeFedd[$$$$] sells securities to the PUBLICPUBLIC[T-bills], DDDD (don’t change/incr/decr) & banking system RR, ER & TR (incr/decr).51. When the FedFed[T-bills] buys securities from commercial bankscommercial banks[$$$$], DD (don’t change/increase/decrease) & ER and TR (increase/decrease).
52. When the commercial bankingcommercial banking systemsystem[$$$$] borrows from the FedFed, DD (don’t change/increase/decrease) but ER & TR (incr/decr).53. When commercial bankscommercial banks[$$$$] sell government securities to the FedFed[T-bills], DD (don’t change/incr/decr) but their ER & TR (do not change/incr/decr).54. When the PUBLICPUBLIC[T-bills] buys securities from the FedFed[$$$$], DD (don’t change/incr/decr) and RR, ER, & TR of banks (don’t change/incr/decr).55. When a commercial bankcommercial bank gets a loan from the FedFed, their lending ability (incr/decr).
56. Assume that the RR is 25% & the Thunder BankThunder Bank borrows $100,000 from the
FedFed., commercial bank ERs are increased $________. PMC in the banking system are increased by $_______. TMS can be as much as $________.57. The (margin requirement/discount rate) specifies the size of the down payment on stock purchasesdown payment on stock purchases. 58. If the Fed Fed were to increase the RR [10% to 20%]were to increase the RR [10% to 20%] we would expect (higher/lower) interest rates, a (reduced/expanded) GDP and (appreciation/depreciation) of the dollar. [less “C”, “Ig”, & “Xn”]
NS 48-58NS 48-58 ((MSMS == DDDD + + Currency of PublicCurrency of Public))
100,000100,000400,000400,000 400,000400,000
59. When the RR is increased [10RR is increased [10% to% to 50 50%%]], the ER of member banks are (increased/decreased) and the monetary multiplier is (incr/decr).60. Assume the RR is 25% and the FedFed buys $4 M of bonds from the publicpublic. The MS is increased by ($3/$4/) million and the PMC is increased by ($16/$12) M. Potential TMS is ($3/$4/$12/$16) M.61. When the Fed Fed lends to commercial bankscommercial banks, this is called the (Fed Funds Rate/discount rate) and when commercial bankscommercial banks make loans to one another, this is the (Fed Funds Rate/ Discount Rate). 62. The Keynesian cause-effect chain of ancause-effect chain of an easy money policyeasy money policy would be to (buy/sell) bonds; which would (increase/decrease) the MS, which would (lower/raise) interest rates & (incr/decr) Ig, “C”, Xn, & Y.63. If the FedFed were to buy government securitieswere to buy government securities in the open marketin the open market, we would anticipate (lower/higher) interest rates, an (expanded/contracted)
GDP, and (appreciation/depreciation) of the dollar.64. If the FedFed were reducing demand-pull inflationwere reducing demand-pull inflation, the proper policies would be (lower/raise) the discount rate, (lower/raise) the RR and ((buy/sell) government bonds.65. Monetary policyMonetary policy is is thought thought to beto be more effective more effective in (controlling inflation/
fighting depressions) and fiscal fiscal is is more effectivemore effective (controlling inflation/ fighting depressions).66.The “net export effect”“net export effect” of an “easy” money policy“easy” money policy (strengthens/ weakens) that policy, while the “net export effect” of “expansionary” fiscal policy (strengthens/weakens) that policy. [impact of interest rates]
NS 57-66NS 57-66
YYRR YY** Investment Demand
99%%
6%6%
33%%
0
Money MarketMoney Market $50$50 $60$60
AS
ADAD11
PLPL11
99%%
66%%
33%%
00
MSMS22ADAD22
PLPL22
$70$70 YYII
ADAD33DI
DDmm
PLPL33
MSMS11 MSMS33
$100$100 120120 140140 QQIIDD
II=$50]=$50] II=$60=$60
II=$70=$70
RDORDO
67. If 67. If AD is AD3AD is AD3, what must the Fed do to get to , what must the Fed do to get to AD2(FE GDP [Y*])AD2(FE GDP [Y*])?? (increase/decrease) the MS from ($120/$140) to ($100/$120).(increase/decrease) the MS from ($120/$140) to ($100/$120).68. If the 68. If the MS is MS1MS is MS1, & the goal of the Fed is , & the goal of the Fed is FE GDPFE GDP[[Y*Y*], they should], they should (increase/decrease) the MS from ($100/$120) to ($120/$140).(increase/decrease) the MS from ($100/$120) to ($120/$140).69. Which of the following would 69. Which of the following would shift the MS curve from shift the MS curve from MS3MS3 toto MS2 MS2?? (buying/selling) bonds.(buying/selling) bonds.70. If the 70. If the MS is MS2MS is MS2 and the goal of the Fed is and the goal of the Fed is FE GDP of Y*FE GDP of Y*, they should, they should (increase/decrease/don’t change) the Ms.(increase/decrease/don’t change) the Ms.
NS 67-70NS 67-70
71. 71. An An easy money policyeasy money policy will (apprec/deprec) the dollar & (incr/decr) U.S. Xn. will (apprec/deprec) the dollar & (incr/decr) U.S. Xn. A A tight money policytight money policy will (apprec/deprec) the dollar & (incr/decr) U.S. Xn. will (apprec/deprec) the dollar & (incr/decr) U.S. Xn.72. If the economy were in a 72. If the economy were in a severe recessionsevere recession, , proper monetary policyproper monetary policy would call would call for (lowering/raising) the discount rate, for (lowering/raising) the discount rate, (lowering/raising(lowering/raising) the RR, & (buying/selling)) the RR, & (buying/selling) bonds. Proper bonds. Proper fiscal policyfiscal policy would be to (incr/decr) “G” & (incr/decr) “T”, both of would be to (incr/decr) “G” & (incr/decr) “T”, both of which would result in a bugetary (deficit/surplus). which would result in a bugetary (deficit/surplus).
NS 71-72NS 71-72
1. If your bankbank borrows $50,000 from the FedFed, does this automatically increase the MS? _____ Does this loan increase the amount in RR?_____ ER? ____ With 10% RR, PMC is __________. TMS is __________.2. If the RR is 50% & the FedFed buys $100 mil. of securities from the publicpublic, then: MSMS is increased by ________. PMC is _________. TMS is ________.3. What will cause the Dt(& total demand) for money curve to shift rightDt(& total demand) for money curve to shift right? (increase/decrease) in nominal (money) Y?4. When the FedFed buys bonds from banksbuys bonds from banks [or gives them a loan], DD are (incr/decr/ unchanged) but their ER & TR both (incr/decr/unchanged).5. If the FedFed buys $10 million of securities from the publicpublic, with a RR of 40%, MSMS is increased by ________ & PMC is _________. TMS is ________.6. If the FedFed decreased the RR from 20% to 10%RR from 20% to 10%, we would expect (higher/lower) interest rates, (appreciation/depreciation) of the dollar, and an
(increase/decrease) in GDP.7. DD of $100,000 and RR of 25% in a commercial banking systemcommercial banking system with TR of $40,000. PMC in the banking system is ($240,000/$60,000).8. If you are estimating your expensesestimating your expenses for the prom at $3,000for the prom at $3,000, money is functioning as (unit of account/medium of exchange/store of value).
MoneyMoney, , BankingBanking, , & & FedFed Test Review 1-8Test Review 1-8
NoNo NoNoYesYes $500,000$500,000 $500,000$500,000
$100 $100 mil.mil. $100 $100 milmil.. $200$200 mil. mil.
$10 $10 mil.mil. $15 $15 mil.mil. $25 mil.$25 mil.
YYRR Real GDP
DDMM
InvestmentDemand
Rea
ll I
nte
res
t R
ate 10
8
6
0Money MarketMoney Market QID1QID1
NS 9. “Easy Money” During RecessionsNS 9. “Easy Money” During RecessionsMSMS11
ASADAD11
P1
10
8
6
0
MSMS22
P2
Pri
ce le
vel
BuyBuy
If there is If there is RECESSIONRECESSIONMS will beMS will beincreased.increased.
QID2QID2
DDII
Y*Y*
9. 9. “Easy Money”“Easy Money”––((Buy/Sell) Buy/Sell) bonds,bonds,whichwhich (increase/decrease)(increase/decrease) MS, MS, which which (increase/decrease) interest rates, (increase/decrease) interest rates, which (appreciate/depreciate)which (appreciate/depreciate)the the dollar, dollar, whichwhich (increase/decrease)(increase/decrease)C, Ig,C, Ig, & & Xn, Xn, whichwhich (increase/decrease (increase/decrease))AD & therefore, PL, GDP, & emp. AD & therefore, PL, GDP, & emp. EE11
EE22
ADAD22
““Students, should the Fed Students, should the Fed buybuy or or sell sell bonds to bonds to jumpstart this economy?”jumpstart this economy?”
Jobs are Jobs are tough to get.tough to get.
DDII
ADAD11
YYII
Dm
InvestmentDemand
Real In
tere
st
Rate
10
8
6
0Money Market Money Market QID2 AS
10
8
6
0
P2
MS1
P1
MSMS22
If there isIf there isINFLATIONINFLATION,,MS will beMS will bedecreased.decreased.
SellSell
QIDQID11
YY**
NS 10. “Tight Money” during InflationNS 10. “Tight Money” during Inflation
10. 10. “Tight Money”“Tight Money” – (Buy/Sell) – (Buy/Sell)bonds, bonds, whichwhich (incr/decr) the MS,(incr/decr) the MS,whichwhich (incr/decr) in. rates, (incr/decr) in. rates, whichwhich (apprec/deprec) the dollar,(apprec/deprec) the dollar,which (incr/decr) C, Ig, & Xn,which (incr/decr) C, Ig, & Xn,whichwhich (incr/decr) AD, PL, (incr/decr) AD, PL,&& GDP. GDP.
EE11
EE22
ADAD22
““Now, should Now, should I I buybuy or or sellsell?”?”
““I’ll get rid of I’ll get rid of some money.”some money.”
RR RR is is 20% Assets 20% Assets DDDD(Liabilities)(Liabilities)
TR[RR+ER] = TR[RR+ER] = $20 mil.$20 mil. $100 million
11. How much can 11. How much can Pam’sPam’s bankbank loan out? $______ loan out? $______12. If Pam Anderson’s BankPam Anderson’s Bank borrows $1,000 from the FedFed ER will increase by $$_______.
13. Possible Money Creation in the system could be $$_______.
14. Potential Total Money Supply could be as much as $$________.
00
1,0001,000
5,0005,000
5,0005,000
TR 11-14 TR 11-14 MS = Currency + DD of Public
PPam am AAnderson’snderson’s Bank Bank FedFed
RR RR is is 50% Assets 50% Assets DDDD(Liabilities)(Liabilities)
TR[RR+ER] = TR[RR+ER] = $50 mil.$50 mil. $100 million
11. How much can 11. How much can Cameron’sCameron’s bankbank loan out? $______ loan out? $______12. If Cameron Diaz’s BankCameron Diaz’s Bank borrows $5,000 from the FedFed ER will increase by $$_______.
13. Possible Money Creation in the system could be $$________.
14. Potential Total Money Supply could be as much as $$________.
00
5,0005,000
10,00010,000
10,00010,000
Extra PracticeExtra Practice MS = Currency + DD of Public
Cameron Diaz’s BankCameron Diaz’s Bank FedFed
15. If the goal is F.E., 15. If the goal is F.E., & the& the interest rateinterest rate is is 9%9%, a(an) (recess/, a(an) (recess/ inflat) gap exists, the inflat) gap exists, the FedFed should (incr/decr) the in. rate. should (incr/decr) the in. rate.16. If the 16. If the interest rate isinterest rate is 3%3%, a(an) (recess/inflat) gap exists, , a(an) (recess/inflat) gap exists, the the FedFed should (increase/decrease) the interest rate. should (increase/decrease) the interest rate.17. I17. If the f the interest rateinterest rate is is 6%6%, the the Fed Fed shoulshould d (incr/decr/do nothing)(incr/decr/do nothing) to the interest rate. to the interest rate. 18.18. To reduce To reduce inflationinflation,, the the Fed Fed should should (lower, lower, buy/raise, raise, sell)(lower, lower, buy/raise, raise, sell)
19. 19. To get out ofTo get out of a a recessionrecession, , the the Fed Fed should should (lower, lower, buy/raise, raise, sell)(lower, lower, buy/raise, raise, sell)
YYRR YY** Investment Demand
99%%
6%6%
33%%
0
Money MarketMoney Market $50$50 $60$60
AS
ADAD11
PLPL11
99%%
66%%
33%%
00
MSMS22ADAD22
PLPL22
$70$70 YYII
ADAD33DI
DDmm
PLPL33
MSMS11 MSMS33
$100$100 120120 140140 QQIIDD
II=$50]=$50] II=$60=$60
II=$70=$70
RDORDO
Test Review 15-19Test Review 15-19
1. If the RR is 40% and the FedFed buys $100 M of bonds from the publicpublic, then the MSMS is increased by _______. ER are increased by ______. PMC is _______. TMS would be ______.2. RR is 50% and the Bishop BankBishop Bank borrows $100 M from the FedFed. As a result, RR are increased by ______. ER is increased
by _______. PMC and TMS is increased by ________.3. Your bankbank has DDDD of $400,000 and the RR is 25%. If RR and ER are equal, then TR are _______.4. The Duck BankDuck Bank has ER of $60,000 & DD is $200,000. If the RR is 20%, TR are _________.5. RR is 20% & the FedFed buys $50 million of bonds from the publicpublic. The MSMS is increased by _______. ER are increased by _______. PMC is _______. TMS would be _________.
Additional Practice on Money CreationAdditional Practice on Money Creation
$100 M$100 M
$60 M$60 M $150 M$150 M $250 M$250 M
$100 M$100 M $200 M$200 M
$200,000$200,000
$100,000$100,000
$50 M$50 M
$40 M$40 M $200 M$200 M $250 M$250 M
00
BanksBanks PublicPublic FedFed
1.1. RR are 10% & there are no ER in the RR are 10% & there are no ER in the Riley BankRiley Bank. Matt. Matt depositsdeposits ( (DDDD) $200.00 there. This ) $200.00 there. This one bankone bank can increase can increase its loans by a maximum of $______.its loans by a maximum of $______.2. RR2. RR are are 20%; 20%; the the Rostro BankRostro Bank borrowsborrows $80,000 from the $80,000 from the FedFed.. This This one bankone bank can increase its loans by a maximum of $___. can increase its loans by a maximum of $___.3. RR3. RR areare 25%;25%; the the Fed Fed buys $8,000buys $8,000 of of securities securities from thefrom the PublicPublic.. PPotential otential MMoney oney CCreationreation in the banking system could be $____. in the banking system could be $____.4. The 4. The Tuason BankTuason Bank has DD of $10 million; has DD of $10 million; RR are 20%; RR & ER are equal. RR are 20%; RR & ER are equal. TRTR are $_____. are $_____.5. The 5. The Tyll BankTyll Bank, with no ER, borrows $20 M from the , with no ER, borrows $20 M from the FedFed.. WithWith a a RRRR of of 50%, 50%, PMCPMC in thein the banking system could banking system could be be $___.$___.6. RR6. RR are are 40%;40%; the the FedFed buys $100 M buys $100 M of securities of securities from thefrom the PublicPublic.. PPotential otential MMoney oney CCreationreation in the banking system could be $____. in the banking system could be $____.7. RR 7. RR areare 50%; the 50%; the Volante BankVolante Bank borrows $40 M from the borrows $40 M from the FedFed;; this this single bank’s ERsingle bank’s ER are increased by $_______. are increased by $_______.8. RR8. RR are are 50%; 50%; FedFed buys $50 billionbuys $50 billion of of securities securities from from the the PublicPublic.. PPotentialotential T Total otal MMoneyoney Supply Supply (TMS) could (TMS) could be asbe as much as $____. much as $____.9. The RR is 40% & the 9. The RR is 40% & the FedFed buys $20 M of bonds from a buys $20 M of bonds from a bankbank.. Potential Money CreationPotential Money Creation in the banking system is $_____. in the banking system is $_____.10. No ER 10. No ER in ain a bankbank & & RRRR is is 2525%. %. DDDD of $of $200 200 is madeis made. . PMCPMC is $__is $__
QQuiz uiz 44 Commercial BankCommercial Bank FedFed PublicPublicAnsw:Answ: 1. $180.00 2. $80,000 3. $24,000 4. $4 1. $180.00 2. $80,000 3. $24,000 4. $4 mil.mil. 5. $40 5. $40 mil.mil.6. $150 6. $150 mil.mil. 7. $40 7. $40 mil.mil. 8. $100 bil. 9. $50 mil. 10. $600.00 8. $100 bil. 9. $50 mil. 10. $600.00
QQuiz uiz 55 CCommercial ommercial BBankank FedFed PublicPublic1.1. RRRR are are 50% & there 50% & there are noare no ER ER in ain a BankBank. Suzy . Suzy depositsdeposits ( (DDDD)) $10.00 there. This $10.00 there. This one bankone bank can increase its loans can increase its loans by by ?____.?____.2. RR are 50%; the 2. RR are 50%; the Luu BankLuu Bank borrows $1 mil. from the borrows $1 mil. from the FedFed.. This bankThis bank can increase its loans can increase its loans by aby a maximum of of $_____. maximum of of $_____.3. RR3. RR are are 40%;40%; the the FedFed buys $buys $100,000100,000 of of securitiessecurities from thefrom the PublicPublic.. Potential Total Money SupplyPotential Total Money Supply could be as much as $______. could be as much as $______. 4. The 4. The Gohsman BankGohsman Bank has DD of $400,000 and RR is 25%. has DD of $400,000 and RR is 25%. RR & ER are equal. RR & ER are equal. Total ReservesTotal Reserves are $_____. are $_____.5. T5. The he Alvarado BankAlvarado Bank, , with nowith no ER, borrows $200,000 ER, borrows $200,000 from thefrom the FedFed.. With RR of 40%, With RR of 40%, this this oneone bank bank can increase its loans can increase its loans by by $__. $__.6. RR6. RR are are 50%; 50%; the the FedFed buys buys $60,000$60,000 of of securities securities from thefrom the PublicPublic.. Potential Money CreationPotential Money Creation in the banking system is $_____. in the banking system is $_____.7. RR 7. RR areare 10%; the 10%; the Cochran BankCochran Bank borrows $150 million from the borrows $150 million from the FedFed. This . This single bank’s ERsingle bank’s ER are increased by $_____. are increased by $_____.8. RR are 25%; 8. RR are 25%; FedFed buys $200 M of securities from the buys $200 M of securities from the PublicPublic.. Potential Total MoneyPotential Total Money Supply could be as much as $____. Supply could be as much as $____.9. RR 9. RR are are 25% 25% & the& the FedFed buysbuys $40 M$40 M of of bonds bonds from thefrom the Collins BankCollins Bank.. Potential Money CreationPotential Money Creation in the banking system could bein the banking system could be $___. $___.10. RR 10. RR areare 20% & no ER in the 20% & no ER in the Joseph BankJoseph Bank. Steph . Steph depositsdeposits $125.00 there. $125.00 there. PPotential otential MMoney oney CCreationreation in thein the system is $____. system is $____.
Answ:Answ: 1. $5.00 2. $1 1. $5.00 2. $1 mil.mil. 3. $250,000 4. $200,000 5. $200,000 3. $250,000 4. $200,000 5. $200,0006. $60,000 7. $150 6. $60,000 7. $150 mil.mil. 8. $800 8. $800 mil.mil. 9. $160 9. $160 mil.mil. 10. $500.00 10. $500.00
1.1. RRRR are are 40% & there 40% & there are noare no ER ER in ain a BankBank. Bo . Bo depositsdeposits ( (DDDD)) $100.00 $100.00 there.there. This This one bank can increase its loans can increase its loans by by ?____?____2. RR are 10%; the 2. RR are 10%; the Torres BankTorres Bank borrows $9 mil. from the borrows $9 mil. from the FedFed.. This bankThis bank can increase its loans can increase its loans by aby a maximum of of $_____ maximum of of $_____3. RR3. RR is is 50%;50%; the the FedFed buys $10,000buys $10,000 of of securities securities from thefrom the PublicPublic.. Potential Total Money SupplyPotential Total Money Supply could be as much as $____ could be as much as $____ 4. The 4. The John BankJohn Bank has DD of $100,000 and RR is 40%. has DD of $100,000 and RR is 40%. RR & ER are equal. RR & ER are equal. Total ReservesTotal Reserves are $_____. are $_____.5. T5. The he Martin BankMartin Bank, , with nowith no ER, borrows $500,000 ER, borrows $500,000 from thefrom the FedFed.. With RR of 20%, With RR of 20%, this this oneone bank bank can increase its loans can increase its loans by by $___ $___6. RR6. RR are are 50%; 50%; the the FedFed buys buys $500,000$500,000 of of securities securities from thefrom the PublicPublic.. Potential Money CreationPotential Money Creation in the banking system is $_____ in the banking system is $_____7. RR are 10%; the 7. RR are 10%; the Matthews BankMatthews Bank borrows $5 million borrows $5 million from thefrom the FedFed.. This This single bank’s ERsingle bank’s ER are increased by $_____ are increased by $_____8. RR are 10%; 8. RR are 10%; FedFed buys $10 M of securities from the buys $10 M of securities from the PublicPublic.. Potential Total MoneyPotential Total Money Supply could be as much as $____ Supply could be as much as $____9. RR are 25% 9. RR are 25% & the& the FedFed buys buys $8 M$8 M of of bonds bonds from thefrom the Weber BankWeber Bank.. Potential Money CreationPotential Money Creation in the banking system could bein the banking system could be $____ $____10. RR 10. RR are are 20% & no ER in the 20% & no ER in the Clark BankClark Bank. Steph . Steph depositsdeposits $100.00 there. $100.00 there. PPotential otential Total Money Supply Total Money Supply is $____ is $____
Quiz 6 Quiz 6 Commercial BanksCommercial Banks FedFed PublicPublicAnsw:Answ: 1. $60.00 2. $9 1. $60.00 2. $9 mil.mil. 3. $20,000 4. $80,000 5. $500,000 3. $20,000 4. $80,000 5. $500,0006. $500,000 7. $5 6. $500,000 7. $5 mil.mil. 8. $100 8. $100 mil.mil. 9. $32 9. $32 mil.mil. 10. $500.00 10. $500.00
Monetary Questions From 2000 AP ExamMonetary Questions From 2000 AP ExamMoney and the FedMoney and the Fed1. (61%) In the Keynesian modelKeynesian model, an expansionary monetary policyexpansionary monetary policy will lead to a. lower real interest rates and more investment b. lower real interest rates and lower prices c. higher real interest rates and lower prices d. higher real interest rates and higher real income e. higher nominal interest rates and more investment
2. (58%) Which of the following will most likely occur in an economy if more money ismore money is demanded than is supplieddemanded than is supplied? a. the amount of investment spending will increase.
d. interest rates will decrease b. the demand curve for money will shift to the left
e. interest rates will increase. c. the demand curve for money will shift to the right.
3. (64%) When consumers hold money rather than bonds because they expect thehold money rather than bonds because they expect the interest rate to increase in the futureinterest rate to increase in the future, they are holding money for what purposes? a. transactions
c. speculation (asset) b. unforeseen expenditures
d. illiquidity
Money CreationMoney Creation4. (80%) If on receiving a checking deposit of $300 a bank’s ER increased by $255checking deposit of $300 a bank’s ER increased by $255, the RRRR must be: a. 5% b. 15% c. 25% d. 35% e. 45%
When interest rates are too low, people will hold more asset (speculation) money. They don’t want to tie their money into interest rate bearing assets (like CDs & bonds) getting low returns. They will hold the speculative money until interest rates go back up.
5. (62%) The money-creating ability of the banking systemmoney-creating ability of the banking system will be less than thewill be less than the maximum amount indicated by the money multipliermaximum amount indicated by the money multiplier when a. interest rates are high b. the velocity of money is rising c. people hold a portion of their money in the form of currency d. the unemployment rate is low
6. (71%) RR is 20%. If a bank initially has no ER and $10,000 cash is deposited$10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loansthis bank may increase its loans is a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50,0007. (86%) RR is 15% and that bank receives a new DD of $200. Which of the following will most likely occur in the bank’s balance sheet? Liabilities(DD)
Required Reserves a. increase by $200
increase by $170 b. increase by $200
increase by $30 c. increase by $200
no change d. decrease by $200
decrease by $30 e. decrease by $200
decrease by $170
The FedFed and Monetary PolicyMonetary Policy8. (89%) The Federal ReserveFederal Reserve can increase the money supply by a. selling gold reserves to the banks b. selling foreign currency holdings
c. buying government bonds on the open market d. borrowing reserves from foreign governments
9. (73%) An increase in the money supplyincrease in the money supply is most likely to have which of the following short-run effects on real interest rates and real outputshort-run effects on real interest rates and real output? Real Interest Rates
Real Output a. decrease
decrease b. decrease
increase c. increase
decrease d. increase
no change e. no change
increase
10. (81%) Under which of the following conditions would a restrictive (contractionary)restrictive (contractionary) monetary policymonetary policy be most appropriate? a. high inflation
d. low interest rates b. high unemployment
e. a budget deficit c. full employment with stable prices
11. (82%) The FedFed can change the U.S. money supplychange the U.S. money supply by changing the a. number of banks in operation
d. prime rate b. velocity of money
e. discount rate c. price level 12. (**30%) If the money stock decreases but nominal GDP remains constantmoney stock decreases but nominal GDP remains constant, which of the following has occurred? a. income velocity of money has increased.
d. price level has decreased. b. income velocity of money has decreased.
e. real output has decreased. c. price level has increased.
13. (54%) Policy-makers concerned about fostering long-run growth in an economy that is currently in a recessionrecession would most likely recommend recommend which of the following combinations of monetary and fiscal policy actionscombinations of monetary and fiscal policy actions? Monetary Policy
Fiscal Policy a. sell bonds
reduce taxes b. sell bonds
raise taxes c. no change
raise taxes d. buy bonds
reduce spending e. buy bonds
no change
14. (76%) Open market operationsOpen market operations refer to which of the following activities? a. the buying and selling of stocks in the New York stock Market b. the loans made by the Fed to member commercial banks c. the buying and selling of government securities by the Federal Reserve d. the government’s purchases and sales of municipal bonds e. the government’s contribution to net exports
15. (58%) An open market sale of bonds by theopen market sale of bonds by the FedFed will most likely change the money supplymoney supply, the interest rateinterest rate, and the value of the U.S. dollarvalue of the U.S. dollar in which of the following ways? Money SupplyMoney Supply
Interest RateInterest Rate
Value of the DollarValue of the Dollar a. increase
decrease
decrease b. increase
decrease
increase c. decrease
decrease
decrease d. decrease
increase
increase e. decrease
increase
decrease
The reason you don’t incr G hereThe reason you don’t incr G hereis that it would push up interestis that it would push up interestrates rates and and offset offset the the lower interestlower interestrates of the Fed’s buying bonds. rates of the Fed’s buying bonds.
1995 AP Exam1995 AP Exam16. (82%) Commercial banks can create moneyCommercial banks can create money by a. transferring depositors’ accounts at the Fed for conversion to cash b. buying Treasury bills from the Federal Reserve c. sending vault cash to the Fed d. maintaining a 100% reserve requirement e. lending excess reserves to customers
17. (65%) If the RR is 20%RR is 20%, the existence of $100 worth of ERexistence of $100 worth of ER in the banking system can lead to a maximum expansion of the money supplymaximum expansion of the money supply equal to a. $20 b. $100 c. $300 d. $500 e. $750
18. (71%) If the Fed lowers the RRFed lowers the RR, which of the following would most likely occurmost likely occur? a. Imports will rise, decreasing the trade deficit. b. The rate of saving will increase. c. Unemployment and inflation will both increase. d. Businesses will purchase more factories and equipment. e. The budget deficit will increase.
19. (61%) If the public’s desire to hold money as currency increasespublic’s desire to hold money as currency increases, what will the impact be on the banking systemimpact be on the banking system? a. Banks would be more able to reduce unemployment. b. Banks would be more able to decrease AS. c. Banks would be less able to decrease AS. d. Banks would be more able to expand credit. e. Banks would be less able to expand credit
More MS More MS means means lower I.R. & more Iglower I.R. & more Ig
Holding currency means less ER & higher I.R.Holding currency means less ER & higher I.R.
5x$100=$5005x$100=$500
20. (86%) Which of the combinationscombinations is most likely to cure a severe recessioncure a severe recession? Open-Market OperationsOpen-Market Operations TaxesTaxes Gov. SpendingGov. Spending a. Buy securities Increase Decrease b. Buy securities Decrease Increase c. Buy securities Decrease Decrease d. Sell securities Decrease Decrease e. Sell securities Increase Increase21. (61%) The demand for moneydemand for money increases when national income increasesnational income increases because a. spending on goods and services increases d. the MS increases b. interest rates increase e. the budget deficit increases c. the public becomes more optimistic about the future22. (76%) Suppose the RR is 20%RR is 20% and a single bank with no ER receives a $100 DDsingle bank with no ER receives a $100 DD from a new customer. The bank now has excess reserves equal tobank now has excess reserves equal to a. $20 b. $80 c. $100 d. $400 e. $50023. (45%) Which of the following is most likely to increasemost likely to increase if the public decides topublic decides to increase its holding of currencyincrease its holding of currency? a. the interest rate d. Employment b. The price level e. The reserve requirement c. Disposable personal income24. (47%) During a mild recessionmild recession, if policymakers want to reduce unemployment by reduce unemployment by increasing investmentincreasing investment, which of the following policies would be most appropriate? a. Equal increases in government expenditure and taxes b. An increase in government expenditure only c. An increase in transfer payments d. An increase in the reserve requirement e. Purchase of government securities by the Fed
Holding MS; bankshave less; higher I.R.
25. (73%) Which of the following monetary and fiscal policy combinationsmonetary and fiscal policy combinations would most likely result in a decrease in AD? Discount RateDiscount Rate Open-Market OperationsOpen-Market Operations Gov. SpendingGov. Spending a. Lower Buy bonds Increase b. Lower Buy bonds Decrease c. Raise Sell bonds Increase d. Raise Buy bonds Increase e. Raise Sell bonds Decrease26. (35%) Under which of the following circumstances would increasing the MS be increasing the MS be most effective in increasing real GDPmost effective in increasing real GDP? Interest RatesInterest Rates EmploymentEmployment Business OptimismBusiness Optimism a. High Full High b. High Less than full High c. Low Full High d. Low Full Low e. Low Less than full Low27. (57%) According to both monetaristsmonetarists and KeynesiansKeynesians, which of the following happens when the Fed reduces the discount rate? a. The demand for money decreases and market interest rates decrease. b. The demand for money increases and market interest rates increase. c. The supply of money increases and market interest rates decrease. d. The supply of money increases and market interest rates increase.
e. Both the demand for money and the MS increase and market interest rates increase.28. (79%) AllAll of the following are components of the MSare components of the MS in the U.S. EXCEPTEXCEPT a. paper money b. gold bullion c. checkable deposits d. coins e. demand deposits
29. (47%) If the Fed undertakesFed undertakes a a policypolicy to to reduce interest ratesreduce interest rates, international capitalinternational capital flowsflows (financial capital like CDs, bonds) will be affectedwill be affected in which of the following ways? a. Long-run capital outflows from the U.S. will decrease. b. Long-run capital inflows to the U.S. will increase. c. Short-run capital outflows from the U.S. will decrease. d. Short-run capital inflows to the U.S. will decrease. e. Short-run capital inflows to the U.S. will not change.30. (73%) If the FedFed wishes to use monetary policy to reinforce Congress’ wishes to use monetary policy to reinforce Congress’ fiscal policy changesfiscal policy changes, it should a. increase the MS when government spending is increased b. increase the MS when government spending is decreased c. decrease the Ms when government spending is increased d. increase interest rates when government spending is increased e. decrease interest rates when government spending is decreased
This would keep the interestrate from going up.
Lower U.S. interest rates will result in fewer capital inflows
