TA8LE 1 5..3 and inflation
Monetary policies tor recessio~
Easy money policy
Tight money policy
Problem: unemployment and recession
Problem: i nflation
1
1 Federal Reserve sells
Federal Reserve buys bonds, lowers reserve ratio, or lowers the discount rate
bonds, increases reserve ratio, or increases the discount rate
1
1
Excess reserves Increase
Excess reserves decrease
1
1
Money supply falls Money SUP11yrises Interest rate faJ"s .
1
.
1
Investment spending I ncreases
1 Aggregate demand Increases
1
Real GDP rises by a multiple of the increase in investment
Interest role rises.
1
Investment spending decreases 1
Aggregate demand decreases 1 Inflation declines
TABLE 1 5~4
Monetary policy and the net
export effect
Easy money policy
Tight money policy
Problem: recession,
Problem: inflation
slow growth 1 Easy money policy (Iower interest rate) 1 Decreased foreign demand for dollars 1
Dollar depreciates
1
Tight money policy (hig her interest rate) 1 Jncreased foreign demand for dollars 1 DoJlar appreciates
1
1
Net exports increase (aggregate demandC increases, strengthening
Net exports decrease (aggregate demand decreases, strengthening the tight money policy)
.
the easy money policy) ------------
Purchasing comrnon stock by writing a check best exemplifies money serving as a: a) store of value. b) unit of account. c) medium of exchange. d) index of satisfaction. Answer:
When we say that money serves as a medium of exchange, we mean tht it is: a) a way to keep some of our wea1thin a readily spendable form for future use. b) a means of payment. c) a monetary unit for measuring and c0111:parmg tbe relative values of goods. d) dec1aredas legal tencler by the government. Answer:
), When we say tli1atmoney serves as a unit of account, we mean tht it is: a) away tq keep some of our wea1th in a readily spendable form for future use. b) a means odfwayment. c) a monetary unit for measuring and comparing the relative values of goods. d) decbreclas1egal tendeTby tbe govemment. Answer:
a~ ~ stQre of vah!1e,we mean that it is: wea,.l1Jlin a t~adily s,pendable fonn for future use.
-t !;-)L~L
IV-v {'ý.7
of 1890. c) United StatesNotes.
L)( The major component ofthe money supply (Ml) is: a,.)g()lci ceitificates. b) checkable deposits. c) paper.money in circulation. Answer:
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d) Feder~
d) coms.
~
Type:D Topic:2 E: 265-266 MA: 265-266 36. Checkable deposits are: a) included in Ml. b) not included in either.Ml or M2. Answer:
37.
Checkable deposits are: a) included mMl but not inM2. b) co~s,icleredto be a near -money. Answer:
38.
Tne amount ofmoney reported asM2: a)is smaHer fuan the amount reported asMl. b) ~$1.@If'ger than the arnountreported asMl.
,12.
c) considered to be a near mone d) also called tirne deposits.
c) included inMl and inM2. d) also called time deposits.
c) excludes coins and currency. d) includes large ($100,000 or more) certÍficates of deposit.
Jt~~~~?~~ pUFses are: ~~t
mM~.
':U~,andínM2. iU~.~~:t)~.~l.
.
.
~{lf~2~~c~use people can exchange them for Federal Reserve note;S,..
"
ti~é deposlts, non~heckable savings accounts, nióneY'm~~~t~~}D'()'$~t accounts, and money market . quitual ~~'Ofama!lilíC'es.
.
c) the latter mq~'1ilt(')!e'sFJ!egotiablegovemment bonds. u~J_.!h~}atter ~~~Mi~es cásfuheld by commercial banks and the U.S. Treasury. Answer:
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Jse the following to answer questions 28-30: \nswer the next question(s) on the basis ofthe following tab1e: Year 1 2 3 4
Value of doUar $1.00
Price level 1.00 1.25 .80: .50
28. Refer to the above table. The va1ue of the dollar in year 2 is: a) $1.25. b) $1.33. c) $.80. d) $1.00. Answer:
29. Refer to the above table. The value ofthe dollar in year 3 is: a) $1.00. b) $1.25. c) $.80. d) $.50. Answer:
30. Refer to the above table. The value of the doUar in year 4 is: a) $.25. b) $.33. c) $.50. d) $2.00. Answer:
31.
Which of the folfowing is not part qf the M2 money supply? a) monJ~ymarket mutual fund balapces b} . money market deposit accounts Answer:
..32. TheM2 moneysupplyincludes: a) stock certificates. b) corporate bond certificates. Answer:
.,.34.
-
. c) currency d) large ($1 OO,OODor more) time deposlts
c) the cash v-alueof life insurance policies. d) individual shares in money market mutual funds.
Currency is part of: a) Ml ouly. b) M2only. Answer-
c) M30nly.
.d) Ml, M2, and M3.
20. ff Mis $300, P is,$4, and Q is 200, then V must be: a) 4. b) 22/3' c) 1. d) 3. Answer: J.
21.
22.
In the equation of exchange the level of aggregate expenditures is indicated by: a) MV. b) MV/Q. c) PM. d) MV/P. Answer: According to the equation of exchange, changes in the money supply can affect: a) only the ve10city ofmoney. c) only real output and employment. b) both the price level and rea1 output. d) only the price level. Answer:
'
a) relationship between the money supply and the price level. b) number of times per year the average dollar is spent on final goods and services. c) relationship between asset and transactions demands for money. d) price level divided by aggregate supply. Answer:
24.
Ii a certain household earns and spends $24,000 per year and, on the average;.holcl.sxamoneybalance of $6,000, then the ve]ocitv of money for this household: a) is 6. b) is 1/6. c) is 4. d) is 1/4. Answer:
25.
Which of the following is a component of the equatioll ofexchap.ge? a) consumption b) the interest rate c) investment él)!thevelocity ofmcmey Answer:
Use the folIowing to answer questions 82-83: Answer the next question(s) on the basis ofthe following infonnation for a bond having no expiration date: bond price = $1 OOO~bond Tl\cd annual interest payment = $100; bond annual interest rate
= 10 percent.
82.
Refer to the above ~onnation. Ifthe price ofthis bond falls by $200, the interest rate will: a) rise by 2.5 percentage points. c) fall by 2.5 percentage points. b) rise by 5 percentage points. d) fall by 5 percentage points. Answer:
83.
Refer to the above infonnation. If the price of this bOBidmcreas.es to $:~.25@., the interest rate wilI: a) falI to 9 percent. b) fall to 8 percent. c) rise to 11 preir'e:em\t.Glt)J1JÍ;~1pto 12 percent. Answer:
84.
Which of the following staternents is correct? a) lnterest rates and bond prices vary du-ectly. b) Interest rates and bond prices vary inverse1y.
c) Interestrates and bond prices are unrelated.
.
d) lnterest rates and bond pricesvary directly d:~i~iiimdnla.t~@)FJ)si{a;m(~i;~N\iM.(f~$:€jlYiiank reserves decrease. expanDSa:ffdc0fl1ÍIlercÍ'ál;:-bankreserves increase.
59. Iftbe amount ofmoney demanded exceeds the amount supplied, it
