1. Exit Fed Policy Definitions 100 100 100 100 100 200 200 200 200 200
What if or How?
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Exit

2. Definitions for 100
What are the three jobs of money and what job do they perform?
Medium of Exchange: Buying things
Unit of Account/Standard of Value: Tells how much things cost
Store of Value: Holding money for future use (hopefully investing it!)
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3. Definitions for 200
What does Asset Demand involve? What does the Asset Demand Curve look like? Why?
Money held as a store of value, as cash that earns little or no interest. The Asset Demand Curve is downward sloping and has an inverse relationship between the quantity of money held as a non-interest bearing asset and nominal interest rates. It slopes downward.
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4. Definitions for 300
What is the difference between the Discount Rate and the Federal Funds Rate?
The Discount Rate is the interest rate charged by the Fed when banks borrow from the Fed. The Federal Funds Rate is the interest rate charged by banks when they borrow from each other
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5. Definitions for 400 What is the Reserve Requirement or Reserve Ratio?
The percentage of checkable deposits (demand deposits) banks may not lend out.
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6. Definitions for 500
What does Transactions Demand involve and what is the shape of the Transactions Demand Curve? Why?
It is money used as a medium of exchange. It’s demand curve is vertical because money used for transactions is not influenced by interest rates.
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7. Fed for 100
If the Fed uses expansionary monetary policy to fight recession, what would be the cause-effect chain for the following items (increase or decrease)? Money Supply, bank reserves, interest rate (nominal), I (investment spending), C (consumption), AD, GDPr, Unemployment
Money Supply increases, bank reserves up, i% down, I up, C up, AD up, GDPr up, and u% down.
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8. Fed for 200
If the Fed wants to lower the Federal Funds rate it should?
Buy bonds from the public to increase the money supply and reduce the rate.
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9. 1. Speed: it can be implemented fast.
Fed for 300
What are two strengths of monetary policy?
1. Speed: it can be implemented fast.
2. Political Isolation: Fed members are not elected politicians and can therefore make decisions that are best for the long-term health of the economy.
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10. Fed for 400
If the Fed pursues an expansionary monetary policy, what happens to the international value of the dollar, Net Exports, and Real GDP (due to the change in Net Exports, called The Net Export Effect)?
The dollar will depreciate as interest rates go down and the demand for the dollar decreases, Net Exports go up as U.S. products b/c cheaper on the world market and imports become more expensive (Xn = Exports minus Imports), and Real GDP goes up. This strengthens monetary policy.
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11. Fed for 500
If the Fed pursues a Contractionary Monetary Policy, what will happen to the international value of the dollar, Net Exports, and Real GDP (due to the change in Net Exports)? Why?
The international value of the dollar will appreciate as demand for the dollar goes up due to higher domestic interest rates which attract foreign investment money, Net Exports go down as U.S. products b/c more expensive due to the appreciation of the dollar and imports increase as foreign products become cheaper (Xn = Exports minus imports), and Real GDP goes down. This strengthens monetary policy.
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12. What if or How? for 100
How can changes in velocity hurt monetary policy?
This is because of the Asset Demand for money. When the Fed conducts Expansionary Monetary Policy and increases M, i% goes down. As such, people hold more money as an asset and don’t spend it on investments. As such, velocity goes down and AD/GDPr is reduced. Expansionary policy is meant to increase AD/GDPr. When the Fed conducts Contractionary Policy, M decreases, i% goes up, people hold less cash as an asset and invest it. As such, velocity goes up and AD/GDPr goes up, partially offsetting contractionary policy which is meant to decrease AD/GDPr.
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13. Bank A can lend out $1,600, 80% of the new demand deposit.
What if or How? for 200
What if the reserve requirement is 20% and a new demand deposit of $2,000 is put in Bank A, how much can Bank A lend out if it had no excess reserves before this deposit?
Bank A can lend out $1,600, 80% of the new demand deposit.
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14. What if or How? for 300
If the Federal Reserve sells government securities on the open market, what happens to the following? Why?
Money Supply, Bank Reserves, and the Federal Funds
Rate?
Money Supply decreases, Bank Reserves decreases, and the Federal Funds Rate increases. This is because banks have less money available when people use their cash to buy government securities.
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15. What if or How? for 400
When the Fed conducts Contractionary Monetary Policy, what will be the cause-effect chain of the following (increase or decrease): Money Supply, Bank Reserves, i%, I, C, AD, GDPr, and u%?
Money Supply decrease, Bank Reserves Decrease, i% up, Investment or I down, AD/GDPr down, and u% up.
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16. What if or How? for 500
What are excess reserves, required reserves, and actual reserves?
Excess = Demand Deposits banks may lend out
Required = Demand Deposits banks may not lend out.
Actual = Required + Excess Reserves
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17. 1. Ease and flow of electronic funds, etc. may undermine Fed action.
Monetary Policy for 100
List three weaknesses of Monetary Policy.
1. Ease and flow of electronic funds, etc. may undermine Fed action.
2. Changes in Velocity
3. Cyclical Asymmetry
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18. Monetary Policy for 200 What does Cyclical Asymmetry involve?
That the Fed is better at controlling inflation than solving recessions. They can decrease the money supply and choke off inflation. However, people and businesses may not want to borrow money no matter how low the interest rate due to economic conditions, business confidence, etc. Also the impact of monetary policy make take 9 months to three years.
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19. Monetary Policy for 300 What are the three tools of monetary policy?
Reserve Requirement (aka Reserve Requirement Ratio or Reserve Ratio)
Discount Rate
Open Market Operations: Buying or Selling of Govt Securities.
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20. Monetary Policy for 400
If the Fed conducts Expansionary Monetary Policy, what will it do to the following? Reserve Requirement or ratio, discount rate, and open market operations.
Decrease the reserve requirement or ratio, lower the discount rate, and buy government securities (bonds). This should increase the Money Supply and Bank Reserves, decrease i% and thus increase C and I spending (cheaper to get loans), increase AD/GDPr, increase PL, and decrease u%. The Net Export Effect will be the demand for the dollar decreasing as a lower i% decreases the demand for the dollar, thus increasing Xn/AD/GDPr. A strengthening Net Export Effect for Expansionary Monetary Policy.
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21. Monetary Policy for 500
If the Fed conducts Contractionary Monetary Policy, what will it do to the following? Reserve Requirement or ratio, discount rate, and open market operations.
Increase the reserve requirement or ratio, raise the discount rate, and sell government securities (bonds). This should decrease the Money Supply and Bank Reserves, increase i% and thus decrease C and I spending (more expensive to get loans), decrease AD/GDPr, decrease PL, and increase u%. The Net Export Effect will be the demand for the dollar increasing as a higher i% increases the demand for the dollar, thus decreasing Xn/AD/GDPr. A strengthening Net Export Effect to Contractionary Monetary Policy.
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22. Miscellaneous for 100
Assume a bank has no excess reserves. If it receives $10,000 from a depositor, and the bank finds it can safely lend out $8,500, the reserve ratio must be?
Step 1: Find required reserves. Actual Reserves = $10,000 and excess reserves = $8,500, so Required Reserves = $10,000 - $8,500 = $1,500.
Step 2: Reserve Ratio = Required Reserves divided by Checkable Deposits or $1,500/$10,000 = 15%.
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23. Miscellaneous for 200
Suppose the reserve requirement is 10%. If a bank has checkable deposits of $7 Million and Actual Reserves of $3 Million, it can safely lend out how much?
Step 1: Calculate required reserves x $7 Million = $700,000 or $.7 Million
Step 2: Actual Reserves – Required Reserves = Excess Reserves (which may be loaned out). $3 Million minus $.7 Million = $2.3 Million.
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24. Money Supply increases, bank reserves increase, i% decreases.
Miscellaneous for 300
If the Fed buys government securities from the public, what will happen to the money supply, bank reserves, and i% (nominal interest rate)?
Money Supply increases, bank reserves increase, i% decreases.
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25. Miscellaneous for 400
If the Fed buys bonds from banks, will that money be a demand deposit for the bank? Will that money be subject to the required reserve ratio?
Not a demand deposit. It will increase excess reserves and is not subject to the reserve requirement or ratio. All of the bond purchase may be loaned out by the bank and banking system.
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26. Miscellaneous for 500
What happens to the money supply if a loan is repaid? Is that money subject to the reserve requirement?
The money supply decreases as money is “destroyed.” It is not subject to the reserve requirement and counts as excess reserves which may be loaned out to “create” money and expand the money supply.
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