ECON 2000 Lecture Notes - Lecture 52: Money Supply, Monetary Transmission Mechanism

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14 May 2018

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ECON 2000

Lecture 52

 Higher The increase in money supply lowers the interest rate and raises

the level of income

 An Increase in Money Supply:

 When central bank increases supply of money, people have more

money than they want to hold at prevailing interest rate, resulting in

them depositing it in banks or buying bonds

 Interest rate r then falls until people bring money market to new

equilibrium

 Lower interest rate, in turn, has ramifications in goods market:

o Lower interest rate stimulates planned investment, which increases

planned expenditure, and finally increasing production and income

 Thus, IS-LM model shows that monetary policy influences income by

changing interest rate

 In chapter 9, showed that in short run, expansion of money supply raises

income, but we did not show how monetary expansion induces greater

spending on goods and services

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Related Questions

QUESTION 46

When the Fed buys a U.S. bond in the open market

		its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
		its action expands total reserves and the money supply.
		its action contracts total reserves and the money supply.
		total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

		reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

		the reserve ratio.
		one minus the reserve ratio
		the inverse of the required reserve ratio.
		the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

		the growth in the money supply when income increases.
		the growth in real national income when the money supply increases.
		the maximum potential change in the money supply due to a change in income.
		the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

		increases the money multiplier.
		will cause banks to make more loans.
		has an expansionary effect on the money supply.
		has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

		banks against lawsuits.
		the deposits held in member banks.
		the deposits held in the Fed.
		the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

		in difficult times people want currency instead of demand deposits.
		the FDIC is inefficient.
		banks do not keep enough reserves to cover all their depository liabilities.
		bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

		make riskier loans than they otherwise would.
		reject some loans that probably would be profitable.
		maintain excess reserves that are too great.
		be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

		discourages banks from engaging in excessive risk taking.
		was established after the Panic of 1907.
		only insures deposits in money-center banks.
		increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

		Money is government issued and it is redeemable for gold or silver.
		Money is part of every barter transaction and it is divisible.
		Money is accepted as a medium of exchange and it is the common unit of account used to express prices.
		Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

		asset demand.
		precautionary demand.
		aggregate demand.
		transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

		the transaction demand for money.
		the spending demand for money.
		the asset demand for money.
		the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

		decreases.
		increases.
		decreases initially and then increases to the original position.
		does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

		increases, and the money demand curve shifts to the right.
		remains constant, and the money demand curve remains the same.
		decreases, and the money demand curve shifts to the left.
		increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

		it fulfills no precautionary role.
		it fulfills no transactions role.
		it earns no interest income.
		its real value always increases.

blacktrout920

51.The Fed is conducting expansionary monetary policy if it:

A increases the discount rate, buys bonds, and sets a lower target for the federal funds rate.

B decreases the discount rate and sells bonds.

C sets a lower target for the federal funds rate and buys bonds in the open market.

D increases reserve requirements and buys bonds in the open market.

E buys bonds in the open market and raises the discount rate.

52.If banks become concerned about future conditions and decide to hold larger excess reserves, which of the following is a likely result?

A A rise in interest rates

B An increase in bond prices

C An increase in aggregate demand

D An increase in the money supply

E Both C and D

53.The Fed is under no obligation to coordinate its actions with fiscal policy. And in fact, the Fed may take actions specifically designed to counteract some piece of fiscal policy. An example of fiscal and monetary policies with opposite effects is:

A an increase in taxes and increased sales of bonds by the Fed.

B a decrease in government spending and an increase in the discount rate.

C a decrease in taxes and a decrease in the target for the federal funds rate.

D an increase in government spending and an increase in reserve requirements.

E a decrease in taxes and increased purchases of bonds by the Fed.

54.In the fictitious nation of Zagora, a worker can produce either 5 books or 10 televisions in an hour. In neighboring Plovdiv, a worker can produce either 3 books or 5 televisions in an hour. Which statement about this situation is true?

A Zagora has comparative advantage in the production of books.

B Zagora has comparative advantage in the production of televisions.

C Workers in Plovdiv canât possibly compete against the super-productive workers in Zagora.

D Workers in Zagora canât be expected to compete against the low-wage workers in Plovdiv.

E None of the above

55.Given the U.S. has a current account deficit, a large increase in the demand for U.S. computer programs among Japanese residents will have all the following effects except:

A an increase in the exchange rate, expressed in yen per dollar.

B an increase in the U.S. capital account surplus.

C an increase in investment in Japan.

D an decrease in the U.S. trade deficit.

E It may have all the above effects.

56.Fiscal policy affects exchange rates because:

A as government spending increases, the government must buy more and more goods and services from foreign countries.

B as government debt increases, interest rates rise, and the value of the currency rises.

C as government debt increases, interest rates rise, and the value of the currency falls.

D as the money supply increases, interest rates fall, and the value of the currency rises.

E as the money supply increases, interest rates fall, and the value of the currency falls.

57.There are many kinds of trade restrictions, and trade restrictions are put into place for many reasons. Which of the following is not a reason to use trade restrictions?

A To save natural habitats from over-use

B To protect the jobs of workers in certain industries

C To make a political statement regarding the labor policies of another nation

D To compensate for higher taxes placed on domestic producers

E To create a lower prices for domestic consumers

58.If the value of the U.S. dollar in foreign exchange markets rises:

A U.S. exports will become relatively less expensive.

B capital inflows into the United States will increase.

C people in the U.S. will purchase fewer imports.

D U.S. exports will likely decrease.

E All of the above

59.Saying that leakages equal injections give the equation:

A T + S + X = G + I + M

B Y = C + S + T

C Y = C + I + G + X - M

D T + S + M = C + G + I + X

E T + S + M = G + I + X

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ECON 2000 Lecture Notes - Lecture 52: Money Supply, Monetary Transmission Mechanism

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