Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.
a. If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.
b. The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macro economy.
c. A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.
d. The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.
e. Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.
Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.
a. If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.
b. The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macro economy.
c. A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.
d. The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.
e. Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.
Related textbook solutions
Related questions
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
| Reserve Requirement | Simple Money Multiplier | Money Supply |
|---|---|---|
| (Percent) | (Dollars) | |
| 20 | ||
| 10 |
A higher reserve requirement is associated with a money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
- The Fed cannot control the amount of money that households choose to hold as currency.
- The Fed cannot prevent banks from lending out required reserves.
- The Fed cannot control whether and to what extent banks hold excess reserves.
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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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QUESTION 56
Holding money to meet unplanned expenditures and emergencies is known as
| asset demand. | ||
| precautionary demand. | ||
| aggregate demand. | ||
| transactions demand. |
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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. |
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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. |
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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. |
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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. |
