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dynamic macroeconomics

Macroeconomics For Today 9th Edition Irvin B. Tucker - Solutions

In Part (a) of Exhibit A-4, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues thata. SRAS1 will shift to SRAS2 without government intervention.b. lower wages will result in a shift from SRAS1 to SRAS2.c. long-run equilibrium will be
In Part (a) of Exhibit A-4, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it would most likelya. decrease taxes.b. increase transfer payments.c. increase the level of government spending for goods and services.d.
In Part (a) of Exhibit A-4, suppose that the initial equilibrium is at real GDP level Y1 and price level P2. At real GDP level Y1 there isa. an inflationary gap.b. a recessionary gap.c. full employment.d. long-run equilibrium.
In Part (b) of Exhibit A-3, assume the economy is in equilibrium at Y1. Classical policy would predict that competitiona. from unemployed workers results in lower wages and SRAS shifts rightward until Yp, P1.b. among firms for workers results in higher wages and SRAS shifts leftward until Yp, P2.c.
In Part (b) of Exhibit A-3, the economy is initially in short-run equilibrium at real GDP level Y1 and price P2. Classical theory argues thata. SRAS1 will shift to SRAS2 without government intervention.b. lower wages will result in a shift from SRAS1 to SRAS2.c. long-run equilibrium will be
In Part (b) of Exhibit A-3, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government decides to intervene, it woulda. decrease taxes.b. increase taxes and government spending by equal amounts.c. increase the level of government spending
In Part (a) of Exhibit A-3, an expansionary stabilization policy designed to move the economy from Y1 and Yp would shift thea. aggregate demand curve (AD) to the left.b. aggregate demand curve (AD) to the right.c. SRAS rightward.d. LRAS rightward.
As shown in Part (a) of Exhibit A-3, assume classical nonintervention policy is adopted. Which of the following would cause the economy to self-correct?a. Competition among firms for workers increases the nominal wage and SRAS shifts rightward.b. Long-run equilibrium will be established at Y1 and
Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to Keynesian theory, which of the following policies should be followed?a. The Federal Reserve should use open market operations and buy U.S. government securities.b. The Federal Reserve should
Assume the economy is operating at a real GDP below full-employment real GDP. Keynesian economists would prescribe which of the following policiesa. Noninterventionistb. Fixed rulec. Contractionaryd. Expansionary
Assuming the economy is in a recession, classical economists predict thata. wages will remain fixed.b. monetary policy will sell government securities.c. higher wages will shift the short-run aggregate supply curve leftward.d. lower wages will shift the short-run aggregate supply curve rightward.
Assume the economy is in short-run equilibrium at a real GDP. According to classical self-correction theory, which of the following policies should be followed?a. The Federal Reserve should increase the money supply.b. The federal government should increase spending.c. The federal government should
Assume the economy is experiencing a recessionary gap. Classical economists would support which of the following policies?a. Contractionaryb. Expansionaryc. Noninterventionistd. Fixed wage
If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?a. 14.0.b. 7.0.c. 3.5.d. 2.0.
Which of the following is the velocity of money?a. How quickly the average worker gets paid after his or her work is done.b. The average speed of ATM machines.c. The average number of times per year that a given dollar of the money supply is spent.d. None of the answers above are correct.
Which of the following correctly gives us the equation of exchange?a. TR ¼ PQ.b. MV ¼ VM.c. MV ¼ PQ.d. TR ¼ VM.
If the Fed reduces the discount rate, which of the following are most likely to result?a. The money supply curve shifts rightward, and the equilibrium interest rate falls in the money market.b. Investment spending declines, causing the aggregate demand curve to shift leftward, reducing equilibrium
Suppose that the Fed makes a $100 billion openmarket sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?a. The money supply shifts inward, and the equilibrium interest rate rises in the money market.b. The money supply shifts outward, and
The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on thea. indirect impact of changes on the interest rate.b. indirect impact of changes on profit expectations.c. indirect impact of changes in fiscal policy on aggregate
In Exhibit 13, the Fed believes the economy is at AD3, how might it engineer a decline in the price level?a. By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall.b. By decreasing the money supply, the interest rate
In Exhibit 13, a move from MS1 to MS2a. increases the money supply, causing the interest rate to rise from i2 to i1.b. increases the money supply, causing the interest rate to fall from i1 to i2.c. decreases the money supply, causing the interest rate to rise from i2 to i1.d. decreases the money
Beginning from an equilibrium at E2 in Exhibit 12, a decrease in the money supply from$600 billion to $400 billion causes people toa. sell bonds and drive the price of bonds down.b. buy bonds and drive the price of bonds up.c. buy bonds and drive the price of bonds down.d. sell bonds and drive the
Starting from an equilibrium at E1 in Exhibit 12, a rightward shift of the money supply curve from MS1 to MS2 would cause an excessa. demand for money, leading people to sell bonds.b. supply of money, leading people to buy bonds.c. supply of money, leading people to sell bonds.d. demand for money,
Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that thea. money demand curve is horizontal at any interest rate.b. aggregate demand curve is nearly flat.c. investment demand curve is nearly vertical.d. money demand curve is vertical.
Which of the following is not an issue in the Keynesian–monetarist debate?a. The importance of monetary vs. fiscal policy.b. The importance of a change in the money supply.c. The importance of a crowding-out effect.d. All of the issues above are part of the debate.
The V in the equation of exchange represents thea. variation in the GDP.b. variation in the CPI.c. variation in real GDP.d. average number of times per year a dollar is spent on final goods and services.
Based on the equation of exchange, the money supply in the economy is calculated asa. M ¼ V=PQ.b. M ¼ VðPQÞ.c. MV ¼ PQ.d. M ¼ PQ V.
Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level anda. lower both the interest rate and the real GDP.b. raise both the interest rate and real
Assume the demand for money curve is fixed and the Fed increases the money supply. The result is that the price of bondsa. rises.b. remains unchanged.c. falls.d. does none of the above.
Assume the demand for money curve is fixed and the Fed decreases the money supply. The result is a temporarya. excess quantity of money demanded.b. excess quantity of money supplied.c. increase in the price of bonds.d. increase in the demand for bonds.
Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that peoplea. increase the supply of bonds, thus driving up the interest rate.b. increase the supply of bonds, thus driving down the interest rate.c. increase the demand for bonds, thus driving up
A decrease in the interest rate, other things being equal, causes a (an)a. upward movement along the demand curve for money.b. downward movement along the demand curve for money.c. rightward shift of the demand curve for money.d. leftward shift of the demand curve for money.
Keynes gave which of the following as a motive for people holding money?a. Transactions demand.b. Speculative demand.c. Precautionary demand.d. All of the answers above are correct.
Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy? (Hint: Review Exhibit 6 in the chapter on aggregate demand and supply.)
Suppose the investment demand curve is a vertical line. Would the Keynesian or the monetarist view of the impact of monetary policy on investment spending be correct?
Based on the quantity theory of money, what would be the impact of increasing the money supply by 25 percent?
Explain the difference between the Keynesian and the monetarist views on how an increase in the money supply causes inflation.
Exhibit 6 shows the monetarist monetary policy transmission mechanism. Assume the economy is in a recession. At each arrow, identify a reason why the transmission process could fail.
What is the quantity theory of money, and what does each term in the equation represent?
“A monetarist investigator might say that the sewer flow of 6,000 gallons an hour consisted of an average of 200 gallons in the sewer at any one time with a complete turnover of the water 30 times every hour.”1 Interpret this statement using the equation of exchange.
Assume you are a Keynesian, and start at point E1 in the money market and the product market. State the likely direction of change in the price level, real GDP, and employment caused by each of the following monetary policies:a. The Fed makes an open market sale of government bonds.b. The Fed
Assume you are the chair of the Federal Reserve Board of Governors and the condition of the economy is shown in Exhibit
Using the demand and supply schedule for money shown in Exhibit 10, do the following:a. Graph the demand for money and the supply of money curves.b. Determine the equilibrium interest rate.c. Suppose the Fed increases the money supply by $100 billion. Show the effect in your graph, and describe the
Suppose a bond pays annual interest of $80.Compute the interest rate per year that a bondholder can earn if the bond has a face value of$800, $1,000, and $2,000. State the conclusion drawn from your calculations.
What are the basic motives for the transactions demand, precautionary demand, and speculative demand? Explain how these three demands are combined in a graph to show the total demand for money.
How much money do you keep in cash or checkable deposits on a typical day? Under the following conditions, would you increase or decrease your demand for money? Also identify whether the condition affects your transactions demand, precautionary demand, or speculative demand.a. Your salary
Assume all banks in the system are identical to Best National Bank in Exhibit
If all banks in the system are identical to Best National Bank in Exhibit 5, the money multiplier would bea. 5.b. 10.c. 15.d. 20.
The result would bea. a $200 increase in excess reserves.b. a $200 increase in required reserves.c. a $1,200 increase in required reserves.d. zero change in required reserves.
Suppose Brad Jones deposits $1,000 in the bank shown in Exhibit
If the bank in Exhibit 5 received $100,000 in new deposits, its addition to required reserves would bea. $10,000.b. $20,000.c. $30,000.d. $40,000.
The required reserve ratio in Exhibit 5 isa. 10 percent.b. 15 percent.c. 20 percent.d. 25 percent.
The cost to a member bank of borrowing from the Federal Reserve is measured by thea. reserve requirement.b. price of securities in the open market.c. discount rate.d. yield on government bonds.
In a simplified banking system in which all banks are subject to a 20 percent required reserve ratio, a $1,000 open market purchase by the Fed would cause the money supply toa. increase by $100.b. decrease by $200.c. decrease by $5,000.d. increase by $5,000.
In a simplified banking system in which all banks are subject to a 25 percent required reserve ratio, a$1,000 open sale by the Fed would cause the money supply toa. increase by $1,000.b. decrease by $1,000.c. decrease by $4,000.d. increase by $4,000.
If an increase of $100 in excess reserves in a simplified banking system can lead to a total expansion in bank deposits of $400, the required reserve ratio must bea. 40 percent.b. 400 percent.c. 25 percent.d. 4 percent.e. 2.5 percent.
The Best National Bank operates with a 10 percent required reserve ratio. One day a depositor withdraws $400 from his or her checking account at the bank. As a result, the bank’s excess reservesa. fall by $400.b. fall by $360.c. fall by $40.d. rise by $400.
Assume a simplified banking system in which all banks are subject to a uniform required reserve ratio of 30 percent and checkable deposits are the only form of money. A bank that receives a new deposit of $10,000 is able to extend new loans up to a maximum ofa. $3,000.b. $7,000.c. $10,000.d.
If a bank has total deposits of $100,000 with$10,000 set aside to meet reserve requirements of the Fed, its required reserve ratio isa. $10,000.b. 10 percent.c. 0.1 percent.d. 1 percent.
plus plus equals .a. Total deposits, loans, required reserves, excess reserves.b. Loans, required reserves, excess reserves, total deposits.c. Required reserves, total deposits, excess reserves, loans.d. Excess reserves, loans, total deposits, required reserves.
If the Fed decides to engage in an open market operation to increase the money supply, what will it do?a. Sell Treasury bonds, bills, or notes on the bond market.b. Buy Treasury bonds, bills, or notes on the bond market.c. Increase the required reserve ratio.d. Increase the fed funds rate.
Which of the following is correctly the money multiplier?a. The required reserve ratio.b. 1/(1 − the required reserve ratio).c. 1/(required reserve ratio).d. 1/(1 − MPC).
If total deposits at Last Bank and Trust are$100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio?a. 70 percent.b. 30 percent.c. 20 percent.d. 10 percent.
Which of the following correctly describes fractional reserve banking?a. The federal government only insures a fraction of the deposits at most banks.b. Banks keep a fraction of their loans with other banks to maintain the quality of their loan portfolio.c. Banks can loan out all but a small
What are some problems faced by the Fed in controlling the money supply?
Briefly describe the effect on the money supply of the following monetary policies:a. The Fed purchases $20 million worth of U.S.Treasury bonds.b. The Fed increases the discount rate.c. The Fed decreases the discount rate.d. The Fed sells $40 million worth of U.S. T-bills.e. The Fed decreases the
Assume the required reserve ratio is 10 percent and a bank’s excess reserves are $50 million.Explain why checkable deposits resulting from new loans based on excess reserves are not likely to generate the maximum of $500 million.
Suppose the Federal Reserve’s trading desk buys$500,000 in T-bills from a securities dealer who then deposits the Fed’s check in Best National Bank. Use a balance sheet to show the impact on the bank’s loans. Consider the money multiplier and assume the required reserve ratio is 10
Suppose it is the holiday season and you withdraw$1,000 from your account at First National Bank to purchase presents. Using a balance sheet, show the impact on this bank’s assets and liabilities. If the required reserve ratio is 20 percent, what is the impact on the bank’s loans?
Suppose you remove $1,000 from under your mattress and deposit it in First National Bank. Using a balance sheet, show the impact of your deposit on the bank’s assets and liabilities. If the required reserve ratio is 10 percent, what is the maximum amount the bank can loan from this deposit?
Suppose you deposit your paycheck drawn on another bank. Explain the impact on the money supply.
In what form does a bank hold its required reserves? Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?
Consider this statement: “Banks do not create money because this is the Fed’s responsibility.”Do you agree or disagree? Explain.
If you deposit a $20 bill into a checking account and your bank has a 10 percent reserve requirement, by how much will the bank’s excess reserves rise?
Relate Shakespeare’s admonition “Neither a borrower nor a lender be” to the goldsmiths’evolutionary use of fractional reserve banking.
What happened at the last FOMC meeting? Visit http://www.federalreserve.gov/fomc/default.htm.
Which of the following is not part of the Federal Reserve System?a. Council of Economic Advisers.b. Board of Governors.c. Federal Open Market Committee.d. 12 Federal Reserve District Banks.e. Federal Advisory Council.
The major protection against sudden mass attempts to withdraw cash from banks is thea. Federal Reserve.b. Consumer Protection Act.c. deposit insurance provided by the FDIC.d. gold and silver backing the dollar.
Which of the following is in charge of the buying and selling of government securities by the Fed?a. President.b. Federal Open Market Committee (FOMC).c. Congress.d. None of the answers above are correct.
Which of the following is not one of the functions of the Federal Reserve?a. Clearing checks.b. Printing currency.c. Supervising and regulating banks.d. Controlling the money supply.
Which of these institutions has the responsibility for controlling the money supply?a. Commercial banks.b. Congress.c. U.S. Treasury Department.d. Federal Reserve System.
Which definition of the money supply includes credit cards, or “plastic money”?a. M1.b. M2.c. Both answersa. andb. are correct.d. Neither answersa. norb. are correct.
Which of the following is not part of M1?a. Checking accounts.b. Coins.c. Credit cards.d. Paper currency.
Which of the following is part of the M2 definition of the money supply, but not part of M1?a. Checkable deposits.b. Currency held in banks.c. Currency in circulation.d. Money market mutual fund shares.
Which of the following items is not included when computing M1?a. Coins in circulation.b. Currency in circulation.c. Savings accounts.d. Checking account entries.
The M1 definition of the money supply consists ofa. coins and currency in circulation.b. coins and currency in circulation, and checkable deposits.c. Federal Reserve notes, gold certificates, and checkable deposits.d. Federal Reserve notes and bank loans.
M1 refers toa. the most narrowly defined money supply.b. currency held by the public plus checking account balances.c. the smallest dollar amount of the money supply definitions.d. All of the answers above are correct.
The easier it is to convert an asset directly into goods and services without loss, thea. less secure it is.b. more secure it is.c. more liquid it is.d. less liquid it is.
Which of the following is not a store of value?a. Dollar.b. Money market mutual fund share.c. Checking account balance.d. Credit card.
Which of the following is not a characteristic of money?a. It provides a way to measure the relative value of goods and services.b. It is always backed by something of high intrinsic value such as gold or silver.c. It is generally acceptable as a medium of exchange.d. It allows for saving and
Which of the following is a problem with barter?a. Individuals will not exchange goods.b. Individuals’ wants must coincide in order for there to be exchange.c. Goods can be exchanged, but services cannot.d. None of the above is a problem.
If a society were to use a widely accepted, easily measurable, but highly perishable food product as its money, which of the following functions of money would be most impaired?a. Medium of exchange.b. Unit of account.c. Store of value.d. None of the answers above are correct.
What establishes the value of fiat money?a. Our collective trust and confidence that the central government, which decrees that money cannot be refused as payment for debt.b. Gold and silver owned by the large commercial banks.c. The central government authority’s promise to redeem fiat money for
Which of the following defines the “store of value” function of money?a. A common measurement of the relative value of different goods and services.b. The ability of money to hold value over time.c. That the materials used to manufacture money are of medium grade or quality, so that people will
Which of the following defines the “unit of account” function of money?a. A common measurement of the relative value of different goods and services.b. The ability of money to hold value over time.c. The materials used to manufacture money are of medium grade or quality, so that people will not
Which of the following defines the “medium of exchange” function of money?a. To provide a common measurement of the relative value of different goods and services.b. The ability of money to hold value over time.c. The materials used to manufacture money are of medium grade so that people will
Briefly discuss the importance of the Depository Institutions Deregulation and Monetary Control Act of 1980.
Which banks must be insured by the FDIC?Which banks can choose not to be insured by the FDIC?
Should the Fed be independent or a government agency subordinate to Congress and the president?
What is the major purpose of the Federal Reserve System? What is the major responsibility of the Board of Governors and the Federal Open Market Committee?

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