AP Macro Jeopardy

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AP Macro Jeopardy
The FED and Monetary Policy
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Round 1
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Key Terms Formulas Money Creation FED Tools
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
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Because interest foregone is an opportunity cost
of holding money as interest rates rise, people
decrease their money balances (and vice versa).
This inverse relationship illustrates the
Asset or Speculative Demand for Money
Transactions Demand for Money
Aggregate Demand Curve
Supply of Money
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The transactions demand for money
varies inversely with interest rates.
varies directly with interest rates
varies inversely inversely with the nominal GDP.
varies directly with the nominal GDP.
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A single bank can create money by the amount of
its . . .
Actual reserves
Required reserves
Excess reserves
Deposits
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Bond prices and interest rates . . .
vary directly
vary inversely
are independent of each other
increase or decrease together
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M1, the most narrow measure of the money supply,
consists of
Currency and checkable deposits
Currency, checkable deposits and small time
deposits
Currency, checkable deposits and large time
deposits
Paper money and coins only
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In the equation of exchange (MVPQ)
M money supply
V velocity of money (the number of times the
dollar is spent)
PQ nominal GDP
All of the above are correct
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The maximum amount of new money the banking
system can create from a deposit is equal to
1 / reserve requirement
Actual reserves required reserves
The deposit multiplier x the initial excess
reserves
The money supply x the velocity of money
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The amount of new money a single bank can create
is equal to
1/reserve requirement
Its excess reserves
Excess reserves x the deposit multiplier
Existing deposit New money created by banking
system
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If the reserve requirement is 5, the deposit
multiplier is
5
5 x the excess reserves
20
25
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Excess reserves
1 / reserve requirement
Deposit multiplier x the actual reserves
Reserve requirement x deposits
Actual reserves required reserves
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Assume the FED purchases a 1000 bond and the
payment for the bond is deposited in bank A. If
the reserve requirement is 10, what is the
maximum change in the money supply that could
result from the bond purchase?
100
900
9,000
10,000
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If you deposit 1500 in pocket change into your
checking account at the bank, the immediate
result is
The money supply increases by 1500
The money supply decreases by 1500
The money supply does not change, but its
composition changes from 1500 currency to 1500
demand deposits.
The money supply increases by 1500 and its
composition changes from 1500 in cash to 1500
in checkable deposits.
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If the reserve requirement is 20, the bank must
keep how much of a 1000 deposit in the bank
vault or on deposit at the FED?
1000
200
800
4000
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Assume the FED sells 20,000 in bonds to a bank
customer. If the reserve requirement is 20 and
the customer pays for the bonds by check, the
maximum change in the money supply that could
result from the bond sale is
4000 decrease
16,000 increase
80,000 increase
100,000 decrease
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If the reserve requirement is 25, the deposit
multiplier is
25
5
4
2.5
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If the economy is in a severe recession, which of
the following would be an appropriate monetary
policy action?
FED purchase of bonds on the open market
Increase the discount rate
Increase the reserve requirement
FED sale of bonds on the open market
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An open market operation
Occurs when the FED makes a loan to a bank and
charges the Discount rate.
Involves the FED in the buying or selling of
government Securities.
Increases or decreases the of deposits a bank
must keep In the vault or on deposit at the FED.
Is the least used tool of monetary policy
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Which one of the following would be a
contractionary monetary policy action to fight
inflation?
FED purchase of bonds
Decrease the discount rate
Increase the reserve requirement
Increase taxes
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In a severe recession, the FED might use which of
the following tools?
Lower the reserve requirement to allow banks to
increase their loans.
Lower the discount rate to make it easier for
banks to borrow from the FED.
Purchased bonds on the open market to increase
bank reserves and put downward pressure on
interest rates.
All of the above tools are expansionary monetary
policy tools available to the FED.
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All of the following are tight money policy
actions EXCEPT
FED sale of bonds on the open market
Raising the reserve requirement
Raising the discount rate
Raising taxes
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5 POINT BONUS QUESTION!
Bond prices and interest rates
Are unrelated
Vary directly
Vary inversely
Move in the same direction
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5 POINT BONUS QUESTION!
Assume a reserve requirement of 20. If excess
reserves are 10,000, what is the maximum amount
of new money the banking system can create?
50,000
2000
8000
40,000
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5 POINT BONUS QUESTION!
If the reserve requirement is 10 and deposits
are 100,000, excess reserves are
10,000
90,000
900,000
10
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5 POINT BONUS QUESTION!
If nominal GDP is 5 trillion and the velocity of
money is 5, the money supply needed to purchase
the GDP is
5 trillion
1 trillion
25 trillion
None of the above
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5 POINT BONUS QUESTION!
Assume a bank currently has 20,000 in excess
reserves. If a deposit of 10,000 is made, what
is the maximum the bank could loan out if the
reserve requirement were 10?
20,000
27,000
29,000
200,000
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5 POINT BONUS QUESTION!
Assume the economy is experiencing inflation.
Which one of the following FED tools could be
employed to put a damper on prices?
a. Increase the reserve requirement
b. Increase the discount rate
c. FED purchase of bonds on the open market
a and b only
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5 POINT BONUS QUESTION!
The discount rate is
The interest rate banks charge each other for
temporary loans.
The interest rate the FED charges banks for loans.
The percent of deposits a bank must keep in the
vault or on deposit at the FED.
None of the above.
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5 POINT BONUS QUESTION!
If the economy is experiencing severe inflation,
which of the following would be an appropriate
monetary policy action?
Purchase bonds on the open market
Sell bonds on the open market
Lower the discount rate
Lower the reserve requirement