Banks and Monetary Policy 1. Considered the following data for an economy. Curre

Question

Banks and Monetary Policy

1. Considered the following data for an economy. Currency in circulation held by the public: CU = 400 dollars; Monetary Base: B = 800 dollars; currency/deposit ratio: cu = 0.25. What is the value of reserves in this economy?

2. Suppose velocity is 3, real output is 9000, and the price level is 1.5. What is the level of real money balances in this economy?

3. An open-market purchase of bonds by the Central Bank _____

A. increases monetary base and reduces the nominal interest rate.

B. increases monetary base and reduces bond prices.

C. has no effect on the monetary base or the nominal interest rate.

D. increases the monetary base but reduces the nominal money supply.

4. If the expected inflation rate was 1% per year, and the expected real interest rate was 2% per year, but the actual inflation rate turned out to be 3% per year, then the ex post real interest rate turned out to be ___

5. According to the Taylor rule, the Fed reacts to an increase in inflation by ____________. __________ thus stabilizing inflation.

A. increasing the Fed Funds rate one-for-one; The resulting increase in real rates reduces aggregate demand.

B. increasing the Fed Funds rate more than proportionally; The resulting increase in real rates reduces aggregate demand

C. increasing the Fed Funds rate less than proportionally; The resulting fall in real rates increases aggregate demand.

D. lowering the Fed Funds rate; The resulting increase in real rates reduces aggregate demand

6. The demand for real money balances is an increasing function of

A. the overall level of prices in the economy.

B. real income.

C. the expected rate of inflation.

D. the nominal interest rate.

7. Considered the following data for an economy. Currency in circulation held by the public: CU = 400 dollars; Monetary Base: B = 800 dollars; currency/deposit ratio: cu = 0.25. What is the value of the money multiplier in this economy?

8. Considered the following data for an economy. Currency in circulation held by the public: CU = 400 dollars; Monetary Base: B = 800 dollars; currency/deposit ratio: cu = 0.25. What is the value of deposits in this economy?

Explanation / Answer

1. Monetary base = Currency + Reserves

800 dollars = 400 dollars + Reserves

Reserves = 800 - 400 = 400 dollars

2. According to Quantity Theory of Money: MV = PY

M is the money supply

V is the velocity of money

P is the price level

Y is the real output

M x 3 = 1.5 x 9000

M = 4500

3. A. increases monetary base and reduces the nominal interest rate.

Open market operation is the tool of Federal Reserve to control the supply of money in the economy. It includes sale and purchase of government securities, sale of government securities by the Fed reduces the money supply and purchase of securities increases money supply. Increase in Money supply shifts AS curve rightwards causing decrease in market interest rate.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.