AP Macro Jeopardy

1. AP Macro Jeopardy The FED and Monetary Policy

2. Round 1

4. 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

5. 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.

6. A single bank can create money by the amount of its . . . Actual reserves Required reserves Excess reserves Deposits

7. Bond prices and interest rates . . . vary directly vary inversely are independent of each other increase or decrease together

8. 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

9. In the equation of exchange (MV=PQ): M = money supply V = velocity of money (the number of times the dollar is spent) PQ = nominal GDP All of the above are correct

10. 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

11. 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

12. If the reserve requirement is 5%, the deposit multiplier is: 5 5 x the excess reserves 20 25

13. Excess reserves = 1 / reserve requirement Deposit multiplier x the actual reserves Reserve requirement x deposits Actual reserves – required reserves

14. 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

15. 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.

16. 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

17. 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

18. If the reserve requirement is 25%, the deposit multiplier is: 25 5 4 2.5

19. 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

20. 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

21. 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

22. 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.

23. 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

24. 5 POINT BONUS QUESTION! Bond prices and interest rates Are unrelated Vary directly Vary inversely Move in the same direction

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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.

31. 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