Question

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 1) The LM curve represents A) the single level of output where the goods market is in equilibrium. B) the combinations of output and the interest rate where the goods market is in equilibrium. C) the single level of output where financial markets are in equilibrium. D) the combinations of output and the interest rate where the money market is in equilibrium. E) none of the above

2) Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; government securities C) government securities; discount loans D) government securities; reserves

3) The money demand curve will shift to the right when which of the following occurs? A) an increase in the money supply B) a reduction in the interest rate C) an increase in income D) all of the above E) none of the above

4) Which of the following is not an entity of the Federal Reserve System? A) Member banks B) BOG C) FDIC D) FOMC

5) During 2008 in the United States, consumer confidence fell significantly. Which of the following will occur as a result of this reduction in consumer confidence? A) The LM curve will shift up. B) The IS curve will shift rightward. C) The IS curve will shift leftward. D) The IS curve will shift rightward, and the LM curve will shift up. E) The LM curve will shift down.

6) If government purchases (G) and taxes (T) decrease by the same amount, A) an output will increase B) an interest rate will increase C) the budget deficit will increase D) all of the above E) none of the above 7) Which of the following will cause an increase in the amount of money that one wishes to hold? A) a reduction in income (Y). B) an increase in price (P). C) an increase in the interest rate (i) increase. D) none of the above 1 8) The money supply (Ms) will tend to rise when which of the following occurs? A) an increase in the ratio of currency to deposits (c) B) an increase in the excess reserve ratio (er) C) a central bank sale of bonds D) all of the above E) none of the above 9) Which of the following is included as a component of the M2 definition of money? A) travelers check B) small time deposits C) checkable deposits D) all of the above E) none of the above 10) Which of the following generally occurs when a central bank pursues contractionary monetary policy? A) the central bank sells bonds and the interest rate decreases. B) the central bank purchases bonds and the interest rate increases. C) the central bank sells bonds and the interest rate increases. D) the central bank purchases bonds and the interest rate decreases. 11) Suppose the economy is operating on the IS curve but not on the LM curve. Given this information, we know that A) the goods market is in equilibrium and the money market is not in equilibrium. B) the money market and bond markets are in equilibrium and the goods market is not in equilibrium. C) the money, bond and goods markets are all in equilibrium. D) neither the money, bond, nor goods markets are in equilibrium. E) the money market and goods market are in equilibrium and the bond market is not in equilibrium. 12) The LM curve shifts to the right when which of the following occurs? A) an increase in consumer confidence B) an open market sale of bonds by the central bank C) an increase in taxes D) an increase in output E) none of the above 13) An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists? A) The money supply, M, will not change. B) Output will increase. C) The interest rate will decrease. D) The interest rate will not change. E) none of the above 14) Which of the following is a liability on a bankʹs balance sheet? A) loans B) checkable deposits C) reserves D) all of the above E) none of the above 2 15) Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause A) an increase in the interest rate (i). B) a reduction in i. C) an increase in output (Y). D) a reduction in Y. 16) The interest rate will increase as a result of which of the following events? A) a reduction in income. B) an open market purchase of bonds by the central bank. C) an increase in income. D) all of the above. E) none of the above. 17) The IS curve will shift when which of the following occurs? A) a reduction in output. B) a reduction in interest rate. C) a reduction in consumersʹ confidence. D) a reduction in money supply. 18) When a liquidity trap situation exists, the most appropriate policy to increase output would be A) a central bank purchase of bonds. B) an increase in government purchase. C) a central bank sale of bonds. D) none of the above 19) Which of the following will cause the money multiplier to become smaller? A) an increase in the publicʹs preference for checking deposits as opposed to holding currency B) an increase in the ratio of reserves to checkable deposits C) an increase in high powered money D) a reduction in high powered money E) none of the above 20) When a customer withdraws money from her checking account at a commercial bank, the bankʹs assets ________ and its liabilities ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase 3 ECON 3312-001 Professor C.Y. Choi Macroeconomics Fall, 2018 Mid-term 2 – PART II (version A) Name . (last name first, please print) This is a closed-book exam. Answer all questions. Please write or print clearly with precise and concise answers. In the graphical analysis, be sure to label the axes, the curves, the initial equilibrium values, the direction of the curves shift, and so on. Credit can be given only for legible answers. Good luck! 1. (17 points) Fill in the blanks. 1.1. Currently the interest rate charged by the Fed when it makes a loan to banks is ( )%, while the interest rate charged by banks each other is ( )%. 1.2.The Fed has a ( ) mandate because it is supposed to achieve both price stability and ( ). 1.3.In general, monetary policy is preferred over fiscal policy as it has a shorter ( ) lag, while ( ) lag and impact lag is similar between the two policies. 1.4.Both ( ) and ( ) are the primary liabilities of the Fed, which are also known as the central banks money or monetary ( ). 1.5. Non-money assets pay ( ) while money assets do not, and hence it is known as the ( ) cost of holding money asset. 1.6.M1 consists of ( ), ( ) and travelers checks. 1.7. Three major assets held by banks include ( ), ( ) and loans. 1.8.The U.S. monetary policy is decided by the Fed’s monetary policy committee called ( ) which meets ( ) times a year. 2. (18 points) State whether each of the following statement is true or false, and then briefly explain your answers (the explanation is what counts). 2.1.If the Fed lowers discount rate, it will shift LM curve to the right because it increases money demand. 2.2. When an economy is in the liquidity trap, neither monetary policy nor fiscal policy is effective in getting the economy out of recession. 2.3. Money demand is related to the functions performed by money. So, money demand curve is downward sloping because of its medium of exchange function. 2.4. Other things being held constant, a trade deficit will reduce money supply in the U.S. 2.5.According to the IS-LM model, a simultaneous increase in consumer confidence and discount rate by the Fed will raise both the equilibrium interest rate (i*) and real GDP (Y*). 2.6. There will be no crowding-out effect if demand for money is not sensitive (responsive) to interest rate change. 3. (10 points) Please answer the following questions regarding a small economy named ‘LaLaland’. People in this economy tend to save 25 cents for every dollar increase in their disposable income. Their autonomous consumption is 200. Also, people in this country tend to keep 20 cents as currency for every dollar of deposit at banks. The required reserve ratio is 10% and banks hold no excess reserve. You are also given the following numbers: Government purchases = $250; Government budget deficit = $50; I = 150 – 1000i; Md = 2Y – 8000i; CU = $300; R = $100. Based on this information, please answer the following questions. 3.1.Derive both IS-relation and LM-relation and solve for the equilibrium Y* and i*. 3.2. Explain step by step what will happen to the equilibrium Y* and i* if the central bank of this country buys $10 worth government securities to a commercial bank. 4. (15 points) Please answer the following situations regarding the U.S. economy using your knowledge on the macroeconomic models. (Unless specified otherwise, each sub-question is separate. In the graphical analysis, be sure to label the axes, the curves, the initial equilibrium values, the direction of the curves shift, and so on.)) 4.1.Since December 2015, the Fed has raised the targeted Federal funds rate 7 times straight and announced to shrink its balance sheet. Using the balance sheet of the Fed, explain how this Fed’s actions affect the supply of money in the U.S. and discuss why the Fed takes such actions. 4.2. (continued from the previous question) Using the monetary policy transmission mechanism we discussed during class (bowling game analogy), explain step-by-step what the Fed intends to achieve with the policy actions, especially with the focus on its dual mandate. 4.3. (continued from the previous question) At the same time, the Trump administration and the Congress lowered corporate tax rate from 35% to 21% last December. Using the graphs below for the money market and IS-LM, explain the impacts of these monetary and fiscal policy actions on the U.S. economy (Y* and i*). Also, explain why President Trump is complaining about the Fed’s recent monetary policy stance. If you were in Jerome Powell’s shoes, how would you explain to him for the Fed?

Answer 1

3) The LM erue represents D. The combination of output and the interest rate Where the money market is in equilibrium. [Note: The conibination of output and the interest rate where the goods market is in equilibrium is represented by the Is ournei. Moreover, the single level of any variable can be .. determined by the intersection of two wnies, The point of intersection of Is and LM wine. corresponds to equilibrium in goods market, money! market and financial market.] ..

L i hi Shift P. : 2. Both government sewrities and seum are Federal Reserve Assets [Note: Curency in circulation and discount loans live, bang made to the banks) are a source of liabilities to the central Bank, whereas, gouernment sewrities and reserves are' assets? Hence the correct option is: D:) : ? 3). The money demand curne will a 1. when : c.) there is an increase income [Note: An increase in the money supply shifts the money supply wrue to the right. IA reduction in the interest rate causes a movement along the money demand wore. The intuition behind the shift in the hisney" demand whice to the right, due to an increase income is that, as income increases, people transaits more avid hence, Transaction Demand for money, mucreases fire spending inireases) Tv 4 c.) FDIC is not an meinbe entity of the Federal Reserne system. [Note : Member Banks, Board of Goueniors (806) and Federal Open Market Coromittee cromch are the key entities of Federal Reserne System. The Federal Deposit Insuranie Corporation (FDIC) 's not i demande I de meuber "entity of the Federal Reserve System.] .

Due to the fall in consumer to confidence - "C) The is wrue will shift leftward Note ? fall in consumer confidence reduces the aggregate demand which inturn causes the is curre to shift leftward Moreover, the LM eurne, generally, shift up whe there is an either a reduction in money supply or increase in money demand. It mover down, when there is either an increase in money supply or decrease in money Lemanser. (there can be other reasons which might shift the LM wine). Is carrue shifts to the right when there is an increase in aggregate demand? 67. If G and I decrease by the same aniont, then # None of the above. Note: It G and I both decreases, then the net effect will be reduction in output (as government expenditure multiplier is greater than the tax multiplier in magnitude). As the net effect is reduction in outputy the Is wine will shift to the left, as a result of which interest-rate will decrease - Budget deficit occurs when GYI, but here, both G and T decreases by equal amount and home, the Budget Deflat will remain mehanged.].

7. (B) An increase in price (1) will cause an increase in the amount of money that one who wishes to hold [Note: 'An increase in interest rate will increase the Opportunity cost of holding money and here people would rather save than hold money. A reduction in incomie decreases spending and hence the necessity to hold money decreases äý well. An increase in price (p) ie, inflation erodes money of it's value and that is why eaving is discouraged and one this one wishes to hold money. . . 8) The money supply (Ms) tends to rise when there is an Al increase in the ratio of wrrency to deposits (). | Note : An increase in the excess- reserve ratio (er), increases, Reserves of banks, which cannot be loaned out A Central Bank sale of bonds will lead to less money in hands of people (1.e, they have spent the money in buying bonds and then the money is lept with the Banking bond An increase in the ratio of wrrency to deposits increases money supply, as people find themselves with liquid assets] . more of