Name: ______

MANDATORY HOMEWORK

AP ECONOMICS UNIT #4 Money & Monetary Policy

1)Draw a graph of the Money Market (demand/supply of money)

  1. Show the effect of Expansionary Monetary Policy on your graph

2)Provide a definition for the discount rate, reserve requirement and open market operations.

3)Describe how the Fed uses each of the 3-tools of monetary policy defined in question 2.

4)What is the goal of expansionary monetary policy in terms of the macro economy?

  1. Describe what the Fed hopes to accomplish in terms of GDP, employment, Investment

5)Describe how the Fed ultimately determines the “value” of money.

Provide BOTH the correct answer & an explanation for the problems below:

6.If the reserve ratio is 10 percent and a bank receives a new deposit of $4000, it will initially lead to

a. / an increase in required reserves of $400.
b. / an increase in excess reserves of $3,600
c. / an increase in required reserves of $4,000
d. / an increase in excess reserves of $4,000
e. / Both A & B

Explanation:

Table 29-4

Bank of Tampa
Assets / Liabilities
Reserves / $1,000 / Deposits / $10,000
Loans / $9,000

8.Refer to Table 29-4. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does the Bank of Tampa now hold?

a. / $250
b. / $500
c. / $550
d. / $750
e. / there are no excess reserves

Explanation:

10.If the public decides to hold more currency and fewer deposits in banks, bank reserves

a. / decrease and the money supply eventually increases
b. / decrease but the money supply does not change.
c. / increase and the money supply eventually increases.
d. / increase but the money supply does not change.
e. / decrease and the money supply eventually decreases.

Explanation:

16.Deflation

a. / increases the ability to pay debts and raises the value of money.
b. / increases the ability to pay debts and lowers the value of money.
c. / reduces the ability to pay debts and raises the value of money.
d. / reduces the ability to pay debts and lowers the value of money.
e. / reduces the ability to pay debts but has no affect on the value of money

Explanation:

20.According to the classical theory, when the money supply doubles, which of the following must also double?

a. / neither the nominal wage nor the price level will change
b. / the price level, but not the nominal wage
c. / the nominal wage, but not the price level
d. / the price level and nominal wages
e. / none listed are true

Explanation:

21.Suppose that the money supply doubled, but at the same time velocity fell by half and real GDP was unchanged. According to the equation of exchange function the price level

a. / must double
b. / must increase by 50% or 1/2
c. / must fall by 50%
d. / remains unchanged
e. / none listed

Explanation:

24.Steven puts money into an account. One year later he sees that he has 6 percent more dollars and that his money will buy 2 percent more goods. Which is true:

a. / The nominal interest rate was 6 percent and the inflation rate cannot be determined
b. / The nominal interest rate was 6 percent and the inflation rate was 4 percent.
c. / The nominal interest rate was 4 percent and the inflation rate was 2 percent.
d. / The nominal interest rate was 8 percent and the inflation rate was 6 percent.
e. / none listed are correct

Explanation:

29.If the Federal Funds rate is below the Fed's “target” rate, the Fed would

a. / buy bonds to increase the money supply.
b. / buy bonds to decrease the money supply.
c. / sell bonds to increase the money supply.
d. / sell bonds to decrease the money supply.
e. / none listed

Explanation:

32.The Federal Reserve would use expansionary monetary policy in which cases below:

a. / Economy is in a recession, inflation is low
b. / U.S. Unemployment falls to 4.0%
c. / Inflation is rising Rapidly
d. / GDP growth is in excess of 6.0%
e. / all listed

Explanation:

37.Money Neutrality implies that increases in the money supply in the long run will lead to

a. / higher real GDP
b. / lower unemployment
c. / lower inflation
d. / all listed
e. / none listed are true

Explanation:

38.If Joey puts $100,000 of cash into the local bank and the reserve requirement is 20%, then money supply will eventually increase by how much due to this deposit:

a. / $500,000
b. / $400,000
c. / $300,000
d. / $100,000
e. / none listed

Explanation:

40.Which is trued about the Quantity Theory of Money

a. / The quantity of money determines the value of money
b. / Primary cause of inflation is demand for money
c. / Inflation is caused by too many goods chasing too few dollars
d. / Money is inversely related to real GDP
e. / all listed are true

Explanation: