Question 1

Each of the following is a component of the Conference Board's Index of Leading Indicators except

Accepted Answer

The Conference Board's Index of Leading Indicators includes various economic measures such as average weekly hours in manufacturing, the interest rate spread between 10-year Treasury bonds and federal funds, and the index of consumer expectations. However, it does not include bond prices, such as those of 500 common bonds, making option C the correct choice.

Question 2

A big problem with using only the money supply as a leading indicator is that

Accepted Answer

There are multiple measures of money supply (such as M1, M2, M3, etc.), and these different measures can sometimes show divergent trends, making it difficult to use money supply as a singular leading indicator for economic forecasting or policy making.

Question 3

As an example of the problem of using only the money supply as a leading indicator, during 1992 if M1 were used as the measure of the money supply rather than M3

Accepted Answer

The answer of As an example of the problem of...

Question 4

As an example of the problem of using only the money supply as a leading indicator, during 1992 if M3 were used as the measure of the money supply rather than M1

Accepted Answer

During 1992, M3 was growing more slowly than M1, which would have suggested a contractionary monetary policy stance, potentially worsening the recession.

Question 5

If the reserve requirement is 5% and the Federal Reserve increases the reserves in the banking system by $20 billion, the potential increase in the money supply is

Accepted Answer

The potential increase in the money supply can be calculated using the money multiplier formula, which is 1/reserve requirement. With a 5% reserve requirement, the multiplier is 1/0.05 = 20. Therefore, if the Federal Reserve increases reserves by $20 billion, the potential increase in the money supply is 20 times that, or $400 billion.

Question 6

If the reserve requirement is 5%, the money multiplier is

Accepted Answer

The money multiplier formula is 1 divided by the reserve requirement. Therefore, if the reserve requirement is 5% (or 0.05 in decimal form), the money multiplier is 1 / 0.05 = 20.

Question 7

If the reserve requirement is 5%, and households' and businesses' desired holding ratio of currency-to-deposits is .2, the money multiplier is

Accepted Answer

The money multiplier formula in this context is 1 / (Reserve Requirement + Desired Holding Ratio - (Reserve Requirement * Desired Holding Ratio)). Plugging in the values, we get 1 / (0.05 + 0.2 - (0.05 * 0.2)) = 1 / (0.25 - 0.01) = 1 / 0.24 = 4.1667, which rounds to 4.8.

Question 8

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .1, and the ratio of excess reserves to total deposits that banks desire to hold is .05, the money multiplier is

Accepted Answer

The money multiplier is 1/(reserve requirement + currency-to-deposits ratio + excess reserves-to-deposits ratio) = 1/(0.05 + 0.1 + 0.05) = 5.5.

Question 9

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .1, the ratio of excess reserves to total deposits that banks desire to hold is .05, and the Federal Reserve increases the monetary base by $100 billion, the increase in the money supply would be

Accepted Answer

The answer of If the reserve requirement is 5%, households'...

Question 10

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .2, and the Federal Reserve increases the monetary base by $100 billion, the increase in the money supply would be

Accepted Answer

The money multiplier formula in this context is 1 / (Reserve Requirement + Currency-to-Deposit Ratio * (1 - Reserve Requirement)). Plugging in the values: 1 / (0.05 + 0.2 * (1 - 0.05)) = 4.8. Therefore, a $100 billion increase in the monetary base would increase the money supply by $480 billion (4.8 * $100 billion).

Question 11

If the Federal Reserve increases the reserve requirement,

Accepted Answer

When the Federal Reserve increases the reserve requirement, banks are required to hold more reserves and can lend out less of their deposits. This reduces the money multiplier, which is the amount of money that can be created in the banking system for each dollar of reserves.

Question 12

If the Federal Reserve decreases the reserve requirement,

Accepted Answer

When the Federal Reserve decreases the reserve requirement, banks are required to hold less money in reserve and can lend out more of their deposits. This increases the money supply in the economy, which in turn increases the value of the money multiplier. The money multiplier effect describes how an initial change in the monetary base leads to a greater final change in the total money supply.

Question 13

If the Federal Reserve increases the monetary base,

Accepted Answer

The money multiplier is determined by the reserve requirement set by the Federal Reserve and not directly by changes in the monetary base. Increasing the monetary base does not inherently change the reserve ratio, which is what influences the money multiplier.

Question 14

If the ratio of excess reserves to total deposits that banks desire to hold increases,

Accepted Answer

When banks desire to hold a higher ratio of excess reserves to total deposits, they lend out a smaller portion of their deposits. This reduces the money multiplier because less money is being created from each dollar of reserves.

Question 15

If the ratio of excess reserves to total deposits that banks desire to hold decreases,

Accepted Answer

When banks desire to hold a lower ratio of excess reserves to total deposits, they are more willing to lend out their reserves. This increases the amount of money that can be created from a given amount of reserves, thereby increasing the value of the money multiplier.

Question 16

If households' and businesses' desired holding ratio of currency-to-deposits increases,

Accepted Answer

When households and businesses desire to hold more currency relative to deposits, it means that a larger portion of the monetary base is held as currency rather than deposited in banks. This reduces the amount of reserves available to support the creation of new deposits through the banking system's lending activities, effectively decreasing the money multiplier. The money multiplier is inversely related to the currency-to-deposit ratio; as the ratio increases, the multiplier decreases.

Question 17

If households' and businesses' desired holding ratio of currency-to-deposits decreases,

Accepted Answer

When households and businesses desire to hold less currency relative to deposits, it means more money stays within the banking system. This increases the base for banks to create loans, effectively increasing the money multiplier. The money multiplier is inversely related to the reserve ratio and the currency-to-deposit ratio. A decrease in the currency-to-deposit ratio allows banks to lend out a greater portion of their deposits, thereby increasing the money multiplier.

Question 18

Households' and businesses' desired holding ratio of currency-to-deposits __________ until the late-1970s and has ___________ since then.

Accepted Answer

Until the late-1970s, the ratio of currency-to-deposits held by households and businesses was fairly stable. Since then, this ratio has seen substantial fluctuations, reflecting changes in financial behavior, technology, and policy.

Question 19

The one kind of fiscal policy that does work rapidly enough to be important is

Accepted Answer

Fiscal automatic stabilizers work rapidly because they automatically adjust government spending and taxes in response to economic changes without the need for new legislation.

Question 20

The automatic revenue and spending changes built into the federal budget have the effect of

Accepted Answer

Automatic revenue and spending changes in the federal budget, such as taxes and welfare payments, adjust with the economy's performance. When the economy grows, taxes increase and welfare payments decrease, reducing disposable income and thus the marginal propensity to expend. This action reduces the multiplier effect because there is less additional spending generated from an initial injection of spending.

Quiz 13: Stabilization Policy