Question 1

Based on the information in the table, what quantity of reserves would the Federal Reserve have had to inject into the economy in 1932 to prevent the money supply from falling, given that the public increased the amount of currency it held and that banks increased the reserve-deposit ratio?

Accepted Answer

Bank deposits = (Bank reserves)/(Desired reserve-deposit ratio). The Fed injected $0.30 billion (the public held $0.23 billion as currency and reserves increased by $0.07 billion was held as reserves). However, the money supply still fell by $3.3 billion. It would have taken an additional 0.109 × $3.3 billion = $0.36 billion in reserves to support $3.3 in additional deposits. So the answer is $0.30 billion + $0.36 billion = $0.66 billion.

Question 2

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

Accepted Answer

The Quantity Equation says: P × Y = M × V. In this case, (P × 2,500)= 1,000 × 5, and P = 5,000/2,500 = 2.

Question 3

If real GDP equals 5,000, nominal GDP equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?

Accepted Answer

Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, 10,000/2,000 = 5.

Question 4

Based on the information in the table, what quantity of reserves did the Federal Reserve inject into the economy in 1932?

Accepted Answer

Bank deposits = (Bank reserves)/(Desired reserve-deposit ratio). The Federal Reserve injected reserves of $0.30 billion. Some of this ($0.23 billion)was held as currency ($4.82 billion - $4.59 billion)and some ($0.07 billion)was held as bank reserves ($3.18 billion - $3.11 billion).

Question 5

The speed at which money circulates is called:

Accepted Answer

The speed of which money circulates is called velocity.

Question 6

Based on the information in the table, if the public had not decided to hold more currency in 1932, but the actions of the Federal Reserve and the banks remained the same, the money supply at the end of 1932 would have been:

Accepted Answer

If the public held $4.59 billion in currency rather than $4.82 billion, the additional cash would have served as bank reserves, creating an additional $0.23 billion/0.109 = $2.11 billion in deposits. The difference between these deposits and the currency (either of which would be part of the money supply)is $2.11 billion - $0.23 billion = $1.88 billion. This is the amount by which the money supply would have been higher in 1932.

Question 7

The link between the money supply and prices is strongest in:

Accepted Answer

Short run changes in the money supply can be missed because it is hard to distinguish between a change in relative prices and a change in the price level. In the long run, changes in the price level are easier to distinguish.

Question 8

The quantity equation states that:

Accepted Answer

The Quantity Equation which says: P × Y = M × V.

Question 9

Based on the information in the table, the total amount of bank deposits decreased from ________ to ________ over the course of 1932.

Accepted Answer

Bank deposits = (Bank reserves)/(Desired reserve-deposit ratio). Thus, bank deposits in 1931 were $3.11 billion/0.095 = $32.7 billion, whereas bank deposits in 1932 were $3.18 billion/0.109 = $29.2 billion.

Question 10

If real GDP equals 1,500, nominal GDP equals 3,750, and the price level equals 2.75, then what is velocity if the money stock equals 1,875?

Accepted Answer

Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, 5,250/2,100 = 2.5.

Question 11

Velocity is determined by:

Accepted Answer

Velocity is a measure of how quickly the money stock turns over. Changes in velocity occur when people desire to hold different amounts of money and these changes are often due to changes in the payments system.

Question 12

If real GDP equals 3,500, nominal GDP equals 5,250, and the price level equals 1.5, then what is velocity if the money stock equals 2,100?

Accepted Answer

Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, 5,250/2,100 = 2.5.

Question 13

The introduction of credit cards and debit cards has ________ velocity.

Accepted Answer

Debit cards allow people to carry less cash, so the cash they do carry is spent more quickly and this has increased velocity.

Question 14

Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that ________ in Alpha than in Beta.

Accepted Answer

This comes from the Quantity Equation which says: P × Y = M × V and M = P × Y/V. In this case, both countries have the same PY. In Alpha, V is larger than it is in Beta. Therefore, M has to be smaller in Alpha than Beta.

Question 15

Based on the information in the table, we can conclude that, in 1932, each of the following events occurred except:

Accepted Answer

We see the public held more currency and the desired reserve-deposit ratio increased, meaning that banks made fewer loans. Additionally, the Federal Reserve injected reserves into the banking system. Although the money supply decreased, there is no evidence the Fed made open-market sales of U.S. government bonds.

Question 16

A rapidly growing supply of money will lead to:

Accepted Answer

If the supply of money grows rapidly, the price level will rise.

Question 17

Refer to the information in the table. The amount of currency held by the public ________, and the amount of reserves held by banks ________. It must be the case that, in 1932, the Federal Reserve ________.

Accepted Answer

The amount of currency held by the public increased and the amount of reserves held by banks also increased, according to the table. From this we can conclude that the Federal Reserve injected reserves into the economy.

Question 18

If M stands for the money stock, P for the price level, and Y for real GDP, then velocity, V, equals:

Accepted Answer

Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock.

Question 19

Nominal GDP divided by the money stock equals:

Accepted Answer