Economics Assignment: Monetary Policy, Inflation, and Unemployment

This economics assignment delves into critical macroeconomic concepts, examining the relationship between hyperinflation and economic growth, the impact of unemployment, and the different types of unemployment. It explores the Federal Reserve System's role in promoting financial stability and controlling the money supply through tools like reserve requirements, open market operations, and discount policy. The assignment also covers the quantity theory of money, velocity, and the motives for holding money. It analyzes the causes of inflation, including demand-pull and cost-push inflation, and discusses the Lucas critique and rational expectations theory. Furthermore, the assignment includes explanations of how the Federal Reserve can influence the monetary base, the limitations on its control over bank deposits and loans, and how the Fed can stabilize an economy experiencing an inflationary gap. The assignment provides detailed answers to multiple-choice questions and short-answer explanations of key economic concepts.

Economists believe that countries recently suffering hyperinflation have experienced
 A. reduced growth.
 B. increased growth.
 C. reduced prices.
 D. lower interest rates.
High unemployment is undesirable because it
 A. results in a loss of output.
 B. always increases inflation.
 C. always increases interest rates.
 D. reduces idle resources.
Unemployment resulting from a mismatch of workers? Skills and job requirements is called
 A. frictional unemployment.
 B. structural unemployment.
 C. seasonal unemployment.
 D. cyclical unemployment.
The Federal Reserve System was created to
 A. make it easier to finance budget deficits.
 B. promote financial market stability.
 C. lower the unemployment rate.

 D. promote rapid economic growth.
Banks subject to reserve requirements set by the Federal Reserve System include
 A. only nationally chartered banks.
 B. only banks with assets less than $100 million.
 C. only banks with assets less than $500 million.
 D. all banks whether or not they are members of the Federal Reserve System.
Of the three players in the money supply process, most observers agree that the most important
player is
 A. the United States Treasury.
 B. the Federal Reserve System.
 C. the FDIC.
 D. the Office of Thrift Supervision.
The percentage of deposits that banks must hold in reserve is the
 A. excess reserve ratio.
 B. required reserve ratio.
 C. total reserve ratio.
 D. currency ratio.
Goal independence is the ability of ________ to set monetary policy ________.
 A. the central bank; goals
 B. Congress; goals

 C. Congress; instruments
 D. the central bank; instruments
The Fed uses three policy tools to manipulate the money supply: open market operations, which
affect the ________; changes in borrowed reserves, which affect the ________; and changes in
reserve requirements, which affect the ________.
 A. money multiplier; monetary base; monetary base
 B. monetary base; money multiplier; monetary base
 C. monetary base; monetary base; money multiplier
 D. money multiplier; money multiplier; monetary base
Discount policy affects the money supply by affecting the volume of ________ and the ________.
 A. excess reserves; monetary base
 B. borrowed reserves; monetary base
 C. excess reserves; money multiplier
 D. borrowed reserves; money multiplier
When the Fed acts as a lender of last resort, the type of lending it provides is
 A. primary credit.
 B. seasonal credit.
 C. secondary credit.
 D. installment credit.
Which of the following are not liabilities on the Fed?s balance sheet?

 A. Discount loans
 B. Bank deposits
 C. Deferred availability cash items
 D. U.S. Treasury deposits
The total amount of reserves in the banking system is equal to the ________ required reserves and
excess reserves.
 A. sum of
 B. difference between
 C. product of
 D. ratio between
The quantity theory of money is a theory of how
 A. the money supply is determined.
 B. interest rates are determined.
 C. the nominal value of aggregate income is determined.
 D. the real value of aggregate income is determined.
According to the quantity theory of money demand,
 A. an increase in interest rates will cause the demand for money to fall.
 B. a decrease in interest rates will cause the demand for money to increase.
 C. interest rates have no effect on the demand for money.
 D. an increase in money will cause the demand for money to fall.

In the 20th century, velocity has
 A. been quite stable over periods as long as a decade.
 B. grown at a constant rate.
 C. been quite volatile.
 D. been quite stable over short, two year periods.
Velocity, over the business cycle, tends to
 A. rise during economic contractions.
 B. fall during economic expansions.
 C. stay constant.
 D. fall during economic contractions
The speculative motive for holding money is closely tied to what function of money?
 A. Store of wealth
 B. Unit of account
 C. Medium of exchange
 D. Standard of deferred payment
Countries with the highest inflation rates are likely to have
 A. the highest rates of money growth.
 B. small budget deficits relative to GDP.
 C. the lowest interest rates.
 D. nonaccommodating monetary policy.

According to aggregate demand and supply analysis, inflation is caused by
 A. supply shocks.
 B. expansionary fiscal policies.
 C. expansionary monetary policies.
 D. rising prices.
The combination of a successful wage push by workers and the government?s commitment to high
employment leads to
 A. demand-pull inflation.
 B. supply-side inflation.
 C. supply-shock inflation.
 D. cost-push inflation.
The Lucas critique is an attack on the usefulness of particular policies.
 A. conventional econometric models as forecasting tools.
 B. conventional econometric models as indicators of the potential impacts on the
economy of
 C. rational expectations models of macroeconomic activity.
 D. the relationship between the quantity theory of money and aggregate demand.
In the new classical model, prices.
 A. wages and prices are sticky with respect to expected changes in the price level.
 B. a rise in the expected price level results in an immediate and equal rise in wages and

 C. an anticipated increase in the money supply will increase aggregate output
temporarily.
 D. unanticipated policy has no effect on aggregate output and unemployment.
Rational expectations theory suggests that the success of an anti-inflationary policy depends on the
 A. adoption of a gold standard.
 B. passage of a tax cut.
 C. credibility of the policy in the eyes of the public.
 D. imposition of wage and price controls.
It is the existence of rigidities such as sticky wages, not adaptive expectations that explains why
________ policies can affect real output in the ________ model.
 A. unanticipated; new classical
 B. anticipated; new classical
 C. unanticipated; new Keynesian
 D. anticipated; new Keynesian
Explain two ways by which the Federal Reserve System can increase the monetary base. Why is
the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary
base? (100 words)
Two ways in which the monetary base can be increased by the Fed is through the purchase of
government bonds and by extension of discount loans. If government bonds are purchased,
then money is injected into the system through the banks who tend to sell the government
bonds. It is imperative to note that the concerned person or institution that is selling the security
may choose to keep the proceeds obtained in the form of currency only which would not lead to
higher bank reserves. Considering that the distribution of the monetary base cannot be
controlled by the Fed, hence the effect of Federal Reserve is less precise for bank reserves.
Explain two reasons why the Fed does not have complete control over the level of bank deposits
and loans. Explain how a change in either factor affects the deposit expansion process. (100 words)

Complete control over bank deposits and loans level is not experienced by Fed owing to ability
of the bank to hold excess reserves beyond the minimum required reserve. Also, the currency
holdings can be changed by the public. The deposit expansion process would be changed if any
change in experienced in any of the two factors highlighted above. If there is an increase in
either currency or excess reserves tends to reduce the increase witnessed in the loans and
deposits.
Suppose the economy is currently in an inflationary gap. Describe the three tools in detail the Fed
has to stabalize an economy that is growing too fast? (100 words)
Three tools of use for the Fed are highlighted below,.
1) Increase the interest rate by raising the Fed Funds rate. This would ensure that there are higher
interest rates which would lead to higher cost of funding and thereby slow down the aggregate
demand which would help in reduction of inflation.
2) Conduct open market operations where treasury bills and bonds would be sold so as to suck up
the excess liquidity. This would lower the money supply and would have adverse impact on
aggregate demand.
3) Also, the reserve requirement ratio can be increased which would result in higher amount of
funds being parked with the Federal Reserve by the banks. As a result, money supply in the
system would shrink having an adverse impact on aggregate demand.