Macroeconomics
13th Edition
ISBN: 9780134735696
Author: PARKIN, Michael
Publisher: Pearson,
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Chapter 25, Problem 7SPA
To determine
Identify the interest rate when the real GDP is $10 billion
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Suppose the current money supply (M) is 4.8 billion U.S. dollars, the nominal gross domestic product (GDP) is 72 billion U.S. dollars, and the actual gross domestic product (Y) is 12 billion U.S. dollars. Calculate the price level (P) and the velocity of money (V) separately. Show your steps.
Suppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve
requirement is 5%.
What is the maximum possible increase in the money supply as a result of your bank deposit?
maximum increase: $
Which events could cause the increase in the money supply to be less than its potential?
Banks choose to loan out all excess reserves.
Some loan recipients choose to hold some cash instead of depositing all of it in banks.
Banks decide to keep some excess reserves on hand.
All money loaned out is deposited back into the banking system.
The Federal Reserve manages the amount of money in circulation by buying or selling U.S. Treasury securities, usually Treasury bills. The increase or decrease of money in circulation helps the Fed to control inflation or deflation. This has an effect on your disposable income. Research the Federal Reserve system and money supply, then answer the following questions.
Under what conditions would the Fed choose to decrease the money supply, how would it do so, and what is the goal of doing so? How does the Fed factor inflation into its actions?
Chapter 25 Solutions
Macroeconomics
Ch. 25.1 - Prob. 1RQCh. 25.1 - Prob. 2RQCh. 25.1 - Prob. 3RQCh. 25.1 - Prob. 4RQCh. 25.1 - Prob. 5RQCh. 25.2 - Prob. 1RQCh. 25.2 - Prob. 2RQCh. 25.2 - Prob. 3RQCh. 25.2 - Prob. 4RQCh. 25.2 - Prob. 5RQ
Ch. 25.3 - Prob. 1RQCh. 25.3 - Prob. 2RQCh. 25.3 - Prob. 3RQCh. 25.3 - Prob. 4RQCh. 25.3 - Prob. 5RQCh. 25.4 - Prob. 1RQCh. 25.4 - Prob. 2RQCh. 25.4 - Prob. 3RQCh. 25.5 - Prob. 1RQCh. 25.5 - Prob. 2RQCh. 25.5 - Prob. 3RQCh. 25.5 - Prob. 4RQCh. 25.5 - Prob. 5RQCh. 25.6 - Prob. 1RQCh. 25.6 - Prob. 2RQCh. 25.6 - Prob. 3RQCh. 25.6 - Prob. 4RQCh. 25 - Prob. 1SPACh. 25 - Prob. 2SPACh. 25 - Prob. 3SPACh. 25 - Prob. 4SPACh. 25 - Prob. 5SPACh. 25 - Prob. 6SPACh. 25 - Prob. 7SPACh. 25 - Prob. 8SPACh. 25 - Prob. 9SPACh. 25 - Prob. 10APACh. 25 - Prob. 11APACh. 25 - Prob. 12APACh. 25 - Prob. 13APACh. 25 - Prob. 14APACh. 25 - Prob. 15APACh. 25 - Prob. 16APACh. 25 - Prob. 17APACh. 25 - Prob. 18APACh. 25 - Prob. 19APACh. 25 - Prob. 20APACh. 25 - Prob. 21APACh. 25 - Prob. 22APACh. 25 - Prob. 23APACh. 25 - Prob. 24APACh. 25 - Prob. 25APACh. 25 - Prob. 26APACh. 25 - Prob. 27APA
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- In 1963, the average price for a gallon of gas was about $0.30. In 2014, the average price for a gallon of gas was about $3.37. What does this data show? In 1963, people carried more money in their pockets than they did in 2014. From 1963 to 2014, the money demand curve shifted leftward. The interest rates were most likely lower in 1963 than in 2014. The demand for money has increased significantly from 1963 to 2014.arrow_forwardAccording to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 1.0%. The growth rate of nominal GDP is 3.8%. The nominal interest rate is 7.1%. The real interest rate is 4.3%. The money supply (M2) is $10,612(in billions) According to the quantity theory of money, the growth rate of the money supply must be___%. (Round your answer to the nearest tenth.)arrow_forwardAccording to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 1.0%. The growth rate of nominal GDP is 3.8%. The nominal interest rate is 5.6%. The real interest rate is 2.8%. The money supply (M2) is $10,612 (in billions) According to the quantity theory of money, the growth rate of the money supply must be .......%. (Round your answer to the nearest tenth.) According to the quantity theory of money, what is the inflation rate? Use the information given above and calculate the inflation rate. According to the quantity theory of money, the inflation rate is ........%. (Round your answer to the nearest tenth.)arrow_forward
- A problem that the Fed faces when it attempts to control the money supply is that the Fed can only control excess reserves but not total reserves. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount. the Fed does not control the amount of money that households choose to hold as deposits in banks.arrow_forward♫ The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 0 Money Demand 0.1 Money Supply 0.2 0.3 04 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 14 New MS Curve + New Equilibrium Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open- market operations to money by the public. thearrow_forwardRefer to Figure 14.5. Assume the interest rate equals 8% and the money supply decreases from to . If the interest rate remains at 8%: money demand will increase. money demand will decrease. there will be an excess demand for money. there will be an excess supply of money.arrow_forward
- Homework (Ch 21) less than the quantity of After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to decrease their money holdings. In order to do so, people will buy bonds and other interest-bearing assets, and bond issuers will find that they can offer lower interest rates until the money market reaches its new equilibrium at an interest rate of 6% The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. 180 150 Aggregate Demand 120 O PRICE LEVEL 80 I AD1 C1 Oarrow_forwardMoney serves three functions in the economy: medium of exchange, unit of account, and store of value. Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply. Inflation erodes money's purchasing power. In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good. Inflation causes menu costs.arrow_forwardUse the graph to explain why changes in the supply of money affect the quantity of money demanded.arrow_forward
- Suppose you receive Tk. 10,000 from your grandmother and deposits the money in a saving account. your grandmother gave you the money by writing a check on her saving account. Would the maximum increase in the money supply still be what you found it to be in part a) where you received the money from the sky? Why or why not? can anyone explain please why it will changearrow_forwardThe people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 20% of the deposits as reserves. What is the money multiplier in this economy?arrow_forwardCENGAGE | MINDTAP Homework (Ch 21) The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 6% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. 8.0 7.5 7.0 6.5 PRICE LEVEL 6.0 5.5 5.0 4.5 4.0 0 Money Demand 0.1 Money Supply 02 0.3 04 0.5 0.6 0.7 MONEY (Trillions of dollars) 0.8 New MS Curve ++ Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to the money by the public. New Equilibrium Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location.…arrow_forward
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