Name: Alex ODorisio

AP ECONOMICS---Ippolito

Study Guide for A.P. Macro (Test #4)

Due: Friday December 3rd
BANK 1
Assets

2000

Required Reserves
Loans

BANK 2
Liabilities

Assets

Deposits

Required Reserves

8000

Liabilities
Deposits

Loans

Total Assets

Total Liabilities

BANK 3
Assets

Liabilities

Required Reserves

Deposits

Loans

Total Assets

Total Liabilities

Total Assets

Total Liabilities

1) Assume the required reserve ratio is 20% and a bank holds no excess reserves
Joe deposits $10,000 into Bank 1
Fill in the balance sheets above for each of the 3 banks which shows the effect of Joes deposit
2) Calculate the increase in bank reserves caused by Joes deposit
$24,400
3) Calculate the increase in money supply caused by Joes deposit

$40,000

1/.02 = 5

5*$10,000 = $50,000 initial deposit $10,000 = $40,000

4) List everything which is included in M2:

_Savings Deposits, Small time deposits, Money market mutal funds, A few minor Categories + All the things that make uo M1
5) During expansionary monetary policy state the appropriate actions on the following:
Reserve Requirement
_______Lowered______
Discount Rate
_______Lowered _______
Open Market Operations
______Buy Bonds________
6) The economy is in a recessionary gap and the current federal funds rate is 5.0%
Draw the current market equilibrium on both graphs below
Show the affect of expansionary monetary policy on both graphs
AD/AS Graph

Money Market Graph

7) Explain how the Federal Government raises money for deficit spending.
How does this affect the Loanable Funds market?
Does this affect money supply?
_______________T ___________________________________________________________________________________
__________________________________________________________________________________________________

8) Explain how the Federal Reserve increases the money supply.

How does this affect the Money Market graph
________The Federal Reserve lowers the reserve ratio, lowers the discount rate, and buys federal bonds in order to
increase MS. This occurs because as these things happen 2 things happen, one more loaning from bank to bank is
occurring which increases the MS, the Money multiplier is also higher and now new money is being introduced to the
Money flow as bonds are
bough._________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
_________________________________________________________________________________________________

9) Why is the credit crunch a problem for the Federal Reserve as the federal funds rates approaches zero percent? How is
quantitative easing designed to get around this problem.
Think: liquidity trap
__________________________________________________________________________________________________
_________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

10) Explain what the classical dichotomy is in terms of economic analysis. Why is it important
Hint: see page 667 -668 of your textbook
__________________________________________________________________________________________________
_________________________________________________________________________________________________
__________________________________________________________________________________________________

11) Write the equation of exchange and explain what the quantity theory of money implies about monetary policy.
__________________________________________________________________________________________________
_________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

Note: correct answers are in Bold

6.

If the reserve ratio is 10 percent and a bank receives a new deposit of $4000, it will 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:

(correct answers in BOLD)

12. Under what circumstances would increasing the money supply be most effective in increasing real GDP?
Interest Rates
Unemployment Rate
Business Optimisim
a.
High
Full
High
b.
High
Higher than Full
High
c.
Low
Higher than Full
High
d.
Low
Full
Low
e.
Low
Almost at Full
Low
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:

---------

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
c. $300,000
d. $100,000
e. none listed
b. $400,000
Explanation: 400,000 B, You take the initial amount deposited multiply by the money multiplier, and then you subtract the
initial amount deposited.
100,000 * 5 = 500,000 100,000 = $400,000

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:
(A) , The rate of inflation is directly correlated to the amount of money circulating, this concludes that the higher the MS the more
inflation the less purchasing power one has.

TOTAL SCORE
Excellent Work

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Very Good Work

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Good Work

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Poor Work

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________/30 PTS