FED - T Accounts Multiple Choice Review (Released AP exam questions)

Federal Reserve - Central Bank - Monetary Policy

Past AP Exam (Released) Questions 

Multiple Choice Review 

(A) Keep part of their demand deposits as reserves

(E) The Discount Rate - The rate of Interest that the FED charges banks 

when they borrow from the FED

(FED2Bank Loans)

(D) Business purchase more factories & equip

RRR decreases-MS increases-Nominal Interest rate decreases-Investment increase

Investment = More loans taken out to create capital goods - factories, equipment, tools etc

(E) Banks less able to extend credit

If people's DM increases then they want more money in their poskets and less money in the banks - If the banks have less money they have less ability to extend loans

also if there is less money in the banks the NIR will increase and less people will

take out loans for investment purposes.

(Below full employment level of output) = Recession

(D) open market purchases of bonds

(D) MS increases and market (nominal) Interest Rate decreases)

(B) bank charge one another for short-term loans

FED Funds Rate = (Bank2Bank Loans)

(E) Fed buys gov't bonds

As the Fed Buys Bonds the MS increases and the Nominal Interest rate decreases

Lower nominal rates = lower rates that banks can charge one another

therefore lower Federal Funds rates

If you only have the categories of 

Required Reserves & Excess Reserves 

Then Req. Res. & Exc. Res. must = Checkable Deposits

$45 must be in Required Reserves & $45 is 15% of $300

(B) Increase by $200 - Increase by $30

$200 is deposited in Checkable deposits

the RR is 15%

15% of the $200 goes into the Req. Res. = $30

the rest ($170) flows into Exc Res.

(B) $80

$100 is deposited into the Banks Checkable deposits/ demand deposits

The RRR is 20%

Therefore 20% of checkable deposits goes to the Req. res. = $20

the rest $80 flows into excess reserves.

What is in Excess Reserves can be loaned out

(B) $8,000

What is in Excess Reserves can be loaned out

(C) $3,000

Anytime the College Board gives you (Total Reserves or Reserves)

you must figure out the required and the excess

they are trying to trick you - the jerks!

(D) $9,000

(D) $500

RRR = 20%

Money Multiplier = 1/RRR = 5

Banks Loan out money from Excess Reserves increases the Money Supply

$100 in excess reserves x 5 = $500 increase in the Money Supply

(B) $900

$100 in Check Dep.

RRR = 10% therefore $10 in Req Res.

$90 flows into Excess Res.

Banks loan out all of their Exc Res.

Money Multiplier = 1/RRR = 1/.1 = 10

$90 x 10 = MS increases by $900

(B) less than $5 million

** Notice in the question (A $1 million increase in Reserves)

If the full $1million was in excess reserves

and it all was loaned out.

The Money Multiplier = 1/RRR = 1/.2 = 5

$1million x 5 = 5 million increase in money supply

but

The problem said: banks voluntarily keep some excess reserves.

If banks loan out less than the $1 million in exc. res. then the money supply can't increase by the full $5 million

(C) $2,000 billion

** Tricky tricky question

Recognize that when the FED buys bonds the MS increases by $400b immediately

Then when citizens deposit that $400b in the banks the money supply

increases again when banks loan out money

Exc Res. = $320 x 5 = $1,600 increase in the MS

Therefore $1,600 Bank increased MS

 + $400 FED increased MS

= $2,000 total increase in MS

(C) $900

(E) Decrease of $5 million

Selling Bonds is Contrationary - MS will decrease

RRR = 20% = Money Multiplier = 1/.2 = 5

$1 million sold bonds  = $1m x 5 = $5 million decrease in MS

(D) B can increase loans by $40

** Notice these T - Accts only have Actual Reserves

You need to break them up into 

Required Reserves

Excess Reserves

2008 B Macro FRQ #1

2008 B Macro FRQ #1

(A) How will the increase in government expenditures (spending) affect each of the following in the short-run?

(i) Aggregate Demand

Government spending will shift the AD curve rightward. 

Government spending causes (C) consumption to increase which increases AD.

The AD/AS cheat sheet is here.

(ii) Short-run Aggregate Supply

Government spending does not affect the SRAS - short run aggregate supply curve.

These shift the SRAS curve 

(B) Using a CLG of the AD/AS, show the effects of the expenditure on the real output (RGDP) and the price level (PL).

PL, increases

RGDP, increases

&

Incomes (Y) increase

(C) Assume that the government funded this increase in expenditures by borrowing from the public. Using a CLG of the loanable funds market, show the effects of the borrowing on the RIR, real interest rate.

Government spending increases, the RIR, increases

Fiscal Policy Cheat Sheet is here.

(D) Given the change in the real interest rate (C), what will be the effect of the change in the FOREX?

(i) Supply of Z currency. Explain. (WHY?)

If, the government increases spending then the RIR will increase. This increased interest rate will attract foreigners to invest into Z's interest bearing assets (people want to put their money into Bonds) because they can earn a higher interest rate compared to their own countries. Capital flows (money) will flow into the country of Z to take advantage of the higher interest rates. 

To be able to invest in country Z investors must exchange their currency in the FOREX market. They are demanding Z's currency. The demand for Z's currency will increase. This will decrease the supply of Z's currency in the FOREX. 

(ii) The value of Z currency.

Demand increases for Z's currency and supply decreases, so the value will rise.

(E) Given your answer in part (d)(ii), what will be the effect of the change in the value of Z's currency on Z's exports? Explain.

(D)(ii) says that the currency's value will increase. This means that to buy a Z, one must spend more in the FOREX. 

Explain, - I want to buy a jacket from the country of Z and it costs 100z. The company who makes the jacket do not take $ they only take z's. So, I must trade my $ for z's in the FOREX. Before the government spending (RIR increased) I could buy the jacket for $100. 

The exchange rate was 1 for 1.  - 100$ for 100z

Now the value of Z's currency has increased, it now takes 2$ to equal 1z. So, I must take $200 to buy 100z. I can still buy the jacket but since the RIR increased and the value of the z increased I must pay more for each z that I want to buy.

This means that the price of the goods in the country of Z have increased for foreigners wanting to buy their goods.

If the price of Z's goods have increased relative to other countries then they will not be able to export as much. Their exports will decline.

2007 Macroeconomic Exam FRQ #2

2007 Macroeconomic Exam FRQ #2

Watch me answer it

https://youtu.be/BnJSiAHQJoY

(A) Define the Federal Funds Rate.

From, the Fiscal Cheat Sheet, Here

(B) If the Federal Reserve wants to lower the federal funds rate, what open-market operation would be appropriate?

The OMO (open market operation) to lower the Federal Funds Rate is for the FED to buy bonds. The FED buys bonds and the cash is injected into the economy. The money supply has been increased due to the injection of cash. The Nom IR (nominal interest rate) falls/decreases and so does the Federal Funds Rate.

(C) Assume that the OMO operation you indicted in part (b) is equal to 10 million. If the required reserve ratio (RRR) is 0.2 calculate the maximum change in loans throughout the banking system.

Required Reserves are .2 or 20% of all deposits must be kept in reserve, and that implies that 80% can be loaned out. The multiplier works here. Check out the MPC/MPS Cheat Sheet Here.

If the banks can loan out 80% of the 10 million that is 8 million dollars. BUT, it asks for the maximum change in loans,, and that money will be multiplied/created/expanded into 8 x 5 = 40 million.

** Understand that there is a mistake (I believe) in this problem's answer.

If the FED buys bonds on the open-market and wants the maximum change in the MS

it would buy bonds from banks

If bought from banks there is no reason that some of the funds would need to be held

in the Required Reserves as none of the money would go into checkable deposits,

Buying Bonds from a bank would cause all of the 10m to flow directly into Excess Reserves

All 10m could be loaned out

10m x 5 = 50m maximum increase in the MS.

(D) Indicate the effect on the OMO that you indicated for part (b) on the nominal interest rate.

In part (b) the FED's plan was to buy bonds, buy bonds and the nominal interest rate falls.

Check out the monetary cheat sheet Here.

(E) Assume that the FED's actions cause some inflation (you think!!!) What would be the impact of the OMO (buying bonds) on the real rate of interest. ((EXPLAIN..))

So, the real rate of interest as we have learned is the Loanable Funds graph. If the FED is dumping money into the economy by buying bonds, we can assume much of the cash is finding its way into the banks. That implies that the supply of loanable funds is increasing in the banks. Supply of loanable funds increases and this pushes the Real Interest Rate down as banks compete for customers.. Graph??

Supply increases, RIR decreases

EXPLAIN.. It appears that explanation that is acceptable is that the Real Rate has fallen because the Nominal Rate has fallen and inflation has increased.