Question

1. Suppose the national income is $850 billion, mpc = 0.8 and autonomous consumption is $60 billion. What is the level of consumption spending (in $ billions)? (Hint the C component in the aggregate expenditure approach to calculating GDP, also just write the value and not the $ or billions afterwards) ?

2. Some money is backed by gold, others are commodity money, the U.S. uses money backed by the declaration of the U.S. government. What type of money is that called?

a. honest money

b. old money

c. fiat money

d. commodity money

e. all of the above.

3. Suppose the Federal Reserve wants to impose a contractionary monetary policy, what would the Fed need to do with their three tools below to enact a contractionary monetary policy? Select the word in parenthesis (Raise or lower) the reserve requirement? ------------ (Raise or lower) the discount rate? ---------------- (Buy or sell) bonds utilizing open market operations?--------------?

4. The main policymaking committee of the Federal Reserve System is the

a. Federal Monetary Policy Committee

b. Board of Governors

c. Federal Committee on Monetary Conditions

d. Federal Open Market Committee

e. all of the above

Answer 1

1)

Given,

mpc (c) = 0.8

National income (Y) = 850

and, autonomous consumption = 60

Consumption can be computed as follows:

C = + cY

C = 60 + 0.8 (850)

C = 740

2)

The correct option is C) fiat money

It is a government issued currency and is not backed by any commodity such as gold. It has no intrinsic value.

3)

Reserve requirement : To contract money supply in the economy, the central bank should raise the reserve requirement.

It is because when central banks raises the reserve requirement, banks keeps a larger fraction of their deposits as reserves which reduces the credit supply in the economy thereby reducing the money supply.

Discount rate - To contract money supply in the economy, the central bank should raise the discount rate.

It is because an increase in discount makes the borrowing expensive thereby discouraging the borrowers to borrow money from bank. It thus reduces the money supply.

Open market operations - To contract money supply, the central bank should sell bonds in the market. By doing this it will eject money from the economy , thus reducing money supply.

4)

The correct option is d) federal open market committee.

It is the primary monetary policy making body of the Fed.