Equilibrium - AP Macroeconomics

The money multiplier is equal to 1/r, where r is the reserve ratio. In this example, the money multiplier is 1/.1 = 10.

Since the bank has $300 in excess reserves, it can loan out the entire $300, which we then multiply by the money multipler to find the total expansion of the money supply:

The maximum expansion of the money supply generated by that bank is therefore $3000.

If you selected $300, you may have forgotten to multiply by the money multipler.

If you selected $30, you may have multiplied by r rather than 1/r.

If you selected $30,000, you may have thought that the reserve ratio was 1 percent rather than 10 percent.

The correct answer is that the Federal Reserve would be most likely to buy bonds via open market operations.

Here's why: The most common tool that the Federal Reserve uses to manage recessions is to expand the monetary supply, which makes it cheaper for businesses to borrow money and make capital expenditures, which has a net effect of increasing aggregate demand. In order to increase the money supply, the Federal Reserve buys bonds on the open market (and pays cash for these bonds). The cash that the Federal Reserve pays for these bonds expands the money supply, which has the net effect of decreasing interest rates.

If you understand the theory behind this, but answered "Decrease the Reserve Requirement for Banks", pat yourself on the back - you most likely understand the theory behind the Federal Reserve quite well. However, this is still not a correct answer - the reason is that the question was what would the Federal Reserve be most likely to do. Decreasing Reserve Requirements is a major move by the Federal Reserve, and the Federal Reserve would be much less likely to adjust Reserve Requirements than to adjust interest rates via open market operations.

Money in a personal savings account would not be considered a part of M1. The reason for this is that money in a savings account is considered to be lacking in liquidity - as a result, money in a savings account is considered to belong to M2.

As with any supply curve increase, price decreases and quantity increases.

Since in the market for money, price is referred to as the interest rate (i.e. the price of borrowing money), the decrease in price is interpreted as a decrease in the interest rate.

An increase (not a decrease) in the quantity of money available would be expected after an increase in the money supply curve.

Hyper inflation has to do with the rate of inflation, and is not a cause of inflation. Therefore, hyperinflation is not one of the three main causes of inflation.

When money becomes more valuable over time but debts do not change, the money owed on debts will be worth much more than the amount borrowed. This is damaging to borrowers as they must pay back loans that are effectively much more expensive than they agreed to.

The consumer price index is a government published tool calculated by collecting the prices of various retail items periodically. This snapshot view of current prices is one of the chief measures of inflation, as the inflation rate is simply the measure of the change in the consumer price index.

Selling Government Bonds would be considered open market activities. When the Federal Reserve wants to adjust interest rates, they conduct open market operations - which involves selling government bonds (which raises interest rates by decreasing the money supply) or buying government bonds (which lowers interest rates by increasing the money supply.)

The money multiplier is equal to 1/r, where r is the reserve ratio. In this example, the money multiplier is 1/.1 = 10.

Since the bank has $300 in excess reserves, it can loan out the entire $300, which we then multiply by the money multipler to find the total expansion of the money supply:

The maximum expansion of the money supply generated by that bank is therefore $3000.

If you selected $300, you may have forgotten to multiply by the money multipler.

If you selected $30, you may have multiplied by r rather than 1/r.

If you selected $30,000, you may have thought that the reserve ratio was 1 percent rather than 10 percent.

The correct answer is that the Federal Reserve would be most likely to buy bonds via open market operations.

Here's why: The most common tool that the Federal Reserve uses to manage recessions is to expand the monetary supply, which makes it cheaper for businesses to borrow money and make capital expenditures, which has a net effect of increasing aggregate demand. In order to increase the money supply, the Federal Reserve buys bonds on the open market (and pays cash for these bonds). The cash that the Federal Reserve pays for these bonds expands the money supply, which has the net effect of decreasing interest rates.

If you understand the theory behind this, but answered "Decrease the Reserve Requirement for Banks", pat yourself on the back - you most likely understand the theory behind the Federal Reserve quite well. However, this is still not a correct answer - the reason is that the question was what would the Federal Reserve be most likely to do. Decreasing Reserve Requirements is a major move by the Federal Reserve, and the Federal Reserve would be much less likely to adjust Reserve Requirements than to adjust interest rates via open market operations.

Money in a personal savings account would not be considered a part of M1. The reason for this is that money in a savings account is considered to be lacking in liquidity - as a result, money in a savings account is considered to belong to M2.

As with any supply curve increase, price decreases and quantity increases.

Since in the market for money, price is referred to as the interest rate (i.e. the price of borrowing money), the decrease in price is interpreted as a decrease in the interest rate.

An increase (not a decrease) in the quantity of money available would be expected after an increase in the money supply curve.

Hyper inflation has to do with the rate of inflation, and is not a cause of inflation. Therefore, hyperinflation is not one of the three main causes of inflation.

When money becomes more valuable over time but debts do not change, the money owed on debts will be worth much more than the amount borrowed. This is damaging to borrowers as they must pay back loans that are effectively much more expensive than they agreed to.

The consumer price index is a government published tool calculated by collecting the prices of various retail items periodically. This snapshot view of current prices is one of the chief measures of inflation, as the inflation rate is simply the measure of the change in the consumer price index.

Selling Government Bonds would be considered open market activities. When the Federal Reserve wants to adjust interest rates, they conduct open market operations - which involves selling government bonds (which raises interest rates by decreasing the money supply) or buying government bonds (which lowers interest rates by increasing the money supply.)

The money multiplier is equal to 1/r, where r is the reserve ratio. In this example, the money multiplier is 1/.1 = 10.

Since the bank has $300 in excess reserves, it can loan out the entire $300, which we then multiply by the money multipler to find the total expansion of the money supply:

The maximum expansion of the money supply generated by that bank is therefore $3000.

If you selected $300, you may have forgotten to multiply by the money multipler.

If you selected $30, you may have multiplied by r rather than 1/r.

If you selected $30,000, you may have thought that the reserve ratio was 1 percent rather than 10 percent.

The correct answer is that the Federal Reserve would be most likely to buy bonds via open market operations.

Here's why: The most common tool that the Federal Reserve uses to manage recessions is to expand the monetary supply, which makes it cheaper for businesses to borrow money and make capital expenditures, which has a net effect of increasing aggregate demand. In order to increase the money supply, the Federal Reserve buys bonds on the open market (and pays cash for these bonds). The cash that the Federal Reserve pays for these bonds expands the money supply, which has the net effect of decreasing interest rates.

If you understand the theory behind this, but answered "Decrease the Reserve Requirement for Banks", pat yourself on the back - you most likely understand the theory behind the Federal Reserve quite well. However, this is still not a correct answer - the reason is that the question was what would the Federal Reserve be most likely to do. Decreasing Reserve Requirements is a major move by the Federal Reserve, and the Federal Reserve would be much less likely to adjust Reserve Requirements than to adjust interest rates via open market operations.

Money in a personal savings account would not be considered a part of M1. The reason for this is that money in a savings account is considered to be lacking in liquidity - as a result, money in a savings account is considered to belong to M2.

As with any supply curve increase, price decreases and quantity increases.

Since in the market for money, price is referred to as the interest rate (i.e. the price of borrowing money), the decrease in price is interpreted as a decrease in the interest rate.

An increase (not a decrease) in the quantity of money available would be expected after an increase in the money supply curve.