Eco 029 Midterm 2

When money is used to account for value, it is being used as a ________.

unit of account

Given​ that, in billions of U.S.​ dollars, we have 1063.2 in​ currency, 513.5 in demand​ deposits, 4.3 in​ traveler's checks, 5637.8 in savings​ deposits, and 319 in other checkable deposits. The total M1 amount in this economy is ​$

1900.00

Suppose ​$100,000 is deposited at a bank. The required reserve ratio is 20 ​percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves? Total reserves are ​$

20000

Suppose ​$200,000 is deposited at a bank. The required reserve ratio is 25 ​percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves? Total reserves are ​$

50000

Critics of Fed independence argue​ that: A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the​ Fed, since it does not face a binding budget​ constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct

A

How does the Federal Reserve have a high degree of instrument​ independence? A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. B. The Federal Reserve is able to set the goals of monetary policy. C. The Federal Reserve is not subject to the influence of Congress. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.

A

The European Central Bank​ (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System​, the ECB​ is: A. more independent. B. less independent. C. equally independent.

A

The federal funds interest rate is determined by​ the: A. equilibrium of supply and demand in the market for reserves. B. equilibrium of supply and demand in the money market. C. equilibrium of supply and demand in the bond market. D. FOMC.

A

The graph on the right shows a relationship between a measure of central bank independence and macroeconomic performance for 17 countries. On the horizontal axis is an index of central bank independence. The 17 central banks are rated from 1​ (least independent) to 4​ (most independent.). On the vertical axis is the average annual inflation rate measured over the years 1980-1988. Based on this​ graph, one would conclude that central bank independence and inflation​ are: A. negatively​ related; countries with low ratings have generally produced higher inflation B. positively​ related; countries with low ratings have generally produced lower inflation C. not​ related; there is no general relationship shown between independence and inflation

A

The portion of checkable deposits that banks are required to hold is​ called: A. required reserves. B. excess reserves. C. currency outstanding. D. vault cash.

A

The primary reason for the creation of the Federal Reserve System ​was: A. to reduce or eliminate future bank panics. B. to eliminate​ state-chartered banks. C. to create a single central bank similar to the Bank of England. D. to stabilize​ short-term interest rates.

A

Which of the following is not included in the M1 monetary​ aggregate? A. money market deposit accounts B. ​traveler's checks C. NOW accounts D. currency E. demand deposits

A

Which of the following statements about the liquidity of the assets in the monetary aggregates is true​? A. The assets in M1 are more liquid than the assets in M2 B. The assets in M2 are more liquid than the assets in M1. C. The only liquid asset in the monetary aggregates is currency. D. All of the assets in the monetary aggregates have equal liquidity.

A

Which of the following statements about the monetary aggregates is true​? A. When you transfer funds from your savings account to your checking account, M1 increases and M2 stays the same. B. When the growth rate of M2 increases, the growth rate of M1 must also increase. C. The growth rates of M1 and M2 always track each other closely. D. M1 is greater than M2.

A

Why has the development of overnight loan markets made it more likely that banks will hold fewer excess​ reserves? A. The presence of overnight loan markets reduces the costs associated with deposit outflows. B. Banks find it more profitable to loan out their excess reserves in the overnight market. C. This new market has led to an increase in interest​ rates, thus raising the opportunity cost of holding excess reserves. D. The overnight loan market has supplanted the Fed as the lender of last resort.

A

​"The Fed can perfectly control the amount of the monetary​ base, but has less control over the composition of the monetary​ base." Is this statement​ true, false, or​ uncertain? Explain your answer. A. False. Since the Fed cannot control the amount of discount lending to financial​ institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base. B. True. Because the Fed can alter the monetary base through its open market​ operations, it effectively gives the Fed perfect control of the monetary base. C. True. By controlling the discount​ rate, the Fed is able to accurately predict​ banks' borrowings from the​ Fed, which allows the Fed to control the amount of reserves in the banking system and hence the monetary base. D. Uncertain. Perfect control of the monetary base is only guaranteed if MBn ​= MB − BR.

A

A decrease in the discount rate does not normally lead to an increase in borrowed reserves​ because: A. setting the discount rate below the equilibrium rate is forbidden by​ law, since a clear arbitrage opportunity would exist. B. the equilibrium interest rate will still fall below the discount rate. C. there is often a time lag between a decrease in the discount rate and the market reaction to it. D. a decrease in the discount rate usually leads to an increase in nonborrowed reserves.

B

Although neither​ _____ nor the​ _____ is officially set by the Federal Open Market Committee ​, decisions concerning these policy tools are effectively made by the committee. A. reserve​ requirements; federal funds rate B. reserve​ requirements; discount rate C. margin​ requirements; federal funds rate D. margin​ requirements; discount rate

B

Following the global financial crisis in​ 2008, assets on the Federal​ Reserve's balance sheet increased​ dramatically, from approximately​ $800 billion at the end of 2007 to​ $3 trillion in 2011. Many of the assets held are​ longer-term securities acquired through various loan programs instituted as a result of the crisis. In this​ situation, how could reverse repos​ (matched sale-purchase​ transactions) help the Fed reduce its assets held in an orderly​ fashion, while reducing potential inflationary problems in the​ future? A. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to further increase its balance​ sheet, thus increasing the money supply and lowering​ short-term interest rates. B. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance​ sheet, thus decreasing the money supply and raising​ short-term interest rates. C. Reverse repos serve as dynamic open market operations that are intended to permanently reduce the Federal​ Reserve's balance​ sheet, thus limiting fluctuations in the money supply. D. In this​ situation, the Fed should engage in repurchase agreements​ (a repo) rather than reverse​ repos, as this would further expand reserves and the monetary base.

B

If borrowers with the most risky investment projects are more likely to seek bank loans as compared to those borrowers with the safest investment​ projects, banks are said to face the problem​ of: A. adverse credit risk B. adverse selection C. risk satiation D. moral hazard

B

If the Federal Reserve has a specific mandate from Congress to achieve​ "maximum employment and​ low, stable​ prices," then how does the Fed have goal​ independence? A. The Fed can choose any method it wants in order to achieve the assigned goal. B. The Fed is free to interpret exactly what these objectives mean. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.

B

If you are a banker and expect interest rates to rise in the​ future, would you want to make​ short-term or​ long-term loans? A. You would want to make​ short-term loans since there is no guarantee that the interest rate will rise as expected. B. You would want to make​ short-term loans so you can reinvest the funds at higher interest rates after their maturity. C. You would want to make​ long-term loans to secure the higher interest rate for an extended period of time. D. Both​ short-term and​ long-term loans will be profitable with an expected interest rate increase.

B

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________. A. ​Treasury; carrying out open market exchanges of government securities B. central​ bank; the conduct of monetary policy C. financial​ comptroller; regulatory oversight of government reserves D. national​ bank; ensuring money demand equals money supply

B

The president of the United States can exert influence over the Federal Reserve in all of the following ways except​: A. appointing a new chairman to the Board of Governors. B. reducing the​ Fed's net earnings. C. appointing new members to the Board of Governors. D. influencing congressional decisions that might reduce the independence of the Fed.

B

Under​ 100% reserve​ banking, the money multiplier will​ be: A. 0 B. 1 C. 10 D. 100 E. infinite

B

Which of the following is not part of the checks and balances of the Federal Reserve System​? A. The ability of the twelve regional banks to affect discount policy. B. The requirement that all depository institutions keep deposits at the Fed. C. The provision for three types of directors to district banks​ (A, B, and​ C) that would represent different groups​ (professional bankers, business​ people, and the​ public). D. The​ Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.

B

Why is paying interest on reserves an important tool for the Federal Reserve to manage​ crises? A. It allows for fluctuations in the federal funds​ rate, making monetary policy more flexible. B. It allows the Fed to increase its lending as much as it wants without reducing the federal funds rate. C. It allows the Fed to increase the money supply to support excessive demand for goods and services. D. It allows the Fed to increase the effective tax on​ deposits, thereby increasing economic efficiency.

B

​"Bank managers should always seek the highest return possible on their​ assets." Is this statement​ true, false, or​ uncertain? A. True. Seeking the highest return possible will always prevent a bank failure. B. False. A bank must also consider an​ asset's risk and liquidity when deciding which assets to hold. C. True. The highest return possible on assets will guarantee the highest income for the bank. D. Uncertain. This statement is true only if the bank has more​ rate-sensitive liabilities than assets.

B

​"The federal funds rate can sometimes be above the discount​ rate." Is this statement​ true, false, or​ uncertain? A. False. Once the federal funds rate reaches the discount​ rate, banks borrow directly from the​ Fed, preventing the federal funds rate from a further rise. B. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.

B

Classify the following transaction as affecting either​ assets, a​ liabilities, or neither for each of the​ "players" in the money supply process—the Federal​ Reserve, banks, and depositors. The Fed provides an emergency loan to a bank for $1,000,000. A. Assets and liabilities of the banking system as a whole are unaffected, however, individual bank balance sheets will change. B. Depositors: Assets rise and are offset by a fall in assets due to lower checking account balances. Banks: Reserve assets decrease and checkable deposit liabilities decrease. C. Banks: Assets and liabilities increase. Fed: Assets and liabilities increase. D. Depositors: Assets rise and liabilities rise. Banks: Assets rise comma but this is offset by a decrease in reserve assets.

C

If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund​ account, what happens to​ M1? Why? A. M1 increases due to a shift from one component of the money supply​ (chequable deposits) with less multiple expansion to another​ (money market mutual​ funds) with more B. M1 increases because the funds that go to the money market mutual fund are first deposited into the mutual​ fund's bank account C. M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual​ fund's bank account D. M1 decreases due to a shift from one component of the money supply​ (chequable deposits) with less multiple expansion to another​ (money market mutual​ funds) with more

C

If float decreases below its normal​ level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base rather than an outright purchase of​ bonds? A. Changes in float tend to be longer term. B. The Fed only uses repurchase agreements. C. Changes in float tend to be temporary. D. None of the above are correct.

C

The ability of a central bank to set monetary policy instruments is​ ___________, while the ability of a central bank to set goals of monetary policy is​ _______. A. policy​ independence; target independence B. goal​ independence; target independence C. instrument​ independence; goal independence D. target​ independence; policy independence

C

The federal funds interest rate is determined by​ the: A. equilibrium of supply and demand in the bond market. B. equilibrium of supply and demand in the money market. C. equilibrium of supply and demand in the market for reserves. D. FOMC.

C

The presidents of each of the district Federal Reserve banks​ (including the New York Federal Reserve​ bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is​ appropriate? A. No. Because private banks can influence the appointment of their district Federal Reserve​ president, the benefits of eliminating this potential conflict of interest far outweigh the costs of the approval process. B. Yes. Since only five of the Federal Reserve bank presidents have a​ vote, they are not able to influence policy​ matters, thus a formal political appointment and approval process is unnecessary. C. Maybe. A formal approval process is​ lengthy, which might leave some Federal Reserve districts without​ leadership, possibly creating more problems than it solves.

C

When the Fed increases reserve​ requirements, it reduces the money supply by​ causing: A. reserves to fall. B. the monetary base to fall. C. the money multiplier to fall. D. Both A and B are correct.

C

Which of the following entities in the Federal Reserve System controls the discount rate​? A. Member commercial banks B. The FDIC C. The Board of Governors D. The Federal Advisory Council

C

Which of the following entities in the Federal Reserve System controls the discount rate​? A. The Federal Advisory Council B. Member commercial banks C. The Board of Governors D. The FDIC

C

Which of the following entities in the Federal Reserve System directs open market operations​? A. The Federal Advisory Council B. Member commercial banks C. The FOMC D. The Board of Governors

C

Which of the following functions is not performed by the twelve Federal Reserve​ Banks? A. Withdrawing damaged currency and issuing new currency. B. Clearing checks. C. Setting the reserve requirement. D. Acting as liaisons with the business community.

C

Which of the following is measured as a flow per unit of​ time? A. wealth B. money C. income D. money supply

C

Which of the following is not included in​ M2? A. savings deposits B. currency C. ​large-denomination time deposits D. ​small-denomination time deposits

C

Which of the following is not part of the checks and balances of the Federal Reserve System​? A. The provision for three types of directors to district banks​ (A, B, and​ C) that would represent different groups​ (professional bankers, business​ people, and the​ public). B. The ability of the twelve regional banks to affect discount policy. C. The requirement that all depository institutions keep deposits at the Fed. D. The​ Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.

C

Why is the Twelfth Federal Reserve district so geographically​ large, while the Second Federal Reserve district is so small by​ comparison? A. The size of the district reflects its relative importance in the Federal Reserve​ system: The smaller Second district is economically less important than the very large Twelfth district. B. The larger size of the Twelfth Federal Reserve district is the result of lobbying by bankers and business people. C. The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created. D. The size of the Second Federal Reserve district reflects its importance and special role in the Federal Reserve System.

C

Why is the composition of the​ Fed's balance sheet a potentially important aspect of monetary policy during a​ crisis? A. When the Fed provides liquidity to a particular segment of the credit​ market, it can freeze the market and hence decrease inflation. B. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. C. The Fed can influence interest rates and provide more targeted liquidity. D. A consistent composition of the​ Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future.

C

Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the​ Fed? A. ​Non-member banks can only borrow from the Fed by paying additional loan origination fees. B. Other banks are willing to lend reserves for free within the banking community. C. Borrowing from the Fed might invite greater supervisory scrutiny from the central bank. D. The Fed charges a lending rate much higher than market rates.

C

​"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount​ rate." Is this statement​ true, false, or​ uncertain? Explain your answer. A. False. The Fed can also engage in open market operations. B. True. The Fed uses only the discount rate to adjust the amount of discount loans made. C. False. The Fed can also limit the amount of discount loans that an individual bank can have. D. Uncertain. It depends on whether the discount rate is set lower than the federal funds rate target.

C

Although neither​ _____ nor the​ _____ is officially set by the Federal Open Market Committee​, decisions concerning these policy tools are effectively made by the committee. A. margin​ requirements; discount rate B. margin​ requirements; federal funds rate C. reserve​ requirements; federal funds rate D. reserve​ requirements; discount rate

D

If the bank you own has no excess reserves and a sound customer comes in asking for a​ loan, should you automatically turn the customer​ down, explaining that you​ don't have any excess reserves to lend​ out? Why or why​ not? What options are available for you to provide the funds your customer​ needs? A. Yes. Although excess reserve are not the only source of new​ lending, the cost of acquiring the excess reserves for lending are higher than the expected return on the loan. B. Yes. In response to the subprime mortgage​ meltdown, the Federal Lending Act of 2008 stipulates that excess reserves are the only source of new lending. C. No. There are only two sources of funds that can used to acquire reserves. The bank can borrow at the discount window or in the federal funds market. D. No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs.

D

If you decide to hold​ $100 less cash than usual and therefore deposit​ $100 more cash in the​ bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency​ constant? Assume the required reserve ratio is​ 10% and banks do not hold any excess reserves. A. Checkable deposits fall by​ $1,000. B. Checkable deposits fall by​ $100. C. Checkable deposits increase by​ $100. D. Checkable deposits increase by​ $1,000. E. Checkable deposits do not change.

D

In what ways can the regional Federal Reserve Banks influence the conduct of monetary​ policy? A. By having members serve on the Federal Advisory Council. B. By having five of their presidents sit on the FOMC. C. Through their administration of the discount facilities at each bank. D. All of the above are correct.

D

Increasing the independence of a central bank would​ probably: A. allow the central bank to more easily pursue monetary policies that directly oppose the​ government's fiscal policies B. hinder the coordination of monetary and fiscal policy C. reduce pressures to pursue inflationary policies D. All of the above are correct

D

Money may serve as an instrument that allows for comparison of the relative worth of various goods and services. What function of money does this​ describe? A. Store of value B. Medium of exchange C. Standard of deferred payment D. Unit of account

D

Reserves​ are: A. liabilities for the Fed. B. assets for banks. C. deposits at the Fed plus vault cash. D. All of the above are correct. E. None of the above are correct.

D

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________. A. ​Treasury; carrying out open market exchanges of government securities B. national​ bank; ensuring money demand equals money supply C. financial​ comptroller; regulatory oversight of government reserves D. central​ bank; the conduct of monetary policy

D

The monetary base is affected​ by: A. the Federal Reserve through open market operations. B. the Federal Reserve through its extension of discount loans. C. float and Treasury deposits at the Federal Reserve. D. All of the above are correct. E. None of the above are correct.

D

The portion of checkable deposits that banks are required to hold is​ called: A. currency outstanding. B. vault cash. C. excess reserves. D. required reserves.

D

The primary reason for the creation of the Federal Reserve System ​was: A. to stabilize​ short-term interest rates. B. to create a single central bank similar to the Bank of England. C. to eliminate​ state-chartered banks. D. to reduce or eliminate future bank panics.

D

The ratio of the money supply to the monetary base is​ called: A. ​high-powered money B. the required reserve ratio C. the currency ratio D. the money multiplier

D

What is the main advantage of an unconditional policy​ commitment? A. It represents a tacit commitment by the central bank, which determines the policy's stability and effectiveness. B. It does not really have any advantages over a conditional policy commitment. C. Such a commitment is expected to be abandoned and so it will have a large effect on long-term interest rates. D. It provides a significant amount of transparency and certainty for markets and households.

D

Which of the following entities in the Federal Reserve System directs open market operations? A. Member commercial banks B. The Federal Advisory Council C. The Board of Governors D. The FOMC

D

Which of the following entities in the Federal Reserve System sets reserve​ requirements? A. Member commercial banks B. The Federal Advisory Council C. The FDIC D. The Board of Governors

D

Which of the following is a strategy banks could use to eliminate a capital​ shortfall? A. Payout higher dividends to shareholders B. Buyback shares of bank stock C. Purchase more securities D. Make fewer loans

D

Why is the composition of the​ Fed's balance sheet a potentially important aspect of monetary policy during a​ crisis? A. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. B. When the Fed provides liquidity to a particular segment of the credit​ market, it can freeze the market and hence decrease inflation. C. A consistent composition of the​ Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future. D. The Fed can influence interest rates and provide more targeted liquidity.

D

​Why, considering most float changes are​ temporary, do repurchase agreements fit better than outright​ purchases? A. Repurchase agreements are used more often for defensive operations. B. Repurchase agreements can be easily counteracted if the float changes again. C. Repurchase agreements are temporary in their time frame. D. All of the above are correct.

D

1. Earnings received from​ working, property​ rentals, entrepreneurship, or the ownership of financial assets. 2. A tool used to facilitate​ transactions, store​ wealth, or to be used as a yardstick to compare values. 3. What you own—the total collection of assets that serve to store value. This includes not only money but also other assets such as​ bonds, common​ stock, art,​ land, furniture,​ cars, and houses. 4. The difference between what is earned and what is spent. This adds to total wealth. 5. What you owe—the accumulation of spending over and above periodic earnings.

Debt 5 Money 2 Income 1 Savings 4 Wealth 3

By​ definition, when the Fed conducts an open market​ purchase, it​ is: A. decreasing the quantity of reserves. B. buying bonds. C. increasing the quantity of reserves. D. selling bonds. E. Both B and C are correct.

E

Why is the New York Federal Reserve always a voting member on the​ FOMC? A. It is the only Federal Reserve bank that is a member of the Bank for International Settlements​ (BIS). B. The New York Federal Reserve district contains many of the largest commercial banks in the United States. C. The New York Federal Reserve is actively involved in the bond and foreign exchange markets. D. Only A and C are correct. E. All of the above are correct.

E

​'The independence of the Fed leaves it completely unaccountable for its​ actions.' Why is this statement not​ true? A. The president can appoint a new chairman of the Board of Governors every four years B. The legislation that structures the Fed is written by Congress and is subject to change C. The Fed has to report to Congress on a semiannual basis to explain its actions D. Only A and B are correct E. All of the above are correct

E

_________ is the relative ease and speed with which an asset can be converted into cash.

Liquidity

___________ is the most liquid store of value in the economy.

Money

___________ is the total collection of pieces of property that serves to store value.

Wealth

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the​ same, M1 will __________ and M2 will ________.

decrease stay the same

If there is a sharp rise in the currency​ ratio, then people begin to hold __________ deposits relative to currency and the level of multiple deposit expansion ________. This causes the money multiplier to _________, which in turn causes the money supply to _______.

fewer decrease fall decrease

When money is used as acceptance for payment of goods and​ services, it is being used as a _________.

medium of exchange

In ancient​ Greece, what property made gold a more likely candidate for use as money than​ wine? ​Gold's property as a _____________ made it a more likely candidate for use as money when compared to wine.

store of value

When money is used to hold purchasing power for future​ use, it is being used as a _____________.

store of value