ECON 441 - Final multiple choice (Chapter 14, 15, & 17) Dr. Currott

As of October 2012, the value of currency in circulation was about

$1.1 trillion.

A $10 million open market purchase will increase the monetary base by

$10 million.

Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?

$40,000

Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans?

$8 million

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?

$8,000

In what year did the United States go off the gold standard?

1933

If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?

20

The first signs of trouble in the subprime mortgage market came in August of:

2007.

In what year did sales of gold for investment exceed that for jewelry for the first time?

2009

What did the Federal Reserve do in response to the Great Recession?

It conducted open market purchases to drive down interest rates.

In 2012, Ben Bernanke expressed which concern about persistently high unemployment?

It would result in structural damage to the economy that would last for years.

A negative real shock causes the economy's:

SRAS and LRAS curves to shift inward.

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

What do many economists think contributed to the greater than 13% inflation rates experienced by the United States in the 1980s?

The Fed overstimulated the economy with too much money in the 1970s.

If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?

by $50,000

The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to:

AD.

Changes in the quantity of money lead to real changes in the economy. If this is the case, why would the central bank ever stop increasing the money supply?

Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive down the value of money.

Dynamic open market operations

are aimed at achieving changes in monetary policy.

As of October 2012, which of the following was true?

bank reserves > currency in circulation > deposits of foreign government and international organizations

If the Fed buys securities worth $10 million, then

bank reserves will increase by $10 million.

Rates of inflation in the hundreds or thousands of percent per year are known as

hyperinflation.

The money multiplier

is an expression that converts the monetary base to the money supply.

Most economists believe that a zero rate of unemployment

is inconsistent with a well-functioning economy.

When banks hold excess reserves, the size of the money multiplier

is less than the simple deposit multiplier would suggest.

The Fed's goal of interest rate stability

is motivated by political pressure as well as by a desire for a stable saving and investment environment.

When the Fed extends loans to depository institutions

it increases the level of reserves.

If the Fed desired to reduce the federal funds rate,

it would conduct an open market purchase, increasing reserve supply.

What is the maximum amount a bank can lend?

its excess reserves

Reserve requirements are changed

less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Interest rate fluctuations

make it difficult for households and firms to plan for the future.

Central banks can use monetary policy to

make it easier for people and businesses to borrow.

Inflation is an economic problem because it

makes prices less useful as signals for resource allocation.

Most macroeconomic policy consists of:

monetary policy

The Fed can implement open market operations

more rapidly than either changes in the discount rate or changes in reserve requirements.

A negative shock to AD will cause the growth rate of real GDP to increase in:

neither the short run nor the long run.

How many times has the Fed has changed reserve requirements since 1993?

never

High employment spurs economic growth because high employment

often leads to high rates of investment.

In managing the monetary base, the Fed most often uses

open market purchases.

How can the Fed reduce the implicit tax on banks resulting from reserve requirements?

paying interest on reserves

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

3.43.

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

3.57.

Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?

Banks loan out all of their excess reserves.

________ policy is when a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.

Contractionary monetary

Which of the following explains contractionary monetary policy in the long run?

Contractionary monetary policy shifts aggregate demand to the left, moving the economy from long-run equilibrium to a short-run equilibrium with a lower price level and a lower level of real gross domestic product (GDP). In the long run, as resource prices fall, the short-run aggregate supply curve shifts to the right, bringing the economy back to a long-run equilibrium, where no real changes to GDP have occurred.

Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009?

Excess reserves exceeded checkable deposits.

Which of the following statements is true about monetary policy and the unemployment rate?

Expansionary monetary policy can decrease the unemployment rate in the short run but has no effect on the unemployment rate in the long run.

Which of the following countries experienced hyperinflation during the 1920s?

Germany

Which of the following statements concerning seasonal credit is true?

Improvements in credit markets have reduced the need for a seasonal credit facility.

Which of the following statements is correct?

The discount rate is generally above the federal funds rate.

Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?

The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier.

How were open market operations conducted prior to 1935?

They were carried out by the district Federal Reserve banks.

Expansionary monetary policy occurs when

a central bank acts to increase the money supply in an effort to stimulate the economy.

If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show

a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

If the interest rate on a loan is higher than the expected return from an investment,

a rational firm will not take out a loan for the investment.

If the interest rate on a loan is lower than the expected return from an investment,

a rational firm will take out a loan for the investment.

Disinflation is:

a reduction in the rate of inflation.

The problem associated with too much expansionary monetary policy is:

additional inflation.

The Fed was created

after financial panics in the late 1800s and early 1900s.

Expectations

can dampen the effects of monetary policy.

In order to increase its target for the federal funds rate, the Fed would normally

conduct open market sales.

Monetary policy is a _____ means of popping a bubble, because monetary policy _____ push down the price of specific commodities.

crude; can't

The aggregate M1 consists of

currency plus checkable deposits in financial institutions.

Holding all else constant, in the short run, a decrease in the money supply can cause a(n)

decrease in real gross domestic product (GDP).

To reduce inflation in response to a negative real shock, the Federal Reserve would:

decrease the money growth rate, which would lower both the inflation rate and economic growth rate.

An open market sale

decreases the price of Treasury securities and increases their yield.

As the prices of goods and services increase, the value of money

decreases.

A decrease in the price level is called:

deflation.

Reserves equal

deposits with the Fed plus vault cash.

The primary assets of the Fed are

discount loans and government securities.

When the Fed lends to depository institutions, the loans are called

discount loans.

Most of the increase in the monetary base between 2007 and 2012 was due to increases in:

excess reserves

An active monetary policy that attempts to smooth out the business cycle would involve conducting ________ monetary policy during recessions and ________ monetary policy during expansions.

expansionary; contractionary

Which of the following is NOT considered to be a goal of monetary policy?

fair wages

All of the following were reasons that the Fed increase the required reserve ration in 1936 EXCEPT:

fears that the economy was overheating

Which of the following interest rates tends to fluctuate the most?

federal funds rate

When people believe that a central bank will stick with its policy, monetary policy is likely to have:

high credibility.

The disinflation experiment reduced inflation in the United States, but at the cost of:

high unemployment.

In the short run, if the Fed responds to a negative real shock by raising the growth rate of the money supply, inflation will be:

higher than the rate without responding to the negative shock.

The Fed responded to the 1997-2006 housing boom by:

holding easy monetary policy for too long.

Under which circumstance is the Fed most likely to carry out a defensive open market operation?

if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float

Some economists argue that the Fed should commit to keeping M^- + v^- fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

increase M^- ; do nothing

The Federal Reserve's response to the Great Recession was an attempt to

increase aggregate demand.

Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine how much checking deposits would change.

increase by $1 million

In the short run, a negative real shock will cause the inflation rate to:

increase.

Shortly after September 11, 2011, the Federal Reserve:

increased its lending to banks.

An open market purchase

increases the monetary base.

Injecting new money into the economy eventually causes

inflation

An economy in which the central bank overstimulates aggregate demand will suffer from:

inflation.

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation.

When the Fed buys bonds from financial institutions, new money moves directly

into the loanable funds market.

Because the Fed can easily provide too much or too little response to economic shocks, many economists advocate:

policy rules.

When economists and policymakers refer to the Fed's dual mandate, they are referring to:

price stability and maximum employment.

Discount loans available to health banks which can be used for any purpose are called

primary credit.

Which is NOT a tool that the Federal Reserve can use to influence AD?

printing money

By shifting aggregate demand, monetary policy can affect ________ and ________.

real gross domestic product (GDP); unemployment

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up being 2 percent, the ________ interest rate is ________ percent.

real; 1

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up being 5 percent, the ________ interest rate is ________ percent.

real; −2

The bursting of the bubble in the housing market caused homeowners to:

reduce spending.

In October 2012, the largest liability of the Fed was

reserves.

A matched sale-purchase transaction is also known as a

reverse repo.

As a result of an open market purchase, bank reserves

rise and interest rates fall.

If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

rise by $12.5 million

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as

seasonal credit.

Discount loans intended for banks that are not financially healthy are called

secondary credit.

If uncertainty causes people to increase their demand for cash at the same time that the Fed raises money supply growth, then the Fed's action will:

shift the AD curve less to the right.

Contractionary monetary policy makes the aggregate demand curve

shift to the left.

Expansionary monetary policy makes the aggregate demand curve

shift to the right.

In the federal funds market diagram, a decrease in the required reserve ratio

shifts the demand curve for reserves to the left.

In the federal funds market diagram, an open market sale by the Fed

shifts the reserve supply curve to the left.

When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the:

size of the Fed's assets

When did the Fed first begin to use open market operations as a policy tool?

the 1920s

Reserve requirements are set by

the Fed.

The FOMC states its overall objectives for interest rates in

the Policy Directive.

Monetary neutrality is

the idea that the money supply does not affect real economic variables.

The Fed has the greatest control over which of the following?

the nonborrowed monetary base

All of the following statements about secondary credit are true EXCEPT

they are temporary, short-term loans to satisfy seasonal requirements.

Since 1980, discount loans have been available

to all depository institutions.

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between:

too low a rate of growth or too high a rate of inflation.

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium,

unemployment is at its natural rate.

In the short run, some prices are inflexible. Most often, the prices that are inflexible are

wages for workers.

Suppose the government subsidizes the price of bananas, making it so low that you buy an enormous number of bananas and store them on your roof. If your roof caves in, it's

your fault.

On the books of the Fed the difference between borrowed reserves and discount loans is equal to

zero; they are the same thing.