ECON CH. 15

Which of the following is NOT something that the Fed will try to predict and monitor to estimate the effect of its actions on aggregate demand? how low short-term interest rates have to go before they stimulate more investment borrowing whether the next Fed chairperson will be appointed by a Republican or Democratic president whether businesses that borrow will hold the money as a precaution against bad times whether businesses that borrow will promptly buy capital and hire labor

whether the next Fed chairperson will be appointed by a Republican or Democratic president **Appointments of chairpersons of the Fed are not typically as political as other appointments.

Suppose that banks want to maintain a reserve ratio of 1/10. If the Fed increases reserves by $5,000, by how much must the money supply increase? $500,000 $5,000 $500 $50,000

$50,000 **The money multiplier is 1/RR, or 10. So $5,000 × 10 = $50,000.

Which of the following statements is TRUE? If the Fed buys bonds in an open market operation, the Solow growth curve will shift to the right. One question the Fed must ask to estimate its impact is, "Will banks lend out all or none of the new reserves?" The responses to monetary policy take time, and the lags from action to response are not fixed but may vary. The Fed has the most influence over long-term rates, while most investment spending depends on shorter-term rates.

The responses to monetary policy take time, and the lags from action to response are not fixed but may vary. This is a correct statement.

If the Fed wants to increase aggregate demand, it should: increase marginal tax rates. buy bonds in an open market operation. sell bonds in an open market operation. decrease marginal tax rates.

buy bonds in an open market operation. ***Buying bonds in open market operations would increase the money supply, causing more borrowing and investing.

If the Fed wants to decrease interest rates, it should: issue bonds in open market operations. buy bonds in open market operations. sell bonds in open market operations. recall bonds in open market operations.

buy bonds in open market operations. **Buying bonds would cause the monetary base to increase, thereby reducing interest rates.

Moral hazard occurs when banks and other financial institutions take on: too little risk, hoping to avoid upsetting the Fed and regulators. too little risk, hoping that the Fed will supplement their low profits. too much risk, hoping that the Fed and regulators will later bail them out. too much risk, hoping to fail.

too much risk, hoping that the Fed and regulators will later bail them out. **When individuals or institutions are insured, they tend to take on too much risk.

Which of the following is NOT something that the Fed will try to predict and monitor to estimate the effect of its actions on aggregate demand? whether businesses that borrow will promptly buy capital and hire labor how low short-term interest rates have to go before they will stimulate more investment borrowing whether businesses want to borrow whether households will borrow to buy durable goods or nondurable goods

whether households will borrow to buy durable goods or nondurable goods **This will not affect the influence of the Fed's actions on aggregate demand.

If the Fed wants to increase interest rates, it should: recall bonds in open market operations. issue bonds in open market operations. buy bonds in open market operations. sell bonds in open market operations.

sell bonds in open market operations. **Selling bonds would cause the monetary base to decrease, thereby raising interest rates.

The amount of U.S. currency held by people and nonbank firms is enough for every man, woman, and child in the United States to have approximately how much currency? $5,200 $300 $9,000,000 $9,000

$5,200 $1.7 trillion ÷ 329 million = $5,200.

Which of the following statements is TRUE? There are 12 Federal Reserve Banks, each headquartered in a different region of the country. There are 5 members of the Federal Reserve Board of Governors. There are 21 members of the Federal Open Market Committee. Governors of the Federal Reserve System are appointed for 14-year terms and can be reappointed.

There are 12 Federal Reserve Banks, each headquartered in a different region of the country. This is a correct statement.

Which of the following statements is TRUE? When banks are worried that depositors might want to withdraw their cash or when loans don't seem profitable, they want a reserve ratio that is relatively high. The money multiplier is the ratio of reserves to deposits. If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $100. The reserve ratio is determined primarily by how liquid the government wants banks to be.

When banks are worried that depositors might want to withdraw their cash or when loans don't seem profitable, they want a reserve ratio that is relatively high.

If the reserve ratio is 1/10, what is the money multiplier? 10 5 100 20

10 **This is correct. For every $1 reserve increase, we expect a $10 increase in the money supply.

Which of the following includes currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits? M1 M2 M3 M4

M2 See Figure 15.1(34.1) for a depiction of M2 in 2020.

Of the following assets, which is the LEAST liquid? reserves held by banks at the Fed checkable deposits savings deposits currency

savings deposits **According to Figure 15.1(34.1), savings deposits are the least liquid of the assets listed here.

Which of the following is NOT something that the Fed will try to predict and monitor to estimate the effect of its actions on aggregate demand? how much the LRAS growth rate will change as a result whether banks will lend out all of the new reserves or only a portion how quickly increases in the monetary base translate into new bank loans whether businesses want to borrow

how much the LRAS growth rate will change as a result The LRAS growth rate is determined by capital, labor, and technology.

A bank whose short-term liabilities are greater than its short-term assets but overall whose assets are greater than its liabilities is: illiquid. insolvent. capitalized. liquid.

illiquid. If many banks become illiquid, there is a liquidity crisis.

The factor of increase in the money supply that occurs with each dollar of increase in reserves is called: the reserve ratio. the money multiplier. fractional reserve banking. an open market operation.

the money multiplier. The formula for the money multiplier is MM = 1 ÷ RR.

The ratio of reserves to deposits is called: an open market operation. fractional reserve banking. the money multiplier. the reserve ratio.

the reserve ratio. **The reserve ratio is determined primarily by how liquid banks wish to be.

The amount of U.S. currency held by people and nonbank firms is enough for every man, woman, and child in the United States to have approximately how much currency? $9,000,000 $9,000 $5,200 $300

$5,200 $1.7 trillion ÷ 329 million = $5,200.

Which of the following statements is TRUE? The money multiplier is the amount by which the money supply shrinks with each dollar increase in reserves. Banks hold reserves only to meet ordinary depositor demands for currency and payment services. The money supply will increase by less than the initial change in reserves. Banks earn profits on loans.

Banks earn profits on loans. This is the correct statement.

Which of the following statements is FALSE? When the Federal Funds rate is close to zero, it is said to be near the zero-lower bound. The U.S. Federal Reserve no longer uses interest payments on reserves to control the money supply. Quantitative tightening occurs when the Fed sells longer-term government bonds or other securities. The Fed acts as a lender of last resort.

The U.S. Federal Reserve no longer uses interest payments on reserves to control the money supply. This method is still in use.

Which of the following statements is TRUE? When banks are confident that depositors will not want to withdraw their cash or when loans seem profitable, they want a reserve ratio that is relatively high. The money multiplier tells us how much deposits expand with each dollar decrease in reserves. If depositors start visiting the ATM a lot more often, banks will want to have a lower reserve ratio. If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $10,000.

If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $10,000. **Deposits would increase by $10,000, since $1,000/$10,000 = 1/10.

What effect does a decrease in reserves have on the money supply? It increases both M1 and M2. It increases M1 but decreases M2. It decreases both M1 and M2. It decreases M1 but not M2.

It decreases both M1 and M2. **A decrease in reserves decreases the money supply through a multiplier process.

What effect does an increase in reserves have on the money supply? An increase in reserves decreases both M1 and M2. An increase in reserves increases M1 but decreases M2. An increase in reserves increases both M1 and M2. An increase in reserves increases M1 but not M2.

An increase in reserves increases both M1 and M2. **An increase in reserves increases the money supply through a multiplier process.

When the Federal Reserve lends money to banks and other financial institutions because no one else will, it is: creating a liquidity crisis. acting as a primary market participant. acting as a lender of last resort. conducting open market operations.

acting as a lender of last resort. **The Fed acts as a lender of last resort to avoid systemic risk.

Which of the following statements is FALSE? The Fed acts as a lender of last resort. Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. When the Federal Funds rate is close to zero, it is said to be near the zero-lower bound. The U.S. Federal Reserve uses interest payments on reserves to control the money supply.

Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. **This is the definition of quantitative tightening.

The Federal Reserve does all of the following activities EXCEPT: set marginal tax rates. manage the nation's check payment system. regulate banks. lend money to banks.

set marginal tax rates. **Congress sets tax rates.

What is the formula for the money multiplier? 1 ÷ RR RR × 1 1 ÷ (ΔReserves × MM) ΔReserves × MM

1 ÷ RR **The money multiplier is the amount the money supply expands with each dollar increase in reserves.

The Fed acted quickly to stop AIG from going under because of the existence of: a liquidity crisis. solvency risk. systemic risk. moral hazard.

systemic risk. **Systemic risk is the risk that the failure of one financial institution will bring down other institutions.

What does (1 ÷ RR) equal? the change in the money supply the money multiplier the reserve ratio the GDP multiplier

the money multiplier **The money multiplier is the amount the money supply expands with each dollar increase in reserves.

When banks hold only a fraction of their deposits in reserve and lend the rest, this practice is called: fractional disbursement. fractional reserve banking. deposit banking. reserve banking.

fractional reserve banking. **When you open a bank account, the teller doesn't take your money and put it into a box labeled with your name.

A solvent, illiquid bank is one whose short-term liabilities are: greater than its short-term assets, but whose overall assets are greater than its liabilities. less than its short-term assets, but whose overall assets are less than its liabilities. less than its short-term assets, but whose overall assets are greater than its liabilities. greater than its short-term assets, but whose overall assets are less than its liabilities.

greater than its short-term assets, but whose overall assets are greater than its liabilities. **When many banks become illiquid, it is called a liquidity crisis.

An insolvent bank is one whose: assets are greater than its liabilities. liabilities are greater than its assets. assets and liabilities sum to zero. assets are equal to its liabilities.

liabilities are greater than its assets. **When many banks become insolvent, it is called a solvency crisis.

Which of the following is something that the Federal Reserve does? set marginal tax rates print money to pay federal employees' salaries manage the nation's check payment system calculate labor market statistics, such as the unemployment rate

manage the nation's check payment system **The Federal Reserve makes paying by check possible.

The Federal Reserve is usually one of the _____ agencies in the U.S. government. least influential most independent most political most accountable

most independent **The Federal Reserve Board of Governors' website describes the Fed as "independent within the government."

Which of the following statements is TRUE? An illiquid asset is an asset that cannot be quickly converted into cash without a large loss in value. An insolvent bank has liabilities that are smaller than its assets. The Federal Funds rate is chosen by the Fed. A solvency crisis occurs when banks become solvent.

An illiquid asset is an asset that cannot be quickly converted into cash without a large loss in value. This is the correct statement.

Which of the following statements is TRUE? The money multiplier is the amount by which the money supply shrinks with each dollar increase in reserves. Banks hold reserves according to the law and the Federal Reserve as well as to meet ordinary depositor demands for currency and payment services. The money supply will increase by less than the initial change in reserves. Banks earn profits on deposits.

Banks hold reserves according to the law and the Federal Reserve as well as to meet ordinary depositor demands for currency and payment services.

The overnight lending rate from one major bank to another is known as the _____ rate. discount Federal Funds risk prime

Federal Funds **Since the Fed can easily change the reserves of major banks through open market operations, it can exercise especially tight control over the Federal Funds rate.

Which factor(s) help(s) to reduce the potential economic consequences of banks facing a liquidity problem? I. the existence of the FDIC II. the Fed's role as lender of last resort III. the existence of the Federal Open Market Committee II and III I, II, and III I and II I only

I and II **A liquidity crisis occurs when banks are illiquid, meaning that their short-term liabilities are greater than their short-term assets.

Which of the following statements is TRUE? People would be less likely to invest their savings in bank alternatives if the reserve ratio is 100%. If banks kept a 100% reserve ratio, the money multiplier would equal 1. The money multiplier tells us how much deposits expand with each dollar decrease in reserves. With a 100% reserve ratio, the interest rate on bank deposits would likely go up.

If banks kept a 100% reserve ratio, the money multiplier would equal 1. **The money multiplier equals deposits divided by reserves, but at a 100% reserve ratio, they are equal so the ratio equals 1.

Of the events that might occur as a part of the Fed's use of monetary policy, which would probably NOT occur if the Fed's goal was to increase aggregate demand? Investment borrowing decreases. The Fed buys bonds in an open market operation. The monetary base increases. Short-term interest rates decrease.

Investment borrowing decreases. When short-term interest rates fall, firms borrow more to make more investments.

Which of the following statements is TRUE? The Fed acts as a lender of first resort because banks always borrow from the Fed before borrowing from other banks. The Federal Funds rate is the long-term lending rate from one major bank to another. Quantitative easing occurs when the Fed buys longer-term government bonds or other securities. Open market operations occur when the Fed buys and sells corporate bonds.

Quantitative easing occurs when the Fed buys longer-term government bonds or other securities. This is the correct statement.

Which president asked the Federal Reserve chair to stimulate the economy before an election, contributing to his landslide victory? George W. Bush Richard Nixon Arthur Burns Bill Clinton

Richard Nixon **The long-run impact was that inflation remained too high for the rest of the 1970s

Of the events that might occur as a part of the Fed's use of monetary policy, which would probably NOT occur if the Fed's goal was to decrease aggregate demand? The Fed sells bonds in an open market operation. The monetary base decreases. Short-term interest rates decrease. Investment borrowing decreases.

Short-term interest rates decrease. ***When the monetary base decreases, short-term interest rates increase.

What event would occur third as a part of the Fed using monetary policy to increase aggregate demand? Investment borrowing increases. Short-term interest rates decrease. The monetary base increases. The Fed buys bonds in an open market operation.

Short-term interest rates decrease. **Buying bonds in open market operations would increase the money supply, which would then reduce short-term interest rates, causing more borrowing and investing.

Which of the following is one of the reasons that banks keep their accounts at the Federal Reserve? Some banks are required by law to hold accounts with the Federal Reserve. Interest paid by the Federal Reserve exceeds the returns from any other type of investment. All of the money that banks have ultimately belongs to the Federal Reserve anyway. It would be too inconvenient for banks to hold their own accounts.

Some banks are required by law to hold accounts with the Federal Reserve. **It is also safe and convenient for private banks to hold their money at the Federal Reserve.

Which of the following statements is TRUE? The Fed acts as a lender of first resort because banks always borrow from the Fed before borrowing from other banks. Open market operations occur when the Fed buys and sells corporate bonds. Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. The Federal Funds rate is the overnight lending rate from one major bank to another.

The Federal Funds rate is the overnight lending rate from one major bank to another. It is the overnight lending rate (very short term).

Which of the following statements is TRUE? Banks earn profits on deposits. The money supply will increase by less than the initial change in reserves. Banks hold reserves only to meet ordinary depositor demands for currency and payment services. The money multiplier is the amount by which the money supply expands with each dollar increase in reserves.

The money multiplier is the amount by which the money supply expands with each dollar increase in reserves. This is a correct statement.

ΔReserves × MM equals the: reserve ratio. GDP multiplier. money multiplier. change in the money supply.

change in the money supply. **The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.

The size of the money multiplier is: not fixed but depends on interest rates. not fixed but is set by the Federal Reserve. not fixed but depends on how much of their assets banks want to hold as reserves. equal to 2.

not fixed but depends on how much of their assets banks want to hold as reserves. **Even though the Fed controls the monetary base, the Fed may not know how much or how quickly changes in the base will change the money supply.

If the Fed buys bonds in an open market operation, the LRAS growth curve will: shift upward. not shift. shift to the right. shift to the left.

not shift. **Monetary policy affects the aggregate demand curve, not the LRAS growth curve.

Which of the following is one of the major tools of monetary policy covered in the textbook? issuing bonds to the public printing more U.S. currency the use of funds to aid banks through the Troubled Asset Relief Program (TARP) paying interest on reserves held by banks at the Fed

paying interest on reserves held by banks at the Fed **In previous times, banks received no interest payments on reserves. Not surprisingly, banks wished to minimize their reserves.

The Federal Reserve is a: quasi-private, quasi-public institution. private system of banks. branch of the federal government. single government-owned bank.

quasi-private, quasi-public institution. **The Federal Reserve Board of Governors' website describes the Fed as "independent within the government."

What does RR stand for? required reserves reserve ratio real reserves reserve requirement

reserve ratio **The reserve ratio is determined primarily by how liquid banks wish to be.

Of the following assets, which is the MOST liquid? money market mutual funds savings deposits checkable deposits reserves held by banks at the Fed

reserves held by banks at the Fed **According to Figure 15.1(34.1), currency is the most liquid asset, and reserves held by banks at the Fed are the second most liquid.

Of the following assets, which is the MOST liquid? reserves held by banks at the Fed money market mutual funds checkable deposits savings deposits

reserves held by banks at the Fed **According to Figure 15.1(34.1), currency is the most liquid asset, and reserves held by banks at the Fed are the second most liquid.

Of the following assets, which is the LEAST liquid? savings deposits checkable deposits reserves held by banks at the Fed currency

savings deposits **According to Figure 15.1(34.1), savings deposits are the least liquid of the assets listed here.

Savings deposits, money market mutual funds, and small-time deposits are like checkable deposits in that _____, but unlike checkable deposits in that _____. they may be used to pay for goods and services; to do so typically requires a little bit of extra work they are very liquid; they cannot be used to pay for goods and services they are part of M1; they are also part of M2 they require no time to reach maturity; they are very liquid

they may be used to pay for goods and services; to do so typically requires a little bit of extra work **This is why these assets are part of M2 but not M1.

What is the Fed's ultimate goal in undertaking monetary policy? to shift the LRAS growth curve to permanently increase the real growth rate to control the inflation rate to influence aggregate demand

to influence aggregate demand **To stimulate the economy, the Fed would want to take action to increase aggregate demand.

Which of the following will the Fed try to predict and monitor to estimate the effect of its actions on aggregate demand? whether households expect inflation to rise or to fall whether businesses that borrow will promptly buy capital and hire labor whether the next Fed chairperson will be appointed by a Republican or Democratic president the slope of the short-run aggregate supply curve

whether businesses that borrow will promptly buy capital and hire labor **If businesses borrow but do not use that money to buy capital or hire workers, the borrowing may not stimulate the economy much.

If the reserve ratio is 8% and the change in reserves is $15 billion, then the money multiplier is _____ and the change in the money supply is _____. 12.5; $187.5 billion 5; $40 billion 1; $5 billion 20; $200 billion

12.5; $187.5 billion **With a reserve ratio of 8%, the money multiplier is 1 ÷ 0.08 = 12.5 and the change in the money supply is thus 12.5 × $15 billion = $187.5 billion.

Which of the following statements is TRUE? The money multiplier is the amount by which the money supply shrinks with each dollar increase in reserves. The money supply will increase by more than the initial change in reserves. Banks hold reserves only to meet ordinary depositor demands for currency and payment services. Banks earn profits on deposits.

The money supply will increase by more than the initial change in reserves. This is the correct statement.