Econ Exam 3

Put the following events in order from first to last. Increase in aggregate demand Increase in the money supply Decrease in the interest rate Increase in investment spending

1. Increase in the money supply 2. Decrease in the interest rate 3. Increase in investment spending 4. Increase in aggregate demand

Which of the following statements regarding money is true? a. Digital currency is not real money because it does not exist in physical form. b. Fiat money is backed by a specific commodity, such as gold or silver. c. Anything that someone will accept in exchange for something else is technically money. d. A good money has little or no intrinsic value so that its best use is as money.

A good money has little or no intrinsic value so that its best use is as money.

People increase the quantity of cash balances they hold when the interest rate decreases and vice-versa

Asset demand for money

Rate banks charge households for a mortgage or credit card account

Consumer rate

Federal Open Market Committee

Determine and conduct monetary policy

Rate Federal Reserve District Banks charge depository institutions for an overnight loan of reserves

Discount rate

Rate banks charge other banks for an overnight loan of reserves

Federal funds rate

Which of the following statements is not associated with the Monetarists? a. Fiscal policy is often ineffective or counterproductive for stabilizing the economy. b. The key to long-run stability in the economy is stable money growth. c. Government policy-makers are unnecessary; complete laissez-faire is the most appropriate policy approach. d. Policy rules, such as a monetary growth rule, yield better outcomes than discretionary policy.

Government policy-makers are unnecessary; complete laissez-faire is the most appropriate policy approach.

The current Chair of the Federal Reserve Board of Governors is:

Jerome Powell.

A change in the money supply changes the interest rate which changes investment spending which then changes aggregate demand

Keynesian Monetary Transmission Mechanism

National Banks

Lend to consumers and hold demand deposits of the public

Federal Reserve District Banks

Lend to depository institutions and issue currency

Horizontal portion of the money demand curve

Liquidity Trap

Which of the following best describes the Keynesian perspective of how expansionary monetary policy affects the economy?

Lower interest rates, higher investment and consumption expenditure, and higher real GDP

If people move money out of checking accounts and into saving accounts:

M1 decreases, M2 stays the same, and the system becomes less liquid.

The equation of exchange is:

MV = PQ.

Buying groceries and paying rent

Medium of exchange

Which statement regarding the Federal Reserve Board of Governors is NOT true? a. Members of the Board are appointed by the President to 14-year nonrenewable terms b. Members of the Board are elected by Congress on the same 6-year cycle as the House of Representatives c. Each member of the Board must come from a different Federal Reserve District d. One member is chosen by the President to serve a 4-year term as Chair of the Board of Governors

Members of the Board are elected by Congress on the same 6-year cycle as the House of Representatives

The Monetarist model is based on the work of:

Milton Friedman.

The main tool used by the Fed to implement monetary policy is:

Open Market Operations

The primary tool used by the Fed to manipulate the amount of reserves in the banking system is:

Open Market Operations.

Reason why investment spending may not increase even when there is a substantial decrease in the interest rate

Pessimistic business expectations

Rate banks charge their biggest and best customers

Prime rate

Which of the following is NOT a monetary policy tool under the direct control of the Fed? a. Prime rate b. Discount rate c. Open Market Operations d. Reserve requirements

Prime rate

Suppose the Federal Reserve Board of Governors has determined that tighter credit conditions and higher interest rates will help control inflation. To accomplish this goal, they will most likely do which of the following?

Sell government securities (bonds) in the open market

Board of Governors

Set the discount rate and reserve requirements

Paying $240 per month to a bank for an $8000 used car loan

Standard of deferred payment

Depositing $200 per month into an individual retirement account (IRA)

Store of value

Which of the following is not true regarding The Federal Reserve System? a. The Federal Reserve is the central bank of the United States. b. The Federal Reserve conducts monetary policy. c. The chair of the Federal Reserve is an elected official. d. The chair of the Federal Reserve is appointed by the president.

The chair of the Federal Reserve is an elected official.

Which of the following statements is NOT associated with the Monetarist school of thought? a. Inflation is always a monetary phenomenon. b. The velocity of money is not stable in the short run. c. The key to long-run economic stability is stable money growth. d. Fiscal policy may be ineffective due to crowding out.

The velocity of money is not stable in the short run.

Cash balances held to meet expected spending such as paying rent and buying groceries

Transactions demand for money

Checking the price of a room at several different hotels in the same part of the city before deciding where to stay

Unit of account

When the price of a bond is higher than the face value of the bond, the bond sells at:

a premium.

The voting members of the Federal Open Market Committee (FOMC) are:

all 7 Federal Reserve Governors plus 5 Federal Reserve Bank Presidents.

The most likely actions by the Fed when it pursues expansionary monetary policy are to:

announce a lower federal funds rate target and buy government securities.

Which of the following is NOT an expansionary monetary policy action by the Fed? a. Lowering the discount rate b. Selling bonds (securities) in the open market c. Increasing reserves in the banking system d. An open market purchase of securities

b. Selling bonds (securities) in the open market

In a fractional reserve banking system:

banks create money by creating checkable deposits through the lending process.

When the Federal Reserve buys bonds in the open market:

bonds prices increase, bonds yields decrease, and interest rates on other competing assets decrease.

Contractionary monetary policy: a. entails the Fed increasing reserves in the banking system. b. is also referred to as tight money policy. c. entails the Fed decreasing the reserve ratios for the banking system. d. Both b. and c. are true.

c. is also referred to as tight money policy.

All of the following statements are true EXCEPT: a. the monetary base consists of currency and reserves. b. the most important tool of the Fed for changing reserves and the monetary base is Open Market Operations. c. the Fed expands reserves and the monetary base by requiring that banks sell bonds to the Fed. d. U.S. Savings Bonds are not marketable securities.

c. the Fed expands reserves and the monetary base by requiring that banks sell bonds to the Fed.

In the U.S., bank reserves:

can be held as cash in a bank's vault or as deposits at a Federal Reserve District Bank.

Open market operations (OMO) are the main tool used by the Fed for conducting monetary policy because open market operations:

can be implemented quickly and are easily reversed.

If the Federal Reserve is concerned that the economy may be heading into an inflationary period, it will most likely conduct:

contractionary monetary policy and interest rates will be kept higher by the Fed.

The Fed reducing bank reserves and loanable funds is_______________ monetary policy, also called tight money policy; this type of policy is likely to be implemented when there is a(n)______________________gap.

contractionary, inflationary

The Federal Reserve:

controls the flow of money and credit in the economy through its conduct of monetary policy.

The liquidity trap: a. is the horizontal portion of the money demand curve. b. occurs when investors believe interest rates have bottomed out and hoard cash. c. implies that an increase in the money supply has no impact on interest rates. d. All of the above are true regarding the liquidity trap.

d. All of the above are true regarding the liquidity trap.

Expansionary monetary policy: a. entails the Fed increasing reserves in the banking system. b. is also referred to as easy money policy. c. entails the Fed decreasing reserves in the banking system. d. Both A. and B. are true.

d. Both A. and B. are true.

An increase in the money supply, ceteris paribus, leads to a(n):

decrease in the interest rate and an increase the quantity demanded of money.

Ceteris paribus, an increase in the reserve ratio __________ the deposit multiplier and _________ the banking system's ability to create deposits.

decreases; decreases

The rate banks pay for an overnight loan of reserves from a Federal Reserve bank is called the:

discount rate.

Banks pay the __________ rate when they borrow reserves from the Fed. Banks pay the __________ rate when they borrow reserves from other banks.

discount; federal funds

According to the Monetarists, historically inflation is a result of:

excessive money growth.

Increasing the money supply and the availability of credit is_______________ monetary policy, also called easy money policy; this type of policy is likely to be implemented when there is a(n)________ gap.

expansionary, recessionary

Banks charge other banks the ____________ for an overnight loan of reserves.

federal funds rate

Fiat money:

has been designated by government as legal tender.

A commodity money:

has value in a use other than as a medium of exchange.

In a fractional reserve banking system, banks:

hold less than 100% of deposits as reserves.

The money demand function:

illustrates the inverse relationship between the quantity of money balances demanded and the interest rate.

Ceteris paribus, a decrease in the ratio of reserves to deposits held by banks will:

increase the value of the simple deposit multiplier.

The Fed is likely to respond to a negative aggregate demand shock by:

increasing bank reserves and lowering interest rates.

The Federal Reserve controls the creation of money and the money supply by:

influencing the amount of reserves and lending capacity in the banking system.

All of the following are functions of the Federal Reserve District Banks except: a. holding reserves for banks. b. clearing checks. c. making loans to banks. d. insuring household deposits.

insuring household deposits.

Bond prices and bond yields are:

inversely related.

Digital currency:

is money in electronic form.

Something is considered to be money if:

it is generally accepted in payment for goods and services and settlement of debts.

For an item to be considered money:

it must be generally accepted in payment for goods and services and settlement of debts.

In a fractional reserve banking system, banks create money by:

making loans from their excess reserves.

Using money to buy goods and services represents money functioning as a:

medium of exchange.

Influencing the flow of money and credit conditions in the economy is:

monetary policy which is conducted by the Federal Reserve.

If an item is generally accepted in payment for goods and services and settlement of debts, then it is:

money because it is a medium of exchange.

The use of money is more efficient than barter for conducting exchanges because:

money does not require satisfying a double coincidence of wants which reduces transactions times.

Even though money loses purchasing power during inflationary periods, people still choose to hold part of their wealth in the form of money because:

money is an asset with the characteristic of liquidity.

Ceteris paribus, if the Fed sells bonds in the open market:

money supply will shift to the left, causing interest rates to rise.

If the Fed sells government bonds in the open market, the:

money supply will shift to the left, causing interest rates to rise.

Bond prices and the market rate of interest (yields) are:

negatively (inversely) related.

All of the following are true with respect to money except: a. money is an asset with the characteristic of liquidity. b. the value of a given amount of money decreases during inflationary periods. c. money in the U.S. is fiat money. d. only physical items with an intrinsic value can act as both a medium of exchange and a store of value.

only physical items with an intrinsic value can act as both a medium of exchange and a store of value.

The primary way the Fed alters the amount of reserves and lending capacity in the banking system is:

open market operations.

Banks charge their biggest and best (most favored) customers the:

prime rate.

Ceteris paribus, as the price of a bond falls, its yield:

rises.

To conduct contractionary monetary policy, the Fed is most likely to:

sell bonds (securities) in the open market.

All of the following are expansionary monetary tools of the Fed except: a. buying bonds on the open market. b. decreasing the discount rate. c. lowering the federal funds rate target. d. selling bonds to banks.

selling bonds to banks.

Functions of the Federal System include all of the following except:

setting tax rates to promote financial stability for consumers.

According to many non-Keynesian Schools of Thought, macroeconomic policy:

should not be implemented and continually changed at the discretion of current

Defining the payback terms of a loan in terms of money represents money functioning as a:

standard of deferred payment.

Depositing money in a savings account for future use represents money functioning as a:

store of value (store of wealth).

Keeping money in a savings account as a safety measure against possible future income declines or job loss represents money functioning as a:

store of value (store of wealth).

The Federal Reserve entity that is directly responsible for the discount rate and reserve requirements is:

the Board of Governors.

An increase in the federal funds rate target is often viewed by financial markets as a signal that:

the Fed is pursuing a contractionary monetary policy.

The liquidity of an asset refers to:

the ease with which the asset can be converted to a medium of exchange without loss of value.

The notion that the Fed should adhere to a policy of steady and predictable expansion of the money supply represents:

the monetary rule put forth by the Monetarists.

Ceteris paribus, if the Fed pursues contractionary monetary policy:

the money supply decreases and the interest rate increases.

Suppose the money market is initially in equilibrium. If the Fed lowers the discount rate and buys more bonds on the open market, then:

the money supply will increase and the interest rate will fall.

The M1 measure of money is:

the most liquid measure of the money supply because its components act as a medium of exchange.

Using the equation of exchange, if V and Q are both constant, then a 10% increase in the money supply leads to a 10% increase in:

the price level.

The voting members of the Federal Open Market Committee (FOMC) include:

the seven members of the Board of Governors, the president of the New York Federal Reserve District Bank, and four Federal Reserve District Bank presidents on a rotating basis.

if depositors move money from savings accounts into checking accounts:

the size of M1 increases, but the size of M2 stays the same, and the system becomes more liquid.

When the Fed sells bonds in the open market:

the supply of loanable funds decreases and interest rates increase.

Monetary policy refers to:

the use of money and credit controls to influence macroeconomic outcomes.

Using money prices to compare the relative values of goods and services represents money functioning as a:

unit of account.

All of the following are true with respect to the money market EXCEPT: a. the transactions demand for money is independent of the interest rate. b. the opportunity cost of holding cash balances is higher at higher rates of interest than at lower rates of interest. c. when the interest rate is above the equilibrium interest rate, people are likely to move into of cash and out of interest-bearing assets. d. the downward-sloping money demand curve represents the asset demand for money.

when the interest rate is above the equilibrium interest rate, people are likely to move into of cash and out of interest-bearing assets.