Macro Final Exam

The lending ability of commercial banks increases when the:

Fed buys securities in the open market

The purchase of government securities (bonds) from the public by the Fed will cause:

The Money Supply to Increase

What is one of the advantages of monetary policy over fiscal policy?

The quickness with which it can be used

the interest rate varies inversely with the

aggregate demand

A decrease in the reserve ratio increases the

amount of excess reserves in the banking system

a wealthy executive is holding money waiting for a good time to invest in the stock market, this action would be a good example of:

asset demand for money

Money is "created" when

bank grants a loan to a customer

open market operations change

commercial bank reserves but not the size of the monetary multiplier

if the board of governors of the federal reserve system increases the legal reserve ratio:

decrease excess reserves of member banks, and decrease the money supply

a contraction of the money supply will:

increase interest rates, and decrease aggregate demand

an increase in the money supply is likely to reduce:

interest rates, and commercial bank reserves

The asset demand for money:

varies inversely with the rate of interest

what is the formula for the monetary multiplier?

1/reserve ratio in . percent

money supply varies inversely with the

interest rate

when the legal reserve ratio is 30 percent, the money multiplier is

3.33

if the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier would now be:

5

what varies directly with the legal reserve ratio?

interest rates

the asset demand for money:

varies inversely with the rate of interest

A commercial bank has required reserves of 60 million and the reserve ratio is 20 percent. How much are the banks checkable deposit liabilities?

$300 million

An increase in the money supply usually:

Decreases the interest rate and increase aggregate demand

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right

False

The federal funds rate target is the most frequently used monetary policy tool:

False

The Federal Reserve Could Reduce the Money Supply by:

Increasing commercial bank reserves

The Federal Reserve can increase aggregate Demand by

Reducing the Discount Rate

The market is initially at equilibrium (in the graph) at a 6 percent interest rate, if the money supply increases, Sm2 will shift to:

Sm3 and the IR will be 4 percent

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves:

True

money supply varies directly with the

excess reserves

what is the formula for excess reserves?

excess= actual reserves-required reserves

Overnight loans from one bank to another for reserve purposes entail an interest rate called the

federal fund rate

monetary policy is expected to have its greatest impact on:

gross investment

if the Fed were to increase the legal reserve ratio, we would expect

higher interest rates, decrease in investment, and shrinking GDP, lower rate of inflation

It is costly to hold money because:

in doing so, one sacrifices interest income

interest paid on reserves held at the Fed:

incentivizes financial institutions to hold more reserves and reduce risky lending.

If the Fed were to reduce the required reserve ratio, we would expect:

lower interest rates, higher investment, and expanded GDP

if the Fed were to reduce the legal reserve ratio, we would expect

lower interest rates, increase in investment, expanded GDP, and higher rate of inflation

Lowering the Discount Rate has the effect of:

making it less expensive for commercial banks to borrow from central banks

lowering the discount rate has the effect of:

making it less expensive for commercial banks to borrow from central banks

an increase in the nominal GDP increases the demand for money because

more money is needed to finance a larger volume of transactions

which of the following is a tool of monetary policy

open market operations

what varies directly with interest rates?

rate of inflation

headline "fed raises discount rate for the third year in a row" the Fed is trying to:

reduce inflationary pressures in the economy

what is the formula for required reserves?

required reserves= deposits x required reserve rate

The main tools that the Fed can use to alter the money supply are the

required-reserve ration

a television report states: The Federal Reserve will lower the discount rate for the fourth time this year. the report concludes that the Federal Reserve is most likely trying to:

stimulate the economy

Assuming the FED sells 65 million in government securities to commercial banks and the reserve ratio is 25 percent then the effect will be to reduce:

the money supply by potentially 260 million

what will increase commercial bank reserves?

the purchase of government bonds in the open market by the Federal Reserve System

If severe demand-pull inflation was occurring in the economy, proper monetary policy would involve:

the sales of securities in the open market, a higher discount rate, and a higher reserve requirements

the vertical money supply curve reflects the fact that

the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes

Checkable deposits are classified as money because:

they can readily be used in purchasing goods and paying debts

The functions of money are to serve as a:

unit of account, store of value, and medium of exchange