Macroeconomics Final: Chapters 12-15

Deposits on which checks can be written.

Checkable Deposits

Coins and paper money.

Currency

According to Keynesian monetary theory: A) Monetary policy is ineffective if the economy is ina liquidity trap. B) The effectiveness of monetary poliy depends on the sensitivity of interest rates to changes in the money supply. C) The effectiveness of monetary policy depends ont he sensitivity of investment spending to changes in the interest rate. D) All of the above are correct. E) Only (b) and (c) are correct.

D

Banks pay the ________ rate to borrow reserves from the Federal Reserve. Banks pay the ________ rate to borrow reserves from other banks. A) Federal Funds; Prime. B) Federal Funds; Discount. C) Discount; Prime. D) Discount; Federal Funds.

D

Ceteris paribus, if bond prices rise, then: A) The Federal Reserve must be pursing contractionary monetary policy. B) There is no effect on bond yields (interest rates). C) Bond yields (interest rates) will increase as well. D) Bond yields (interest rates) will fall.

D

If Sue Jones deposits $1,000 of previously circulating currency into her checking account and the required reserve ratio is 10%, the money supply: A) Increases by $900. B) Increases by $1,000. C) Does not change immediately, but can potentially increase by as much as $10,000. D) Does not change immediately, but can potentially increase by as much as $9,000.

D

If the Fed sells government bonds in the open market, ceteris paribus: A) Money demand will shift to the right, causing interest rates to rise. B) Money demand will shift to the left, causing interest rates to fall. C) Money supply will shift to the right, causing interest rates to rise. D) Money supply will shift to the left, causing interest rates to fall.

D

If the Fed's goal is to decrease the growth rate of the money supply, it would most likely decide to: A) Lower the required reserve ratio. B) Lower the federal funds rate target. C) Lower the discount rate. D) Sell government bonds in the open market.

D

If the banking system holds $50 billion in total reserves and the required reserve ratio is 10%, then the maximum amount of checkable deposits the system can legally support is: A) $10 billion. B) $50 billion. C) $250 billion. D) $500 billion.

D

In March 2014 the chairman of the Federal Reserve Board of Governors was: A) Alan Greenspan. B) Hillary Clinton. C) Ben Bernanke. D) Janet Yellen.

D

In the U.S. banking system, depository institutions (banks) may hold required reserves: A) Only as vault cash. B) Only on deposit at a Federal Reserve Bank. C) As government bonds so they can be easily liquidated. D) As either vault cash or on deposit at a Federal Reserve Bank.

D

The Federal Reserve System consists of _____ Federal Reserve Districts: A) 50 B) 24 C) 14 D) 12

D

The investment demand function is assumed to be: A) Downward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower. B) Upward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower. C) Upward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower. D) Downward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower.

D

The liquidity trap is: A) The vertical portion of the money demand curve. B) The horizontal portion of the investment demand curve. C) The vertical portion of the investment demand curve. D) The horizontal portion of the money demand curve.

D

The nominal rate of interest is equal to the expected or desired real rate of interest: A) Divided by the expected inflation rate. B) Multiplied by the expected inflation rate. C) Minus the expected inflation rate. D) Plus the expected inflation rate.

D

Which of the following best describes the Keynesian perspective on how contractionary monetary policy affects the economy? A) Higher interest rates, higher investment and consumption expenditures, and a higher price level. B) Lower interest rates, lower investment and consumption expenditures, and a lower price level. C) Lower interest rates, higher investment and consumption expenditures, and a higher price level. D) Higher interest rates, lower investment and consumption expenditures, and a lower price level.

D

Paper money issued by the Federal Reserve.

Federal Reserve Notes

The central bank of the United States.

Federal Reserve System

A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.

Fractional Reserve Banking

A percentage of each dollar deposited that must be held in reserve form (specifically, as bank deposits at the Fed or vault cash).

Required Reserve Ratio

The minimum dollar amount of reserves that a bank must hold against its checkable deposits, as mandated by the Fed.

Required Reserves

The Fed rule that specifies the amount of reserves a bank must hold to back up deposits.

Reserve Requirement

The sum of bank deposits at the Fed and vault cash.

Reserves

An interest-earning account at a commercial bank or thrift institution. Normally, checks cannot be written on these, and the funds in it can be withdrawn at any time without a penalty payment.

Savings Deposit

The ability of an item to hold value over time; a function of money.

Store of Value

What is the formula to find Total Reserves?

TR = RR+XR

A common measure in which relative values are expressed; a function of money.

Unit of Account

What is the formula to find the change in the spending multiplier?

change in the spending multiplier = 1/rr(change in XR)

All of the following are functions of the Federal Reserve District Banks except: A) Accepting deposits from individuals. B) Clearing checks. C) Providing currency to banks. D) Making loans to banks.

A

If investment spending is not sensitive to changes in interest rates, then: A) Expansionary moneary policy may not lead to an increase in aggregate demand. B) Contractionary monetary policy will be more effective than contractionary fiscal policy for closing a recessionary gap. C) The investment demand function will be a horizontal line. D) The Fed will increase interest rates so that savers will earn higher rates of interest.

A

If the Fed increases the money supply but the economy is in a liquidity trap, then: A) There will be no change in interest rates or aggregate expenditures. B) Money demand will shift and cancel out the change in the money supply. C) Interest rates will fall and aggregate expenditures will rise. D) Interest rates will rise and aggregate expenditures will fall.

A

If the nominal interest rate was 8 percent, expected inflation was 2 percent, and actual inflation was 4 percent, then: A) Lenders expected to earn a 6 percent real rate of interest, but they actually earned a 4 percent real rate of interest. B) Lenders expected to earn a 4 percent real rate of interest, but they actually earned a 2 percent real rate of interest. C) Lenders earned a 6 percent real rate of interest, as expected. D) Lenders earned a 4 percent real rate of interest, as expected.

A

If the nominal rate of interest is 7.5 percent and the expected real rate of interest is 4.5 percent, then the expected inflation rate is equal to: A) 3 percent. B) 4.5 percent. C) 7.5 percent. D) 12 percent.

A

Monetarists argue that continual increases in the growth rate of the money supply that are greater than the growth rate of real GDP will: A) Increase the price level in the long run. B) Increase real GDP in the short run and in the long run. C) Increase real GDP without affecting the price level in the long run. D) Decrease real GDP in the short run but increase real GDP in the long run.

A

Suppose the Board of Governors has determined that continued increases in consumption and investment spending are likely to be inflationary. To control inflation, the Fed would most likely pursue polices that promote: A) Higher interest rates and a contraction of bank lending activity. B) Higher interest rates and an expansion of bank lending activity. C) Lower interest rates and a contraction of bank lending activity. D) Lower interest rates and an expansion of bank lending activity.

A

Suppose the Fed desires to decrease the money supply. This would likely involve: A) An announcement that the targeted federal funds rate has been raised. B) A loosening of credit conditions due to a lower required reserve ratio C) An announcement that interest rates in the open market are likely to fall. D) The purchase of government bonds by the Fed.

A

The Federal Open Market Committee (FOMC) includes: A) 7 Federal Reserve Governors plus 5 Federal Reserve Bank Presidents. B) 5 Federal Reserve Governors plus 7 Federal Reserve Bank Presidents. C) One banker from each Congressional district. D) One banker from eah of the 10 Federal Reserve Districts.

A

The Monetarists argue that one of the keys to economic stability is: A) Stable money growth. B) Continual adjustment of nomial interest rates to keep the real inteerst rate equal to zero. C) Requiring the Federal Reserve to use the equation of exchange to determine the appropriate required reserve ratio. D) Using discretionary fiscal policy to fine-tune the economy.

A

The equation of exchange can be expressed algebraically as: A) MV = PQ. B) MQ = PV. C) M/V = P/Q. D) M/V = PQ.

A

The notion that the Fed should adhere to a policy of steady and predictable expansion of the money supply represents: A) The monetary rule put forth by Monetarists. B) The fiscal rule put forth by Monetarists. C) The monetary rule put forth by Keynesians. D) The fiscal rule put forth by Keynesians.

A

When dispositors move funds from their checking accounts into their saving accounts: A) M1 decreases, M2 stays the same, and the system becomes less liquid. B) M1 decreases, M2 increases, and the system becomes less liquid. C) M2 increases, M1 increases, and the system becomes more liquid. D) M2 stays the same, M1 increases, and the system becomes more liquid.

A

Which of the following would likely cause the money supply to increase? A) An open market bond purchase by the Fed. B) An increase in the federal funds rate target. C) An increase in the required resereve ratio. D)A decision on the part of the public to increase their holdings of cash by removing money from checkable deposits.

A

Total checkable deposits in the banking systen will equal total bank reserves times the simple deposit multiplier as long as: A) The public holds at least part of all newly-created money in the form of cash. B) There are no currency leakages and each bank holds zero excess reserves. C) There are no currency leakages and each bank holds positive excess reserves. D) Banks are not profit-maximizers.

B

When it was first created by Congress in 1913, the primary role of the Federal Reserve System was to: A) Make loans to small businesses and farmers in the agricultural sector of the economy. B) Act as lender of last resort to the banking community. C) Regulate business practices by granting loans only to those businesses that met federal competitive guidelines. D) Provide a safe bank for the government to store the tax revenue it collected as a result of the establishment of a permanent federal income tax.

B

When the Fed buys bonds in the open market, ceteris paribus: A) Nothing happens to the monetary base, bank loans, or the money supply. B) The monetary base, bank loans, and the money supply increase. C) The monetary base and bank loans increase, and the money supply decreases. D) Bank loans are not affected, but the monetary base and the money supply increase.

B

Exchanging goods and services for other goods and services without the use of money.

Barter

What is the formula to find Required Reserves?

RR = DD(rr)

Any reserves held beyond the required amount; the difference between (total) reserves and required reserves.

Excess Reserves

The required reserve ratio is _____% if banks are required to hold $125 billion in reserves to support $1,000 billion in deposits.

12.5

The required reserve ratio is _____% if banks are required to hold $60 billion in reserves to support $440 billion in deposits.

15

A bank with $1,500,000 in deposits has required reserves of $________ if the required reserve ratio is 10%.

150,000

If the required reserve ratio is 25% and Bank B has $150,000 in checkable deposits, then Bank B's required reserves are equal to $_____.

37.5

If the required reserve ratio is 10% and Bank C is holding $400,000 in reserves, then Bank C's checkable deposits are $________ if Bank C has excess reserves currently equal to zero.

4 million

If the bank in number 1 has total reserves of $200,000, then the bank has excess reserves of $_____.

50

Checkable deposits are equal to $75 with $0 in excess reserves and a 20% reserve ratio. If the required reserve ratio decreases to 10%, excess reserves would become $_____.

7.5

If Bank A is holding $15 million in reserves, then Bank A has chackable deposits equal to $_____, if excess reserves are currently equal to zero and the required reserve ratio is 20%.

75

Required reserves are $________ when total reserves are $800,000, the required reserve ratio is 20%, and the total checkable deposits are $4,000,000.

800,000

According to Monetarists, sustainable and long-yerm economic growth is the result of: A) Expansionary fiscal and monetary policies. B) Improvements in resource productivity and technology. C) Contractionary fiscal and monetary policies. D) Only policies that are designed to reduce the economy's rate of unemployment.

B

According to Monetarists, the most important determinant of inflation in U.S. history has been: A) Decisions by Congress to raise income tax rates. B) Decisions by the Fed to allow the money supply to grow too quickly. C) Supply shocks such as OPEC activity leading to higher energy prices. D) Attempts by labor unions to raise wages.

B

Ceteris paribus, a decrease in the required reserve ratio will: A) Nullify the value of the simple deposit multiplier. B) Increase the value of the simple deposit multiplier. C) Decrease tbe value of the simple deposit multiplier. D) Have no impact on the value of the simple deposit multiplier.

B

If the nominal rate of interest s 6 percent and the inflation rate is 2.5 percent, then the actual real rate of interest is equal to: A) 2.5 percent. B) 3.5 percent. C) 6 percent. D) 8.5 percent.

B

If the required reserve ratio is 10%, then: A) Banks must hold a maximum of 10% of deposits in the for of vault cash or in deposits at Federal Reserve Banks. B) Banks must hold a minimum of 10% of deposits in the form of vault cash or in deposits at Federal Reserve Banks. C) Banks are required to reserve 10% of deposits in order to make low-interest loans. D) Banks are required to reserve 10% of outstanding stock for sale to the public.

B

In the U.S. banking system, banks are required to hold: A) Enough cash to back every dollar of deposits. B) A fraction of total deposits on reserve. C) A multiple of total deposits on reserve. D) Whatever amount of cash they feel is prudent.

B

Money is more efficient than barter for conducting transactions because: A) Using money requires satisfying a double coincidence of wants, which increases transacion times. B) Using money does not require statisfying a double coincidence of wants, which reduces transaction time. C) Most money is made of paper that is difficult to counterfeit. D) Barter does not use any specific material so it cannot be counterfeited.

B

Since the U.S. government has decreed that U.S. currency is legal tender: A) It is illegal for people to make trades with anything else. B) People are more likely to accept the dollar as a medium of exchange. C) The government must hold enough gold to redeem all curency. D) All of the above are correct.

B

Suppose the money market is initally in equilibrium. If the Fed lowers the discount rate and buys bonds on the open market, then, ceteris paribus: A) The money supply will increase and the interest rate will rise. B) The money supply will increase and the interest rate will fall. C) The money supply will decrease and the interest rate will rise. D) The money supply will decrease and the interest rate will fall.

B

The Federal Reserve Board of Governors consists of: A) 7 members elected by Congress to lifetime terms. B) 7 members appointed by the U.S. President to 14-year terms. C) 12 members appointed by the U.S. President to 14-year terms. D) 12 members appointed by the Senate to lifetime terms.

B

The Keynesian view argues that: A) Investment and consumer spending vary directly with the interest rate, so raising the interest rate is likely to lead to an increase in business and cinsumer borrowing and spending. B) Investment spending and some consumer spending depend on the current interest rate, which means a decrease in the interest rate may lead to an increase in aggregate demand. C) Investment and consumer spending depend on disposable income, which means businesses and consumers do not alter their borrowing and spending in response to changes in the interest rate. D) Investment spending is likely to increase in the current period if businesses develop pessimisti expectations regarding future economic conditions.

B

The discount rate is the rate of interest that: A) Depositors earn on Eurodollars. B) A bank pays to the Fed for an overnight loan of reserves. C) One bank pays another for an overnight loan of reserves. D) The best corportate customers pay on short-term business loans.

B

The investment demand function would most likely shift to the right as a result of: A) More pessimistic business expectations. B) More optimistic business expectations. C) An increase in interest rates. D) A decrease in interest rates.

B

The most important and most frequently used tool of the Fed for controlling the money supply is: A) The discount rate. B) Open market operations. C) The prime rate. D) The required reserve ratio.

B

The short-run impact of the Fed pursuing a contractionary monetary policy is: A) An increase in interest rates and an increase in spending. B) An increase in interest rates and a decrease in spending. C) A decrease in interest rates and an increase in spending. D) A decrease in interest rates and a decrease in spending.

B

Ceteris paribus, a decrease in money demand would cause: A) An increase in the interest rate and a decrease in investment spending. B) An increase in the interest rate and an increase in investment spending. C) A decrease in the interest rate and an increase in investment spending. D) A decrease in the interest rate and a decrease in investment spending.

C

If a bond with a face value of $5,000 and coupon rate of 6% sells for $4,000, the current yield on the bond: A) Is 4.8%. B) Is 6%. C) Is 7.5%. D) Cannot be calculated from the information given.

C

If interest rates rise, ceteris paribus: A) The demand for money will shift to the right. B) The demand for money will shift to the left. C) People will want to hold less money and more interest-earning assests, like bonds. D) People will want to hold more money and less interest-earning assets, like bonds.

C

If the Fed announces a lower federal funds rate target, this most likely means that the Fed will act to: A) Decrease bank reserves, which will likely increase borrowing and spending. B) Decrease bank reserves, which will likely reduce borrowing and spending. C) Increase bank reserves, which will likely increase borrowing and spending. D) Increase bank reserves, which will likely reduce borrowing and spending.

C

In a fractional reserve banking system, money is created when: A) Banks accept cash deposits. B) The Treasury Department prints new coins. C) Banks make new loans. D) The U.S. Mint issues new paper money.

C

M1 is the most liquid measure of the money supply because its components: A) Cannot be used to purchase goods and services directly. B) Retain their real value over time and serve as a hedge against inflation. C) May be used to purchase goods and services directly. D) Do not retain their real value over time and do not serve as a hedge against inflation.

C

Money is best defined as: A) Anything you can trade in exchange for other goods and services. B) A debt incurred when payment is deffered when making a purchase on credit. C) An asset that is generally accepted as a means of payment for goods and services. D) As asset that serves as the best possible store of value over time.

C

The "liquidity" of an asset refers to: A) How well the asset serves as a store of value. B) The rate of return earned by the holder of the asset. C) The ease with which the asset may be converted into a medium of exchange without loss of value. D) How well the asset serves as a hedge against inflation.

C

The Federal Reserve controls the creation of money and the money supply by: A) Raising and lowering the prime rate. B) Setting the interest rate for new bank loans to the public. C) Influening the amount of reserves in the banking system. D) Altering the required reserve ratio in order to change interest rates.

C

The Federal Reserve uses open market operations to control the money supply when it: A) Issues government bonds to finance the federal government's deficit. B) Purchases government bonds to decrease the money supply. C) Purchases government bonds to increase the money supply. D) Sells government bonds to increase the money supply.

C

The Federal Reserve: A) Determines U.S. fiscal policy. B) Cannot legally provide loans to banks. C) Is responsible for monetary policy in the United States. D) Is responsible for tax policy in the United States.

C

The federal funds rate is the rate of interest that: A) Depositors earns on Eurodollars. B) A bank pays to the Fed for an overnight loan of reserves. C) One bank pays another for an overnight loan of reserves. D) The best corporate customers pay on short-term business loans.

C

The monetary tool of the Fed that has been used least often in recent years is: A) Changing the discount rate. B) Changing the federal funds rate target. C) Changing the required reserve ratio. D) Buying or selling government bonds in the open market.

C

The primary responsibility of the Federal Reserve System is to: A) Make loans to businesses and consumers. B) Provide currency to banks and automated teller machines (ATMs). C) Control the nation's money supply and add stability to the financial system. D) Issue government bonds to finance the government budget deficit.

C

The short-run impact of the Fed pursuing an expansionary monetary policy is: A) An increase in interest rates and an increase in spending. B) An increase in interest rates and a decrease in spending. C) A decrease in interest rates and an increase in spending. D) A decrease in interest rates and a decrease in spending.

C

The three main functions of money are: A) Unit of exchange, method of saving, and medium of acounting. B) Protection against inflation, store of value, and medium of exchange. C) Store of value, unit of account, and medium of exchange. D) Unit of account, protection against inflation, and unit of exchange.

C

Which of the following best describes the Keynesian perspective on how expansionary monetary policy affects the economy? A) Higher interest rates, higher investment and consumption expenditures, and higher real GDP. B) Lower interest rates, lower investment and consumption expenditures, and lower real GDP. C) Lower interest rates, higher investment and consumption expenditures, and higher real GDP D) Higher interest rates, lower investment and consumption expenditures, and lower real GDP.

C

You are using money as a unit of account when you: A) Purchase an ice cream cone. B) Save for a vacation. C) Tell a friend how much you paid for your new car. D) Buy something on sale and get good value for your money.

C

Borrowers and lenders come together in a market setting, such as in the bond market.

Direct Finance

In a barter economy, a requirment, which must be met before a trade can be made. It specifies that a trader must find another trader who at the same time is willing to trade what the first trader wantrs and wants what the first trader has.

Double Coincidence of Wants

Funds are loans and borrowed through a financial intermediary.

Indirect Finance

Currency held outside banks plus checkable depostis plus traveler's checks.

M1

M1 plus savings deposits (including money market deposit accounts) plus small-denomination time deposits plus money market mutual funds (retail).

M2

Anything that is generally acceptable in exchange for goods and services; a function of money.

Medium of Exchange

Any good that is widely accepted for purposes of exchange and the repayment of debt.

Money

An interest-earning account at a bank or thrift institution, for which a minimum balance is usually required and most of which offer limited check-writing privileges.

Money Market Deposit Account

An interest-earning account at a mutual fund company, for which a minimum balance is usually required and most of which offer limited check-writing privileges. Only retail ones are part of M2.

Money Market Mutual Fund

An interest-earning deposit with a specified maturity date. They are subject to penalties for early withdrawal, that is, withdrawal before the maturity date. Small-denomination ones are less than $100,000.

Time Deposit