MacroEconomics Quiz 11

A contractionary or tight monetary policy

reduces borrowing.

Which of the following Federal Reserve bank functions is related to moral hazards?

Lender of last resort

How do central bank policies affect interest rates?

When the central bank decides to increase the discount rate, then interest rates increase.

An open market operation increases the money supply when the Federal Reserve

buys bonds from banks, which increases bank reserves.

An open market purchase of US Treasury bonds by the central bank will ________ credit conditions for private firms.

ease

Lower reserves requirements, lead to a ________ in interest rates and a/an ________ in the money supply.

fall; increase

Quantitative easing can be described as a means of

improving credit conditions for private firms and encouraging them to commit to capital expansion projects.

Which of the following actions by the Fed will increase the money supply?

lowering the discount rate and the selling bonds.

Bank regulation requires that banks

maintain a minimum net worth in order to protect depositors and creditors.

One of the goals of monetary policy is

maintaining price stability.

If the public and community loses trust in banks it affects the entire U.S. financial system. In order to keep this type of financial contagion from happening, the Fed

makes as needed short-term emergency loans, by acting as the lender of last resort.

A decision by the Federal Reserve to change reserve requirements for banks is an example of:

monetary policy.

If the Fed wants to decrease the quantity of money in the economy, it can

sell bonds.

What would economic conditions potentially be like in the U.S if the Federal Reserve did not regulate fiscal policy, monitor banks and provide services for banks?

In the economy, transactions would likely be more costly and less efficient.

A critical function of the private banking system is ________?

Establishing the links between savers and borrowers.

If the central bank raises the reserve requirement on deposits

the money supply decreases and interest rates increase.

When the central bank lowers the reserve requirement on deposits

the money supply increases and interest rates decrease.

When considering which monetary policy to implement, the Central Bank needs to also be conscious of the tradeoff between

unemployment and inflation.

Why are bank runs in the United States relatively scarce since the 1930s?

Because of the guarantees that depositors will receive a portion, if no all, of their money from the FDIC deposit insurance.

Atlantic Bank is required to hold 10% of deposits as reserves. If the central bank increases the discount rate, how would Atlantic Bank respond?

By increasing its reserves.

Which of the following statements is correct?

Central Bank intervention reflects its goals for inflation, unemployment and economic growth.

Who is responsible for monitoring the money supply and the general stability and safety of the U.S. banking system?

The Federal Reserve

Which of the following aptly describes the mission of the Federal Reserve Bank?

The banking industry's private bank.

If the Federal Reserve did not regulate fiscal policy, monitor banks and provide services for banks, what would most likely be the economic conditions to transact business in the U.S.?

The economy would be less efficient and transactions most likely more costly.

Say that Fed policy requires all banks to hold 8% of deposits in reserves. If Ventura Bank does not hold any excess reserves and the Fed increases the reserve requirement to 10%, what will be the result?

The money supply in the economy decreases

Say that Fed policy requires all banks to hold 8% of deposits in reserves. If Ventura Bank does not hold any excess reserves and the Fed increases the reserve requirement to 10%, what will be the result?

The money supply in the economy decreases.

In order to ________ the money supply, government should sell bonds in open market operations.

decrease

What is the economic risk of using quantitative easing?

inflation

When a Central Bank decides to make a policy intervention it must be mindful of the trade off between

inflation and unemployment.

A midwest bank with new managers and loan officers loaned out large amounts on very risky home loans. The bank sold off some of its real estate assets, but did not have enough to cover its liabilities when the majority of the loans defaulted. The bank is now considered

insolvent.

Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank?

reserve requirement

Which of the following is excluded from the Federal Reserve Bank's crucial role?

producing profits

Since the 1930s, bank runs are not problematic in the United States because

the FDIC provides deposit insurance and guarantees that depositors will receive a portion, if no all, of their money.

After 2008, the reasoning for the Fed to undertake quantitative easing was because ________.

the demand for loanable funds remained stagnant even as the federal funds rate was at historic lows.

The Bank of Merica has been making risky mortgage loans to high risk individuals. A recession then takes place and the Bank of Merica has the potential to experience

a growing possibility of depositors creating a run on the bank.

Which of the following is considered a Federal Reserve monetary policy tool?

varying the discount rate

In the scenario where the Central Bank creates policies which increase the money supply but the aggregate demand is unchanged, is created by following what type of monetary policy?

An expansionary policy.

Which of the following scenarios would be MOST beneficial to a bank?

Kim and Micah decide to move most of their money from a checking account into a savings account.

What term is used to describe the interest rate charged by the central bank when it makes loans to commercial banks?

discount rate

After 2008, quantitative easing was distinctively different from traditional central bank intervention because it focused on

encourage long-term capital projects and ease mortgage conditions by purchasing long-term government securities.

When the interest rate in an economy decreases, it is likely the result of either a/an ________ or a/an ________.

expansionary practice; open market purchase of securities by the Fed

When the interest rate in an economy decreases, it is likely the result of either a/an ________ or a/an ________.

expansionary practice; open market purchase of securities by the Fed.

When the Central Bank acts in a way that causes the money supply to increase while aggregate demand remains unchanged, it is

following an expansionary monetary policy.

A bank is more likely to face bank runs by depositors if it

makes risky loans to investors.

A central bank that desires to reduce the quantity of money in the economy can:

raise the reserve requirement.

The proportion of deposits that banks are legally required to deposit with the central bank are called

reserve requirements.

If the Fed raises reserves requirements, then interest rates will ________ and the money supply will ________.

rise; decrease

By increasing its reserves.

setting minimum reserve requirements, ensuring bank net worth remains positive, and setting restrictions on investments.

An expansionary monetary policy increases investment and consumption spending, which

shifts the AD curve to the right and increases equilibrium GDP

Quantitative easing undertaken after 2008 was deemed to be necessary because ________.

short-term interest rates had already been driven down to zero and could not go lower