Test 4, Ch. 27, 32, 33, 34
Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by:
$125 $0 $175 $75 ??
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the non-bank public, this action has the potential to increase money supply by a maximum of:
$16 billion, but only by $14 billion if the securities are purchased directly from commercial banks $14 billion, and by $20 billion if the securities are purchased directly from commercial banks $14 billion, but by $16 billion if the securities are purchased directly from commercial banks $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks??
Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:
$200 $225 $125 $175
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP?
$50 $150 $100 $225 ??
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:
$600 million, but by $800 million if the securities are purchased directly from commercial banks
Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by:
$75
Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:
$9 billion
The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $100, what will be the interest rate yield to a new buyer of the bond?
16.7 percent fixed amount / bond price=IR (150/900)*100=16.7
The Federal Reserve System was established by the Federal Reserve Act of: 1933 1945 1955 1913
1913
Refer to the graph above. If the supply of money was $200 billion, the interest rate would be:
2 percent
Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:
5 percent
A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:
8,000
A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:
9 percent
Which of the following statements is true?
A lower interest rate raises the opportunity cost of holding money The supply of money is directly related to the interest rate Bond prices and the interest rate are inversely related The total demand for money is directly related to the interest rate ??
(Assume the required reserve ratio is 30 percent. All figures are in billions.) Assets Liabilities and net worth Reserves $ 51 Checkable Deposits $140 Securities 100 Capital Stock 130 Loans 109 Property 10 Refer to the above data. The maximum amount by which the commercial banking system can expand the supply of money by lending is: A) $30 billion B) $23.1 billion C) $27 billion D) $15 billion
A) $30 billion
The major purpose of the Federal Reserve buying government securities in open market operations is to:
Allow banks to increase their lending
Lowering the reserve ratio:
Also reduces the discount rate Increases the total reserves in the banking system Reduces the amount of excess reserves the banks keep Turns required reserves into excess reserves ??
A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:
Asset demand for money
Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: A) zero B) 10 percent C) 20 percent D) 25 percent
B) 10 percent
When a check is drawn and cleared, the A)reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction B)Bank against which the check is cleared loses reserves and deposits equal to the amount of the check C)Bank receiving the check loses reserves and deposits equal to the amount of the check D)Bank against which the check is cleared acquires reserves and deposits equal to the amount of the bank
B) Bank against which the check is cleared loses reserves and deposits equal to the amount of the check
In the U.S. economy the money supply is controlled by the: A) US Treasury B)Federal Reserve System C)Senate Committee on Banking and Finance D) Congress
B) Federal Reserve System
When economists say that money serves as a medium of exchange, they mean that it is: A) a way to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government
B) a means of payment
The transactions demand for money is most closely related to money functioning as a: A) unit of account B) medium of exchange C) store of value D) measure of value
B) medium of exchange
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to:
Buy government securities in the open market Increase the discount rate Increase the reserve ratio Sell government securities in the open market??
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
Buying government securities and lowering the discount rate
Overnight loans from one bank to another for reserve purpose entail an interest rate called the: A) prime rate B) discount rate C) Federal funds rate D) treasury bill rate
C) Federal funds rate
Commercial banks create money when they: A) accept cash deposits from the public. B) purchase government securities from the central banks C) create checkable deposits in exchange for IOUs D) raise their interest rates
C) create checkable deposits in exchange for IOUs
The twelve Federal Reserve Banks: A) are owned and operated by the U.S. Treasury. B)were created in 1776 C) hold the reserve deposits of commercial banks D)are also known as national banks
C) hold the reserve deposits of commercial banks
The asset demand for money is most closely related to money functioning as a: A) unit of account B) medium of exchange C) store of value D) measure of value
C) store of value
The equilibrium rate of interest in the money market is determined by the intersection of the: A) supply of money curve and the asset demand for money curve B)supply of money curve and the transactions demand for money curve. C)supply of money curve and the total demand for money curve D) investment demand curve and total demand for money curve.
C) supply of money curve and the total demand for money curve
In defining money as M1 economists exclude time deposits because: A) the intrinsic value of time deposits is nil. B)the purchasing power of time deposits is much less stable than that of checkable deposits and currency. C) they are not directly or immediately a medium of exchange. D) they are not recognized by the Federal government as legal tender.
C) they are not directly or immediately a medium of exchange
If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions is equal to: A. four percent of nominal GDP. B. 25 percent of nominal GDP. C. nominal GDP multiplied times 4. D. nominal GDP divided by 25.
C. nominal GDP multiplied times 4
If the Fed buys government securities from commercial banks in the open market:
Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to:
Decrease aggregate demand by increasing the interest rate from 4 to 6 percent
Other things equal, an increase in taxes on businesses will:
Decrease aggregate supply and decrease aggregate demand, and cause real GDP to fall
Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:
Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million
A decrease in the interest rate will cause a(n):
Decrease in the transactions demand for money Increase in the transactions demand for money Increase in the amount of money held as an asset Decrease in the amount of money held as an asset??
Other things equal, an appreciation of the U.S. dollar would:
Decrease net exports and decrease aggregate demand Increase the prices of imported resources and decrease aggregate supply Decrease the supply of money and decrease aggregate demand Increase productivity and increase aggregate supply ??
If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:
Decrease the excess reserves of member banks and thus decrease the money supply
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should:
Decrease the interest rate from 10 to 8 percent Decrease the interest rate from 6 to 4 percent Increase investment spending from $30 to $60 billion Decrease the interest rate from 8 to 6 percent ??
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Y on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?
Decrease the money supply from $225 to $150 billion Increase aggregate demand from AD3 to AD2 Make no change in monetary policy Increase interest rates from 4 to 8 percent ??
Which of the following is a monetary policy intended to rein in inflation?
Decrease the money supply to shift the aggregate demand curve leftward
Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:
Decreased by $50 billion
The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:
Exchange rate
Refer to the graph above which shows the supply and demand for money where Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following a decrease in the transactions demand for money?
F
Money performs its function as a store of value very well, because it protects one against the erosion of purchasing power from inflation. (T/F)
False
The M1 money supply is composed of currency, checkable deposits, and savings deposits. (T/F)
False
When you use money to purchase groceries, money is functioning as a store of value. (T/F)
False
Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:
Fed has decided that money supply needed to be reduced Maximum money-creating potential of the banking system has been increased by $7 billion Banking system now has excess reserves of $3 billion Monetary multiplier has decreased ??
Other things equal, an increase in consumer wealth will:
Increase aggregate demand
Assume that the MPC is 0.75 and that the price level is "sticky". If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to:
Increase by $32 billion
Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately:
Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP?
Increase the money supply from $150 to $225 billion Decrease the money supply from $225 to $150 billion Increase the money supply from $75 to $150 billion Make no change in the money supply ??
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate demand curve AD3. What policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?
Increase the money supply from $75 to $150 billion
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?
Increase the money supply from $75 to $150 billion
An increase in nominal GDP will:
Increase the transactions demand and the total demand for money
A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. (assume that all proceeds from this bond sale are lent out) The money supply:
Increases by $100,000.
The Federal Reserve could reduce the money supply by:
Increasing the interest on reserves
The most recently-introduced tool of monetary policy is the:
Interest on reserves
If bond prices decrease, then the:
Interest rate increase
The transactions demand for money will shift to the:-
Left when nominal GDP decreases
If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:
Less excess reserves
Which of the following Fed actions increases the excess reserves of commercial banks?
Lower the reserve ratio
Checkable deposits are included in
M1 and M2
Lowering the discount rate has the effect of:
Making it less expensive for commercial banks to borrow from central banks
The Federal Reserve alters the amount of the nation's money supply by:
Manipulating the size of excess reserves held by commercial banks
Currency in circulation is part of
NOT M1 only
The purchase and sale of government securities by the Fed is called:
Open market operations
The interest rate will fall when the:
Quantity of money supplied exceeds the quantity of money demanded
The purpose of an expansionary monetary policy is to increase:
Real GDP
A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:
Reduce inflationary pressures in the economy
Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?
Required reserve ratio Open-market operations Check collection Issuing currency ??
Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:
Rise to 6 percent
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary full-employment level of real GDP?
Sell government securities in the open market
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective?
Selling government securities and raising the reserve ratio Selling government securities and raising the discount rate Buying government securities and lowering the reserve ratio Buying government securities and raising the discount rate ??
Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to:
Sm3 and the interest rate will be 4 percent
A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:
Stimulate the economy
There is an asset demand for money primarily because of which function of money?
Store of value
Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the:
Supply of money curve is vertical
Which of the following Fed actions will increase bank lending?
The Fed buys $400 million worth of Treasury bonds from commercial banks. The Fed lowers the discount rate from 4 percent to 2 percent.
If the Fed sells government securities to the general public in the open market:
The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed
The level of GDP, ceteris paribus, will tend to increase when:
The Federal Reserve buys government securities in the open market
Changes in interest rates, ceteris paribus, cause a shift in
The aggregate demand curve, but not the investment demand curve
If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:
The demand for money increases
What policy tool of the Federal Reserve relies on bank borrowing to be effective?
The discount rate
In which case would the quantity of money demanded by the public tend to increase by the greatest amount?
The interest rate decreases and nominal GDP increases
Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:
The money supply by potentially $200 million
Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?
The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase
Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?
The purchase of government securities in the open market and an increase in government spending
After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:
The time lags of monetary policy
Which of the following best describes what occurs when monetary authorities sell government securities?
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP
The M2 money supply is larger than the M1 money supply. (T/F)
True
Which of the following institutions does not provide checkable-deposit services to the general public? commercial banks savings and loan associations credit unions U.S. Treasury
U.S. Treasury
When economists say that money serves as a unit of account, they mean that it is: a monetary unit for measuring and comparing the relative values of goods a means of payment declared as legal tender by the government a way to keep wealth in a readily spendable form for future use
a monetary unit for measuring and comparing the relative values of goods
The members of the Federal Reserve Board: serve seven-year terms are appointed by the American Economic Association are elected by votes of the 12 presidents of the Federal Reserve Banks are appointed for 14-year terms
are appointed for 14-year terms
Disequilibrium in the money market is mainly corrected via a change in:
bond prices
Money functions as a store of value if it allows you to: delay purchases until you want the goods make exchanges in a more efficient manner measure the value of goods in a reliable way increase your confidence in money
delay purchases until you want the goods
The amount of money reported as M2: is larger than the amount reported as M1 is smaller than the amount reported as M1 excludes coins and currency includes large ($100,000 or more) certificates of deposit
is larger than the amount reported as M1
Currency held within banks is part of: the M2 definition of the money supply only neither the M1 nor the M2 definition of the money supply both the M1 and M2 definitions of the money supply the M1 definition of the money supply only
neither the M1 nor the M2 definition of the money supply
The interest rate that the Fed charges banks for loans to them through the traditional channel is called:
the discount rate
