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6) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.0. D) 0.601.
A) 2.5.
12) ________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply. A) Open market operations; monetary base B) Open market operations; money multiplier C) Changes in reserve requirements; monetary base D) Changes in reserve requirements; money multiplier
A) Open market operations; monetary base
19) When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100
A) increase by $100.
18) When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increase; increases
4) When a primary dealer sells a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increase; increases
22) After Ben Bernanke became chair of the Fed in 2006, he A) increased Fed transparency. B) abandoned inflation targeting. C) used "just do it" policy. D) increased the opacity of the policymaking.
A) increased Fed transparency.
8) Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
A) lowers the federal funds rate.
11) The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A) mortgage-backed securities and long-term Treasuries. B) mortgage-backed securities and Treasury bills. C) commercial papers and short-term Treasuries. D) Treasury bills and Treasury notes.
A) mortgage-backed securities and long-term Treasuries.
10) Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A) open market operation B) discount policy C) required reserve ratio D) the Fed's liquidity provision
A) open market operation
3) The Federal Reserve Banks are ________ institutions since they are owned by the ________. A) quasi-public; private commercial banks in the district where the Reserve Bank is located B) public; private commercial banks in the district where the Reserve Bank is located C) quasi-public; Board of Governors D) public; Board of Governors
A) quasi-public; private commercial banks in the district where the Reserve Bank is located
21) Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases
A) remain unchanged; remains unchanged
17) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety
A) ten
12) The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is A) the Federal Reserve System. B) the United States Treasury. C) the U.S. Gold Commission. D) the House of Representatives.
A) the Federal Reserve System.
6) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped.
A) vertical.
8. What is a gold standard? A). A monetary system in which the value of the currency is fixed in terms of gold. B). A monetary system that uses gold as the only currency around the world. C). A monetary system in which the value of gold is fixed in terms of US dollars. D). None of the above.
A). A monetary system in which the value of the currency is fixed in terms of gold.
17. What is "tight money" or a tight monetary policy? A). High interest rates B). An increase in money supply C). Quantitative easing D). Low reserve requirement
A). High interest rates
24) What did the person mean by the statement in the last question? A). Purchasing power will fall if inflation is left unchecked B). Inflation benefits lenders C). Inflation is always at the expected rate D). Inflation is easy to predict.
A). Purchasing power will fall if inflation is left unchecked
16. What did Chairman Paul Volcker do in terms of monetary policy in 1979? A). Raise interest rates to subdue double-digit inflation in the US. B). Increase lending to small and medium enterprises (SMEs) to stimulate economic growth. C). Lower unemployment benefits to incentivize firms to hire workers. D). Cut government spending to fight inflation.
A). Raise interest rates to subdue double-digit inflation in the US.
11. Which of the following is NOT TRUE about the failure of Federal Reserve during the Great Depression? A). The Fed succeeded in stopping the bank runs. B). Monetary policy was too tight. C). The Fed raised interest rates during the Great Depression to prevent speculative attacks. D). All of the above.
A). The Fed succeeded in stopping the bank runs.
23) Who said "Inflation is a thief in the night and if we don't act promptly and decisively we will always be behind?" A). William Martin B). Arthur Burns C). Ben Bernanke D). Milton Friedman
A). William Martin
25) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. A) $8000 B) $1200 C) $1200.8 D) $8400
B) $1200
15) Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.
B) 1 percent.
21) Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.
B) 1 percent.
7) There are ________ members of the Board of Governors of the Federal Reserve System. A) 5 B) 7 C) 12 D) 19
B) 7
5) The Federal Reserve Bank of ________ houses the open market desk. A) Boston B) New York C) Chicago D) San Francisco
B) New York
1) An important function of the regional Federal Reserve Banks is A) setting reserve requirements. B) clearing checks. C) determining monetary policy. D) determining federal funds rate.
B) clearing checks.
What makes the Federal Reserve so unique compared to other central banks around the world is its A) centralized structure. B) decentralized structure. C) regulatory functions. D) monetary policy functions.
B) decentralized structure.
3) When banks borrow money from the Federal Reserve, these funds are called A) federal funds. B) discount loans. C) federal loans. D) Treasury funds.
B) discount loans.
8) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; fall B) increases; fall C) increases; rise D) decreases; rise
B) increases; fall
5) The quantity of reserves supplied equals A) nonborrowed reserves minus borrowed reserves. B) nonborrowed reserves plus borrowed reserves. C) required reserves plus borrowed reserves. D) total reserves minus required reserves.
B) nonborrowed reserves plus borrowed reserves.
13) The most important advantage of discount policy is that the Fed can use it to A) precisely control the monetary base. B) perform its role as lender of last resort. C) control the money supply. D) punish banks that have deficient reserves.
B) perform its role as lender of last resort.
17) Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________. A) price stability; short run B) price stability; long run C) reducing business-cycle fluctuations; short run D) reducing business-cycle fluctuations; long run
B) price stability; long run
7) Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease
B) purchase; increase
10) Everything else held constant, in the market for reserves, when the initial equilibrium level of federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
B) raises the federal funds rate.
16) The amount of deposits that banks must hold in reserve is A) excess reserves. B) required reserves. C) total reserves. D) vault cash.
B) required reserves.
7) Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the equilibrium interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises
B) right; falls
Which of the following is NOT an entity of the Federal Reserve System? A) Federal Reserve Banks B) the Comptroller of the Currency C) the Board of Governors D) the Federal Open Market Committee
B) the Comptroller of the Currency
13) Of the three players in the money supply process, most observers agree that the most important player is A) the United States Treasury. B) the Federal Reserve System. C) the financial institutions. D) the depositors.
B) the Federal Reserve System.
4. Which of the following is the oldest central bank in the world? A). Bank of Sweden (The Riksbank) B). Bank of England C). Banque de France D). Bank of Japan
B). Bank of England
12. How did the US finance WWII and what was the Fed's role? A). By borrowing; the Fed, forced by the Treasury, kept borrowing from other countries to finance the war. B). By borrowing; the Fed, forced by the Treasury, kept interest rates low so it would be cheaper for the government to borrow. C). By printing money; the Fed, forced by the Treasury, kept printing money to support the military spending. D). By quantitative easing; the Fed, forced by the Treasury, purchased bonds from financial institutions.
B). By borrowing; the Fed, forced by the Treasury, kept interest rates low so it would be cheaper for the government to borrow.
9. Which of the following is NOT TRUE about the gold standard? A). Because the money supply is tied to gold, it creates stable value for the currency and keeps price stable over a long period. B). It keeps the price stable in the short run. C). It is possible to have speculative attacks. D). All countries on the gold standard are forced to have fixed exchange rates.
B). It keeps the price stable in the short run.
3. What is the name of the interest rate that the Fed targets (raises and lowers)? A). 3-month London Interbank Offer Rate (LIBOR) B). Overnight interest rate or federal funds rate C). 1-year fixed interest rate D). 1-week percentage rate
B). Overnight interest rate or federal funds rate
7. Why did Congress create a central bank? A). They needed an institution to print money. B). There were many financial panics in the period between the Civil War and 1914, therefore, financial stability concerns were the main reason. C). They wanted to control all the banks in the market. D). All of the above.
B). There were many financial panics in the period between the Civil War and 1914, therefore, financial stability concerns were the main reason.
6. Who said central banks should lend freely against collateral and charge a penalty interest rate during bank panics? A). Adam Smith B). Walter Bagehot C). John Keynes D). Joseph Stiglitz
B). Walter Bagehot
10) The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the A) Board of Governors. B) chairman of the Board of Governors. C) Federal Open Market Committee. D) Open Market Advisory Council
C) Federal Open Market Committee.
19) Which of the following is NOT an advantage of inflation targeting? A) reduction of the time-inconsistency problem B) increased monetary policy transparency C) There is an immediate signal on the achievement of the target. D) consistency with democratic principles
C) There is an immediate signal on the achievement of the target.
18) Which of the following is NOT an element of inflation targeting? A) a public announcement of medium-term numerical targets for inflation B) an institutional commitment to price stability as the primary long-run goal C) an information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) increased accountability of the central bank for attaining its inflation objectives
C) an information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
8) Members of the Board of Governors are A) chosen by the Federal Reserve Bank presidents. B) appointed by the newly elected president of the United States, as are cabinet positions. C) appointed by the president of the United States and confirmed by the Senate. D) never allowed to serve more than 7-year terms.
C) appointed by the president of the United States and confirmed by the Senate.
5) The Fed does not tightly control the monetary base because it does NOT completely control A) open market purchases. B) open market sales. C) borrowed reserves. D) the discount rate.
C) borrowed reserves.
15) The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasury's monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes.
C) currency in circulation and reserves.
23) Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease
C) decrease; decrease
1) The interest rate charged on overnight loans of reserves between banks is the A) prime rate. B) discount rate. C) federal funds rate. D) Treasury bill rate.
C) federal funds rate.
25) Which of the following is NOT a requirement in selecting a policy instrument? A) measurability B) controllability C) flexibility D) predictability
C) flexibility
9) The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. A) one-year B) two-year C) four-year D) eight-year
C) four-year
9) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
C) has no effect on the federal funds rate.
9) Everything else held constant, in the market for reserves, when the initial equilibrium level of federal funds rate is 3%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
C) has no effect on the federal funds rate.
11) In the market for reserves, if the initial equilibrium level of federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising
C) increases; raising
14) Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble. A) less B) about the same amount of C) more D) either more, less, or the same amount of
C) more
2) The case for Federal Reserve independence does NOT include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) policy is always performed better by an elite group such as the Fed. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
C) policy is always performed better by an elite group such as the Fed.
13) The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as A) monetary targeting. B) inflation targeting. C) policy with an implicit nominal anchor. D) exchange-rate targeting.
C) policy with an implicit nominal anchor.
20) The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as A) monetary targeting. B) inflation targeting. C) policy with an implicit nominal anchor. D) exchange-rate targeting.
C) policy with an implicit nominal anchor.
20) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in
C) purchase; extend
2) The quantity of reserves demanded equals A) required reserves plus borrowed reserves. B) excess reserves plus borrowed reserves. C) required reserves plus excess reserves. D) total reserves minus excess reserves.
C) required reserves plus excess reserves.
14) Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) securities; reserves
C) securities; loans to financial institutions
24) Everything else held constant, an increase in currency holdings will cause A) the money supply to rise. B) the money supply to remain constant. C) the money supply to fall. D) checkable deposits to rise.
C) the money supply to fall.
15. Who said "Inflation is always and everywhere a monetary phenomenon?" A). William Martin B). Arthur Burns C). Ben Bernanke D). Milton Friedman
C). Ben Bernanke
22. Which one of the following was NOT among the four economic consequences of the crisis? A). Financial stress increased. B). The stock market dropped. C). Home construction increased. D). Unemployment rate increased.
C). Home construction increased.
1. What is a central bank? A). It is a bank that provides services such as accepting deposits, making business loans, and offering basic investment products. B) It is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting or acting as the client's agent in the issuance of securities. C). It is a government agency that stands at the center of the financial and monetary system of a country. It guides the development of modern financial and monetary systems and plays a major role in economic policy. D) None of the above.
C). It is a government agency that stands at the center of the financial and monetary system of a country. It guides the development of modern financial and monetary systems and plays a major role in economic policy.
5. Which of the following is NOT TRUE about bank panics? A). A bank panic is a financial panic that is caused by a loss of confidence in an institution. B). Depositors line up to pull their money out of the bank during bank panics. C). The bank facing the bank panic would be able to sell commercial loans at full price to raise the money to pay the depositors. D). Bank panics often spread to other markets like stock markets and make them crash too
C). The bank facing the bank panic would be able to sell commercial loans at full price to raise the money to pay the depositors.
20. Which of the following is NOT TRUE about nonprime and sub-prime mortgages? A). Nonprime mortgages are mortgages offered to less qualified borrowers. B). These mortgages often require little or no down payment, and little or no documentation. C). The share of sub-prime mortgage increased sharply before the financial crisis, around mid-2000s and 2006, to almost one third of all mortgages. D). A sub-prime mortgage is a type of nonprime mortgage, and has the worst borrower credit.
C). The share of sub-prime mortgage increased sharply before the financial crisis, around mid-2000s and 2006, to almost one third of all mortgages.
10. Who said, "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind on a cross of gold?" A). John Kenneth Galbraith B). Milton Friedman C). William Jennings Bryan D). Paul Samuelson
C). William Jennings Bryan
22) If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20
D) 0.20
23) Lessons that economists and policy makers have learned from the recent global financial crisis include A) Developments in the financial sector have a great impact on economic activity B) The cost of cleaning up after a financial crisis is very high. C) Price and output stability do not ensure financial stability. D) All of the above.
D) All of the above.
24) The "Greenspan doctrine"—central banks should not try to prick bubbles—was based on which of the following arguments? A) Asset-price bubbles are nearly impossible to identify. B) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. C) Raising interest rates has often been found to cause a bubble to burst more severely. D) All of the above.
D) All of the above.
The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee? A) Philadelphia B) Boston C) San Francisco D) New York
D) New York
12) Which of the following is NOT a disadvantage to inflation targeting? A) There is a delayed signal about achievement of the target. B) Inflation targets could impose a rigid rule on policymakers. C) There is potential for larger output fluctuations. D) There is a lack of transparency.
D) There is a lack of transparency.
15) Which of the following monetary policy tools is NOT nonconventional monetary policy tool? A) liquidity provision B) forward guidance C) quantitative and credit easing D) discount policy
D) discount policy
16) The most common definition that monetary policymakers use for price stability is A) low and stable deflation. B) an inflation rate of zero percent. C) high and stable inflation. D) low and stable inflation.
D) low and stable inflation.
3) In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped.
D) negatively sloped.
14) Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A) open market operation B) discount policy C) required reserve ratio D) nonconventional monetary policy
D) nonconventional monetary policy
4) Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors. A) three; six B) four; five C) five; four D) six; three
D) six; three
4) When the federal funds rate equals the interest rate paid on excess reserves A) the supply curve of reserves is vertical. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the demand curve for reserves is horizontal.
D) the demand curve for reserves is horizontal.
11) The majority of members of the Federal Open Market Committee are A) Federal Reserve Bank presidents. B) members of the Federal Advisory Council. C) presidents of member banks. D) the seven members of the Board of Governors.
D) the seven members of the Board of Governors.
19. Which of the following is TRUE about monetary policy during the Great Moderation? A). Monetary policy during that period of time played a role in creating better stability. B). The stability was partly due to Chairman Volker's legacy of low stable inflation, more stable monetary policy, more confidence on the part of business people and households. C). As a result of more stable monetary policy, both growth and price levels were remarkably stable. D). All of the above.
D). All of the above.
2. Which of the following is TRUE about currency unions? A). The European Central Bank is an important example of a currency union. B). Each of the participating countries in a currency union has its own central bank. C). A currency union is where a number of countries collectively share a central bank. D). All of the above.
D). All of the above.
25) What did Walter Bagehot say about what central banks should do during bank panics? A). Central banks should increase money supply B). Central banks should lower tax rate. C). Central bank should try to affect people's expectation D). Central banks should lend freely against collateral and charge a penalty interest rate
D). Central banks should lend freely against collateral and charge a penalty interest rate
13. Which of the following is NOT TRUE about the Fed Treasury Accord of 1951? A). It is the agreement by the government that the Fed should set interest rates independently to achieve economic stability. B). It was the first clear acknowledgment by the government that the Federal Reserve should be allowed to operate on an independent basis. C). It was negotiated after WWII, to achieve economic stability and avoid high inflation risks. D). It harmed the long-term growth of the U.S. economy, since the inflation rate went up.
D). It harmed the long-term growth of the U.S. economy, since the inflation rate went up.
13. Which of the following is NOT TRUE about the Fed Treasury Accord of 1951? A). It is the agreement by the government that the Fed should set interest rates independently to achieve economic stability. B). It was the first clear acknowledgment by the government that the Federal Reserve should be allowed to operate on an independent basis. C). It was negotiated after WWII, to achieve economic stability and avoid high inflation risks. D). It harmed the long-term growth of the U.S. economy, since the inflation rate went up.
D). It harmed the long-term growth of the U.S. economy, since the inflation rate went up.
18. According to Chairman Bernanke, which of the following is NOT Chairman Volcker's contribution to US economy between mid-80s and mid-2000s? A). Low stable inflation. B). More stable monetary policy. C). Stable growth of the economy. D). Low unemployment.
D). Low unemployment.
21. What triggered the 2007 financial crisis? A). The rise in house prices. B). The crash of stock market. C). The huge government budget deficit. D). The decline in house prices and associated mortgage losses.
D). The decline in house prices and associated mortgage losses.
