Chps 13 and 14

Suppose the Fed purchases $100 million of U.S. government securities from the public. How will this affect the money supply and the national debt?

The money supply will increase; the national debt will be unaffected.

When the Fed increases the interest rate paid to banks on their deposits with the Fed,

banks will have an incentive to hold more reserves and extend fewer loans, which will tend to reduce the money supply.

The primary benefit of a monetary system of exchange compared to a barter system is the increased

efficiency in arranging transactions.

The Fed responded to the COVID-19 pandemic in 2020 by

increasing its purchases of treasury securities and other financial assets by a huge amount.

Suppose a bank confronts a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of

$900.

Suppose the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, who deposits the money with First National Bank. If a required reserve ratio is 20 percent was present, this transaction would increase the excess reserves of First National Bank by

32,000

Which of the following will tend to increase the reserves held by banks?

An increase in the interest rate paid to banks on their deposits with the Fed

Which of the following would cause the money supply in the United States to expand?

An increase in the purchase of securities and other financial assets by the Fed

Which of the following will be classified as a liability on the balance sheet of a commercial bank?

Checking deposits of customers

Which of the following is a major advantage of a money system compared to a barter system?

Money reduces the cost of exchange.

Are outstanding credit card balances counted as part of the money supply?

No; credit card balances reflect funds that have been borrowed. Unlike money, they are a liability.

Which of the following lists two things that both decrease the money supply?

Raise the discount rate and make open market sales.

Which of the following tends to reduce bank failures as the result of bank runs by depositors?

The Federal Deposit Insurance Corporation

Other things constant, if the Fed increases the interest rate paid banks on their deposits with the Fed,

banks will increase their holdings of reserves and extend fewer loans, which will cause the money supply to decline.

If changes in monetary policy are going to help stabilize the economy, they must

be properly timed.

Other things constant, if the Fed decreased the discount rate,

commercial banks would be more willing to borrow from the fed in order to acquire the funds to extend additional loans.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

decrease the interest rate paid to banks on their deposits with the Fed, encouraging banks to extend more loans.

An unexpected shift to a more expansionary monetary policy will generally

exert its primary impact on aggregate demand and real output 6 to 18 months in the future.

When the monetary authorities expand the supply of money rapidly,

holding money is a poor method of storing value.

An unanticipated shift to a more restrictive monetary policy by the Fed will

increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand.

Open-market purchases of securities and other financial assets by the Fed will

increase the reserves available to banks, which will place banks in a position to extend additional loans and thereby expand the money supply.

In the short run, an unanticipated increase in the money supply will exert its primary impact on

output and employment rather than on prices.

Widespread use of credit cards

tends to reduce the average quantity of money that people will choose to hold.

The Federal Reserve System is owned by

the banks that are members of the Federal Reserve System.

The coefficient that represents the average number of times a dollar is used to buy goods and services is called

the velocity of money.

An analysis of countries experiencing rapid inflation indicates that inflation is generally

caused by rapid growth in the money supply.

The type of banking system under which banks are required to hold only a portion of their assets in reserve against the checking deposits of their customers is called a

fractional reserve banking system.

When the actual reserves held by a bank exceed the legal requirement, the bank

has excess reserves, which can be used to extend additional loans.

Countries that persistently expand the supply of money at a rapid rate can expect to experience

high rates of inflation

If there is a recession, the Fed would most likely

increase bank reserves by buying government securities.

During the financial crisis of 2008-2010, the Fed

increased its purchases of securities and other financial assets and extended more loans, which expanded the monetary base.

The M1 money supply

is composed of assets that reflect the medium of exchange function of money.

According to monetarists, which of the following would be most important for the control of inflation?

keeping the growth rate of the money supply low and steady

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a

low (approximately 2 percent) rate of inflation.

Low rates of inflation are generally associated with

low rates of growth of the quantity of money.

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

lower interest rates, increase in aggregate demand, and an expansion in output.

An increase in the money supply

lowers the interest rate, causing an increase in investment and an increase in GDP.

If the Fed purchases government securities from the public, the

monetary base will increase.

In response to the severe recession of 2008-2009, the Fed

more than doubled the size of the monetary base and pushed short-term interest rates to near zero.

In response to the COVID-19 crisis and accompanying severe recession of 2020, the Fed

purchased a huge quantity of Treasury securities and other financial assets and expanded the money supply rapidly.

When the Fed unexpectedly decreases the money supply,

real interest rates will rise and the foreign exchange value of the dollar will appreciate.

The short-run impact of an unanticipated shift to a more restrictive monetary policy is most likely to be a reduction in

real output.

Which of the following would appear on the liability side of the balance sheet of a commercial bank?

Demand and other transaction deposits

The main source of profit for banking institutions is

the difference between interest paid on deposits and interest received on loans.

Which of the following is true?

Both the nominal and real interest rates were substantially lower during 2010-2020 than during the 1990s.

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money.

When the Fed unexpectedly increases the money supply, it will cause

an increase in aggregate demand because lower interest rates will cause the value of assets (for example, stocks) to rise.

What has happened to the ratio of the population age 50 to 75 years divided by the population under age 50 in high-income industrial countries in recent decades?

The ratio has increased in all of the large high-income countries .

Why is it difficult for the Fed to institute monetary policy changes in a manner that will maintain full employment and price stability?

The time lags between changes in monetary policy and when the changes exert an impact on employment and prices are long and variable.

When the fed substantially increased the reserves of the banking system and short-term interest rates fell to near zero during 2009-2012, which of the following occurred?

The velocity of the M1 and M2 money supplies decreased sharply.

If the Federal Reserve increases its bond purchases, the short-run effects will be

an increase in the money supply and lower real interest rates.

As the Fed increased the volume of loans to financial institutions in response to the 2008 financial crisis, this resulted in

a vast increase in the monetary base and the excess reserves of the commercial banking system.

Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation) and a nominal (and real) interest rate of 4 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 6 percent,

the nominal interest rate will rise to 10 percent, but the real interest rate will remain at 4 percent.

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

the price level

Compared to a barter economy, using money increases efficiency by reducing

transaction costs.

The equation of exchange states that

velocity multiplied by money supply equals real output times the price level.