ECON 111 TEST 3

A nominal GDP of $46 billion and an M1 of $23 billion results in a velocity of: a. 23. b. 20. c. 2. d. 0.5.

c.

According to the Taylor rule, the two MOST important factors influencing the Federal Reserve's changing the federal funds rate are: a. an inflation rate different from the Fed's target and output different from potential GDP. b. an inflation rate different from the Fed's target and increasing interest rates. c. increasing interest rates and output different from potential GDP. d. output different from potential GDP and unemployment rates different from full employment.

a.

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price: a. falls to $875. b. falls to $800. c. rises to $1,125. d. falls to $700.

a.

In order for the Federal Reserve to raise interest rates, it needs to: a. reduce the money supply. b. raise the money supply. c.print money to buy bonds. d. reduce the reserve requirement.

a.

Monetary policy is LEAST effective in maintaining low inflation and high GDP when: a. there has been a supply shock. b. there has been a demand shock. c. the government is running a deficit. d. consumers do not want to save.

a.

Refer to the figure. If the economy starts with a recessionary gap at point ______, the Fed can conduct a ___________ monetary policy to take the economy back to the full employment level. a; expansionary b; expansionary a; contractionary c; contractionary

a.

Suppose banks hold 20% of money in reserves. What is the money multiplier? a. 5 b. 10 c. 15 d. 20

a.

Suppose the economy enters a recession and income falls more than the demand for loanable funds. In this case, the supply of loanable funds shifts _____ and the equilibrium interest rate _____. a. left; rises b. right; rises c. left; falls d. right; falls

a.

Suppose the government implements a policy reducing the rewards earned by savers. In this case, the _____ loanable funds shifts _____. a. supply of; left b. supply of; right c. demand for; left d. demand for; right

a.

The supply curve for loanable funds is: a. positively sloped. b. negatively sloped. c. horizontal. d. vertical.

a.

Tightening monetary policy refers to the Federal Reserve: a. raising interest rates, usually to fight inflation. b. buying bonds to pull reserves from the banking system. c. increasing excess reserves to bring the economy to full employment. d. selling bonds to bring the economy to full employment.

a.

Assume that the economy is in full-employment equilibrium. If an inflation targeting rule is used and a positive demand shock hits the economy, the Federal Reserve will use _____ monetary policy to _____. a. expansionary; return the economy to full employment b. contractionary; keep the inflation rate low c. expansionary; keep the inflation rate low d. contractionary; achieve an output target

b.

Based on the graph, if households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D0. a. S0; S1; a b. S0; S1; b c. S1; S0; b d. S1; S0; d

b.

If the reserve requirement is 10% and a bank initially receives $20,000 in deposits, then the maximum amount of money that the banking system can create is $: a. 20,000. b. 200,000. c. 180,000. d. 100,000.

b.

The _____ oversee(s) the main tool of monetary policy. a. 12 regional Federal Reserve banks b. Federal Open Market Committee c. Council of Economic Advisers d. Congressional Budget Office

b.

The output level of a country rises 5% and the money supply increases 8%. According to the equation of exchange, what can be expected in the long run in this country? a. Output will fall by 3%. b. Prices will rise by 3%. c. Output will rise by 3%. d. Prices will fall by 5%.

b.

The twin goals of monetary policy are: a. low taxes and stable prices. b. economic growth and stable prices. c. economic growth and low taxes. d. low taxes and high government spending.

b.

Which is considered to be one of the Federal Reserve's conventional monetary policy tools? a. making loans to firms outside the banking industry b. lowering the federal funds rate c. buying mortgage-backed securities d. dramatically increasing the monetary base

b.

Which of these are functions performed by the Federal Reserve Banks and their branches?I. Regulating and supervising member banksII. Distributing coins and currencyIII. Setting interest rates paid by homeowners a. I only b. I and II c. II and III d. I, II, and III

b.

Bond prices and their yields are _____ related because the bond's _____ can fall below its _____. a. positively; sale price; face value b. positively; face value; sale price c. negatively; sale price; face value d. negatively; face value; sale price

c.

During the Christmas season, people tend to draw money out of their checking accounts to pay for presents. As a result, the actual money multiplier will: a. increase. b. not change. c. decrease. d. become more volatile.

c.

If Eighth Street Bank receives a $1,000 deposit, loans out $800, and keeps $200 in reserves, the total liabilities of Eighth Street Bank increased by $: a. 200. b. 800. c. 1,000. d. 2,000.

c.

If the Federal Reserve adheres strictly to the Taylor rule, it will: a. lower the target federal funds rate when the economy starts to overheat. b. keep the target federal funds rate constant, regardless of evolving economic conditions. c. increase the target federal funds rate when there is concern about inflation and lower it when there is concern about recessions. d. decrease the target federal funds rate when the government runs an expansionary fiscal policy.

c.

If the Federal Reserve tries to target inflation near 2%, the inflation rate is 2.1%, and output is 4% below potential GDP, the target federal funds rate according to the Taylor rule is: a. 0.05%. b. 2.10%. c. 2.15%. d. 4.15%.

c.

Institutions that serve as the bridge between savers and borrowers are known as: a. commercial banks. b. credit unions. c. financial intermediaries. d. securities firms.

c.

Monetarists believe that in the short run, a change in the money supply can affect _____, while in the long run, a change in the money supply will affect _____. a. output and the price level; output only b. output only; the price level only c. output and the price level; the price level only d. the price level only; output only

c.

Sasha buys a pair of shoes for $200. She pays for them with 200 one-dollar bills. The dollar bills, in this case, are functioning as a: a. unit of account. b. store of value. c. medium of exchange. d. barter tool.

c.

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300,000. The bank has excess reserves of $: a. 50,000. b. 100,000. c. 200,000. d. 300,000.

c.

The Federal Reserve System includes _____ regional banks. a. 50 b. 25 c. 12 d. 4

c.

The table above shows the T-account entries of a bank. If the required reserve ratio is 0.20, what is the maximum amount of additional loans that this bank can make from its current reserves? a. $ 2,000 b. $ 2,300 c. $ 2,600 d. $ 6,000

c.

What is the difference between the Eurozone and the European Union (EU)? a. There is no difference; they are simply different terms for the same thing. b. The Eurozone includes all countries within the continent of Europe, whereas the EU includes only the European countries that have joined the European Union. c. The Eurozone includes all countries that adopted the Euro as their official currency, whereas the EU includes all countries that belong to the European Union.

c.

When the Federal Reserve sells bonds, it is implementing: a. quantitative easing. b. expansionary monetary policy. c. tightening monetary policy. d. loosening monetary policy.

c.

Which list represents monetary policy actions that are consistent with one another? a. buy government bonds, raise reserve requirements, raise the discount rate b. sell government bonds, raise reserve requirements, lower the discount rate c. sell government bonds, raise reserve requirements, raise the discount rate d. buy government bonds, lower reserve requirements, raise the discount rate

c.

Which of these was NOT a cause of the 2007-2009 financial crisis? a. Low interest rates encouraged a housing bubble. b. Banks and other lenders lowered their quality standards for mortgage loans. c. Congress enacted restrictive trade policies that failed to curb imports. d. Investors and financial institutions bought assets that required an unsustainable rise in housing prices.

c.

Which of these will cause the demand for loanable funds curve to shift leftward? a. an improvement in firms' expectations about the economy b. an increase in demand for new homes c. an end to a program that provides investment tax credits d. an increase in the government deficit

c.

Which one of these will cause the supply of loanable funds curve to shift rightward? a. an improvement in firms' expectations about the economy b. technological advances that result in new products c. a perceived peak in an asset index (e.g., the Dow Jones Industrial Average) d. an increase in the government deficit

c.

Yolanda took $5,000 from her checking account and put the money in her savings account at the same bank. Based on that information, which of these is true? a. Both M1 and M2 were reduced by $5,000. b. M1 went down by $5,000, but M2 was unchanged. c. Neither M1 nor M2 changed. d. M1 and M2 both rose by $5,000.

c.

Checking deposits generally have a _____ return on investment than do certificates of deposit because checking deposits are _____. a. higher; less liquid b. higher; more liquid c. lower; less liquid d. lower; more liquid

d.

The national economic objectives that the Fed attempts to achieve include all these actions EXCEPT: a. promoting economic growth accompanied by full employment. b. maintaining moderate long-term interest rates. c. keeping the price level stable. d. keeping tax rates low.

d.

Which of the following rates is targeted by the Fed as it conducts the monetary policy? a. Federal Discount Rate b. Interest on Reserve Balances c. Mortgage Rates d. Federal Funds Rate

d.

Why are shares in retail money market mutual funds NOT considered part of the M1 money supply? a. The funds do not provide a store of value. b. The funds are not measured in a standardized unit of measure. c. The funds are too liquid. d. The funds are not spendable as a medium of exchange.

d.

_____ are included in M1. a. Money market deposit accounts b. Certificate of deposits c. Credit limits in Discover credit cards d. Checking accounts

d.