ECON Final

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will:

decrease interest rates and increase investment

If the Fed sells government bonds, bank reserves will:

decrease, leading to a decrease in the money supply.

When the central bank sells $1,000,000 worth of government bonds to the public in a fractional reserve banking system (rrr<1), then the money supply:

decreases by more than $1,000,000.

The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the:

deposit multiplier * the change in excess reserves.

A bank has $100,000 in checkable deposits and $30,000 in total reserves. If the required reserve ratio is 20%, what is the maximum amount of loans this bank can create?

$10,000

The risk-free rate is:

All of these are true

Which of the following is true regarding the reserve requirements?

The Fed does not change them much at all because doing so would make banking operations more difficult

Suppose a bank has $50,000 in deposits and $6,000 in reserves. The required reserve ratio is 10%. Which of the following occurs if the required reserve ratio is increased to 12%?

The bank will now be fully loaned up.

Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%?

The bank's required reserves will increase to $1,000.

What happens when you withdraw cash from a bank?

The bank's reserves are reduced

The demand for bonds curve slopes downwards because

at lower prices, bonds pay higher interest which makes them more attractive to buyers.

The deposit or money multiplier can be described as 1/the required reserve ratio (the inverse of the required reserve ratio). It can also be described by the formula:

change in checkable deposits ÷ change in total reserves.

Shares of stock are:

claims to partial ownership of a firm

If inflation is a threat, then the Fed will be expected to engage in

contractionary monetary policy

The process by which risks are shared among many different assets or people is called:

diversification

In deciding how much money to hold, individuals

evaluate the relative costs and benefits of holding money versus other assets such as bonds.

If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise interest rates will

fall, which will make U.S. financial assets less attractive to foreigners.

The _____ rate is the interest rates charged when a bank lends reserves to another bank.

federal funds

An increase in interest rates is likely to cause

firms and households to decrease the quantity of money demanded

Suppose the economy experiences a recessionary gap. Expansionary monetary policy that increases the money supply will

increase real GDP and increase the price level.

For a given level of reserves, an increase in the reserve requirement ratio will

increase required reserves and decrease the money supply.

A liquidity trap is said to exist when a change in monetary policy has no effect on

interest rates and investment.

If bond prices rise,

interest rates fall, which in turn, stimulate investment.

When the actual reserve/deposit ratio exceeds the (by law) required reserve/deposit ratio banks:

issue new loans

When a member bank borrows reserves from the Fed,

it pays an interest rate called the discount rate

If the Fed acts to increase the money supply,

it will buy bonds, drive bond prices up, and drive interest rates down.

If the Fed acts to decrease the money supply,

it will increase the supply of bonds, drive bond prices down, and drive interest rates up.

The interest rate on newly issued bonds is usually higher for bonds with ______ terms and ______ risk that the borrower will go bankrupt.

longer; greater

The supply of bonds curve slopes upwards because

lower prices raises the cost of borrowing which makes them less attractive to suppliers.

If banks were required to keep 100% of deposits in reserves, they could:

make no loans.

Reserve requirements set by the Federal Reserve are the:

minimum value of the ratio of reserves to bank deposits that commercial banks are allowed to maintain.

If the Federal Reserve is currently paying 1% interest on excess bank reserves deposited with the Fed, but then reduces that interest rate to 0.5%, banks may decide to generate ______ loans, and the money supply may _____.

more; increase

During an economic slump, policies that lower interest rates may not actually boost investment because

of pessimistic expectations by businesses about the future of the economy

An increase in interest rates (due to a decrease in the money supply) will

reduce aggregate demand.

An increase in interest rates due to a decrease in the money supply will

reduce aggregate demand.

When the Fed conducts an open market sale, it

reduces the money supply and raises interest rates

The crowding-out effect refers to which of the following?

reductions in private investment spending that is a result of increased government borrowing

The major tools of monetary policy available to the Federal Reserve System are:

reserve requirements, open-market operations, and the discount rate.

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

risk premium

To an economist, buying assets like stocks and bonds is a way to:

save

When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a (an):

store of value

All of the following are determinants of money demand except

the money supply

What are the three types of monetary policy lags?

the recognition lag, the implementation lag, and the impact lag

Suppose the government issues bonds to finance an increase in government spending. In the bond market,

the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates

Action taken by the Fed to reduce the money supply will tend, all other things unchanged,

to reduce investment spending.

A bank is able to make new loans equal to _____________ and the banking system is able to make new loans equal to __________

total excess reserves of the bank; a multiple of total excess reserves of the system

In the banking system today, the bank reserves that banks hold against their deposit liabilities must take one of two forms. They are

vault cash and deposits at the Fed.

Stockholders receive returns on their financial investment in the form of _____ and _____.

capital gains; dividends

Assume that the required reserve ratio is 20%. What is the direct increase in excess reserves if a bank receives a $10,000 currency deposit?

$8,000

Suppose you deposit $1,000 cash in your checking account at a bank. If the bank is loaned up and if the required reserve ratio is 10%, the maximum amount that this bank can lend right now, following your deposit is:

$900.

Suppose that a bank is "loaned up" and that the bank has total reserves of $80,000 and checkable deposits of $400,000, what must the the required reserve ratio (rrr) be?

20%

A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is

33 1/3%.

Suppose you sell a $1,000 bond that matures in 1 year for $950. Calculate the interest rate you will have to pay on this bond.

5.3%

A $1,000 bond, which matures in one year, has a price of $925. The interest rate on this bond is

8.11%

Which of the following are primary functions of a central bank? I. act as a regulator of banks II. issue government bonds III. set monetary policy IV. regulate dividend payments by corporations

I and III

Which of the following items serve as a medium of exchange in the United States? I. $100 cash II. 50 euros III. the balance in your checking account IV. a $1,000 corporate stock that you own

I and III

The Federal Reserve System: I. is the central bank for the United States. II. is a United States government owned bank. III. is a branch of the Treasury of the United States.

I only

Which of the following are monetary policy goals? I. maintain high interest rates II. keep unemployment rates low III. reduce the size of the banking sector IV. prevent high rates of inflation

II and IV

Which of the following is not a function of the Federal Reserve System?

It determines tax levels in conjunction with the U.S. Treasury.

Which of the following is a consequence of deposit insurance?

It may induce the officers of a bank to take more risks.

Freema withdraws $1,000 from her checking account to put in a $1,000 time-deposit (CD). As a result of her transaction,

M1 decreases and M2 is unaffected.

Who of the following would not generate demand for dollars?

U.S. residents who demand foreign goods, services, and assets

If the Fed increases the discount rate, it is pursuing:

a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy

Which of the following decreases the demand for money?

a decrease in real GDP (income)

Which of the following increases the demand for money?

an increase in the price level

The Board of Governors of the Federal Reserve System is

appointed by the president of the United States and confirmed by the Senate

The unit-of-account function of money means that money is used

as a consistent means of measuring the value of things.

When an individual deposits currency into a checking account:

bank reserves increase, which allows banks to lend more and increases the money supply.

When the Fed sells bonds in the open market, we can expect:

bond prices to fall and interest rates to rise

When the Federal Reserve conducts open market transactions, it

buys or sells previously issued government bonds.