Economics Chap 14, EC 112- Final Exam

) If the Fed sells bonds as part of contractionary monetary policy, there will be

. a decrease in money supply and an increase in interest rates

Which is the formula for the simple deposit multiplier?

1/RR

Which one of the following is not a function of money? A. open market operation B. store of value C. medium of exchange D. unit of account

A

in 1991, the Federal Reserve lowered the reserve requirement from 12% to 10%. Other things the same this should have A. Increased both the money multiplier and the money supply B. Decreased both the money multiplier and the money supply C. Increased the money multiplier and decrease the money supply

A

One of the board members is appointed to a __ year, renewable term as the chairman A. 6 B. 4 C. 7

B

A bank which must hold 100% reserves opens in an economy that had no banks and a currency of $100. If customers deposit $50 into the bank, what is the value of the money supply? A. $50 B. $100 C. $150

B

A higher required reserve ratio _________ the value of the simple deposit multiplier A. Increases B. Decreases C. Eliminates

B

By raising the discount rate, the Fed leads banks to make ______ loans to households and firms, which will _________ checking account deposits and the money supply A. More; decrease B. Fewer; decrease C. Fewer; increase

B

Suppose the banking system currently has 300 billion in reserves that the reserve requirement is 10%, and that $3 billion of the reserves are excess reserves that will not be lent out. What is the value of deposits? A. $3300 billion B. $2970 billion C. $2673 billion

B

The United States is divided into ___ Federal Reserve districts A. 14 B. 12 C. 8

B

The federal reserve bank's board of governors consists of __ members appointed by the president of the US to 14 year, nonrenewable terms A. 8 B. 7 C. 6

B

What is the largest asset and the largest liability of a typical bank?

B. Loans are the largest asset, and deposits are the largest liability

When $100 in cash is withdrawn from a checking account, which of the following accurately describes what happens to the bank's balance sheet?

B. a decrease in reserves by $100 and a decrease in deposits by $100

Based on the quantity theory of money, if velocity s constant, then inflation is likely to occur when

B. the money supply grows at a faster rate than as real GDP

To fight recession, the Fed should

B. use expansionary monetary policy

Reserve requirements are changed infrequently because A. Banks can determine the amount of reserves they wish to hold regardless of the reserve requirement B. Banks cannot usually meet their reserve requirements so the Fed does not monitor it C. Banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement

C

Which is true about the difference between commodity money and fiat money?

C. Fiat money has no value except as money, whereas commodity money has value other than its use as money

The economic definition of money is

C. any asset that people are generally willing to accept for goods and services

Which of the following are monetary targets?

C. interest rate and money supply

Which of the following is not a use of money?

C. open market operation

) When the Federal Reserve buys treasury securities,

C. the money supply increases along with amount of loans that banks extend

The simple deposit multiplier equals A. the ratio of the amount of deposits created by banks to the amount of new reserves B. The formula used to calculate the total increase in checking account deposits from an increase in bank reserves C. The inverse, or reciprocal, of the required reserve ratio D. All of the above

D

The use of money... A. reduces the transaction costs of exchange B. eliminates the double coincidence of wants C. Allows for greater specialization D. All of the above

D

Which of the following is a monetary policy tool used by the Federal Reserve Bank? A. Decreasing the rate at which banks can borrow money from the Federal Reserve B. Increasing the reserve requirement from 10% to 12.5% C. Buying 500 million worth of government securities, such as treasury bills D. All of the above

D

The most important role of the Federal Reserve is

D. controlling the money supply to pursue economic objectives

A very high rate of inflation is called

D. hyperinflation

Which of the following is not a goal of monetary policy?

D. reduce income inequality

An increase in interest rates will

D. shift the aggregate demand curve to the left, decrease real GDP, and lower prices

The federal funds rate is

the interest rate that banks charge each other for overnight loans

The discount rate is

the interest rate the Fed charges to banks for borrowing from the Fed

Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability. A. Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability B. Agree. checking accounts or something of value that is in the bank. Therefore, they are a bank asset C. Disagree. Both checking accounts and car loans represent bank liabilities

A

Distinguishing among money, income, and wealth A. A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to the value of assets minus all debts B. A person's money is the currency held and the earnings from work, income is equal to the bank balance and wealth is equal to the profit from investment C. A person's money is the currency in the pocket, income is the earning and wealth is equal to asset value

A

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10%. In this situation, American bank has A. $50 in required reserves B. $50 in excess reserves C. $200 in required reserves

A

Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10% to 12%. What actions would you need to take? A. You would have to reduce lines to make up for the necessary increase in reserves B. You would need to make loans to match the new reserve requirement C. You would have to charge less for your loans because rates are now at 12%

A

Suppose the bank has a 10% reserve requirement, $5000 in deposits, and has loaned out all it can, given the reserve requirement A. It has $500 in reserves and $4500 in loans B. It has $50 in reserves and $4950 in loans C. It has $555 in reserves and $4445 in loans

A

Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of the money supply? A. Both M1 and M2 will remain unchanged B. M1 will decrease and M2 will increase C. Both M1 and M2 will increase by $2000

A

The formula for the simple deposit multiplier is A. 1/RR B. -RR/1-RR C. 1/1-RR

A

The quantity theory of money is better able to A. To explain the inflation rate in the long run B. To explain the full employment in the long run C. To explain the inflation rate in the short run

A

The value of money varies A. Inversely with the price level B. Directly with the volume of employment C. Directly with the price level

A

What are the largest asset and the largest liability of a typical bank? A. Loans of the largest assets and deposits are the largest liability of a typical bank B. Reserves are the largest asset and deposits are the largest liability of a typical bank C. Loans of the largest liability and deposits are the largest asset of a typical bank

A

When the Fed decreases the discount rate, banks will A. Borrow more from the Fed and lend more to the public. The money supply increases B. Borrow more from the Fed and lend less to the public. The money supply decreases C. Borrow less from the Fed and lend more to the public. The money supply increases

A

When the Federal Reserve sells treasury securities in the open market, A. The buyers of these securities pay for them with checks and bank reserves fall B. The buyers of such securities by new securities in the open market and there is a decrease in bank reserves C. The sellers of such securities deposit the funds in their banks and bank reserves decrease

A

Which of the following best explains the difference between commodity money and fiat money? A. Fiat money has no value except as money, whereas commodity money has value independent of its use as money B. all money is commodity money, as it has to be exchanged for gold by the central bank C. commodity money has no value except as money, where as fiat money has value independent of its use as money

A

) Which of the following is the formula for the Quantity Theory of Money

A. M x V = P x Y

An increase in interest rates will lead to

A. a decrease in consumption, investment spending, net exports, and aggregate demand

Which of the following is not a tool the Fed uses to control the money supply?

A. tax cuts and government spending

If the Fed reduces the discount rate, then

A. the money supply will increase

Excess reserves A. Are loans made at above market interest rates B. Are reserves banks keep above the legal requirement C. Are reserves banks keep to meet the reserve requirement

B

How do the banks create money? A. When there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands B. When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands C. Banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply

B

If something is to be considered as money, it has to fulfill... A. all three functions B. all four functions

B

In a system of 100% reserve banking, A. Banks do not accept deposits B. Banks do not influence the supply of money C. All of the above are correct

B

Money serves as a standard of deferred payment when A. It can be easily store today and used for transactions in the future B. Payments agreed to today but made in the future are in terms of money C. Sellers are willing to accept it in exchange for goods or services

B

Other things equal, an excessive increase in the money supply will A. Increase the purchasing power of each dollar B. Decrease the purchasing power of each dollar C. Have no impact on the purchasing power of the dollar

B

Suppose that the federal reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lay down. If the required reserve ratio is 10%, how much more money can banks create if they lend out the remaining amount? A. $55 million B. $50 million C. $45 million

B

Suppose that the federal reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have 5 million more they wish to lend out. If the required reserve ratio is 10%, how much more money can banks create if they lend out the remaining amount? A. 55 million B. 50 million C. 45 million

B

The most important role of the Federal Reserve in today's US economy is A. Negotiating with foreign nations to reduce the enormous trade deficit B. Controlling the money supply to pursue economic objectives C. Balancing the government's budget by increasing taxes and cutting spending

B

The real world money multiplier A. Equals the simple deposit multiplier because banks keep no excess reserves and households do not hold excess cash B. Is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash C. Is larger than the simple deposit multiplier because banks have no excess reserves and households do not deposit checks

B

When the Federal Reserve conducts open market operations to increase the money supply, it A. Redeems federal reserve notes B. Buys government bonds from the public C. Raises the discount rate

B

When the Federal Reserve purchases treasury securities in the open market, A. The sellers of such securities by new securities in the open market and there is an increase in bank reserves B. The sellers of such securities deposits the funds in their banks and bank reserves increase C. The buyers of those securities pay for them with checks drawn on their bank account and bank reserves increase

B

How does the quantity theory explain inflation?

B. If the money supply grows more quickly than real GDP, then there will be inflation

Congress passed legislation to create the federal reserve system in 1913 in order to A. Take the monetary control over the economy away from the Treasury Department B. End the instability created by a huge crude oil price hike during that time C. End the instability created by bank panics by acting as a lender of last resort

C

Credit cards are A. Included in both the M1 and M2 definitions of the money supply B.Included in the M1 definition of the money supply, but not in the M2 definition C. Included in neither the M1 definition of the money supply nor in the M2 definition

C

If the price index rises from 100 to 120, the purchasing power value of the dollar A. May either rise or fall B. Will rise by one sixth C. Will fall by one sixth

C

Money serves as a unit of account when A. Sellers are willing to accept it in exchange for goods or services B. It can be easily stored and used for transactions in the future C. Prices of goods and services are stated in terms of money

C

The Federal Reserve uses two definitions of the money supply, M1 and M2, because A. M2 satisfies the medium of exchange function of money, whereas M1 satisfies the store of value function B. M2 is a narrow definition focusing more on Liquidy, whereas M1 is a broader definition of the money supply C. M1 is a narrow definition focusing more on liquidy, whereas M2 is a broader definition of the money supply

C

The central bank of a country controls the money supply, which equals the currency held by A. Banks B. The public plus they're checking and savings account balances C. The public plus their checking account balances

C

To decrease the money supply, the Fed can A. Buy government bonds or increase the discount rate B. Buy government bonds or decrease the discount rate C. Sell government bonds or increase the discount rate

C

When the Fed conducts open market purchases, A. Banks by treasury securities from Fed, which increases the money supply B. Banks by treasury securities from the Fed, which decreases the money supply C. It buys treasury securities, which increases the money supply

C

which of the following policy tools is the federal reserve the least likely to use in order to actively change the money supply? A. Discount rate B. Discount loans C. Reserve requirements

C

Which is the best definition of "the monetary rule"?

The monetary rule is a plan to increase the money supply at a constant rate every year regardless of the economy's condition

Monetary policy is defined as actions of the Federal Reserve to manage

money supply and interest rates

The two monetary targets are the interest rate (Fed Funds Rate) and the money supply. For more than twenty years the Fed has used the Fed Funds Rate as its target rather than use the money supply because

the Fed cannot target both at the same time. The Fed must choose between targeting the interest rate or targeting the money supply

To combat inflation, the Fed should

use contractionary monetary policy

The federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary target, and closely controls this rate by using open market operation