MACRO 211 Final

Excess reserves refer to the

difference between actual and required reserves

The amount that a commercial bank can lend is determined by its

excess reserves

The value of money varies

inversely with the price level

A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of

liabilities

Money is destroyed when

loans are repaid

According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one percent above potential GDP, then the Fed should:

raise the real federal funds rate by .5 a percent point

An appreciation of the dollar would

reduce the price of imported resources, lower input prices, and increase aggregate supply

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:

the demand for money increases

To say that coins are "token money" means that

their face value is greater than their intrinsic value

A bank that has liabilities of $150 billion and a net worth of $20 billion must have

Assets of $170 Million

Which of the following describes the identity embodied in a balance sheet?

Assets= liabilities+net worth

If the spending-income multiplier is 4 in the economy depicted, an increase in the money supply from $125 billion to $150 billion will:

shift the aggregate demand curve rightward by $20 billion

Money is "created" when

A bank grants a loan to a customer

If you are estimating your total expenses for school next semester, you are using money primarily as

unit of account

Members of the Federal Reserve Board of Governors are

Appointed by the president for staggered 14 yr terms

The reserves of a commercial bank consist of

Deposits at the reserve bank and vault cash

The greater the required reserve ratio, the

lower is the monetary multiplier

Checkable deposits are classified as money because

they can be readily used in purchasing goods and paying debts

If bond prices decrease, then the:

Interest rates increase

When paper money is designated as legal tender, it means that

It is a means of payment by law

Bank Panics

are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.

The Federal Reserve could increase the money supply from Sm1 to Sm2 by:

buying government securities in the open market

The Fed's response to the zero lower bound problem was quantitative easing (or "QE"), where the Fed buys large amounts of bonds in order to:

increase the banks reserves

Other things being equal, an expansion of commercial bank lending

increases the money supply.

The ultimate objective of an expansionary policy is depicted by:

An increase in real GDP Q1 to Qf

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

An increase in the money supply with decrease the interest rate

What is one significant consequence of fractional reserve banking?

Banks are vulnerable to "panics" or "bank runs."

In a fractional reserve banking system,

Banks can create money through the lending process

Which of the following would reduce the money supply?

Commercial banks sell government bonds to the public.

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:

Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million

As it relates to Federal Reserve activities, the acronym FOMC describes the

Federal Open Market Committee

Paper money (currency) in the United States is issued by the

Federal Reserve

A personal income tax cut, combined with a reduction in corporate income and excise taxes would:

Increase consumption, investment, and Aggregate demand/supply

The Federal Reserve could reduce the money supply by:

Increase interest on reserves

Henry deposits $2,000 in currency in the First Street Bank. Later that same day, Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has

Increased by $5,400

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,

Money supply is increased by $5000

When commercial banks use excess reserves to buy government securities from the public,

New money is created

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the:

Prime interest rate

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to:

Pushing on a strink

If the monetary authorities want to reduce the monetary multiplier, they should

Raise the required reserve ratio

Refer to the figure above. Which change would be consistent with an attempt by the Federal Reserve to rein in inflation?

Shifting Sf1 to Sf2

A successful restrictive monetary policy is evidenced by a shift in the money supply curve from:

Sm3 to a point halfway between Sm2 and Sm3, a decrease in investment from $25 billion to $22.5 billion, and a decline in aggregate demand from AD3 to AD4

If you place a part of your summer earnings in a savings account, you are using money primarily as a

Store of value

The so-called moral hazard problem refers to one's tendency to

Take on greater risks when one is atleast partially insured against losses

When there is inflation in the economy, it implies that the

The price index is rising and purchasing power is falling

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

The purchase of government securities in the open market and an increase in government spending

Lowering the reserve ratio:

Turns required reserves into excess reserves

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

You can lead a horse to water but you cant make it drink

U.S. Treasury deposits at the Federal Reserve Banks are:

a liability of the federal reserve bank and an asset of the treasury.

Money functions as

a store of value, a unit of account, and a medium of exchange

When economists say that money serves as a store of value, they mean that it is

a way to keep wealth in a readily spendable form for future use.

When the Fed wants to lower the Federal funds rate, it:

buys bonds from banks and the public

When commercial banks use excess reserves to buy government securities from the public,

new money is created

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure

The primary purpose of the legal reserve requirement is to

provide a means by which a monetary authority can influence the lending ability of commercial banks

The Federal Open Market Committee (FOMC).

sets policy on the sale and purchase of government bonds by the Fed