Macro test 3

If the required reserve ratio is 10%, the banking system has total reserves in the amount of $40 billion, there are no currency leakages, and each bank makes loans until excess reserves equal zero, then checkable deposits for the banking system will equal:

$400 billion

Mr. Jones deposited $5,000 cash into his account at Bank A. If the required reserve ratio is 10%, Bank A has to keep ____ in the form of required reserves and can make a loan equal to _____.

$500 ; $4,500

If the banking system system holds $50 billion in total reserves and the required reserve ratio is 10%, then the maximum amount of checkable deposits the system can legally support is:

$500 billion

According to Keynesian monetary theory:

-monetary policy is ineffective if the economy is in a liquidity trap -the effectiveness of monetary policy depends on the sensitivity of interest rates to changes in money supply -the effectiveness of monetary policy depends on the sensitivity of investment spending to changes in the interest rate (all of the above are correct)

If the nominal rate of interest is 2.5% and the inflation rate is 2.5%, what is the real rate of interest?

0 percent

simple deposit multiplier

1/required reserve ratio 1/r

The Federal Reserve System consists of _____ Federal Reserve Districts

12

A lender that expects a 4 percent real interest rate will charge a nominal interest rate of ____ if the expected rate of inflation is 2 percent

6 percent

The Federal Open Market Committee (FOMC) members include:

7 Federal Reserve Governors plus 5 Federal Reserve Bank Presidents

The Federal Reserve Board of Governors consists of:

7 members appointed by the U.S. President to 14-year terms

Which of the following best describes the Keynesian perspective on how contractionary monetary policy affects the economy?

Higher interest rates, lower investment and consumption expenditures, and a lower price level

_____ became Chair of the Board of Governors of the Federal Reserve System in February 2018

Jerome Powell

Which of the following best describes the Keynesian perspective on how expansionary monetary policy affects the economy?

Lower interest rates, higher investment and consumption expenditures, and higher real GDP

M2=?

M1 + savings accounts + small denomination time deposits + retail money funds

When depositors move funds from their saving accounts into their checking accounts:

M2 stays the same, M1 increases, and the system becomes more liquid

The equation of exchange can be expressed algebraically as:

MV=PQ (Money supply)(Velocity of money)=(Price level)(quantity of goods and services/RGDP)

If the required reserve ratio decreases from 10 percent to 8 percent:

Potential deposit expansion increases and the simple deposit multiplier increases from 10 to 12.5 (both b and d are correct)

Excess Reserves (ER)=?

Total Bank Reserves - Required Reserves = R-RR

Which of the following is correct?

Total bank reserves = excess reserves + required reserves

The discount rate is the rate of interest that:

a bank pays to the Fed for an overnight loan of reserves

Ceteris paribus, the short-run impact of the Fed pursuing an expansionary monetary policy is:

a decrease in interest rates and an increase in spending

Ceteris paribus, a decrease in the money demand would cause

a decrease in the interest rate and a increase in investment spending

in the U.S. banking system, banks are required to hold:

a fraction of deposits on reserve

All of the following are functions of the Federal Reserve District Banks except:

accepting deposits from individuals

When it was first created by Congress in 1913, the primary role of the Federal Reserve System was to:

act as lender of last resort to the banking community

Suppose the Fed desires to decrease the growth rate of the money supply. This would likely involve:

an announcement of an increase in the federal funds rate target

Money is best defined as

an asset that is generally accepted as a means of payment for goods and services

Ceteris paribus, the short-run impact of the Fed pursuing a contractionary monetary policy is:

an increase in interest rates and a decrease in spending

Which of the following would likely to an increase in the money supply?

an increase in the amount of excess reserves in the banking system

In the U.S. banking system, depository institutions (banks) may hold required reserves:

as either vault cash or on deposit at a Federal Reserve Bank

In a fractional reserve banking system, money is created when:

banks make new loans

Ceteris paribus, of bond prices increase, then:

bond yields (interest rates) will decrease

If the Fed's goal is to increase the growth rate of the money supply, the most likely action it will take to:

buy government bonds in the open market

The monetary tool of the Fed that has been used least often in recent years is:

changing the required reserve ratio

To help alleviate an inflationary gap, the Federal Reserve would most likely:

conduct an open market sale of government bonds

The primary responsibility of the federal reserve system is to:

control the nation's money supply and add stability to the financial system

M1=?

currency held by the public + demand and other checkable deposits + traveler's check

According to Monetarists, the most important determinant of inflation in U.S. history has been:

decisions by the Fed to allow the money supply to grow too quickly

To help alleviate an inflationary gap, the President and Congress might:

decrease the number and amount of tax deductions that can be taken by the wealthy

A monetary policy solution to fix a recessionary gap might include:

decreasing the discount rate

Banks pay the _____ rate to borrow reserves from the Federal Reserve. Banks pay the _____ rate to borrow reserves from other banks.

discount ; federal funds

If Sue Jones deposits $1,000 of previously circulating currency into her checking account and the required reserve ratio is 10%, the money supply:

does not change immediately, but can potentially increase by as much as $9,000

The investment demand function is assumed to be:

downward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower

If investment spending is not sensitive to changes in interest rates, then:

expansionary monetary policy may not lead to an increase in aggregate demand

Suppose the Board of Governors has determined that continued increases in consumption and investment spending are likely to be inflationary. To control inflation, the Fed would most likely pursue policies that promote

higher interest rates and a contraction of bank lending activity

According to Monetarists, sustainable and long-term economic growth is the result of:

improvements in resource productivity and technology

If the Fed announces a lower federal funds rate target, this most likely means that the Fed will act to:

increase bank reserves, which will likely increase borrowing and spending

To help alleviate a recessionary gap, the President and Congress might:

increase the amount of time an unemployed worker can collect benefits

Monetarists argue that continual increases in the growth rate of the money supply that are greater than the growth rate of real GDP will:

increase the price level in the long run

Ceteris paribus, a decrease in the required reserve ratio will:

increase the value of the simple deposit multiplier

A fiscal policy solution to fix a recessionary gap might include:

increasing government expenditures

A fiscal policy solution for an inflationary gap might include:

increasing taxes

A monetary policy solution for an inflationary gap might include:

increasing the federal funds rate target

The Federal Reserve Controls the creation of money and the money supply by

influencing the amount of reserves in the banking system

The Keynesian view argues that

investment spending and some consumer spending depend on the current interest rate, which means a decrease in the interest rate may lead to an increase in aggregate demand

If a bond with a face value of $10,000 and coupon rate of 4.5% sells for $9,000, the current yield on the bond:

is 5%

The Federal Reserve:

is responsible for monetary policy in the United States

If the nominal interest rate was 8 percent, expected inflation was 2 percent, and actual inflation was 4 percent, then:

lenders expected to earn a 6 percent real rate of interest, but they actually earned a 4 percent real rate of interest

To help alleviate a recessionary gap, the Federal Reserve might:

lower the discount rate lower the federal funds rate target conduct an open market purchase of government bonds (d, do all of the above)

M1 is the most liquid measure of money supply because its components:

may be used to purchase goods and services directly

If the Fed sells government bonds in the open market, ceteris paribus:

money supply will shift to the left, causing interest rates to rise

The investment demand function would most likely shift to the right as a result of

more optimistic business expectations

The federal funds rate is the rate of interest that:

one bank pays another bank for an overnight loan of reserves

The most important and most frequently used tool of the Fed for controlling the money supply is:

open market operations

Since the U.S. government has decreed that U.S. currency is legal tender:

people are more likely to accept the dollar as a medium of exchange

the nominal rate of interest is equal to the expected or desired real rate of interest:

plus the expected inflation rate

A bank is likely to charge its biggest and most important, or most-favored, customers the ____ rate

prime

Which of the following is not one of the three main functions of money?

protection against inflation

The Federal Reserve uses open market operations to control the money supply when it:

purchases government bonds to increase the money supply

you are using money as a store of value when you

save for a vacation

The Monetarists argue that one of the keys to economic stability is:

stable money growth

the "liquidity" of an asset refers to:

the ease with which the asset may be converted into cash without loss of value.

The liquidity trap is:

the horizontal portion of the money demand curve

When the Fed buys bonds in the open market, ceteris paribus:

the monetary base, bank loans, and the money supply increase

The notion that the Fed should adhere to policy of steady and predictable expansion of the money supply represents:

the monetary rule put forth by Monetarists

Suppose the money market is initially in equilibrium. If the Fed raises the discount rate and sells the bonds on the open market, then, ceteris paribus:

the money supply will decrease and interest rates will rise

If interest rates rise, ceteris paribus:

the opportunity cost of holding money as an asset increases and people will want to hold more interest-earning assets, like bonds

Required Reserves (RR)=?

the required reserve ratio x Total deposits = (r)(D)

Total checkable deposits in the banking system will equal total bank reserves times the simple deposit multiplier as long as

there are no currency leakages and each bank holds zero excess reserves

If the Fed increases the money supply but the economy is in a liquidity trap, then:

there will be no change in interest rates or aggregate expenditures

To support checkable deposits, banks are legally required to hold reserves equal to:

total checkable deposits multiplied by the required reserve ratio

Excess Reserves (ER)

total reserves - required reserves R-RR

money is more efficient than barter for conducting transactions because:

using money does not require satisfying a double coincidence of wants, which reduces transactions times