Macro Test 3

The Federal Reserve System was created in:

1913

Refer to the given list. The M1 definition of money compromises item(s):

3 and 6. 3. Currency (coins and paper money in circulation) 6. Checkable Deposits

The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the:

Federal Open Market Committee (FOMC)

An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14 year terms is to:

Insulate members from political pressures that could result in inflation

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the:

M1 money supply will not change

When economists say that money serves as a medium of exchange, they mean that it is:

a means of payment

When economists say that money serves as a unit of account, they mean that it is:

a monetary unit for measuring and comparing the relative values of goods

Suppose the price level and value of the US dollar in year one are 1 and $1, respectively: a. If the price level rises to 1.35 in year two, what is the new value of the dollar? b. If, instead, the price level falls to 0.75, what is the value of the dollar

a. $0.74 b. $1.33

Which of the following is not a function of the Fed?

advising Congress on fiscal policy

The members of the Federal Reserve Board

are appointed for 14 year terms

When a check is drawn and cleared, the

bank against which the check is cleared loses reserves and deposits equal to the amount of the check

In a fractional reserve banking system:

banks can create money through the lending process

A commercial bank can add to its actual reserves by

borrowing from a Federal Reserve Bank

A commercial bank can add to its actual reserves by:

borrowing from a Federal Reserve Bank

In the United States, the money supply (M1) includes:

coins, paper currency, and checkable deposits

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve bank in its district. As a result:

commercial bank reserves are increased by $10,000

The Federal Insurance Corporation (FDIC) insures deposits up to $250,000 in:

commercial banks and thrifts

Other things equal, an excessive increase in the money supply will:

decrease the purchasing power of each dollar

An increase in the legal reserve ratio:

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan

excess reserves

If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement, the bank will:

have $45 of additional excess reserves

the value of money varies:

inversely with the price level

A fractional reserve banking system:

is susceptible to bank "panics" or "runs"

A bank that has assets of $85 billion and a net worth of $10 billion must have:

liabilities of $75 billion

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

new money is created

An important routine function of the Federal Reserve Bank is to:

provide facilities by which commercial banks and thrift institutions may collect checks

The discount rate is the interest:

rate at which the Federal Reserve Banks lend to commercial banks

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

store of value

The four main tools of monetary policy are:

the discount rate, the reserve ratio, interest on reserves, and open-market operations

The four main tools of monetary policy are:

the discount rate, the reserve ratios, interest on reserves, open-market operations

The purchase of government securities from the public by the Fed will cause:

the money supply to increase

Open-market operations refer to

the purchase or sale of government securities by the Fed

Open-market operations refer to:

the purchase or sale of government securities by the Fed

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

the reserve ratio

Assume that Jimmy Cash has $2,500 in his checking account at Folsom Bank and uses his checking account card to withdraw $250 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction

$0

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

The two conflicting goals facing commercial banks are:

profit and liquidity

Answer the question on the basis of the following information about a banking system: new currency deposited in the system= $40 billion; legal reserve ration= 0.20; excess reserves prior to the currency deposit= $0. Refer to the information. With the $40 billion deposit, the banking system will be able to expand the money supply through loans by:

$160 billion

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

$20 billion

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual deposits of $1 million, it can safely lend out:

$200,000

Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply?

Decreased

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

buy bonds in the open market

Which of the following does not explain what backs the money supply in the United States?

it is backed by gold

When a commercial bank has excess reserves:

it is in a position to make additional loans

If the Fed were to reduce the legal reserve ratio, we would expect:

lower interest rates, an expanded GDP, and a higher rate of inflation

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system:

m=1/R

The discount rate is the interest rate at which

the Federal Reserve Banks lend to commercial banks

The Federal Open Market Committee (FOMC) is made up of:

the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis