MONETARY POLICY; MONEY AND BANKING; FED RESERVE BANK

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Suppose that you deposit​ $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800.

Suppose you withdraw​ $500 from your checking account and bury it in a jar in your backyard. If the required reserve ratio is 10​ percent, checking account deposits in the banking system as a whole would drop up by a maximum of

$5,000.

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

If Rob deposits​ $300 in currency into his savings account at Bank of​ America,

M1 decreases.

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money​ supply, what would be the effect on M1 or​ M2?

M1 would rise.

Monetarism is a school of thought put forth by​ ________, who argued that the economy would ordinarily be at potential GDP.

Milton Friedman

Among potential stores of​ value, money

has the advantage of being the most liquid asset.

A decrease in the discount rate will

increase the money supply.

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held​ constant, the equilibrium interest rate should

increase.

Using the money demand and money supply​ model, an increase in money demand would cause the equilibrium interest rate to

increase.

Using the money demand and money supply​ model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

increase.

An open market purchase by the Fed

increases investment and increases output.

If the money multiplier is​ 3.0, a​ $1,000 increase in the monetary base

increases quantity of money by​ $3,000.

An increase in the interest rate

increases the opportunity cost of holding money.

An open market purchase by the Fed

increases the total amount of reserves in the banking system.

Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary​ policy? A significant decrease in

investment spending.

Banks can make additional loans when required reserves are

less than total reserves.

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism in which the Fed can affect the economy through monetary​ policy? Increasing the money supply

lowers the interest​ rate, and firms increase investment spending.

Banks create money by

making loans

Which of the following assets is most​ liquid?

money

The nominal interest rate is determined in the

money market.

If the Fed buys Treasury​ bills, this will shift the

money supply curve to the right.

The appreciation of the dollar will make U.S. goods​ ________ to foreigners and make imports​ ________ for U.S. residents.

more​ expensive; cheaper

If the amount you owe on your house is greater than the price of the​ house, you have

negative equity in your house.

If credit card balances rise in the​ economy, then M1 will​ ________ and M2 will​ ________.

not​ change; not change

With the federal funds rate near zero and the economy still​ struggling, the Fed began buying​ 10-year Treasury notes and certain​ mortgage-backed securities to keep interest rates low. This policy is known as

quantitative easing

If the central bank can act as a lender of last resort during a banking​ panic, banks can

satisfy customer withdrawal needs and eventually restore the​ public's faith in the banking system.

What would be a way for the Federal Reserve to slow down the economy when it is growing too quickly or is​ inflationary?

sell more government bonds

The Fed can attempt to increase the federal funds rate by

selling Treasury​ bills, which decreases bank reserves.

The Board of Governors of the Federal Reserve System has

seven members serving for 14−year terms.

A decrease in real GDP can

shift money demand to the left and decrease the interest rate.

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of​ money?

standard of deferred payment

Which of the following functions of money would be violated if inflation were​ high?

store of value

If the Fed raises its target for the federal fund​ rate, this indicates that

the Fed is pursuing a contractionary monetary policy.

Liquidity is defined as

the ease with which a given asset can be converted to a medium of exchange.

When the Fed increases the money​ supply,

the interest rate falls and this stimulates investment spending

The Federal Open Market Committee is

the main policy making body of the Fed.

Monetarists think that the Fed should use​ _________ as a target when conducting monetary policy.

the money supply

When the Fed uses contractionary​ policy,

the price level rises less than it would if the Fed did not pursue policy.

The main belief of the monetarist model is that

the quantity of money should be increased at a constant rate.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

Which of the following describes what the Fed would do to pursue an expansionary monetary​ policy?

use open market operations to buy Treasury bills

If the​ Fed's policy is​ contractionary, it will

use open market operations to sell Treasury bills.

Commodity money is a good

used as money that also has value independent of its use as money.

Bank reserves include

vault cash and deposits with the Federal Reserve.

If households and firms decide to hold less of their money in checking account deposits and more in​ currency, then initially the money supply

will not change.

If the Fed fears​ inflation, then the Fed

will sell government securities in the open market.

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's required reserves increase by

​$2,000.

The required reserve ratio is 20 percent and banks have no excess reserves. Katie deposits​ $300 in her bank. What are the​ bank's excess reserves immediately after Katie makes her​ deposit?

​$240

Refer to the table above. Suppose a transaction changes a​ bank's balance sheet as indicated in the T−​account, and the required reserve ratio is 10 percent. As a result of the​ transaction, the bank has excess reserves of

​$3,600.

Suppose a bank has​ $1,000 in deposits and​ $100 in reserves. If the desired reserve ratio is 5​ percent, how much can this bank increase its​ loans?

​$50

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's excess reserves increase by

​$8,000.

If a person takes​ $100 from​ his/her piggy bank at home and puts it in​ his/her savings​ account, then M1 will​ ________ and M2 will​ ________.

​decrease; not change

When the Federal Reserve increases interest​ rates, investment spending​ ________ and GDP​ ________.

​decreases; decreases

When housing prices​ ________ as they did beginning in 2006 following the housing market​ bubble, most banks and other lenders tightened the requirement for​ borrowers, making it​ ________ for potential home buyers to obtain mortgages.

​fell; harder

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively​ ________ and real GDP to be relatively​ ________.

​higher; higher

A decrease in interest rates can​ _________ the demand for stocks as stocks become relatively​ _______ attractive investments as compared to bonds.

​increase; more

If a person withdraws​ $500 from​ his/her savings account and puts it in​ his/her checking​ account, then M1 will​ ________ and M2 will​ ________.

​increase; not change

When housing prices fell as they did beginning in 2006 following the housing market​ bubble, most banks and other lenders​ ________ the requirement for​ borrowers, making it​ ________ for potential home buyers to obtain mortgages.

​tightened; harder

If the required reserve ratio is 5​ percent, then the simple deposit multiplier is

20.

If the reserve requirement ratio ​(RR​) is​ 0.20, the simple deposit multiplier is

5.

A good can serve as money only if

citizens accept the good as a means of payment for transactions and debts.

To increase the money​ supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

To decrease the money​ supply, the Federal Reserve could

conduct an open market sale of Treasury securities.

The M1 measure of the money supply equals

currency plus checking account balances plus​ traveler's checks.

An open market sale by the Fed

decreases the money supply and decreases output.

The supporters of a monetary growth rule believe that active monetary policy

destabilizes the​ economy, increasing the number of recessions and their severity.

The rate of interest charged to commercial banks by the Fed for loans is called the​ ________ rate.

discount

When housing prices​ ________, as they did beginning in 2006 following the housing market​ bubble, consumption spending on​ furniture, appliances, and home improvements decline as many households find it​ ________ to borrow against the value of their homes.

fall; harder

Paper currency is a

fiat money.

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

Economies where goods and services are traded directly for other goods and services are called​ ________ economies.

barter

Fiat money is generally issued by

central banks.

If the Fed raises the federal funds​ rate, eventually the

AD curve shifts leftward and real GDP decreases.

A U.S. company that wishes to sell more to other countries would favor

a depreciation of the dollar.

The situation in which​ short-term interest rates are pushed to​ zero, leaving the central bank unable to lower them further is known as

a liquidity trap.

The​ statement, "My iPhone is worth​ $700" represents​ money's function as

a unit of account.

The argument advanced by Milton Friedman for adopting a monetary growth rule is that

active monetary policy potentially destabilizes the economy.

Contractionary monetary policy causes

aggregate demand to fall and the price level to fall.

Increased investment spending in the economy would be a possible result of

an open market purchase of bonds by the Fed.

Decreased investment spending in the economy would be a possible result of

an open market sale of bonds by the Fed.

A bank will consider a car loan to a customer​ __________ and a​ customer's checking account to be​ ____________.

an​ asset; a liability

The federal funds rate is the interest rate that

banks charge each other for borrowed money.


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