Mooooonneeyyy and Banking Final

If the inflation rate in country A is 3.5 percent and the inflation rate in country B is 3.0 percent, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be +0.5 percent. −0.5 percent. +16.7 percent. +6.5 percent.

+0.5 percent.

If an American traveling abroad can obtain 115 euros for $100 U.S., the current euro per dollar exchange rate is 0.870 euros per $. 1.15 euros per $. 115 euros per $. 1 euro per $1.15.

0.870 euros per $.

The components of the formula for the Taylor rule include each of the following, except which one? target federal funds rate current inflation rate 30-year U.S. Treasury bond rate inflation gap

30-year U.S. Treasury bond rate

Policymakers in open economies face a "trilemma" of three conditions that cannot all be realized at the same time. Which one of the following is not part of this "trilemma" of open-economy macroeconomics? Fix its exchange rate. Implement capital controls. Be open to international flows. Control its domestic interest rate.

Implement capital controls.

Over the years, most monetary policy experts would agree with each of the following statements, except which one? The reserve requirement is not useful as an operational instrument. Central bank lending is necessary to ensure financial stability. Short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output. Transparency in policy making hinders accountability.

Transparency in policy making hinders accountability.

The United States would be characterized as having a controlled domestic interest rate, a closed capital market, and a flexible exchange rate. no control over the domestic interest rate, an open capital market, and a flexible exchange rate. a controlled domestic interest rate, an open capital market, and a flexible exchange rate. a controlled domestic interest rate, an open capital market, and a fixed exchange rate.

a controlled domestic interest rate, an open capital market, and a flexible exchange rate.

The interest rate the Fed charges for secondary credit is above the primary discount rate. below the market federal funds rate. below the primary discount rate. equal to the market federal funds rate.

above the primary discount rate.

A liability of the central bank in functioning as the bankers' bank is accounts of commercial banks. securities. loans. currency.

accounts of commercial banks.

Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by issuing new money. When the check returns, the Fed's balance sheet will show an increase in assets and a decrease in liabilities of $1 million. only an increase in assets of $1 million. only an increase in liabilities of $1million. an increase in assets and liabilities of $1 million.

an increase in assets and liabilities of $1 million.

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect no change in liabilities but an increase in assets. a decrease in assets and liabilities. an increase in assets and liabilities. an increase in assets and a decrease in liabilities.

an increase in assets and liabilities.

An increase in wealth in the U.S. will lead to which one of the following in the foreign exchange market? a decrease in the demand for dollars a decrease in the supply of dollars an increase in the supply of dollars an increase in the demand for dollars

an increase in the supply of dollars

Reserves are assets of the central bank and liabilities of the U.S. Treasury. assets of the central bank and liabilities of commercial banks. liabilities of commercial banks and assets of the U.S. Treasury. assets of commercial banks and liabilities of the central bank.

assets of commercial banks and liabilities of the central bank.

Bonds issued by a foreign government in its own currency would not be held by the Fed. be held by the Fed as part of its securities. be held by the Fed as part of its foreign exchange reserves. be held by the Fed as part of its loans.

be held by the Fed as part of its foreign exchange reserves.

The objectives set for the Fed by Congress are very specific, which adds to the Fed's accountability. by design, quite vague, allowing the Fed to really set its own goals. specific regarding inflation, but vague on all other goals. specific on the growth rate for the economy, but vague on all other objectives.

by design, quite vague, allowing the Fed to really set its own goals.

Criteria used to judge a central bank's independence include each of the following except which one? budgetary independence long terms for members cabinet or ministry level of authority irreversible decisions

cabinet or ministry level of authority

Capital controls are controls only on capital inflows. are controls only on capital outflows. can be controls on capital inflows or outflows. must be controls on both capital inflows and outflows in order to be effective.

can be controls on capital inflows or outflows.

Assuming the free flow of capital across borders, a central bank can have an independent inflation policy and an exchange rate that doesn't fluctuate. cannot have both a fixed exchange rate and an independent inflation policy. in most industrialized countries favors fixing exchange rates because their primary concern is on domestic inflation. in most industrialized countries focuses on fixed exchange rates.

cannot have both a fixed exchange rate and an independent inflation policy.

Short-run movements in nominal exchange rates are primarily due to changing prices of goods and services in the countries involved. changing expected rates of return on domestic and foreign assets. inflation differentials. changes in exports.

changing expected rates of return on domestic and foreign assets.

The types of loans the Fed makes consist of each of the following, except which one? primary credit conditional credit seasonal credit secondary credit

conditional credit

If domestic residents are restricted in their ability to purchase foreign assets, then their government is imposing controls on capital inflows. controls on capital outflows. controls on both capital inflows and outflows. fixed exchange rates.

controls on capital outflows.

If foreigners are restricted in their ability to sell investments in a country, then that country's government is imposing controls on capital inflows. controls on capital outflows. controls on both capital inflows and outflows. fixed exchange rates.

controls on capital outflows.

The real exchange rate is defined as the nominal exchange rate plus the rate of inflation. spot exchange rate. cost of a basket of goods and services in one country compared to the cost of the same basket in another country. exchange rate that would exist if nominal rates were not fixed by governments.

cost of a basket of goods and services in one country compared to the cost of the same basket in another country.

Each of the following items would appear as assets on the central bank's balance sheet except which one? loans securities foreign exchange reserves currency

currency

The monetary base is the sum of reserves and M2. M1 and reserves. currency in the hands of the public, reserves, and M1. currency in the hands of the public and reserves in the banking system.

currency in the hands of the public and reserves in the banking system.

Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the banking system's balance sheet will be to only reduce demand deposits by $500. increase reserves and reduce demand deposits by $500, respectively. only reduce reserves by the required reserve ratio times $500. decrease reserves and demand deposits by $500, respectively.

decrease reserves and demand deposits by $500, respectively.

If we assume a 10 percent required reserve rate, banks hold no excess reserves, and there is no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed will result in deposits decreasing by $50 million. increasing by $5 million. increasing by $50 million. not changing.

decreasing by $50 million.

An expected appreciation of the dollar, everything else held constant, should cause the supply of dollars to increase. demand for dollars to increase. demand for dollars to decrease. dollar to depreciate now relative to other currencies.

demand for dollars to increase.

The market for reserves derives from the fact that reserves pay a relatively high return. desired reserves do not always equal actual reserves. the Fed refuses to lend to banks. banks do not want excess reserves.

desired reserves do not always equal actual reserves.

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact of Harry's deposit on the monetary base? The monetary base did not change. increased by $1,000. decreased by $1,000. increased by more than $1,000.

did not change.

Purchasing power parity says that differences in inflation rates between countries should have no impact on the exchange rate between those countries. differences in inflation rates between countries will create changes in exchange rates. the changes in exchange rates move independently from inflation. for inflation to change the exchange rate, the rate of inflation has to be the same between countries.

differences in inflation rates between countries will create changes in exchange rates.

In the United States, loans made by Federal Reserve to banks are discount loans. reserves. discount loans and reserves. discount loans and foreign exchange reserves.

discount loans.

If people increase their currency holdings, all else the same, the monetary base does not change but the quantity of M2 will decrease. increases as does the quantity of M2. decreases as does the quantity of M2. does not change and neither does M2.

does not change but the quantity of M2 will decrease.

One trait a central bank has over other businesses, including banks, is that it receives all of its funding from the government. can control the size of its balance sheet. doesn't have stockholders. doesn't have a board of directors.

doesn't have stockholders.

The Fed can control the amount of reserves, but cannot control the monetary base. the composition of the monetary base, but cannot affect the market interest rate. the size of the monetary base but not the price of its components. either the size of the monetary base or the price of its components.

either the size of the monetary base or the price of its components.

The theory of purchasing power parity implies the real exchange rate between two countries is flexible. less than one. greater than one. equal to one.

equal to one.

Quantitative easing is statements today about policy targets in the future. expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. asset purchases that shift the composition of the Fed's balance sheet. expansion of the demand for aggregate reserves to drive down the IORB.

expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target.

The interest rate that the FOMC currently chooses to control is the federal funds rate. 30-year Treasury bond rate. discount rate. prime rate.

federal funds rate.

A central bank holds foreign exchange reserves for diversification purposes. foreign exchange interventions. safekeeping. diversification and safekeeping.

foreign exchange interventions.

A speculative attack on a country with a fixed exchange rate often occurs when financial market participants believe the currency is undervalued. government will have to devalue its currency. government has a large excess of international reserves. government should convert its gold reserves into foreign exchange.

government will have to devalue its currency.

Any central bank policy that influences the domestic interest rate will have no effect on the exchange rate if exchange rates are flexible. have an effect on the exchange rate. not impact the supply of and demand for the domestic currency if exchange rates are flexible. be compatible with fixed exchange rates.

have an effect on the exchange rate.

Inflation targeting does all of the following, except which one? increase policymakers' credibility increase policymakers' accountability communicate policymakers' objectives clearly and openly hinder economic growth

hinder economic growth

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was that the inflation rate increased to over 18 percent in 1983. many banks failed that otherwise may not have. interest rates rose very high. inflation remained high for most of the 1980s.

interest rates rose very high.

Discount lending by the Fed is the key component of monetary policy. is more important today than in years past. is usually small except in times of crisis. amounts to five billion dollars in volume during an average week.

is usually small except in times of crisis.

A country would be better off fixing its exchange rate if it lacks ample foreign exchange reserves. it has a strong reputation for controlling inflation on its own. it is well-integrated with the economy of the country to whose currency its currency is fixed. its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed.

it is well-integrated with the economy of the country to whose currency its currency is fixed.

If the market federal funds rate were above the target rate, the response from the Fed would likely be to purchase U.S. Treasury securities. sell U.S. Treasury securities. lower the IORB (interest rate on reserve balance). lower the discount rate.

lower the IORB (interest rate on reserve balance).

Appreciation of the real exchange rate makes U.S. exports more expensive to foreigners. makes U.S. exports less expensive to foreigners. means a basket of U.S. goods would exchange for fewer foreign goods. benefits all U.S. producers.

makes U.S. exports more expensive to foreigners.

In its role as bank for the U.S. government, the Federal Reserve performs all of the following services except which one? issuing new currency making discount loans maintaining the U.S. Treasury's bank account managing U.S. Treasury borrowings

making discount loans

The Board of Governors of the Fed performs each of the following functions except which one? analyzing financial and economic conditions approving changes to the interest rate paid on reserve balances approving bank merger applications making discount loans

making discount loans

Member banks of the Federal Reserve System include only nationally chartered banks. all state chartered banks with assets exceeding $100 million. nationally chartered banks and state chartered banks that decide to join. nationally chartered banks and all state chartered banks.

nationally chartered banks and state chartered banks that decide to join.

The services that the Federal Reserve provides to foreign central banks and other international organizations are handled directly by the Board of Governors in Washington, D.C. by any of the Reserve Banks. only by the Reserve Bank in New York. only by the Reserve Bank in San Francisco.

only by the Reserve Bank in New York.

Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called managing the float. discount buying. open market operations. reserve adjustment.

open market operations.

Comparing the European and the U.S. central bank systems, the National Central Banks that make up part of the European System of Central Banks resembles the U.S. Treasury. Board of Governors. FOMC. regional Federal Reserve Banks.

regional Federal Reserve Banks.

Monetary policy operations for central banks are run through changes in which liability category? government's accounts currency reserves gold

reserves

The FOMC sets the federal funds rate. uses the discount rate is its primary policy tool. sets the target federal funds rate range. sets the dealer's spread as the difference between

sets the target federal funds rate range.

A foreign exchange intervention that does not alter the domestic monetary base is sterilized. impossible. unsterilized. likely to change domestic interest rates.

sterilized.

Which one of the following does not contribute to the failure of the law of one price? tariffs transportation costs technical specifications tastes are similar across countries

tastes are similar across countries

The real power in the FOMC lies with the President of the New York Fed Bank. the System Open Market Manager. the Chairman of the Board of Governors. no single individual; all participants have an equal share of the power.

the Chairman of the Board of Governors.

The three branches of the Federal Reserve System include each of the following, except which one? the Board of Governors. the Federal Deposit Insurance Corporation. the Federal Open Market Committee. the twelve regional Federal Reserve Banks.

the Federal Deposit Insurance Corporation.

The principal tool the Fed uses to keep the federal funds rate close to the target is the required reserve rate. discount lending. open market operations. the IORB (interest rate on reserve balance).

the IORB (interest rate on reserve balance).

The Reserve Banks of the Federal Reserve System are owned by the taxpayers in their districts. the U.S. Treasury. the Board of Governors. the commercial banks in their districts.

the commercial banks in their districts.

The nominal exchange rate is the price of a good in one country expressed in units of the same good in another country. fixed by the central banks of countries. the price of one country's currency stated in units of another country's currency. adjusted once a year and is the price at which goods are traded.

the price of one country's currency stated in units of another country's currency.

If reserves are scarce, when the Fed enters the foreign exchange market and purchases euros in an unsterilized intervention, the impact on domestic banking reserves would be the same pattern as with capital controls. that domestic banking reserves would decrease. the same as it would be with an open market purchase. uncertain.

the same as it would be with an open market purchase.

One way the Fed can inject reserves into the banking system is to increase the size of the Fed's balance sheet through purchasing securities. the discount rate. loans to nonbank corporations. the size of the Fed's balance sheet through selling securities.

the size of the Fed's balance sheet through purchasing securities.

To make sure the U.S. President cannot unduly influence the Board of Governors the terms of the governors are staggered. the law prevents a president from appointing more than one governor. the terms of the governors are ten years long. only three governors can be replaced in any one year.

the terms of the governors are staggered.

Which one of the following provides a strong incentive to supply dollars on the foreign exchange market? to purchase goods and services produced abroad to get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations to invest in U.S. assets to take advantage of higher inflation rates in other countries

to purchase goods and services produced abroad

Purchasing power parity is a good theory of explaining exchange rate behavior over very short periods. periods lasting six to twelve months. both long and short periods. very long periods, such as decades.

very long periods, such as decades.

The Federal Reserve Bank of New York is unique from other Reserve banks because it is the only regional Bank that serves just one state. the only regional Bank located in a financial center. where the Federal Reserve System's portfolio is managed. the oldest and therefore the largest.

where the Federal Reserve System's portfolio is managed.