practice test 4

A $70 price tag on a sweater in a department store window is an example of money functioning as a: A. unit of account. B. standard of deferred payments. C. store of value. D. medium of exchange.

A

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to: A. sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks. B. buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks. C. sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks. D. sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.

A

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits: A. of commercial banks are unchanged, but their reserves increase. B. and reserves of commercial banks both decrease. C. of commercial banks are unchanged, but their reserves decrease. D. and reserves of commercial banks are both unchanged.

A

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to: A. the reciprocal of the required reserve ratio. B. 1 minus the required reserve ratio. C. the reciprocal of the income velocity of money. D. 1/MPS.

A

To reduce the federal funds rate, the Fed can: A. buy government bonds from the public. B. increase the discount rate. C. increase the prime interest rate. D. sell government bonds to commercial banks.

A

A restrictive monetary policy is designed to shift the: A. aggregate demand curve rightward. B. aggregate demand curve leftward. C. aggregate supply curve rightward. D. aggregate supply curve leftward.

B

An increase in nominal GDP increases the demand for money because: A. interest rates will rise. B. more money is needed to finance a larger volume of transactions. C. bond prices will fall. D. the opportunity cost of holding money will decline.

B

If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should: A. raise the real federal funds rate by 1 percentage point. B. reduce the real federal funds rate by 1 percentage point. C. raise the inflation rate by 1 percentage point. D. change the real federal funds rate until inflation hits the target rate of 4 percent.

B

It is costly to hold money because: A. deflation may reduce its purchasing power. B. in doing so, one sacrifices interest income. C. bond prices are highly variable. D. the rate at which money is spent may decline.

B

Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the federal funds interest rate would rise.

B

The purpose of a restrictive monetary policy is to: A. alleviate recessions. B. raise interest rates and restrict the availability of bank credit. C. increase aggregate demand and GDP. D. increase investment spending.

B

According to the Taylor rule: A. for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP. B. growth in the money supply should be limited to the long-run average growth rate of real GDP. C. if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point. D. the rate of money growth should be set at 4 percent per year.

C

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government: A. deficit, the purchase of securities in the open market, a higher discount rate, and higher reserve requirements. B. deficit, the sale of securities in the open market, a higher discount rate, and lower reserve requirements. C. surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements. D. surplus, the purchase of securities in the open market, a lower discount rate, and lower reserve requirements.

C

In defining money as M1, economists exclude time deposits because: A. the intrinsic value of time deposits is nil. B. the purchasing power of time deposits is much less stable than that of checkable deposits and currency. C. they are not directly or immediately a medium of exchange. D. they are not recognized by the federal government as legal tender.

C

In the United States, monetary policy is the responsibility of the: A. U.S. Treasury. B. Department of Commerce. C. Board of Governors of the Federal Reserve System. D. U.S. Congress.

C

The Fed directly sets: A. the prime interest rate but not the federal funds rate. B. both the federal funds rate and the prime interest rate. C. neither the federal funds rate nor the prime interest rate. D. the discount rate and the prime interest rate.

C

Which of the following statements best describes the 12 Federal Reserve Banks? A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities. B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry. C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare. D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.

C

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts? A. The discount rate. B. The reserve ratio. C. Open-market operations. D. The federal funds rate.

C

Currency in circulation is part of: A. M1 only. B. M2 not including M1. C. neither M1 nor M2. D. both M1 and M2.

D

Excess reserves refer to the: A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. C. difference between actual reserves and loans. D. difference between actual reserves and required reserves.

D

If the demand for money and the supply of money both decrease, the equilibrium: A. interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. B. quantity of money and the equilibrium interest rate will both increase. C. quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. D. quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

D

Money functions as: A. a store of value. B. a unit of account. C. a medium of exchange. D. all of these.

D

Which one of the following is presently a major deterrent to bank panics in the United States? A. The legal reserve requirement. B. The fractional reserve system. C. The gold standard. D. Deposit insurance.

D