Chapter 15 and 16

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising a) inflation. b) Solow growth. c) output growth. d) unemployment.

a) inflation.

The reserve ratio (RR) is the a) ratio of reserves to deposits. b) ratio of deposits to reserves. c) amount the money supply expands with each dollar increase in reserves. d) overnight lending rate from one major bank to another.

a) ratio of reserves to deposits.

Monetary policy is a ______ means of popping a bubble, because monetary policy ______ push down the price of specific commodities. a) good; can b) crude; can't c) crude; can d) good; can't

b) crude; can't

The key difference between quantitative easing and a typical open market purchase is that quantitative easing a) involves state and local government securities, while a typical open market purchase involves federal government securities. b) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities. c) involves small-term government securities, while a typical open market purchase involves long-term government securities. d) does not involve the purchase of government securities, while a typical open market purchase involves the purchase of government securities.

b) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities.

Because the United States has a fractional reserve banking system, banks must hold a) no currency in their vaults. b) less than 100 percent of deposits as reserves. c) 100 percent of deposits as reserves. d) more than 100 percent of deposits as reserves.

b) less than 100 percent of deposits as reserves.

The federal funds rate is the a) ratio of reserves to deposits. b) overnight lending rate from one major bank to another. c) interest rate banks pay when they borrow directly from the Fed. d) interest rate on short-term Treasury securities.

b) overnight lending rate from one major bank to another.

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between a) too low a rate of growth or too low a rate of inflation. b) too low a rate of growth or too high a rate of inflation. c) too high a rate of growth or too high a rate of inflation. d) too high a rate of growth or too low a rate of inflation.

b) too low a rate of growth or too high a rate of inflation.

When a bank has short-term liabilities that are greater than its short-term assets but overall its liabilities are less than assets, the bank is considered a) insolvent. b) liquid. c) illiquid. d) solvent.

c) illiquid.

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the a) wrong direction and increase GDP volatility. b) right direction and increase GDP volatility. c) right direction and lower GDP volatility. d) wrong direction and lower GDP volatility.

c) right direction and lower GDP volatility.

Which of the following is NOT true of the Federal Reserve System? a) It maintains the bank account of the U.S. Treasury. b) It regulates the nation's money supply. c) it serves as the bankers' bank. d) It carries out policies passed by the federal government.

d) It carries out policies passed by the federal government.

Open market operations involve the Federal Reserve a) lending reserves directly to banks. b) providing reserves to banks through auction. c) competing with investment banks for treasury securities. d) buying and selling government bonds.

d) buying and selling government bonds.

If the Fed wishes to lower interest rates, it should a) raise the discount rate. b) do nothing. c) conduct an open market sale. d) conduct an open market purchase.

d) conduct an open market purchase.

Discount rate lending occurs when the Federal Reserve a) provides reserves to banks through auction. b) buys corporate bonds in lagging sectors of the economy. c) buys and sells government bonds. d) lends reserves directly to banks.

d) lends reserves directly to banks.

The risk that the failure of a few large financial institutions can affect the entire financial system is called a) solvency risk. b) credit risk. c) moral hazard. d) systemic risk.

d) systemic risk.