Chapter 16 Review Questions

M1 money multiplier equals a. (transaction accounts + currency) ÷ monetary base b. (transaction accounts - currency) ÷ monetary base c. (transaction accounts + currency) × monetary base d. (transaction accounts - currency) × monetary base

a. (transaction accounts + currency) ÷ monetary base

If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about a. 1.42. b. 2.12. c. 2.81. d. 4.24.

a. 1.42.

A bank in poor condition may take out a loan under close Fed scrutiny. Such a loan is known as a. a secondary credit discount loan. b. a haircut. c. a covenant. d. a primary credit discount loan.

a. a secondary credit discount loan.

If the haricut charged by the Fed is very large a. banks will be discouraged from borrowing. b. transaction accounts held by banks increase. c. the Fed loses a lot of money if banks default on their loans. d. the Fed's discount rate rises.

a. banks will be discouraged from borrowing.

During the holiday season in December, people use more currency than usual. To offset this increase in demand for money, the Fed increases the money supply through a. defensive open-market operations. b. dynamic open-market operations. c. discount loans for profit. d. discount loans for business needs.

a. defensive open-market operations.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the a. federal funds rate decreases. b. primary credit discount rate decreases. c. primary credit discount rate increases. d. federal funds rate increases

a. federal funds rate decreases.

If the Open-Market Desk at the Fed buys securities, the most likely effect is that the a. federal funds rate decreases. b. primary credit discount rate decreases. c. primary credit discount rate increases. d. federal funds rate increases.

a. federal funds rate decreases.

An increase in the amount of discount loans by the Fed a. increases the money supply by an amount equal to the increase in the loans times the multiplier. b. decreases the money supply by an amount equal to the increase in the loans times the multiplier. c. decreases the money supply by an amount greater than the increase in the loans times the multiplier. d. increases the money supply by an amount lower than the increase in the loans times the multiplier.

a. increases the money supply by an amount equal to the increase in the loans times the multiplier.

A __________ is a situation in which additions to an economy's monetary base do not lead to an increase in the economy's money supply or decline the interest rate. a. liquidity trap b. recession c. financial crisis d. credit crunch

a. liquidity trap

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transactions accounts, the M1 multiplier will and the M2 multiplier will . a. not change; decrease b. increase; also increase c. decrease; also decrease d. increase; not change

a. not change; decrease

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _____ and the M2 multiplier will _____ . a. not change; increase b. increase; also increase c. decrease; also decrease d. increase; not change

a. not change; increase

The money multiplier equals a. the money supply divided by the monetary base. b. currency held by the non-bank public plus banks' reserves. c. currency held by the non-bank public plus transaction accounts. d. M2 divided by M1.

a. the money supply divided by the monetary base.

The Fed undertakes dynamic open-market operations a. when it wants to change monetary policy. b. because of seasonal effects. c. when it wants to change fiscal policy. d. to offset a temporary change in money demand.

a. when it wants to change monetary policy.

If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million? a. $10 million b. $100 million c. $1 billion d. $6.889 billion

b. $100 million

A secondary credit discount loan has an interest rate that is __________ percentage point(s) higher than the interest rate on a primary credit discount loan. a. 1/4 b. 1/2 c. 1 d. 2

b. 1/2

Which of the following is true of an economy that has hit the zero lower bound? a. The money supply in the economy increases rapidly as additions are made to the monetary base. b. Any increase increase in its monetary base is exactly offset by a decline in its money multipliers. c. Any short-term bond would provide a return that is much lower than the return from holding cash. d. The economy's interest rates decline when there is an increase in the monetary base.

b. Any increase increase in its monetary base is exactly offset by a decline in its money multipliers.

Which of the following is true of an economy in a liquity trap? a. The money supply in the economy increases rapidly as additions are made to the monetary base. b. The economy's nominal short-term interest rates become close to zero. c. The banks in the economy do not hold any reserves. d. The economy's interest rates decline when there is an increase in the monetary base.

b. The economy's nominal short-term interest rates become close to zero.

The extra collateral the Fed requires above the value of a discount loan is known as a. the term premium. b. a haircut. c. a covenant. d. secondary credit.

b. a haircut.

The Fed undertakes defensive open-market operations a. when it wants to change fiscal policy. b. because of seasonal effects or to offset a temporary change in money demand. c. to offset a permanent change in money demand. d. when it wants to change monetary policy.

b. because of seasonal effects or to offset a temporary change in money demand.

If the federal funds rate equals the primary credit discount rate, the Fed is likely to _____________ securities in the open market, which will cause the federal funds rate to _________. a. buy; increase b. buy; decrease c. sell; decrease d. sell; increase

b. buy; decrease

An increase in interest rates a. decreases the M2 money multiplier. b. decreases the ratio of excess reserves to transaction accounts held by banks c. increases the money supply for a given amount of monetary base. d. increases the ratio of excess reserves to transaction accounts held by banks

b. decreases the ratio of excess reserves to transaction accounts held by banks

If the excess reserves held by banks increase, the money multiplier is likely to a. rise. b. fall. c. remain unchanged. d. rise at first, then decline later.

b. fall.

The main asset on the Federal Reserve's balance sheet is a. discount loans. b. securities. c. monetary base. d. capital.

b. securities.

Third Bank has reserves of $12.3 million and transaction accounts of $115 million. If required reserves are 10 percent of transactions accounts, Third Bank has excess reserves of a. −$0.8 million. b. $0. c. $0.8 million d. $0.08 million

c. $0.8 million

If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will a. increase by $1 billion. b. decline by $1 billion. c. decline by $9 billion. d. increase by $9 billion.

c. decline by $9 billion.

If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will a. not change. b. increase substantially. c. decrease. d. increase slightly.

c. decrease.

The sum of seasonal credit discount loans, secondary credit discount loans, and primary credit discount loans that banks take out because of temporary problems are known as a. unsubstantiated discount loans. b. discount loans for profit. c. discount loans that arise for business needs. d. inelastic discount loans.

c. discount loans that arise for business needs.

Another name for the monetary base is a. commodity money. b. fiat money. c. high-powered money. d. bank reserves.

c. high-powered money.

Primary credit discount loans for profit will be zero when a. primary credit discount rate is equal to secondary credit discount rate. b. primary credit discount rate is greater than federal funds rate. c. primary credit discount rate is lesser than federal funds rate. d. primary credit discount rate is equal to nominal short-term interest rate.

c. primary credit discount rate is lesser than federal funds rate.

Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts. If a customer, who is a government securities dealer, sells $2 million in securities to the Fed a. the bank's transaction accounts reduce to $98 million. b. the bank's securities reduce by $4 million. c. the bank's reserves increase to $12 million. d. the bank's loans reduce by $2 million.

c. the bank's reserves increase to $12 million.

The supply curve of reserves in an economy is horizontal when a. the federal funds rate is greater than the seasonal credit discount rate. b. the federal funds rate is less than the secondary credit discount rate. c. the federal funds rate equals the primary credit discount rate. d. the federal funds rate is less than the primary credit discount rate.

c. the federal funds rate equals the primary credit discount rate.

The main liability on the Federal Reserve's balance sheet is a. discount loans. b. securities. c. the monetary base d. capital.

c. the monetary base

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals a. the Fed's capital stock. b. discount loans. c. the monetary base. d. required clearing balances.

c. the monetary base.

Before 2008, an increase in reserve requirements by the Fed a. would increase the money multiplier. b. would increase money supply. c. would decrease the money multiplier. d. would decrese the amount of reserves held by banks.

c. would decrease the money multiplier.

Green bank has transaction accounts worth $200 million. If the required reserve ratio is 10%, Green bank holds as required reserves. a. $220 million b. $180 million c. $60 million d. $20 million

d. $20 million

If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by a. −$3 million. b. $3 million. c. $10 million. d. $30 million.

d. $30 million.

M2 money multiplier equals a. (nontransaction accounts + money market funds) ÷ monetary base b. (M1 + nontransaction accounts - money market funds) × reserves c. (M2 - money market funds) ÷ excess reserves d. (M1 + nontransaction accounts + money market funds) ÷ monetary base

d. (M1 + nontransaction accounts + money market funds) ÷ monetary base

If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M2 multiplier is about a. 1.43. b. 2.12. c. 2.83. d. 4.25.

d. 4.25.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as a. a no documentation discount loan. b. a haircut. c. a covenant. d. a primary credit discount loan.

d. a primary credit discount loan.

If the Fed decides to tighten monetary policy, it uses __________ to the__________ money supply. a. defensive open-market operations; decrease b. dynamic open-market operations; increase c. defensive open-market operations; increase d. dynamic open-market operations; decrease

d. dynamic open-market operations; decrease

If the Open-Market Desk at the Fed sells securities, the most likely effect is that the a. federal funds rate decreases. b. primary credit discount rate decreases. c. primary credit discount rate increases. d. federal funds rate increases

d. federal funds rate increases

The money supply in an economy equals a. monetary base plus money multiplier. b. monetary base divided by money multiplier. c. money multiplier divided by monetary base. d. money multiplier multiplied by monetary base.

d. money multiplier multiplied by monetary base.

A _______ is a loan from the Fed to a small agricultural bank. a. federal credit discount loan b. secondary credit discount loan c. primary credit discount loan d. seasonal credit discount loan

d. seasonal credit discount loan

If the federal funds rate is below its target, the Fed is likely to __________ securities in the open market, which will cause the federal funds rate to __________. a. buy; increase b. buy; decrease c. sell; decrease d. sell; increase

d. sell; increase

The amount of nonborrowed reserves equals a. the monetary base plus the amount of discount loans. b. the amount of reserves plus the amount of discount loans. c. the amount of reserves minus the sum of the amount of discount loans and currency. d. the monetary base minus the sum of the amount of discount loans and currency.

d. the monetary base minus the sum of the amount of discount loans and currency.

The supply curve of reserves in an economy is when the federal funds rate is less than the primary credit discount rate. a. downward-sloping b. upward-sloping c. horizontal d. vertical

d. vertical