ECON CH 11-14
The fed/federal reserve has very little effect on the money multiplier
false
fractional reserve banking system requires all banks to keep all deposited money to prevent bank runs
false
How much money can be created if the money multiplier is 3 and the initial deposit is $4,000?
$12,000
If the reserve requirement is 25%, how much can a bank lend from an initial $1000 deposit of cash?
$750
How many regional Federal Reserve Banks are there in the United States?
12
What is the rate of inflation if there is a 7% increase in nominal wages and a 4% increase in labor productivity?
3%
Which of the following is true of a central bank that employs inflation targeting?
A target rate of annual inflation is maintained by expanding or contracting the money supply.
_____ are financial instruments that ensure against the potential default on an asset.
Credit default swaps
The _____ is the central bank of the United States
Federal reserve
What happens to the money multiplier when the reserve requirement decreases from 12% to 10%?
Increases. 1/0.12 = 8.33; 1/0.1 = 10.
_____ represent the rate of inflation expected by workers for any given period.
Inflationary expectations
If the money multiplier decreases from 12 to 10, what probably happened to the reserve requirement?
It increased from 8.3% to 10%.
What happens to the money multiplier when the reserve requirement decreases from 25% to 20%?
It increases from 4 to 5. 1/0.25 = 4; 1/0.2 = 5
In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result?
It was decreasing.
Which of these is an example of rational expectations?
Jed assumes that there will be high inflation this year because that's what all of the economic data are pointing to.
In the short run, _____ view fiscal policy as effective, while monetary policy is ineffective in times of deep recession.
Keynesian theorists
Which of these is NOT a reason that lower interest rates lead to higher aggregate demand?
Lower interest rates cause U.S. bonds to become more attractive to foreign investors, leading to an increase in the value of the U.S. dollar in foreign exchange markets. U.S. products become more expensive relative to foreign products, and imports increase.
Which of these is the correct expression for the equation of exchange in the classical quantity theory of money? (M is the supply of money, V is the velocity of money, P is the price level, and Q is the economy's real output level.)
M × V = P × Q
The Federal Reserve Bank uses three important tools to conduct monetary policy. Which of these is NOT one of them?
TAXES. FRB uses open market operations, reserve requirements, and discount rates.
_____ is a formula that takes into account the Federal Reserve's inflation target and the gap between potential GDP and current GDP to set a target for the federal funds rate.
The Taylor rule
Which of these is true of the Federal Reserve's Board of Governors?
The governors serve 14-year terms.
What would happen to interest rates if the quantity of money increased?
They would decrease.
If the Fed raises interest rates, how would higher interest rates affect U.S. exports?
They would reduce U.S. exports, making U.S. exports more expensive.
A foreign entity holding cash is considered a leakage in the economy.
True
Federal deposit insurance corporation (FDIC) protects bank depositors from bank failure.
True
The federal funds rate target in 1990 was
approximately 8%.
If the reserve ratio is less than the reserve requirement, excess reserves
are negative
At many McDonald's locations, kiosks have been installed to replace the cashier's job of taking orders and receiving payments. This is an example of
automation
Quantitative easing (QE) is a monetary policy whereby the Fed
buys risky mortgage-backed securities from banks using money it created.
Banks are able to create money
by issuing loans.
The _____ rate is roughly 0.5 percentage point higher than the Federal Open Market Committee's target federal funds rate.
discount
If the reserve requirement is equal to the reserve ratio, excess reserves
equal zero.
When the Federal Reserve puts more money in the economy and reduces interest rates, this means that the Fed engages in _____ policy.
expansionary monetary
Many countries decide to adopt another country's currency because they
face an economic crisis or uncontrollable inflation.
Banks must lend out all their excess reserves in order to change the M1 money supply
false
According to the Taylor rule, if inflation is above the Federal Reserve's target and there is a positive output gap, the Fed should
increase the target federal funds rate.
Since 1984, the size of the U.S. monetary base has generally
increased.
The portion of deposits that banks must keep on hand for day-to-day operations and other purposes is called the:
reserve requirement
Country Bank needs to increase the amount of deposits it holds in reserve in response to a change in the Fed requirements. Which of these monetary policy tools did the Fed just use?
reserve requirements
One of the federal reserve's main monetary policy tools is:
setting the discount rate which establishes the cost to banks of borrowing from the fed.
The ratio of funds commercial banks and other depository institutions must hold in reserve against deposits is
the reserve requirement.
The Federal Reserve Act of 1913 tasked the central bank with which of these purposes?
to establish more effective supervision of banking in the United States
banks loan out a portion of customer deposits
true
During the housing boom between 2003 and 2007, the American International Group (AIG), the biggest issuer of credit default swaps, sold several trillion dollars of these swaps with only a few billion dollars in capital to back them up. During the financial crisis, AIG could not cover the losses it had insured and went bankrupt. This happened because AIG
underestimated and mispriced the risk.
The Great Recession
was more severe than most past recessions.
When the economy is _______, money leakage tends to rise; this tends to slow the money creation process.
weak
During the housing boom between 2003 and 2007, banks dramatically increased the use of subprime mortgages because these loans
were profitable for banks as long as borrowers made payments on time.
The AD/AS model can show that changes in the money supply
would change prices in the economy.
Bank gets a deposit of 54589 and reserve requirement is 3% A) What amount must be kept on hand? B)What amount will be in excess reserves from this deposit? C)What is the total change in the M1 supply from this deposit?
A) 1637.67 B) 52951.33 C)1765044.33
The total change in the M1 brought about by the money multiplieris affected by the amount of deposits made by households and businesses.
True
Which of these acts did NOT further clarify, supplement, and expand the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?
Communications Act of 1934
What is the difference between reserves and excess reserves in terms of banking?
Excess reserves refer to the reserves that the banks have beyond the legally required reserve amounts. Reserves are the funds banks keep on hand to meet federal reserve requirements.
Classify the actions described as examples of expansionary monetary policy (intended to stimulate the economy), contractionary or restrictive monetary policy (meant to slow down the economy), or not an example of monetary policy.
Expansionary monetary policy: * Federal reserve purchases bonds on open market * Federal reserve decreases discount rate *Federal reserve decreases rate of interest it charges to commercial banks on loans. Contractionary (restrictive) monetary policy: *federal reserve sells bonds on open market *federal reserve increases the percentage of deposits that commercial banks are required to keep in their vaults. Not an example of monetary policy: *President signs legislation that extends the duration of unemployment benefits for people out of work. *Major credit card company lowers the interest rate on outstanding credit card balances. *The president signs a tax cut bill intended to encourage additional consumer spending.
Which of these acts did NOT further clarify, supplement, and expand the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?
Fair Housing Act of 1968
Money can be created in the US economy only by printing paper money and minting more coins.
False
Monetary policy would be involved in which of these scenarios? I. Raising the money supply II. Congress lowering the budget deficit III. The Federal Reserve raising interest rates
I and III
The graph shows the long-run aggregate supply (LRAS), short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. Manipulate the curves to show the short-run effect of an increase in money supply.
In the short run, how will an increase in the money supply affect interest rates, the aggregate price level, and real GDP? Interest rates will -decrease- The aggregate price level will -increase- Real GDP will -increase- GRAPH: Keep everthing same but move AD up and right.
In the aftermath of the recent financial crisis, critics of the Federal Reserve's actions argued that printing money would result in high rates of inflation. Inflation, however, failed to rise significantly. Which of these could explain this situation?
a decrease in velocity
Which of these events did NOT occur when the government used policies to save the economy?
ending of the quantitative easing (QE) programs
Which of these did NOT help increase homeownership rates in the 21st century?
higher home prices
When the economy is sluggish, the Fed aims to _____ consumption and _____ investment spending.
increase; increase
The main function of a central bank is to:
influence monetary policy.
Currency represents _____ the money supply.
less than half of
When the Fed intends to increase the amount people consume or increase the amount businesses invest for building new stores and factories, it would _____ interest rates by engaging in _____ monetary policy.
lower; expansionary
The process by which a country's money supply is controlled is a part of _____ policy.
monetary
The fiscal and monetary policies used during and after the financial crisis were used to
smooth fluctuations in the business cycle.
The twin goals of the Federal Reserve are low unemployment and
stable prices.
The Federal Reserve Act of 1913 tasked the central bank with which of these purposes?
to furnish an elastic currency
The Federal Reserve Act of 1913 tasked the central bank with all of these purposes EXCEPT
to provide employment in the federal government.
The Federal Reserve Act of 1913 tasked the central bank with which of these purposes?
to provide for the establishment of Federal Reserve Banks
What is a reason several members of the European Union, including the United Kingdom, Sweden, and Denmark, chose not to adopt the euro?
to retain independent monetary policy
Which of these is true of the Federal Reserve System?
It has the power to create money.
What are the short-run goals of monetary policy?
output and nominal income
Which function do the Federal Reserve regional banks NOT perform?
oversee open market operations
During the period of recovery after the recession, the Fed continued to buy risky mortgage-backed securities from banks using money it created in a sequence referred to as
quantitative easing (QE) programs.
Who decides U.S. monetary policy?
the Federal Reserve
Which of these events would result in a rightward shift of the aggregate demand curve due to monetary policy?
the Federal Reserve lowering interest rates
Which of these events would result in a leftward shift of the aggregate demand curve due to monetary policy?
the Federal Reserve raising interest rates
Much of the money creation in the US economy is done through actions of ____ and ____.
the federal reserve; commercial banks.
In 2011, the chairman of the Federal Reserve, Ben Bernanke, began to have press conferences after the Federal Open Market Committee reports were released. This is an indication of the Fed's commitment to
transparency.
The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier.
true
bank run is where too many people withdraw at the same time and there isnt enough money to pay them
true
What two key events occurred during the housing boom from 2003 to 2007?
Mortgage credit standards fell, and the market for collateralized debt obligations developed.
Which city does NOT have a regional Federal Reserve Bank?
Omaha
What tool gives the federal reserve the most power to conduct monetary policy?
Open Market Operations
In the short run, what happens to the aggregate price level when the money supply increases?
The aggregate price level rises.
The reserve requirement is the proportion of its deposits that a bank must keep on hand and not use to create money through making loans to borrowers.
True
In the US, banks keep all the deposited money in a vault to meet customer withdraws
false
The ____ rate influences nearly all other interest rates in the economy.
federal funds
If excess reserves are equal to zero, the reserve requirement
is equal to the reserve ratio.
Consider the case where six months after a recession, productivity is growing by 4% but employment is unchanged from its level during the recession. This is an example of a
jobless recovery.
The actual money multiplier is lower than the theoretical maximum because of _____ in the economy.
leakages
If a customer deposits money in a checking account, the bank's
liabilities increase.
When a customer deposits money in a bank account, this deposit represents a(n) _____ for the bank.
liability
In response to the financial crisis in 2008, the Fed took extraordinary measures, including
making massive loans to banks.
Oliver sells beef jerky for a living and has noticed that he is able to consistently sell his beef jerky for higher prices than last year. Given his newfound income, Oliver goes out to eat more often and buys some more luxury goods. Oliver is not aware of how inflation has risen in the past year, so Oliver is affected by the
money illusion.
The ____ enables calculation of the maximum amount of money that can be created from a dollar deposited into the banking system.
money multiplier
Collateralized debt obligations (CDOs) are also known as
mortgage-backed securities.
The 1973 oil crisis was a _____ shock.
negative supply
Monetized debt
occurs when debt is reduced by increasing the money supply, which makes each dollar less valuable through inflation.