Econ exam part 4

A shift to a more expansionary monetary policy will a. Stimulate output and employment, but only after a time lag that is generally long and variable. b. reduce the future rate of inflation. c. increase the long-term growth rate of the economy. d. Stimulate output and employment almost immediately.

a

If the Fed unexpectedly increases the money supply, real GDP a. increases because the resulting decrease in the interest rate leads to an increase in investment. b. increases because the resulting increase in the interest rate leads to a decrease in investment. c. decreases because the resulting increase in the interest rate leads to a decrease in investment. d. decreases because the resulting increase in the interest rate leads to an increase in investment. e. decreases because the resulting decrease in the interest rate leads to an increase in investment.

a

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will a. reduce the size of the deposit expansion multiplier. b. increase the size of deposit expansion multiplier. c. reduce the size of the deposit expansion multiplier during a period of inflation and increase it during a recession. d. reduce the money supply during a period of inflation and increase it during a recession.

a

Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank? a. There is initially no change in the supply of money; your bank's excess reserves are reduced by $800. b. There is initially no change in the supply of money; your bank's excess reserves are reduced by $200. c. The money supply immediately increases by $1,000, and the excess reserves of your bank are reduced by $200. d. The money supply immediately increases by $1,000, and the excess reserves of your bank are reduced by $800.

a

The legal requirement that commercial banks hold required reserves equal to some fraction of their deposits a. limits the ability of banks to expand the money supply by extending additional loans. b. prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their depositors. c. prevents the Fed from controlling the money supply since commercial banks can always offset the actions of the Fed. d. limits the ability of the Treasury to expand the national debt.

a

If the Fed unexpectedly decreases the money supply, real GDP a. increases because the resulting decrease in the interest rate leads to an increase in investment. b. decreases because the resulting increase in the interest rate leads to a decrease in investment. c. decreases because the resulting decrease in the interest rate leads to an increase in investment. d. increases because the resulting increase in the interest rate leads to a decrease in investment. e. decreases because the resulting increase in the interest rate leads to an increase in investment.

b

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could a. increase the interest rate paid on excess reserves encouraging banks to extend more loans. b. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. c. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. d. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

b

If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate a. by altering the size of the federal budget deficit or surplus. b. through its policy of open market operations. c. by imposing legal restrictions that prohibit exchanges at interest rates other than the ones designated by the Fed. d. by having the U.S. Treasury fix this interest rate.

b

If the Federal Reserve wanted to expand the money supply in order to increase output, it should a. increase the discount rate, which will raise the market rate of interest; this will cause both costs and prices to rise. b. buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise. c. sell government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise. d. decrease taxes, which will reduce costs and cause prices to fall.

b

The major overall purpose of the Federal Reserve System is to a. regulate the levels of excess reserves held by member banking institutions. b. regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy. c. insure the deposits of persons holding funds with banking institutions. d. keep the discount rate flexible.

b

When an expansionary monetary policy leads to an acceleration in the rate of inflation, it will also result in a. lower money wages. b. higher nominal interest rates. c. an appreciation of the dollar in the foreign exchange market. d. lower nominal interest rates.

b

An unexpected increase in the supply of money will a. lead to a higher rate of unemployment in the short run. b. reduce aggregate demand and real output in the short run. c. reduce the real rate of interest and, thereby, trigger an increase in current spending by households and businesses. d. increase only the general level of prices in the short run.

c

If you deposit $100 of cash into a checking account at a bank, this action by itself a. increases the money supply. b. decreases the money supply. c. does not change the money supply. d. has an undetermined effect on the money supply; it may rise or it may fall.

c

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy? a. A higher level of real output. b. A lower price level. c. A higher price level. d. A lower level of real output. e. Both a higher price level and a higher level of real output.

c

When the Federal Reserve System wants to increase the money supply, what does it typically do? a. It increases the required reserve ratio. b. It sells bonds on the open market. c. It purchases U.S. government securities. d. It increases the discount rate.

c

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply? a. The dollar value of the bonds issued by the U.S. Treasury b. The federal funds interest rate that commercial banks pay (and receive) for short-term loanable funds c. The reserve requirements mandated by the Fed d. The number of commercial bank charters issued by the Fed

c

If a customer deposits $1,000 cash into her checking account, the bank's a. assets rise by $1,000 and liabilities fall by $1,000. b. profits rise by $1,000. c. assets and liabilities both fall by $1,000. d. assets and liabilities both rise by $1,000. e. assets fall by $1,000 and liabilities rise by $1,000.

d

If the Fed sells bonds and, thereby, unexpectedly shifts to a more restrictive monetary policy, in the short run, the primary impact of this policy will tend to a. reduce unemployment. b. increase inflation. c. increase real output. d. increase real interest rates.

d

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. b. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. c. increase the interest rate paid on excess reserves encouraging banks to extend more loans. d. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

d

If the Federal Reserve increases its bond purchases, the short-run effects will be a. an increase in the money supply and higher real interest rates. b. a decrease in the money supply and higher real interest rates. c. a decrease in the money supply and lower real interest rates. d. an increase in the money supply and lower real interest rates.

d

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy? a. An increase in prices proportional to the increase in the money supply. b. A decrease in real output. c. An improvement in technology, which will stimulate growth in the long run. d. An increase in real output

d

Suppose people gain more confidence in the banking system so they hold relatively less currency and deposit more into checking accounts. What will happen to bank reserves and the money supply? a. Bank reserves will decrease and the money supply will eventually increase. b. Bank reserves will increase and the money supply will eventually decrease. c. Bank reserves will decrease and the money supply will eventually decrease. d. Bank reserves will increase and the money supply will eventually increase.

d

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for a. a reduction in the ability of banks to extend additional loans. b. a gradual increase in the money supply, following the trend of the previous decade. c. a sharp contraction in the money supply, which is likely to increase the length and severity of the recession. d. a rapid increase in the money supply, potentially leading to inflation.

d

Which of the following indicates the primary mechanism by which the money supply expands? a. The U.S. government purchases additional gold. b. The U.S. Treasury prints additional currency. c. The public decides to hold more currency rather than checking deposits. d. The Fed purchases additional bonds, which increases the reserves available to the banking system.

d

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy? a. It would raise the discount rate. b. It would force the Treasury to reduce the national debt. c. It would increase the reserve requirements. d. It would buy U.S. securities.

d