Exam 3 Econ 1040

The real variable or variable that is measured using numerical numbers in the equation of exchange is

Gdp

Henry deposits $2,000 in currency in the first street bank. Later in that day, jay harris negotiates a loan for $5,400 at the same bank. After these transactions, the money supply has

Increased by $5,400

When cash is withdrawn from a checkable deposit account at a bank, the

Money supply M1 does not change but it's composition changes

Assume the economy is on aggregate demand AD1. The Fed should...

Move from MS1 to MS2 to lower interest rates and increase investment

A banks reserves can be calculated by

Multiplying its checkable deposit liabilities by the reserve ratio

Credit card balances are not considered money mostly because they are

Not part of peoples wealth

Expansionary monetary policy...

can reduce the length of a recession

If the fed buys government securities from commercial banks in the open market...

commercial banks give the securities to the fed and the fed increases the banks reserves

An expansionary monetary policy may be less effective than a restrictive monetary policy because...

commercial banks may not be able to find good loan customers

The interest rate that the Fed charges on loans made directly to banks is called...

The discount rate

What policy of the fed relies on bank borrowing to be effective?

The discount rate

The major purpose of the Fed buying government securities in open market transactions is to...

allow banks to increase their lending

The reason for the fed being set up as an independent agency of government is to

Protect it from political pressure

Which of the following functions does the fed not perform?

Providing banking services to the general public

Disequilibrium in the money market is mainly corrected with a change in...

bond prices

which of the following is an example of an economic investment?

building a new bank office

The equation of exchange shows the relationship between

Real and nominal variables

Assets of the commercial banking system include

Reserves and loans

If the quantity of money demanded exceeds the money supply, the interest rate will...

Rise, causing households and businesses to hold less money

Which of the following items are included in money supply m2 but not M1?

Savings deposits

If the fed increased the stock of money, the

supply curve would shift rightward and the equilibrium interest rate would fall

Assume the reserve requirement for the commercial banks is 25%. If the fed buys $3billion in government securities, the lending ability of the commercial banking system will increase by...

$12 billion

If the money multiplier is 6, then the reserve requirement must be

0.167

With no inflation a bank would be willing to lend a business $5million at an annual interest rate of 6%. But if the rate of inflation was anticipated to be 4 percent, the bank would likely charge the firm an annual interest rate of...

10 percent

The price of a bond is originally $1,000 and has a fixed annual interest payment of $150. If the price decreases by $100, what will the new interest rate yield be?

16.7%

If the supply of money was $200 billion, the interest rate would be...

2%

Suppose the nominal annual interest rate on a 2 year loan is 8 percent and the lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest in..

3 percent

A bond that is currently selling at $1000 offers to pay $50 annually. What is the percentage rate of return on the bond?

5%

If the money ssupply equals $300 billion and the transaction demand for money equals $200 billion, the equilibrium rate is

6%

Money functions as a store of value if it allows you to

Delay purchases until you want the goods

Monetary policy has no...

Legislative Lag

The claims of creditors of a bank against the banks assets are called

Liabilities

Money eliminates the need for a coincidence of wants in trading primarily through its role as a

Medium of exchange

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Selling government securities in the open market and decreasing government spending

There is an asset demand for money primarily because of which function of money?

Store of value

When a commercial bank borrows from a Federal Reserve bank...

The commercial banks lending ability is increased

If businesses become pessimistic...

The fed will have to increase the money supply

What's the most accurate description of events when monetary authorities increase the size of a commercial bank's excess reserves?

The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase

Which of the following varies directly with the interest rate?

The opportunity cost of holding money

A newspaper headline reads "The Fed cuts federal funds rate for the 5th time this year". This is indicative of the fed trying to...

ease monetary policy

Bond price of $1,000; Bond fixed annual interest payment of $100; Annual interest rate of 10%. If the price increases to $1,250, the interest rate will

fall to 8 percent

The interest rate that banks charge one another for the loan of excess reserves is the...

federal funds rate

To offset the increase in money demand, the Fed must (____) the money supply to put (_____) pressure on nominal interest rates.

increase, downward

Financial Markets pay close attention to changes in the federal funds rate because these changes...

indicate the feds plans for monetary policy

If bonds decrease,

interest rates increase

All else held constant, if the supply of money increases...

investment spending will increase

When the federal reserve seeks to raise the targeted federal funds rate...

it sells government securities to decrease the excess reserves available for overnight loans

The transactions demand for money will shift to the...

left when nominal GDP decreases

The fed directly sets...

neither the federal funds rate or the prime rate

Bond price of $1,000; Bond fixed annual interest payment of $100; Bond annual interest rate of 10%. If the price of the bond falls $200, the interest rate will...

rise by 2.5 percentage points

If the fed wishes to increase nominal interest rates, it must engage in an open market (______) of bonds to (_____) the money supply

sale, decrease