Maco Exam #3

What are the functions of money?

medium of exchange, unit of account, store of value, standard of deferred payment

Federal Funds Rate:

Interest rate, the Feds are in charge, changes through open market

Use the table below to answer questions 30 and 31. Suppose a country is in the state described in the following table. Year Real GDP Inflation rate 2009 $2.30 trillion 3.7% 2010 $2.14 trillion 3.9%

The likely source of the economic changes this country is experiencing is a. an increase of aggregate demand since real GDP is declining and inflation is rising. b. a decrease of aggregate demand since real GDP is declining and inflation is rising. c. an increase of aggregate supply since real GDP is declining and inflation is rising. d. a decrease of aggregate supply since real GDP is declining and inflation is rising. d. a decrease of aggregate supply since real GDP is declining and inflation is rising.

Crowding Out

increased gov spending

An increase in the discount rate will lead to a decrease in the money supply.

True

The federal funds rate is the interest rate that The Federal Reserve influences through open market operations (OMO)

True

An oil price shock results in a sharp increase in the price level. Other things being equal, the effect will be to:

a. Increase the demand for money b. Decrease the demand for money c. Have no effect on the demand for money d. Not enough information provided a. increase the demand for money

18. If Government announces a tax cut, which of the following most likely happens?

a. a decrease in real GDP, an increase in money demand, and an increase in the interest rate b. an increase in real GDP, a decrease in money demand, and a decrease in the interest rate c. a decrease in real GDP, a decrease in money demand, and a decrease in the interest rate d. an increase in real GDP, an increase in money demand, and an increase in the interest rate d. an increase in real GDP, an increase in money demand, and in increase in the interest rate

Because of the automatic stabilizers, an increase in the level of economic activity (i.e. real GDP) will cause:

a. an increase in tax revenues collected B. an increase in government spending C. a larger government budget deficit (assuming that the budget was already in deficit) D. a reduction in tax revenues collected a. an increase in tax revenues collected

What is money?

any asset that people are generally willing to accept in exchange for goods and services or for payment of debts

A(n) ________ in the interest rate __________ the opportunity cost of holding money and, as a result, _________ the quantity of money demanded.

A. decrease, reduces, reduces B. decrease, increases, increases C. increase, raises, reduces D. increase, reduces, increases C. increase, raises, reduces

As the price level increases, demand for money ________.

A. increases B. decreases C. stay the same D. can't be determined. A. Increases

Imagine the Odyssey National is a brand new bank, and that its legal reserve requirement is 10 percent. If it accepts a $ 1,000 deposit, then its excess reserve balance will be:

A. $ 0 B. $ 90 C. $ 900 D. $ 910 C. $900

If a bank has a new deposit of $ 100 and the required reserve ratio is 5 %, the maximum increase in the money supply from the $ 100 deposit (assuming no leakages) would be:

A. $ 1000 B. $ 500 C. $ 1900 D. $ 2000 D. $2000

Assume that the reserve requirement is 10 percent, and that the amount of checkable deposits in First National Bank is $200. If the bank has loaned out $120, then the bank's excess reserves must equal

A. $0. B. $12. C. $20 D. $60 D. $60

If a banking system receives an initial deposit of $80,000 and the reserve requirement is 20 percent, the deposits in the banking system can expand up to

A. $21,500. B. $40,000. C. $400,000. D. $340,000. C. $400,000.

Suppose you transfer $ 1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?

A. M1 and M2 are both unchanged B. M1 falls by $ 1,000, and M2 rises by $ 100 C. M1 is unchanged, and M2 rises by $ 1,000 D. M1 falls by $ 1,000, and M2 is unchanged D. M1 falls by $1,000, and M2 is unchanged

Which of the following is not a function of the Fed?

A. Regulating the money supply B. Acting as a banker for the federal government C. Lending funds to private businesses D. Making loans to banks C. Lending funds to private businesses

All of the following are goals of the Federal Reserve except

A. control the supply of money B. control the value of money C. make loans to individuals D. regulate the banking system C. Make loans to individuals

When the Fed lowers the legal reserve requirement, it:

A. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public B. raises the costs of borrowing from the Fed, discouraging banks from making loans to the general public C. increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public D. increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public C. increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public

An open market purchase is where the Federal Reserve:

A. purchases government bonds from the public, thereby decreasing the money supply B. purchases government bonds from the public, thereby increasing the money supply C. increases the money supply by selling government bonds to the public D. decreases the money supply by selling government bonds to the public B. purchases government bonds from the public, thereby increasing the money supply

Which of the following actions by the Fed would increase the money supply?

A. reducing the required-reserve ratio B. selling government bonds in the open market C. increasing the discount rate D. increasing the required-reserve ratio A. reducing the required-reserve ratio

A bank will be able to make fewer loans if it:

A. sells bonds to the Fed B. borrows money in the federal funds market C. buys bonds from the Fed D. borrows money from the Fed, i.e. discounting C. buys bonds from the Fed

With respect to control of the money supply, the law requires the Fed to take orders from:

A. the President B. the Speaker of the House C. the Secretary of the Treasury D. no one since the Fed is an independent agency D. No one since the Fed is and independent agency

The discount rate is:

A. the interest rate commercial banks charge its best customers B. the interest rate the Federal Reserve charges individuals and firms C. the interest rate that the Federal Reserve charges its member banks for loans D. the interest rate that one commercial bank charges another commercial bank for a loan C. the interest rate that the Federal Reserve charges its member banks for loans

Which of the following is not included in the M1 definition of money?

A. travelers checks B. savings deposits C. demand deposits D. currency B. Savings Deposits

It is reported that the U.S. real GDP exceeds its potential real GDP, and that there is high inflation. In response to the report, the government decides to implement a fiscal policy that will act to reduce real GDP growth and prices. This can be accomplished by

a. decreasing government spending. b. increasing government spending and transfer payments. c. sell securities and increase the discount rate. d. raising taxes and government spending by the same amount. a. decreasing government spending

A country reports that its actual real GDP is greater than its potential real GDP, inflation is high and the actual unemployment rate is less than the natural rate of unemployment. A well coordinated fiscal and monetary policy solution would be to

a. increase taxes, sell securities and increase the discount rate. b. reduce taxes, sell securities and increase the discount rate. c. increase taxes, buy securities and reduce the discount rate. d. increase taxes, sell securities and reduce the discount rate. a. increase taxes, sell securities and increase the discount rate.

9 . An increase in the money supply will result in a _______ interest rate and __________ output. Ceteris paribus.

a. lower, higher b. higher, lower c. lower, no change d. higher, higher a. lower, higher

If the Federal Reserve authorities wanted to reduce inflationary pressures, the proper policies would be to:

a. sell government securities, raise reserve requirements, and lower the discount rate. b. sell government securities, lower reserve requirements, and lower the discount rate. c. buy government securities, raise reserve requirements, and raise the discount rate. d. sell government securities, raise reserve requirements, and raise the discount rate. d. sell government securities, raise reserve requirements, and raise the discount rate.

The functions of money include all of the following EXCEPT

a. store of value. b. unit of account. c. medium of exchange. d. unit of inflation. d. unit of inflation

There is an inverse (i.e. negative) relationship between all of the following, except:

a. the demand for money and the interest rate b. interest rate (cost of borrowing money) and consumption level c. Consumption expenditures and disposable income d. interest rate (cost of borrowing money) and investment level c. consumption expenditures and disposable income