Macro Exam 4

The legal requirement that commercial banks hold required reserves equal to some fraction of their deposits

limits the ability of banks to expand the money supply by extending additional loans

When the Fed purchases additional securities and shifts to a more expansionary monetary policy

several months will typically pass before the shift in policy exerts much impact on output and employment

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank

There is no initial change in the money supply, and the reserves of your bank decline.

An increase in the discount rate impacts the money supply because it

reduces the incentive of commercial banks to borrow from the Federal Reserve.

Which of the following assets can a commercial bank count as reserves?

Its vault cash and deposits with the Fed

The main purpose of the Fed is to

The main purpose of the Fed is to

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

increase real interest rates.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

If the Fed unexpectedly increases the money supply, real GDP

increases because the resulting decrease in the interest rate leads to an increase in investment

In the long run, the primary effect of rapid monetary growth is

inflation.

An increase in the money supply will have which of the following effects?

It will reduce the interest rate, causing an increase in investment and an increase in GDP

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

It would buy U.S. securities.

Which of the following will cause the U.S. money supply to expand?

A commercial bank uses excess reserves to extend a loan to a customer

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 higher price level

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?

Bank reserves will increase and the money supply will eventually increase.

If the Fed wanted to institute a more expansionary monetary policy, which of the following would it be most likely to do

Buy government bonds from the public.

A decrease in the money supply will have which of the following effects?

It will raise the interest rate, causing a decrease in investment and a decrease in GDP.

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?

Loans and investments generally earn more interest income for the banks than excess reserves

Which of the following indicates the primary mechanism by which the money supply expands

The Fed purchases additional bonds, which increases the reserves available to the banking system.

As the Fed shifted to a highly expansionary monetary policy during the second half of 2008, why were banks reluctant to extend loans and make investments?

The demand for loans was weak and the business climate was uncertain.

If the Federal Reserve increases its bond purchases, the short-run effects will be

an increase in the money supply and lower real interest rates

If a customer deposits $1,000 cash into her checking account, the bank's

assets and liabilities both rise by $1,000

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

buy U.S. securities on the open market

When the Fed sells Treasury Bonds on the open market, it will tend to

decrease the money supply and raise interest rates

An unexpected increase in the supply of money will

reduce the real rate of interest and, thereby, trigger an increase in current spending by households and businesses.