Chapters 15 and 16

A bank becomes insolvent when the a) value of a bank's loans falls so far that the bank can no longer pay back its depositors. b) bank's assets are less than those of other banks. c) bank's assets are greater than its liabilities. d) value of a bank's loans rises so rapidly and exceeds the value of its deposits.

A

In the case of a negative shock to aggregate demand, the central bank should a) increase the rate of growth in the money supply to restore spending growth. b) decrease the rate of growth in the money supply to control inflation. c) do nothing. d) decrease the rate of growth in the price level to keep real growth high.

A

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the a) wrong direction and increase GDP volatility. b) right direction and lower GDP volatility. c) right direction and increase GDP volatility. d) wrong direction and lower GDP volatility.

B

The reserve ratio (RR) is the a) amount the money supply expands with each dollar increase in reserves. b) ratio of reserves to deposits. c) ratio of deposits to reserves. d) overnight lending rate from one major bank to another.

B

U.S. currency is printed by the a) The Comptroller of the Currency. b) The U.S. Department of the Treasury. c) The Federal Reserve. d) The President's Council of Economic Advisors

B

When a bank has short-term liabilities that are greater than its short-term assets but overall its liabilities are less than assets, the bank is considered a) insolvent. b) illiquid. c) solvent. d) liquid.

B

Monetary policy is a ______ means of popping a bubble, because monetary policy ______ push down the price of specific commodities. a) good; can't b) crude; can c) crude; can't d)

C

Which of the following definitions of the money supply is the most expansive? a) the monetary base b) M1 c) M2 d) currency

C

Because the United States has a fractional reserve banking system, banks must hold a) 100 percent of deposits as reserves. b) no currency in their vaults. c) more than 100 percent of deposits as reserves. d) less than 100 percent of deposits as reserves.

D

In the dynamic AS-AD diagram, a tight monetary policy shifts the a) AD curve to the left. b) AD curve to the right. c) Solow growth rate to the right. d) Solow growth rate to the left.

A

Moral hazard occurs when banks and other financial institutions a) take on too much risk, hoping that the Fed and regulators will bail them out. b) hesitate to lend due to concern over excessive risk. c) fail and bring down other institutions in the system. d) fail to maintain their assets exceeding the liabilities.

A

Over which of the following definitions of the money supply does the Fed have the most control? a) the monetary base b) savings deposits c) M2 d) M1

A

Paying a higher interest rate on reserves held at the Fed will tend to a) decrease the money supply. b) increase the money supply. c) have an ambiguous effect on the money supply. d) not change the money supply.

A

The Fed uses each of the following to control the money supply EXCEPT a) prime interest rate lending. b) paying an interest rate on bank reserves held at the Fed. c) open market operations. d) discount rate lending.

A

The Fed's power to influence aggregate demand is constrained by a) uncertainty and an inability for everyone to fully understand the complexity of the economy. b) the significant amount of U.S. dollars held in foreign reserves. c) the president and Congress. d) contracting fiscal policy.

A

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the a) right direction and lower GDP volatility. b) wrong direction and lower GDP volatility. c) right direction and increase GDP volatility. d) wrong direction and increase GDP volatility.

A

The discount rate is the a) interest rate banks pay when they borrow directly from the Fed. b) overnight lending rate from one major bank to another. c) ratio of reserves to deposits. d) interest rate on short-term Treasury securities.

A

The effective reserve ratio is determined primarily by a) How liquid banks wish to be. b) How greedy banks wish to be. c) The number of bank employees. d) The size of banks' vaults.

A

When the Fed sells government bonds in the open market, a) the monetary base decreases and interest rates increase. b) both the monetary base and interest rates increase. c) both the monetary base and interest rates decrease. d) the monetary base increases and interest rates decrease.

A

A bank becomes insolvent when the a) bank's assets are greater than its liabilities. b) value of a bank's loans falls so far that the bank can no longer pay back its depositors. c) bank's assets are less than those of other banks. d) value of a bank's loans rises so rapidly and exceeds the value of its deposits.

B

Discount rate lending occurs when the Federal Reserve a) provides reserves to banks through auction. b) lends reserves directly to banks. c) buys corporate bonds in lagging sectors of the economy. d) buys and sells government bonds.

B

In addition to monetary policy, the Fed also has the power to a) oversee Treasury transactions. b) regulate banks. c) control the mortgage market. d) monitor the housing market

B

In the case of a negative shock to aggregate demand, the central bank should a) decrease the rate of growth in the price level to keep real growth high. b) increase the rate of growth in the money supply to restore spending growth. c) decrease the rate of growth in the money supply to control inflation. d) do nothing.

B

Open market operations occur when the Fed a) changes the discount rate on lending to banks. b) buys and sells government bonds. c) changes the rate of interest paid on reserves. d) sets up the term auction facility.

B

Quantitative easing occurs when the a) government raises income and other taxes. b) Fed buys long-term securities. c) Fed sells long-term securities. d) government lowers income and other taxes.

B

When a bank has short-term liabilities that are greater than its short-term assets but overall its liabilities are less than assets, the bank is considered a) solvent. b) illiquid. c) liquid. d) insolvent.

B

Which of the following definitions of the money supply is the most expansive? a) the monetary base b) M2 c) currency d) M1

B

Which of the following is NOT true of the Federal Reserve System? a) It maintains the bank account of the U.S. Treasury. b) It carries out policies passed by the federal government. c) It serves as the bankers' bank. d) It regulates the nation's money supply.

B

Monetary policy is a ______ means of popping a bubble, because monetary policy ______ push down the price of specific commodities. a) good; can't b) crude; can c) crude; can't d) good; can

C

The discount rate is the a) ratio of reserves to deposits. b) interest rate on short-term Treasury securities. c) interest rate banks pay when they borrow directly from the Fed. d) overnight lending rate from one major bank to another.

C

The federal funds rate is the a) ratio of reserves to deposits. b) interest rate banks pay when they borrow directly from the Fed. c) overnight lending rate from one major bank to another. d) interest rate on short-term Treasury securities.

C

The key difference between quantitative easing and a typical open market purchase is that quantitative easing a) involves state and local government securities, while a typical open market purchase involves federal government securities. b) involves small-term government securities, while a typical open market purchase involves long-term government securities. c) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities. d) does not involve the purchase of government securities, while a typical open market purchase involves the purchase of government securities.

C

The money multiplier (MM) is the a) overnight lending rate from one major bank to another. b) ratio of deposits to reserves. c) amount that the money supply expands with each dollar increase in reserves. d) ratio of reserves to deposits.

C

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between a) too low a rate of growth or too low a rate of inflation. b) too high a rate of growth or too low a rate of inflation. c) too low a rate of growth or too high a rate of inflation. d) too high a rate of growth or too high a rate of inflation.

C

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising a) unemployment. b) Solow growth. c) output growth. d) inflation.

D

Open market operations involve the Federal Reserve a) providing reserves to banks through auction. b) competing with investment banks for treasury securities. c) lending reserves directly to banks. d) buying and selling government bonds.

D

The federal funds rate is the a) interest rate banks pay when they borrow directly from the Fed. b) ratio of reserves to deposits. c) interest rate on short-term Treasury securities. d) overnight lending rate from one major bank to another.

D

The money multiplier (MM) is the a) overnight lending rate from one major bank to another. b) ratio of deposits to reserves. c) ratio of reserves to deposits. d) amount that the money supply expands with each dollar increase in reserves.

D

The risk that the failure of a few large financial institutions can affect the entire financial system is called a) solvency risk. b) moral hazard. c) credit risk. d) systemic risk.

D

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between a) too high a rate of growth or too high a rate of inflation. b) too high a rate of growth or too low a rate of inflation. c) too low a rate of growth or too low a rate of inflation. d) too low a rate of growth or too high a rate of inflation.

D

Which of the following is regarded as a policy rule? a) making policy on the fly b) adjusting policy actions to deal with the nature of the economic shocks c) changing the money supply growth with discretion d) keeping the money supply growth rate consistent with a given inflation rate

D