Final Exam (Part 2)

In the Federal funds market, a bank that needs to meet reserve requirements can borrow reserves, usually for a period: A. Overnight B. Of a week C. Of a month D. Of six months

A

The Federal Reserve could reduce the money supply by: A. Selling government bonds in the open market B. Buying government bonds in the open market C. Operating the term auction facility D. Reducing the discount rate

A

The interest rate that the Fed charges banks for loans to them through the traditional channel is called: A. Discount rate B. Term auction rate C. Federal funds rate D. Reserve rate

A

The most frequently used monetary device for achieving price stability is: A. Open-market operations B. The discount rate C. The reserve ratio D. The prime interest rate

A

When people withdraw money from their deposits in the banking system, the: A. Excess reserves of the banking system will decrease B. Excess reserves of the banking system will increase C. Excess reserves of the banking system will not be affected D. Money supply will immediately decrease

A

Which of the following varies directly with the interest rate? A. The opportunity cost of holding money B. The transactions demand for money C. The asset demand for money D. The level of investment

A

A commercial bank has checkable-deposit liabilities of $50,000 and a reserve ratio of 20 percent. What is the amount of required reserves? A. $10,000 B. $50,000 C. $250,000 D. $1 million

A ($50,000*0.2 = $10,000)

A bank can get additional excess reserves by doing any of the following, except: A. Borrowing from other banks B. Buying Treasury securities from the Fed C. Receiving additional deposits D. Borrowing from the Fed

B

A wealthy executive is holding money for a good time to invest in the stock market. This action would be an example of the: A. Transactions demand for money B. Asset demand for money C. Creation of fiat money D. Use of money as a medium of exchange

B

Compared to fiscal policy, monetary policy has a much shorter: A. Recognition lag B. Administrative lag C. Operational lag D. Effects lag

B

During the Financial Crisis of 2007-2008, the FDIC increased deposit insurance coverage from: A. $50,000 to $100,000 per account B. $100,000 to $250,000 per account C. $200,000 to $500,000 per account D. $500,000 to $1,000,000 per account

B

If bond prices decrease, then the: A. Interest rate decreases B. Interest rate increases C. Transactions demand for money will decrease D. Transactions demand for money will increase

B

In the United States, exports of goods and services account for about what percentage of GDP (total output) in 2008? A. 6 percent B. 13 percent C. 24 percent D. 42 percent

B

Other things equal, an appreciation of the U.S. dollar would: A. Increase productivity and increase aggregate supply B. Decrease net exports and decrease aggregate demand C. Increase the prices of imported resources and decrease aggregate supply D. Decrease the supply of money and decrease aggregate demand

B

Other things equal, an increase in consumer wealth will: A. Increase aggregate supply B. Increase aggregate demand C. Reduce the price level D. Reduce the money supply

B

The basic purpose of imposing legal reserve requirements on commercial banks is to: A. Assure the liquidity of commercial banks B. Provide a device through which the credit-creating activities of banks can be controlled C. Provide a proper ratio between earning and no earning bank assets D. Provide the central banks with necessary working capital

B

The conduct of monetary policy in the United States is the main responsibility of the: A. U.S. Treasury B. Federal Reserve System C. Office of Management and Budget D. Bureau of Economic Analysis

B

The primary reason commercial banks must keep required reserves on deposit at Fed is to: A. Add to the liquidity of the commercial bank B. Allow the Fed to control the amount of bank lending C. Protect the deposits in the commercial bank against losses D. Ensure that depositors can withdraw their money if they wish to

B

There is an asset demand for money primarily because of which function of money? A. Legal tender B. Store of value C. Measure of value D. Medium of exchange

B

What is one of the advantages of monetary policy over fiscal policy? A. Its control over the size of Federal budget deficits B. The quickness with which it can be used C. The opportunity for broad political influence D. It can guarantee an expansion of aggregate demand when needed

B

When loans are repaid at commercial banks: A. Money is created B. Money is destroyed C. The assets of commercial banks increase D. The net worth of commercial banks increases

B

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce: A. The unemployment rate B. The inflation rate C. The target federal funds rate D. The discount rate

B

Which monetary policy tool was created in response to the Financial Crisis of 2007-2008? A. Discount rate B. Term auction facility C. Target federal funds rate D. Open market operations

B

Which monetary policy would most likely increase real GDP? A. Increasing reserve requirements B. Lowering target federal funds rate C. Selling government securities in the open market D. Increasing the discount rate

B

Which of the following statements is correct? A. Excess reserves may be found by subtracting actual from required reserves B. The supply of money declines when the public purchases securities from commercial banks C. Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks D. Commercial banks reduce the supply of money when they purchase government bonds from the public

B

Which of the following statements is true? A. The Federal funds rate will be higher than the prime interest rate B. The prime interest rate will be higher than the Federal funds rate C. The Federal funds rate and the prime interest rate will be the same D. The prime interest rate will be the same as the discount rate

B

A bank is in the position to make loans when required reserves: A. Equal actual reserves B. Equal excess reserves C. Are less than actual reserves D. Are greater than actual reserves

C

A consumer holds money to meet spending needs. This would be an example of the: A. Use of money as a measure of value B. Use of money as legal tender C. Transactions demand for money D. Asset demand for money

C

A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to: A. Reduce inflation in the economy B. Raise interest rates C. Ease monetary policy D. Tighten monetary policy

C

If the Federal funds rate: A. Increases, the prime interest rate will decrease B. Decreases, the prime interest rate will increase C. Increases, the prime interest rate will increase D. Decreases, the prime interest rate will not change

C

Inflation targeting refers to the: A. Actions of the Fed to change the Federal funds rate B. Use of best judgment in the conduct of monetary policy C. Stated goals of Fed policy set on the rate of inflation D. Change in the velocity of money to increase aggregate demand

C

Lowering the reserve ratio: A. Increases the total reserves in the banking system B. Also reduces the discount rate C. Turns required reserves into excess reserves D. Reduces the amount of excess reserves the banks keep

C

Money is "created" when: A. A depositor gets cash from the bank's ATM B. A bank accepts deposits from its customers C. People receive loans from their banks D. People spend the incomes that they receive

C

The Federal funds rate is the rate that banks pay for loans from: A. The Fed B. The U.S. Treasury C. Other banks D. Large Corporations

C

The interest rate that banks use as a benchmark rate for interest rates on a wide range of loans to businesses and individuals is the: A. Discount rate B. Term auction rate C. Prime interest rate D. Real interest rate

C

The purpose of an expansionary monetary policy is to increase: A. The GDP-gap B. The inflation rate C. Real GDP D. Interest rates

C

U.S. Treasury deposits at the Federal Reserve Banks are: A. A liability of the Federal Reserve Banks and the U.S. Treasury B. An asset of the Federal Reserve Banks and the U.S. Treasury C. A liability of the Federal Reserve Banks and an asset for the U.S. Treasury D. An asset of the Federal Reserve Banks and a liability for the U.S. Treasury

C

When the Fed wants to lower the Federal funds rate, it: A. Increases the discount rate B. Increases the reserve ratio C. Buys bonds from banks and the public D. Sells bonds to banks and the public

C

Which is considered an advantage of monetary policy compared to fiscal policy? A. The ability to reduce the budget deficit B. It does not have any of the time lags of fiscal policy C. Its protection from political pressure D. Its cyclical asymmetry

C

Which one of the following is a tool of monetary policy for altering the reserves of commercial banks? A. Issuing currency B. Check collection C. Open-market operations D. Acting as the fiscal agent for the Federal government

C

A trade deficit refers to a situation where: A. Government spending exceeds tax revenues B. A nation is buying less than it is selling to other nations C. Assets are less than liabilities D. Exports are less than imports

D

An increase in the money supply is likely to reduce: A. The general price level B. Nominal income C. Money demand D. Interest rates

D

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment? A. The purchase of government securities in the open market and an increase in taxes B. The sale of government securities in the open market and a decrease in taxes C. The sale of government securities in the open market and a decrease in government spending D. The purchase of government securities in the open market and an increase in government spending

D

In which case would the quantity of money demanded by the public tend to increase by the greatest amount? A. The interest rate increases and nominal GDP increases B. The interest rate increases and nominal GDP decreases C. The interest rate decreases and nominal GDP decreases D. The interest rate decreases and nominal GDP increases

D

Other things being equal, an expansion of commercial bank lending: A. Changes the composition, but not the size, of the money supply B. Is desirable during a period of demand-pull inflation C. Reduces the money supply D. Increases the money supply

D

The Federal Reserve alters the amount of the nation's money supply by: A. Reducing the liabilities of the banking system B. Controlling the assets of the nation's largest banks C. Minting coins and printing currency that is distributed to banks D. Manipulating the size of excess reserves held by commercial banks

D

The establishment of a Federal deposit insurance program resulted from the: A. Establishment of the Federal Reserve System in 1913 B. Speculation during World War I C. Stock market crash of 1987 D. Bank panics of 1930-1933

D

The major purpose of the Federal Reserve buying government securities in open market operations is to: A. Increase interest rates B. Raise money for government spending C. Reduce the excess reserves of banks D. Allow banks to increase their lending

D

The tools of monetary policy for altering the reserves of commercial banks are the: A. Tax rate, transfer payments, and level of government spending B. Consumer price index, inflation, and unemployment rate C. Public debt, budget surplus, budget deficit, and interest rates D. Discount rate, reserve ratio, open-market operations, and term auction facility

D

Which of the following Fed actions increases the excess reserves of commercial banks? A. Selling bonds to the public B. Selling bonds to commercial banks C. Increasing the discount rate D. Lower the reserve ratio

D

Which of the following statements is correct? A. When borrowers repay bank loans, the money supply is increased B. When borrowers take out bank loans, the money supply is decreased C. A single bank can legally lend an amount equal to its total reserves D. A bank can only grant loans to customers if it has excess reserves

D

T/F: If all depositors of a bank were to try withdrawing all their deposits at the same time, a good bank should be able to meet all the withdrawals.

F

T/F: If the monetary authority wishes to rein in inflation, it would buy government securities in the open market.

F

T/F: When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

F

T/F: An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

T

T/F: The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed control over money supply.

T

T/F: When a bank accepts additional deposits, its required reserves and excess reserves will both increase.

T