Macro Exam #3 practice

If P equals the price level expressed as an index number and $V equals the value of the dollar, then

$V = 1/P.

The Federal Reserve System regulates the money supply primarily by a. altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. b. restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. c. altering the reserves of commercial banks, largely through sales and purchases of government bonds d. controlling the production of coins at the U.S. mint.

c. altering the reserves of commercial banks, largely through sales and purchases of government bonds

Other things equal, if the supply of money is reduced a. the demand for money will increase. b. the interest rates will fall. c. bond prices will fall. d. investment spending will increase.

c. bond prices will fall.

Overnight loans from one bank to another for reserve purposes entail an interest rate called the

federal funds rate

The Federal Reserve System consists of which of the following? a. Board of Governors and the 12 Federal Reserve Banks b. Federal Open Market Committee and Office of Thrift Supervision c. U.S. Treasury Department and Bureau of Engraving and Printing d. Federal Deposit Insurance Corporation and Controller of the Currency

Board of Governors and the 12 federal reserve banks

A fractional reserve banking system a. prevents the Federal Reserve from influencing the money supply. b. is susceptible to bank "panics" or "runs" c. only tends to exist in developing economies. d. prevents money creation through the lending process.

is susceptible to bank "panics" or "runs"

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

m = 1/R.

Coins held in commercial bank vaults are?

not part of the nation's money supply

The discount rate is the interest

rate at which the Federal Reserve Banks lend to commercial banks.

The Federal Open Market Committee (FOMC) a) provides advice on banking stability to the Fed. b) follows the actions and operations of financial markets to keep them open and competitive. c) sets policy on the sale and purchase of government bonds by the Fed d) monitors regulatory banking laws for member banks.

sets policy on the sale and purchase of government bonds by the Fed

The Three functions of money are?

- medium of exchange - unit of account - store of value

The problem of cyclical asymmetry refers to the idea that a. an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary policy may not achieve a contraction of the money supply. b. cyclical downswings are typically of longer duration than cyclical upswings. c. the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy. d. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply. C

a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier? a. the reserve ratio b. the discount rate c. open-market operations d. the federal funds rate

a. the reserve ratio

When a check is drawn and cleared, the a. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. b. bank against which the check is cleared loses reserves and deposits equal to the amount of the check c. bank receiving the check loses reserves and deposits equal to the amount of the check. d. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.

b. bank against which the check is cleared loses reserves and deposits equal to the amount of the check

When the required reserve ratio is decreased, the excess reserves of member banks are a. increased and the multiple by which the commercial banking system can lend is reduced. b. increased and the multiple by which the commercial banking system can lend is increased c. reduced and the multiple by which the commercial banking system can lend is increased. d. reduced, but the multiple by which the commercial banking system can lend is unaffected.

b. increased and the multiple by which the commercial banking system can lend is increased

An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14-year terms is to: a. avoid the trouble of constantly having to deal with new members. b. insulate members from political pressures that could result in inflation c. help older members avoid job searches before retiring. d. attract younger people with lots of time left in their careers.

b. insulate members from political pressures that could result in inflation

When a commercial bank has excess reserves... a. its reserves exceed its assets. b. it is in a position to make additional loans c. it is charging too high an interest rate on its loans. d. its actual reserves are less than its required reserves

b. it is in a position to make additional loans

When commercial banks use excess reserves to buy government securities from the public, a. commercial bank reserves increase. b. new money is created c. the money supply falls d. checkable deposits decline

b. new money is created

The primary purpose of the legal reserve requirement is to a. provide a dependable source of interest income for commercial banks. b. provide a means by which the monetary authorities can influence the lending ability of commercial banks c. prevent banks from hoarding too much vault cash. d. prevent commercial banks from earning excess profits.

b. provide a means by which the monetary authorities can influence the lending ability of commercial banks

Which of the following statements is correct? a. A single commercial bank can safely lend a multiple amount of its excess reserves. b. When borrowers repay bank loans, the supply of money increases. c. A bank's liabilities plus its net worth equal its assets d. The actual reserves of a commercial bank equal its excess reserves minus its required reserves.

c. a bank's liabilities plus its net worth equal its assets

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy? a. raise the legal reserve requirement b. recall Federal Reserve Notes from circulation c. buy bonds in the open market d. raise the discount rate

c. buy bonds in the open market

An increase in the legal reserve ratio a. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier. b. increases the money supply by increasing excess reserves and increasing the monetary multiplier. c. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier d. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

c. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier

Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to a. not change its lending activity, as excess reserves are not eligible to receive interest paid on reserve accounts. b. use those excess reserves to increase its lending. c. hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend. d. move a portion of those excess reserves into its required reserve account.

c. hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in a. securities firms and insurance companies. b. thrifts and insurance companies. c. mutual fund companies and pension fund companies. d. commercial banks and thrifts

commercial banks and thrifts

Which of the following is correct? a. Granting and repaying bank loans do not affect the money supply. b. Granting a bank loan destroys money; repaying a bank loan creates money. c. Both the granting and repaying of bank loans expand the aggregate money supply. d. granting a bank loan creates money; repaying a bank loan destroys money

d. granting a bank loan creates money; repaying a bank loan destroys money

Which of the following tools of monetary policy is considered the most important on a day-to-day basis? a. paying interest on excess reserves b. the discount rate c. the reserve ratio d. open-market operations

d. open-market operations

The Federal Reserve System performs the following functions except a. providing financial services to the Federal gov. b. lending money to banks and thrifts c. issuing the paper currency in the economy d. providing banking services to the general public

d. providing banking services to the general public

When the receipts given by goldsmiths to depositors were used to make purchases: a. existing banking laws were violated. b. a fractional reserve banking system was created. c. the gold standard was created. d. the receipts became in effect paper money

d. the receipts became in effect paper money

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will

decrease by $2 billion