MacroEconomics Exam #3

A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of: Select one: a. $2,000 b. $1,500 c. $1,250 d. $1,750

$1,500

A commercial bank has checkable-deposit liabilities of $50,000 and a required-reserve ratio of 20 percent. What is the amount of required reserves? Select one: a. $10,000 b. $50,000 c. $250,000 d. $1 million

$10,000

The fundamental objective of monetary policy is to assist the economy in achieving: Select one: a. A rapid pace of economic growth b. A money supply which is based on the gold standard c. A full-employment, noninflationary level of total output Correct d. A balanced-budget consistent with full-employment

A full-employment, noninflationary level of total output

An asset's liquidity refers to its ability to be: Select one: a. Bought and stored b. Increasing in value over time c. Used and enjoyed d. A means of payment

A means of payment

What function is money serving when you use it when you go shopping? Select one: a. A store of value b. A unit of account c. A medium of deferred payment d. A medium of exchange

A medium of exchange

What function is money serving when you deposit money in a savings account? Select one: a. A store of value b. A unit of account c. A checkable deposit d. A medium of exchange

A store of value

The government bail-out of large institutions creates the problem of moral hazard, which means that these large firms will: Select one: a. Not be able to pay back the bail-out money b. Have an incentive to make highly risky investments c. Now have to play it safer to reduce their risks d. Be limited in terms of the securities and services that they get involved in

Have an incentive to make highly risky investments

The fractional reserve system of banking started when goldsmiths began: Select one: a. Accepting deposits of gold for safe storage b. Charging people who deposited their gold c. Using deposited gold to produce products for sale to others d. Issuing paper receipts in excess of the amount of gold held

Issuing paper receipts in excess of the amount of gold held

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are: Select one: a. $50,000 b. $100,000 c. $900,000 d. $1 million

$100,000

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the above data. If the balance sheet was for the whole commercial banking system rather than a single bank, then loans and deposits could expand by a maximum of approximately: Select one: a. $120,000 b. $213,333 c. $333,500 d. $415,373

$213,333

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. If the required reserve ratio is 10 percent, the bank has excess reserves of: Select one: a. $28,000 b. $22,000 c. $18,000 d. $16,000

$22,000

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the above data. First National Bank can make new loans of up to: Select one: a. $50,000 b. $41,000 c. $32,000 d. $27,000

$32,000

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves? Select one: a. $25,000 b. $37,000 c. $44,000 d. $47,000

$37,000

Refer to the table above. The size of the M2 money supply is: Select one: a. $2,054 billion b. $2,696 billion c. $5,899 billion Correct d. $6,792 billion

$5,899 billion

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively: Select one: a. $30,000 and $150,000 b. $50,000 and $250,000 c. $50,000 and $500,000 d. $100,000 and $500,000

$50,000 and $250,000

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by: Select one: a. $75 b. $125 c. $200 d. $325

$75

The following table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent: Refer to the above information. If there is a deposit of $10 billion of new currency into checking accounts in the banking system, excess reserves will increase by: Select one: a. $1 billion b. $2 billion c. $9 billion d. $10 billion

$9 billion

The Federal Reserve System is divided into: Select one: a. 5 districts b. 7 districts c. 12 districts d. 15 districts

12 districts

The Federal Reserve System was established by the Federal Reserve Act of: Select one: a. 1913 b. 1933 c. 1945 d. 1955

1913

Refer to the graph above. If the supply of money was $200 billion, the interest rate would be: Select one: a. 1 percent b. 2 percent Correct c. 3 percent d. 4 percent

2 percent

If the required reserve ratio were 15 percent, the value of the monetary multiplier would be: Select one: a. 5.50 b. 6.67 c. 7.32 d. 8.54

6.67

Money is "created" when: Select one: a. A depositor deposits money at the bank b. A bank grants a loan to a customer c. Someone lends money to a friend or a family member d. People use money to pay for stuff they buy from one another

A bank grants a loan to a customer

Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government subsequently implements expansionary policy, then the effect of such policy is to shift: Select one: a. AD1 to AD2, which increases the price level from P1 to P2, and increases real domestic output from Q3 to Q2 b. AS1 to AS2, which increases the price level from P1 to P2, and decreases real output from Q1 to Q2 c. AD1 to AD2, which increases the price level from P2 to P3, and increases real output from Q2 to Q1 Correct d. AS2 to AS3 which increases the price level from P2 to P3, and decreases real output from Q2 to Q3

AD1 to AD2, which increases the price level from P2 to P3, and increases real output from Q2 to Q1

A bank is in the position to make loans when required reserves: Select one: a. Equal actual reserves b. Equal excess reserves c. Are less than actual reserves d. Are greater than actual reserves

Are less than actual reserves

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the: Select one: a. Transactions demand for money b. Asset demand for money Correct c. Creation of fiat money d. Use of money as a medium of exchange

Asset demand for money

A checkable deposit at a commercial bank is a(n): Select one: a. Liability to the depositor and an asset to the bank b. Liability to both the depositor and the bank c. Asset to the depositor and a liability to the bank d. Asset to both the depositor and the bank

Asset to the depositor and a liability to the bank

A bank can get additional excess reserves by doing any of the following, except: Select one: a. Borrowing from other banks b. Buying Treasury securities from the Fed c. Receiving additional deposits d. Borrowing from the Fed

Buying Treasury securities from the Fed

Refer to the graph above which shows the supply and demand for money where Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following an autonomous increase in the asset demand for money? Select one: a. C Correct b. D c. G d. I

C

The Federal Reserve System of the U.S. is the country's: Select one: a. Financial adviser b. Comptroller or Accountant c. Central bank d. Deposit insurance provider

Central bank

The Federal Reserve System performs many functions but its most important one is: Select one: a. Issuing currency b. Controlling the money supply c. Providing for check clearing and collection d. Acting as fiscal agent for the U.S. government

Controlling the money supply

Which of the following is not true about the use of a credit card? Select one: a. It is a means of deferring payment for a short period of time b. It allows people to "economize" on the use of money c. Credit-card balances are part of M2, but not part of M1 d. A credit card transaction is not the same as a debit card transaction

Credit-card balances are part of M2, but not part of M1

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. If the reserve ratio is 10 percent and a check for $10,000 is drawn and cleared in favor of another bank, then the actual reserves of the bank above will: Select one: a. Still be $40,000 b. Decrease $10,000 c. Decrease $11,000 d. Decrease $9,000

Decrease $10,000

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will: Select one: a. Increase the excess reserves of member banks and thus increase the money supply b. Increase the excess reserves of member banks and thus decrease the money supply c. Decrease the excess reserves of member banks and thus decrease the money supply d. Decrease the excess reserves of member banks and thus increase the money supply

Decrease the excess reserves of member banks and thus decrease the money supply

Which group is responsible for the policy decision of changing the money supply? Select one: a. Federal Open Market Committee b. Office of Management and Budget c. Thrift Advisory Council d. Federal Advisory Council

Federal Open Market Committee

The conduct of monetary policy in the United States is the main responsibility of the: Select one: a. U.S. Treasury b. Federal Reserve System Correct c. Office of Management and Budget d. Bureau of Economic Analysis

Federal Reserve System

During the Financial Crisis of 2007-2008, Goldman Sachs, Morgan Stanley, and other financial firms with heavy exposure to the mortgage-related problems rushed to become bank holding companies in order to: Select one: a. Follow the order of the U.S. Treasury b. Obtain bail-out money from Congress c. Get massive loans from the Fed d. Acquire funds from the general public

Get massive loans from the Fed

The causes of the skyrocketing mortgage default rates that triggered the financial crisis in 2007-2008 include the following, except: Select one: a. Mortgage lending became very lax b. Many people took on mortgages that they were simply incapable of repaying c. Housing price increased drastically d. Real estate values started declining after having risen for many years

Housing price increased drastically

Other things being equal, an expansion of commercial bank lending: Select one: 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

Increases the money supply

The Federal Reserve System is an: Select one: a. Agency that is controlled by Congress b. Agency that is under the direction of the President c. Independent agency of government d. Agency ran by popularly-elected officials

Independent agency of government

The transactions demand for money is least likely to be a function of the: Select one: a. Price level b. Interest rate Correct c. Level of national income d. Frequency of wage and salary payments

Interest rate

Which line in the graph above would best illustrate the transactions demand for money curve? Select one: a. Line 1 b. Line 2 Correct c. Line 3 d. Line 4

Line 2

In response to the financial crisis and the Great Recession, the Fed took the following actions, except: Select one: a. Reduced the federal funds rate to practically zero b. Lowered the required reserve ratio Correct c. Initiated a few rounds of quantitative easing d. Engaged in a policy of forward commitment

Lowered the required reserve ratio

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to: Select one: a. Increase aggregate demand by increasing the interest rate b. Decrease aggregate demand by increasing the interest rate c. Increase aggregate demand by decreasing the interest rate d. Make no change in the interest rate Correct

Make no change in the interest rate

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that: Select one: a. The asset demand for money is $3,200 billion b. The total demand for money is $4,800 billion c. On average, each dollar will be spent five times a year Correct d. The supply of money needs to be increased to meet the demand

On average, each dollar will be spent five times a year

The Federal funds rate is the rate that banks pay for loans from: Select one: a. The Fed b. The U.S. Treasury c. Other banks d. Large Corporations

Other banks

When there is inflation in the economy, it implies that the: Select one: a. Price index is rising and the purchasing power of money is also rising b. Price index is falling and the purchasing power of money is also falling c. Price index is falling and the purchasing power of money is rising d. Price index is rising and the purchasing power of money is falling

Price index is rising and the purchasing power of money is falling

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to: Select one: a. Completing the circle b. Pushing on a string c. Filling in the blanks d. Checking the list

Pushing on a string

Cash held by a bank in its vault is a part of the bank's: Select one: a. Reserves b. Liabilities c. Money supply d. Net worth

Reserves

Which of the following items are included in money supply M2 but not M1? Select one: a. Federal Reserve notes b. Coins c. Savings deposits d. Checkable deposits

Savings deposits

The so-called moral hazard problem refers to one's tendency to: Select one: a. Buy less of something if one does not have good information about it b. Avoid something that is considered risky or hazardous c. Get insurance against some possible hazard or danger d. Take on greater risk if one is at least partly insured against losses

Take on greater risk if one is at least partly insured against losses

Which of the following "backs" the value of money in the United States? Select one: a. The gold stored in the Federal Reserve Bank of New York b. The acceptability of it as a medium of exchange c. The willingness of foreign government to hold U.S. dollars d. The size of the budget surplus in the U.S. government

The acceptability of it as a medium of exchange

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to: Select one: a. Increase the reserve ratio b. Increase the discount rate c. Buy government securities in the open market Correct d. Sell government securities in the open market

The correct answer is: Buy government securities in the open market

Which of the following is considered an advantage of monetary policy compared to fiscal policy? Select one: a. It is blunter and more politically obvious than fiscal policy b. It does not have any of the time lags of fiscal policy c. Its relative isolation from political pressure Correct d. Its cyclical asymmetry

The correct answer is: Its relative isolation from political pressure

The Federal Reserve alters the amount of the nation's money supply by: Select one: 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 Correct

The correct answer is: Manipulating the size of excess reserves held by commercial banks

Currency and checkable deposits are: Select one: a. Assets of the Federal Reserve Banks or of financial institutions b. Redeemable for gold and silver from the Federal Reserve System c. Of intrinsic value which determines the relative worth of money d. The major components of money supply M1

The major components of money supply M1

Which of the following varies directly with the interest rate? Select one: a. The opportunity cost of holding money Correct b. The transactions demand for money c. The asset demand for money d. The level of investment

The opportunity cost of holding money

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment? Select one: 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 Correct

The purchase of government securities in the open market and an increase in government spending Correct

The multiple by which the commercial banking system can expand the supply of money is equal to: Select one: a. The ratio of actual reserves to required reserves b. The reciprocal of the federal funds rate c. The reciprocal of the reserve ratio d. The ratio of required reserves to actual reserves

The reciprocal of the reserve ratio

The "bail-out" money that went to giant financial institutions like Citibank and Goldman Sachs, along with General Motors and Chrysler during the Financial Crisis and the Great Recession, came from the: Select one: a. American Recovery and Reinvestment Act b. Troubled Assets Relief Program c. Primary Dealer Credit Facility d. Term Securities Lending Facility

Troubled Assets Relief Program