Macroeconomics Exam 4

The money multiplier is:

1 divided by the reserve requirement

The Federal Reserve System includes _____ regional banks.

12

If the reserve requirement is 25%, the potential money multiplier is:

4.

In the classical monetary transmission mechanism any change in _______ will bring about ________.

M a direct proportionate change in P

There are two ways for money to be initially deposited into the banking system. They include:

a cash deposit by a bank customer and an electronic reserve deposit by the government.

Which one of the following will cause the supply of loanable funds curve to shift rightward?

a perceived peak in an asset index like the Dow Jones Industrial Average

Because of the compounding effect:

a small loan balance can become large.

One of the key factors leading to the last economic crisis was:

a worldwide savings glut.

A policy of transparency in the Federal Reserve:

allows Wall Street to audit the Federal Reserve books.

The demand for loanable funds is downward-sloping because:

as interest rates fall, business find more projects to be profitable and thus want to borrow more.

In counteracting demand shocks, the Fed can achieve:

both full employment and price stability.

M1 includes:

cash, demand deposits, and other checkable deposits

A higher interest rate __________ consumption, investment, and _____________, which ___________ aggregate demand

decreases; imports; decreases

If the real interest rate were below the equilibrium real interest rate in the loanable funds market, an excess ________ for loanable funds would exist and the real interest rate would _______.

demand; rise

Thelma grew some carrots in her garden. She needs a winter coat. John has an extra coat he doesn't need but would like to bake some carrot cake. The two find each other and make an exchange. This situation is called the:

double coincidence of wants.

An individual bank can, at most, lend out all of its:

excess reserves.

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

expansionary; buying

Loosening monetary policy causes interest rates to ____ and consumption and investment to ____.

fall; increase

In the first century and a half of the United States' existence, paper money was backed by precious metals. Today, the U.S. dollar is no longer backed by gold or silver. The dollar today is:

fiat money.

The fractional reserve banking system refers to a system in which banks:

hold reserves equal to a fraction of their deposit liabilities.

Liquidity refers to:

how quickly, easily, and reliably an asset can be converted into a medium of exchange

The demand curve for loanable funds represents _____ and is _____.

investors; downward sloping

To say that the Fed is transparent means that the Fed:

is open regarding its monetary policy.

The national economic objectives that the Fed attempts to achieve include all the following actions EXCEPT:

keeping tax rates low.

M2 is ____ in dollar value than M1; it also contains ____ assets.

larger; less liquid

Ceteris paribus, suppose an economy institutes reforms that reduce government regulations. In this case the demand for loanable funds shifts ______ and the equilibrium interest rate _______.

left; rises

Some analysts blame the last economic crisis on Fed policy. They argue that:

low interest rates encouraged excessive mortgage borrowing, leading to the housing bubble.

In a liquidity trap:

monetary policy is ineffective in changing income and output

If the Fed sets a fixed rate for money supply growth, it is using:

monetary targeting.

If the economy is facing inflationary pressures, the Fed will:

raise interest rates.

If the economy has high levels of unemployment, the Fed will:

reduce interest rates.

When a financial institution provides a standardized financial product such as a mortgage, it is:

reducing transaction costs.

The Fed's Board of Governors consists of _____ members who are appointed by the _____ and confirmed by the _____.

seven; President; Senate

Which of the following items is NOT one of the primary tools of the Fed?

tax rates

The Federal Reserve rarely uses control of:

the discount rate.

If the Federal Reserve decides to increase the money supply:

the federal funds rate will fall.

After the banking crisis of 2008, the financial services industry had:

tighter regulations.

What are the primary functions of money?

unit of account, medium of exchange, store of value

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is:

$1.2 million

Assume that the Federal Reserve sets the reserve requirement at 10%. If a bank has $100 million in deposits, then its required reserves must equal:

$10 million.