MacroEconomics; Exam Four; Chapters 25-28

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Which of these facts is true about the creation of the Federal Reserve System (the Fed)?

The Fed was created in 1913.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Which body of the Federal Reserve System sets the majority of U.S. monetary policy?

The Federal Open Market Committee

{DSM Ch 26: Monetary Policy} If the Federal Reserve wishes to decrease the money supply to slow the economy, it will conduct:

an open market sale.

{DSM Ch 26: Monetary Policy} The federal funds rate is the rate:

at which banks lend to each other.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The money multiplier for the United States is __________.

between 2 and 3

{DSM Ch 26: Monetary Policy} One of the criticisms of the Fed's active intervention to stabilize the economy is that:

it is difficult to time monetary policy because of the impact lags.

{DSM Ch 26: Monetary Policy} If the economy moves into a recession, monetarists argue that the Fed should:

keep the money supply growing at a constant rate.

{DSM Ch 26: Monetary Policy} When the interest rate decreases, __________.

there is movement down a stationary money demand curve

{Homework Ch 26: Monetary Policy} The federal funds rate is the interest rate charged

when one bank lends money to another bank

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.

Monetary policy

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called the:

quantity theory of money.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

​$333 billion increase

{Homework Ch 25: Money, Banks, and the Federal Reserve System} In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply?

​Households, firms, and banks.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:

provides funds to troubled banks that cannot find any other source of funds.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:

$1,000 billion in deposits.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals:

$1.5 billion

{Homework Ch 25: Money, Banks, and the Federal Reserve System} The United States is divided into ____ Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of ____ members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a _____year, renewable term as the chairman.

12 , 7 , 4

{Homework Ch 25: Money, Banks, and the Federal Reserve System} In a fractional reserve banking system ​, what is the difference between a​ "bank run" and a​ "bank panic?"

A bank run involves one​ bank; a bank panic involves many banks.

{DSM Ch 26: Monetary Policy} Which of these will shift the money demand curve to the right?

An increase in real GDP

{DSM Ch 26: Monetary Policy} Which of these statements best describes the scenario shown in these graphs?

An open market purchase leads to an increase in the money supply which causes interest rates to fall and investment spending to rise.

{DSM Ch 26: Monetary Policy} The Taylor rule for federal funds rate targeting does which of these things?

It links the Fed's target for the federal funds rate to economic variables.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} The figure to the right shows a breakdown of the M1 definition of the money supply. Which area corresponds to the amount of checking account​ deposits? [ The pie chart Is labeled with shaded areas "A", 'B", and "C". "A" is a very, very small area. "B" Is only slightly smaller than "C". "C" is a little more than half of the diagram.]

C

{Homework Ch 26: Monetary Policy} Which of the following is not an example of monetary​ policy? A. an increase in the money supply B. an increase in interest rates C. an increase in taxes D. all of the above are examples of monetary policy

C. an increase in taxes

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Which of the following is NOT a function of​ money? A.Store of value B.Unit of account C.Acceptability D.Medium of exchange

C.Acceptability

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Which of the following is a monetary policy tool used by the Federal Reserve​ Bank? A.Decreasing the rate at which banks can borrow money from the Federal Reserve. B.Increasing the reserve requirement from 10 percent to 12.5 percent. C.Buying​ $500 million worth of government​ securities, such as Treasury bills. D.All of the above.

D. All of the above

{Homework Ch 26: Monetary Policy} In the figure to the​ right, when the money supply increased from MS1 to MS2​, the equilibrium interest rate fell from​ 4% to​ 3%. Why? A. Initially, firms hold more money than they want relative to other financial assets. B. Increased demand for Treasury securities drives up their prices. C. Increased demand for Treasury securities drives down their interest rate. D. All of the above.

D. All of the above.

{Homework Ch 26: Monetary Policy} Which of the following events is most likely to cause a Right shift in the money demand​ curve? A. Decrease in real GDP or increase in the price level B. Increase in real GDP or decrease in the price level C. Decrease in real GDP or decrease in the price level D. Increase in real GDP or increase in the price level

D. Increase in real GDP or increase in the price level

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M×V=P×Y​? A. V=(P×Y)/M B. P​ = the GDP deflator C. V​ = Average number of times a dollar is spent on goods and services D. M​ = M1 definition of the money supply E. All of the above

E. All of the above

{DSM Ch 26: Monetary Policy} Which of these factors were primary cause of the recession of 2007-2009?

Falling housing prices

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Evaluate the following​ statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

{Homework Ch 26: Monetary Policy} Which of the following describes a liability on the Federal​ Reserve's balance​ sheet? A. loans to another financial institution B. items that the Federal Reserve owns C. Federal Reserve notes D. government securities​ (bonds)

Federal Reserve notes

{DSM Ch 26: Monetary Policy} Which of these is not one of the four main goals of monetary policy?

Home ownership

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Which of these predictions can be made using the growth rates associated with the quantity equation?

If the money supply grows at a faster rate than real GDP, there will be inflation.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

{Homework Ch 26: Monetary Policy} Which of the following is NOT a monetary policy goal of the Federal Reserve bank​ (the Fed)? A. Stable financial markets B. Low unemployment C. Higher living standards D. Low prices

Low prices

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:

M1

{Homework Ch 25: Money, Banks, and the Federal Reserve System} The M2 definition of the money supply includes :

M1, savings​ accounts, small time​ deposits, and money markets.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} When we say that money serves as a unit of account, we mean that:

Prices are quoted in terms of money.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.

Seven, 14-year terms, President

{DSM Ch 26: Monetary Policy} How did the FOMC react to the recession of 2007-2009?

The FOMC reduced the target for the fed funds rate steadily in 2008.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Velocity is defined as:

V = (P × Y)/M

{Homework Ch 26: Monetary Policy} Which of the following accurately describes a recent change in the Federal​ Reserve's balance​ sheet?

The Federal Reserve has more loans to financial markets and institutions on the assets side of its balance sheet.

{Homework Ch 26: Monetary Policy} Which of the following accurately describes contractionary monetary​ policy? A. The Federal Reserve causes an increase in the money supply. B. The Federal Reserve is trying to decrease the unemployment rate. C. The Federal Reserve increases interest rates. D. The Federal Reserve is​ "stepping on the​ gas" of the economy.

The Federal Reserve increases interest rates.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The Federal Reserve System is _______?

The central bank of the United States

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Who is the chairperson of the Federal Open Market Committee (FOMC)?

The chairperson of the Board of Governors

{Homework Ch 26: Monetary Policy} As the figure to the right​ indicates, the Fed can affect both the money supply and interest rates.​ However, in recent​ years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed​ target?

The federal funds rate

{DSM Ch 26: Monetary Policy} Which of these graphs depicts the impact of a decrease in the aggregate price level?

The graph on the right

{Homework Ch 25: Money, Banks, and the Federal Reserve System} According to the quantity theory of money​, inflation results from which of the​ following?

The money supply grows faster than real GDP.

{Homework Ch 26: Monetary Policy} In the figure to the​ right, the opportunity cost of holding money _____________ when moving from Point A to Point B on the money demand curve.

The opportunity cost is what you give up in order to engage in a particular activity. The interest rate is the opportunity cost of holding money. When interest rates on Treasury bills and other financial assets are​ low, the opportunity cost of holding money is​ low, so the quantity of money demanded by households and firms will be high. When interest rates on Treasury bills and other financial assets are​ high, the opportunity cost of holding money is​ high, so the quantity of money demanded by households and firms will be low. ​Therefore, the money demand curve slopes downward. Lower interest rates cause firms and households to switch from financial​ assets, like Treasury​ bills, to money.

{DSM Ch 26: Monetary Policy} Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?

To reduce real GDP in order to reduce inflation, which occurs if real GDP is above potential GDP.

{DSM Ch 26: Monetary Policy} When is the opportunity cost of holding money higher?

When interest rates are high

{DSM Ch 25: Money, Banks, and the Federal Reserve System} When many depositors decide simultaneously to withdraw their money from a bank, there is __________.

a bank run

{DSM Ch 26: Monetary Policy} Monetarism is a school of economic thought that favors:

a monetary growth rule.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:

buy U.S. Treasury securities from the public.

{DSM Ch 26: Monetary Policy} If the FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to:

buy U.S. Treasury securities.

{Homework Ch 26: Monetary Policy} When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it _____ U.S. Treasury securities.

buys ; sells.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} An initial decrease in a​ bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserves.

{DSM Ch 26: Monetary Policy} If the Fed decreases the money supply and increases interest rates in order to reduce inflation, it is engaging in __________.

contractionary monetary policy

{Homework Ch 25: Money, Banks, and the Federal Reserve System} The U.S. dollar can best be described as ____?

fiat money

{DSM Ch 26: Monetary Policy} All of these will most likely increase as a result of expansionary monetary policy except:

government purchases.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

{Homework Ch 26: Monetary Policy} The prime rate

is the basis of the interest rate on many other types of loans

{Homework Ch 26: Monetary Policy} The federal funds rate

is the rate that banks charge each other for​ short-term loans of excess reserves.

{Homework Ch 26: Monetary Policy} The Federal Reserve may try to lower the federal funds rate to

make people more willing to borrow

{DSM Ch 25: Money, Banks, and the Federal Reserve System} A bank panic occurs when:

many banks experience runs at the same time.

{DSM Ch 26: Monetary Policy} As interest rates decline, stocks become a __________ attractive investment relative to bonds, and this causes the demand for stocks and their prices to __________.

more, rise

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Credit cards are:

not part of the money supply.

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The Fed conducts monetary policy primarily through:

open market operations.

{DSM Ch 26: Monetary Policy} One of the primary goals of the Federal Reserve is __________.

price level stability

{DSM Ch 25: Money, Banks, and the Federal Reserve System} The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.

required reserves

{Homework Ch 26: Monetary Policy} The ____________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

{Homework Ch 26: Monetary Policy} When we say that the Federal Reserve has lowered the interest​ rate, we mean that it has lowered its target for

the federal funds rate

{DSM Ch 26: Monetary Policy} If the price level increases, __________.

the money demand curve shifts to the right

{DSM Ch 25: Money, Banks, and the Federal Reserve System} How many Federal Reserve districts are there?

12

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:

$400

{Homework Ch 25: Money, Banks, and the Federal Reserve System} Which of the following is true with respect to ​hyperinflation? A.In the presence of​ hyperinflation, firms and households avoid holding money. B.It can be hundreds—even thousands—of percentage points per year. C.It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. D.All of the above.

D.All of the above.

{Homework Ch 25: Money, Banks, and the Federal Reserve System} The use of money .... A.eliminates the double coincidence of wants. B.reduces the transaction costs of exchange. C.allows for greater specialization. D.all of the above.

D.all of the above.

{Homework Ch 26: Monetary Policy} Which of the following accurately describes expansionary monetary​ policy? A. The Federal Reserve increases interest rates. B. The Federal Reserve is trying to increase the unemployment rate. C. The Federal Reserve causes an increase in the money supply. D. The Federal Reserve is​ "stepping on the​ brakes" of the economy.

The Federal Reserve causes an increase in the money supply.

{DSM Ch 26: Monetary Policy} Because of the __________ in forecasting the economy, many economists believe the Fed __________ take a very active role in trying to stabilize the economy.

difficulties, should not

{DSM Ch 25: Money, Banks, and the Federal Reserve System} Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:

each additional dollar of reserves creates $5 of deposits.

{Homework Ch 26: Monetary Policy} When the Federal Reserve provides liquidity to banks by lending to​ them, it is acting as a

lender of last resort

{DSM Ch 25: Money, Banks, and the Federal Reserve System} On the balance sheet of a bank:

loans are listed as an asset.

{DSM Ch 26: Monetary Policy} When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is __________ , so the quantity of money demanded will be __________.

low, high

{DSM Ch 26: Monetary Policy} If real GDP increases:

the money demand curve shifts to the right.

{DSM Ch 26: Monetary Policy} If the FOMC orders the trading desk to sell Treasury securities:

the money supply curve will shift to the left and the equilibrium interest rates will rise.