Money and Banking Exam 4 Study Guide

By 2020, the euro had become the currency of

19 countries in Europe

The Treaty of Maastricht was signed in

1992

The components of the formula for the Taylor rule include each of the following, except which one?

30-year U.S. Treasury bond rate

Which one of the following statements is not correct?

A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate

The quantity theory of money along with the assumption of constant velocity can explain which one of the following?

At a given level of money growth, the higher the level of real growth the lower the level of inflation will be

Which one of the following cities does not have a Federal Reserve Bank located in it?

Denver

The Fed holds its euro reserves primarily in the form of

German government bonds

The index used by the ECB's Governing Council to measure inflation is a euro-area-wide measure of consumer prices called the

Harmonized Index of Consumer Prices

Which one of the following statements is most correct?

It is impossible to have high, sustained inflation without monetary accommodation

Which one of the following expresses the equation of exchange?

MV = PY

The agreement to form a European monetary union was formalized in the Treaty of

Maastricht

Considering the Federal Reserve Districts, which one of the following is true?

No district coincides with a single state

If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then RR would equal

RR = R - ER

Which one of the following statements is not correct?

Sterilized changes in foreign exchange reserves alter a country's monetary base

The Fed sells German bonds to commercial banks. Which one of the following best describes the impact on the Fed's and the banking system's balance sheets resulting from this transaction?

The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Over the years, most monetary policy experts would agree with each of the following statements, except which one?

Transparency in policy making hinders accountability

Which one of the following would be classified as precautionary demand for money?

You put $1,000 in a savings account at your bank for emergencies

Executive board members of the European System of Central Banks are appointed by

a committee made up of heads of state of member countries

A typical FOMC meeting would best be described as

a fairly formal session with not much give and take

The federal funds rate is stated as

a nominal interest rate

Changes in the federal funds rate influence the economy's growth rate through all of the following except by

altering the real interest rate when inflation is changing quickly

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show

an increase in the asset category of securities and the liability category of reserves by $2 billion

The ECB's Governing Council has price stability as a primary objective and has defined price stability as

an inflation rate below, but close to, 2 percent over the medium term.

Money held for precautionary reasons is included in the demand for money

as part of transactions demand

Reserves are

assets of commercial banks and liabilities of the central bank

Raising interest rates following the use of unconventional policy tools depends on

both the size and composition of the central bank's balance sheet and the toolbox available to the central bank

The objectives set for the Fed by Congress are

by design, quite vague, allowing the Fed to really set its own goals

Capital controls

can be controls on capital inflows or outflows

A sterilized foreign exchange intervention will

change the composition of the asset side of the central bank's balance sheet

Each of the following items would appear as assets on the central bank's balance sheet except which one?

currency

Which one of the following is a liability on the central bank's balance sheet?

currency

The conventional policy tools available to the Fed include each of the following, except which one?

currency-to-deposit ratio

The primary purpose of meetings of the FOMC is to

decide on how to influence financial conditions

The market for reserves derives from the fact that

desired reserves do not always equal actual reserves

In the United States, loans made by Federal Reserve to banks are

discount loans

The European Central Bank has ensured independence by

explicitly forbidding the Governing Council from taking instructions from any government.

The information contained in the Fed's Tealbook is released to the public

five years after the FOMC meeting in which it is used

If M2 is four times larger than M1, the velocity of M1 should be

four times larger than the velocity of M2

Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision

immediately after the meeting

As a person's wealth increases, we would expect the demand for money to

increase but at a rate less than dollar for dollar

All other factors constant, as the nominal interest rate increases, the opportunity cost of money

increases, the velocity of money increases, and the quantity of money people want to hold decreases

If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as the

inflation rate in country A—the inflation rate in country B

A major contributing factor to the instability of money demand over the past 25 years is the

introduction of financial instruments that pay higher returns than money but can be used as a means of payment

The demand for money varies

inversely with the liquidity of other financial assets

The Chairman of the Board of Governors

is appointed by the U.S. President, selected from the Board of Governors

Discount lending by the Fed

is usually small except in times of crisis

A country would be better off fixing its exchange rate if

it is well-integrated with the economy of the country to whose currency its currency is fixed

Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) to determine the change in the target federal funds rate for every one percent decrease in the rate of inflation. This will

lower the target federal funds rate by 1.5percent

Unconventional policy tools are useful when

lowering the target interest rate to zero is not sufficient to stimulate the economy

If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then m would equal

m = M/MB

The ECB's

marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks

During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet?

mortgage-backed securities

The Fed will make a discount loan to a bank during a crisis

only if the bank is sound financially and can provide collateral for the loan

Seasonal credit provided by the Fed is not as common as it used to be because

other sources for long-term loans have developed for banks in these areas

A lesson that policymakers should learn from the Argentinian experience with currency boards is that

poor fiscal policies can undermine any monetary policy regime

Between 1970 and 2000, the Fed

published targets for money growth and rarely hit them

In the long run, a country's exchange rate is determined by

purchasing power parity

Most of the Fed's income is

returned to the U.S. Treasury

The Lucas critique focuses specifically on the

role that economic policymaking has on people's economic behavior

If an investor thinks interest rates are likely to rise, ceteris paribus, she would

sell her bonds and hold more money

The FOMC

sets the target federal funds rate range

How many members are on the Board of Governors of the Federal Reserve System?

seven

The Fed is reluctant to change the required reserve rate because

small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits

The U.S. dollar is to the fifty states as the euro is to the

states of the European Monetary Union

Which one of the following would be categorized as an unconventional monetary policy tool?

targeted asset purchases

The real power in the FOMC lies with

the Chairman of the Board of Governors

The three branches of the Federal Reserve System include each of the following, except which one?

the Federal Deposit Insurance Corporation

If the Federal Reserve is to be independent, then the quantity of securities it purchases must be determined by

the Federal Reserve itself

Most economic historians believe that

the gold flows played a central role in spreading the Great Depression

In the late 1970s and early 1980s, the velocity of money increased significantly. The main reason(s) for the increase was

the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates

A good monetary policy instrument is

tightly linked to monetary policy objectives

Given that velocity was more sensitive to an increase in the opportunity cost of holding money in the 1990s and 2000s as compared to the 1980s, using the relationship from the 1980s to make monetary policy in the 1990s

would not have produced the desired results