Unit 4 Manley, Manley Unit 3, Chapter 6 quiz, Chapter 5 quiz, Chapter 4 Quiz
CMoney-creating transactions of a bank ( _________________ ) directly impact the money supply. (Check all that apply) banks taking in deposits banks printing money banks making loans the Fed acting as Lender of Last Resort
banks making loans
Steven Manley buys his handsome self a $10,000 bond sold at a 6% yield. However, if the market interest rate decreases to 4%, the value of the bond increases to $___. (no comma necessary)
15000
The money multiplier is _______ if the required reserveratio is 5%
20
If an initial new deposit is $2000 and the required reserve ratio is 5 percent, or 1/20, the total new money that can be created by the cycle of new loans is $ ___.
38000
If $1 was worth 100 cents in 1983 (the base year), then $1 is worth ____ cents in 2015 when the CPI is 234. (round to nearest whole number)
43
Check all of the following that are true. Supply comes from the first three resources, namely, land, labor, and capital. These exist before the money Money is the return (income) for producing what people want money cannot be "created" from nothing, but products can There are plenty of things that people want that are still yet to be supplied such as a cure for cancer and other diseases, a time machine, or a fountain of youth, among others. If demand created supply, certainly such products would have long been developed by now demand is not how much we want a product, but rather our ability to purchase it, i.e., money
???
Check each of the following regarding Monetary Policy conducted by Congress and the President MS is eased in recessions MS is tightened by raising tax rates monetary policy is "easy" when the MS is increasing rapidly monetary policy is "tight" when the MS is decreasing monetary policy is "tight" when the MS is increasing slowly
???
The Federal Reserve has never allowed the US to experience a financial panic or depression. True False
False
The level and growth of the NDP is directly impacted by the amount of Business Investment which, in turn, is directly impacted by the money supply (the cost of renting money). True False
False
The Fed aggressively lowered interest rates in 2008 all the way down to nearly zero percent and kept those historically low rates for the following six years. True False
True
The Federal Reserve lowered interest rates all the way down to one percent in 2003, the lowest rates since the 1950s. True False
True
The Federal Reserve lowered interest rates following the terrorist attacks of 9/11 to avoid worsening the recession caused by the dot-com bust True False
True
The Obama administration represented the only post-depression administration to fail to have at least one year of three percent GDP growth True False
True
The U.S. money supply is currently defined by the Federal Reserve system in 2 (or sometimes 3) aggregate forms. True False
True
The banking system facilitates the savings and investment process that is essential to economic stability and growth. True False
True
The implementation of monetary policy can be complex because of the international position of the U.S. dollar. True False
True
The interest rate charged by one bank when another bankborrows reserves from that bank is called the Federal Funds rate. True False
True
The money multiplier process also works in reverse when a loan is repaid since fewer checkable funds are then available to generate excess reserves. True False
True
The quantity theory of money assumes there is a strong relationship between the quantity of money and the price level. True False
True
When the growth of the money supply exceeds the growth of production, demand-pull inflation is the result. In other words, money is not backed by faith, or even gold. It is backed up by products. True False
True
Let's assume a required reserve ratio of 10 percent. If First Bank lends out its excess reserve of $90 and that money is deposited in Second Bank, then Second Bank has an excess reserve of $______ to lend. $900 $81 $9 $10
$81
The functions of the Federal Reserve System are diverse. Among the functions performed by the Fed are which of the following: (Check all that apply) Acts as a "bankers' bank" by holding commercial bank deposits and lending money to commercial banks Changes tax rates Provides a check clearinghouse for commercial banks by electronic crediting and debiting of those banks' accounts Establishes federal government regulations on the private sector Provides banking services for the U.S. federal government and supervises commercial banks in accordance with banking law Changes spending on the part of the federal government
Acts as a "bankers' bank" by holding commercial bank deposits and lending money to commercial banks. Provides a check clearinghouse for commercial banks by electronic crediting and debiting of those banks' accounts Provides banking services for the U.S. federal government and supervises commercial banks in accordance with banking law
Which of the following are true? The Fed tried to fix the mistake by aggressively raising interest rates, but this led to the market crash in October 1929 and subsequent recession All of the above choices are correct A widespread loss of confidence in the banking system led to massive bank runs in which consumers withdrew their money from banks and essentially hid the money under their mattress, effectively taking currency out of circulation The Federal Reserve inflated a massive stock market and debt bubble in the "Roaring 20s" by keeping interest rates too low
All of the above choices are correct
According to monetarists, a "monetary rule" would be very constraining for the Fed and would only increase business cycles. True False
False
Assume $1,000 is deposited in a checkable account by Mr. X in Bank A. Assume further that the reserve requirement is 0.20. The total amount of money which can be created by this excess reserve at Bank A is $4,000 . True False
False
Money (as defined in M1) is created in the loan process because when a bank makes a loan. These funds are usually deposited into a savings account. True False
False
One reason that monetary policy is believed to be very effective by it supporters is because it does not have an equal impact across individuals. True False
False
Only funds inside a bank's vault are counted as part of the M1 money supply. True False
False
Paper money is actually circulating debt of the FDIC and has little intrinsic value. True False
False
______________ believe that there is only a small amount of crowding-out if any at all. none of these choices are correct Classical economists Monetarists Keynesian economists
Keynesian economists
Steven Manley deposits $1,000,000 (chump change for him) into his checking account at his local bank. Check each of the following that apply. M1 does not change M2 does not change M1 decreases M2 decreases
M1 does not change M2 does not change
Steven Manley deposits $98,756 (chump change for him) into a CD at his local bank. Check each of the following that apply. M1 does not change M2 does not change M1 decreases M2 decreases
M2 does not change M1 decreases
Check all of the following that are true about the housing market in the mid to late 2000s. Many people who could not afford the higher monthly payments were also unable to sell their house because it became worth less than the amount for which they had purchased it. Such mortgages are called underwater mortgages With many people unable to repay their mortgages, the banks who had loaned them the money began to incur serious losses as the value of assets called mortgage-backed securities began to increase dramatically Banks holding these now toxic assets could no longer make loans to customers or to each other, and many banks and financial institution began to teeter on the edge of collapse Foreclosures also lowered the property values of other homes in their neighborhood, even if those homeowners were still paying their mortgages
Many people who could not afford the higher monthly payments were also unable to sell their house because it became worth less than the amount for which they had purchased it. Such mortgages are called underwater mortgages Banks holding these now toxic assets could no longer make loans to customers or to each other, and many banks and financial institution began to teeter on the edge of collapse Foreclosures also lowered the property values of other homes in their neighborhood, even if those homeowners were still paying their mortgages
The Fed's three basic tools operate by adjusting interest rates (rental price of money) and the __________ of money. Supply ethical intent Demand moral equivilency
Supply
Check all of the following that are true. Once the tax rate reductions took affect in 1982, unemployment peaked at 10.8 percent but began to fall much more slowly than it did during the recovery in the 2010s The Reagan administration responded with a tax rate reduction across all brackets, most notably reducing the top marginal tax rate from 70 percent down to 50 percent in 1981 legislation and further lowering it to 28 percent in 1986 Reagan famously summed up his view of government intervention in the economy during his first inaugural address by declaring, "In this present [economic] crisis, government is not the solution to our problem. Government is the problem." GDP growth rates skyrocketed following the recession, and even the worst year of economic growth (2.8 percent in 1989) in the 1980s was better than the best year of growth during the Obama administration (2.7 percent in 2014)
The Reagan administration responded with a tax rate reduction across all brackets, most notably reducing the top marginal tax rate from 70 percent down to 50 percent in 1981 legislation and further lowering it to 28 percent in 1986 Reagan famously summed up his view of government intervention in the economy during his first inaugural address by declaring, "In this present [economic] crisis, government is not the solution to our problem. Government is the problem." GDP growth rates skyrocketed following the recession, and even the worst year of economic growth (2.8 percent in 1989) in the 1980s was better than the best year of growth during the Obama administration (2.7 percent in 2014)
Check all of the following that are true about the housing crisis of the mid to late 2000s. The huge bubble in the housing market burst when housing prices began to drop around 2006 and 2007 at the same time that interest rates rose the easy money policy of extremely low interest rates of the early 2000s incentivized people to buy larger and more expensive homes than ever before Many home buyers took out mortgages that they could not really afford, but they were given the loans because the government pressured banks to do so and because the government guaranteed the loans. Based on the assumption that housing prices would drop in the future, more and more people began to buy houses expecting to be able to refinance them later or sell them for a profit in the future.
The huge bubble in the housing market burst when housing prices began to drop around 2006 and 2007 at the same time that interest rates rose the easy money policy of extremely low interest rates of the early 2000s incentivized people to buy larger and more expensive homes than ever before Many home buyers took out mortgages that they could not really afford, but they were given the loans because the government pressured banks to do so and because the government guaranteed the loans.
There were three rounds of QE: $600 billion in QE1 in early 2009, QE2 in November 2010 that was $600 billion worth of securities purchases, and QE3 that started in September 2012 and rose up to $85 billion per month worth of securities purchases that continued until October 2014 True False
True
Through the operation of the Goldsmiths' principle and making loans on excess reserves, new money and purchasing power was (were) created in the local economy. True False
True
Check all of the following that are true. The quick rise in interest rates predictably slowed down the economy, causing a recession at the end of the 1970s and early 1980s that resulted in the highest unemployment rates since the Great Depression This combination of high unemployment and high inflation was called regreflation. In the late 1970s, interest rates reached the highest levels in U.S. history, almost reaching 20 percent in the very early 1980s Reagan famously summed up his view of government intervention in the economy during his first inaugural address by declaring, "In this present [economic] crisis, government is not the solution to our problem. Government is the problem."
The quick rise in interest rates predictably slowed down the economy, causing a recession at the end of the 1970s and early 1980s that resulted in the highest unemployment rates since the Great Depression In the late 1970s, interest rates reached the highest levels in U.S. history, almost reaching 20 percent in the very early 1980s Reagan famously summed up his view of government intervention in the economy during his first inaugural address by declaring, "In this present [economic] crisis, government is not the solution to our problem. Government is the problem."
A tight money policy (high interest rates) will increase the value of the dollar, reduce exports, slow the American economy, but will attract a return of American dollars spent for imports. True False
True
According to the Monetarist theory, the money supply is a critical causal force that determines the nominal GDP. True False
True
Bond prices and interest rates are inversely related to each other. True False
True
Commercial banks loan each other money at the federal funds interest rate. True False
True
Critics of the Monetarist theory, such as Keynesians, argue that both V and Q are unstable. True False
True
Despite that and the trillions of dollars the Fed pumped into the economy from 2009 through 2015, the economy grew at only a meager pace True False
True
Gross domestic product (GDP) grew at an average of only 1.8 percent from the end of the recession until the end of the Obama administration True False
True
One of the reasons the Federal Reserve was created was to help the US avoid financial panics and depressions. True False
True
One reason that monetary policy is believed to be very significant is because of its speed and flexibility in implementation. True False
True
Profit is a measure of how well a product satisfies customers, and as such profit reflects an improvement in the standard of living for the customer as well as the entrepreneur who gets rewarded for producing a product that improves the lives of others True False
True
Check all of the following that are true. although there was very little unemployment and inflation, the escalation of the Vietnam War and Lyndon B. Johnson's Great Society programs drastically increased government spending, causing prices to steadily rise This created demand-pull inflation, leading President Johnson to end the gold standard in 1965. This meant the dollar was no longer backed by gold, but by faith in the Federal Reserve's policies LBJ pressured the Fed to avoid such rate hikes because he believed raising interest rates would dampen economic growth and jeopardize his War on Poverty agenda Over the course of the 1970s, the dollar lost more than half of its value as prices more than doubled
although there was very little unemployment and inflation, the escalation of the Vietnam War and Lyndon B. Johnson's Great Society programs drastically increased government spending, causing prices to steadily rise LBJ pressured the Fed to avoid such rate hikes because he believed raising interest rates would dampen economic growth and jeopardize his War on Poverty agenda Over the course of the 1970s, the dollar lost more than half of its value as prices more than doubled
If the required reserve ratio is increased from 10 percent to 12 percent and there is a $10,000 new deposit, the maximum increase in the money supply will be: < $10,000 between $10,000 and $100,000 $100,000 > $100,000
between $10,000 and $100,000
At certain times banks may not be willing to fully loan out all of their _____________ and customers may not be willing to borrow. legal reserves required reserves excess reserves none of these choices are correct
both legal reserves and excess reserves (wrong)
A shortage of funds in the money market can be addressed by the Federal Reserve ___________ bonds to promote addition to the supply of money. (Check all that apply) buying selling printing stabilizing
buying
The Federal Open Market Committee (FOMC) makes decisions regarding the______________________. discount rate margin requirements on stock purchases (primarily common stock) reserve requirements buying and selling of securities (primarily Treasury bonds)
buying and selling of securities (primarily Treasury bonds)
Check each of the following characteristics of money. can be created "out of thin air" by banks M1 includes currency and checkable deposits M2 includes M1 plus money market mutual funds and small time deposits is created when banks make loans
can be created "out of thin air" by banks M1 includes currency and checkable deposits M2 includes M1 plus money market mutual funds and small time deposits is created when banks make loans
Check each of the following functions of the Federal Reserve. has 9 district branches the closest district bank is in Houston conducts fiscal policy can change the reserve ratio
can change the reserve ratio
Check each of the following tools of the Federal Reserve. increase taxes change interest rates change the reserve ratio conduct open-market operations change gov't spending
change interest rates change the reserve ratio conduct open-market operations
The three most powerful tools of the Fed are ___. changing the reserve ratio credit controls open-market operations margin requirements moral hazard changing the interest rate
changing the reserve ratio open-market operations changing the interest rate
Changes in the money supply M1 relate strongly to changes in _____________ that are determined largely by loans made by the banking system. (Check all that apply) savings deposits small time deposits checkable deposits U.S. bonds
checkable deposits
_____________________ at commercial banks are considered part of the "money supply" because they represent the debts of those banks that are circulating as purchasing power. (check all that apply) checking accounts savings accounts CD's none of these choices are correct
checking accounts
Money is __________ when a bank makes a loan to a customer. destroyed created stabilized not affected
created
In "financial panics" prior to 1913, loans were often recalled by the lenders leading to __________ in the money supply and additional "runs" on the banking system. increases decreases no changes all of these choices are correc
decreases
Check each of the following tools of the Federal Reserve. decreases the reserve ratio in recessions decreases interest rates in recession sells securities in recessions decreases tax rates in recessions
decreases the reserve ratio in recessions decreases interest rates in recession
Making the correct adjustments in the money supply can be _______ for the Fed because the economy is ______. difficult; always changing easy; always the same easy; constantly changing difficult; always the same
difficult; always changing
During periods of recession a(n) ___________ money policy is appropriate to encourage business expansion with low interest rate. none of these choices are correct tight easy stable
easy
The process of controlling the money supply is a tremendous responsibility for the Fed since the health of the ___________ is at stake. housing market none of these choices are correct entire economy stock market
entire economy
Check each of the following characteristics of money. gets its value from its purchasing power is anything backed by gold can only be created by the Federal Reserve can be divided into M1 and M2 based on liquidity
gets its value from its purchasing power can be divided into M1 and M2 based on liquidity
Check each of the following that applies to the Federal Reserve. Established in 1913 during the Hoover administration has a Board of Governors consisting of 7 members each member of the Board serves 14 year staggered terms each member of the Board is nominated by President and confirmed by the Senate the Board of Governors is responsible for conducting open-market operations
has a Board of Governors consisting of 7 members each member of the Board serves 14 year staggered terms each member of the Board is nominated by President and confirmed by the Senate
In a recession the money supply can be _____________ by the Fed buying securities. (check all that apply) increased decreased stabilized left constant
increased
During a period of _____________, a tight money policy is recommended to control over expansion of the money supply. depression deflation inflation recession
inflation
In the graph below (the market for money), the ___________ is determined by the total demand for money intersecting with the total supply of money. price of a dollar interest rate price of borrowing or lending money purchasing power
interest rate price of borrowing or lending money
Check each of the following that applies to the federal government's bank bailout in 2008. it followed the stock market boom earlier that year it was called "TARP", the Troubled Asset Relief Program. it was an example of fiscal policy set by Congress and President Bush it was an example of monetary policy by the Federal reserve it can be argued that it helped stop further bank collapses it was President Bush's first inclination as to how to respond to the banking crisis
it was called "TARP", the Troubled Asset Relief Program. it was an example of fiscal policy set by Congress and President Bush it can be argued that it helped stop further bank collapses
Check each of the following that applies to the bank bailout in 2008. it was not President Bush's first inclination regarding how to respond to the banking crisis was $285 billion worth of government spending (loans to failing banks) was needed because the banks were thought to be "too big to fail" was a better example of socialism than capitalism
it was not President Bush's first inclination regarding how to respond to the banking crisis was needed because the banks were thought to be "too big to fail" was a better example of socialism than capitalism
The term ___________________ means that the American dollar is the official unit for all monetary transactions within the United States. (check all that apply) barter commodity token legal tender
legal tender
A Goldsmith could hold some gold in reserve for depositors' withdrawals, but ________________ excess gold and thereby make a profit from depositors' funds. loan out sell hoard none of these choices are correct
loan out
Check each of the following that are related to an "easy" money policy. lower interest rates dollar appreciates exports from the US increase lower interest rates discourage Americans from spending money in the US Lower interest rates discourage foreigners from investing in America
lower interest rates exports from the US increase Lower interest rates discourage foreigners from investing in America
Check each of the following that are minor controls of the Fed used in a recession. more government spending (stimulus) lower margin requirements deceasing the MS Lowering credit controls encouraging banks to make more loans lowering the reserve ratio
lower margin requirements Lowering credit controls encouraging banks to make more loans
Check each of the following regarding the Fed's response to the financial crisis in 2008. lowered interest rates QE1 QE2 QE3 QE4 lowered taxes
lowered interest rates QE1 QE2 QE3
Raising the reserve ratio __________ the ability of banks to create money (make loans) and decreases a bank's ability to make a profit. doesn't change lowers none of these choices are correct raises
lowers
Check each of the following functions of the Federal Reserve. serves as a lender of first resort manages member banks conducts monetary policy serves as the US government's bank
manages member banks conducts monetary policy serves as the US government's bank
Check each of the following characteristics of money. medium of exchange used in a barter economy can be anything that people will accept as payment for goods or service is a unit of account
medium of exchange can be anything that people will accept as payment for goods or service
The money control process is called________________. fiscal policy stabilization policy monetary policy the policy of truth
monetary policy
Changing the reserve requirement is the _______________ tool of the Fed. (Check all that apply) least powerful most frequently used most powerful least use
most powerful least used
Assets = liabilities + ____ Steven Manley's pride (which is enormous) credit cards John Stossel's mustache none of these
none of these
People hold the same cash balances for _______________ regardless of the interest rate. (check all that apply) speculation investment 401k's none of these choices are correct
none of these choices are correct
The Fed sets the percentage of depositor funds which must be retained by the bank in "legal reserves" (cash in the vault or _________________). on deposit with the Fed with other commercial banks Treasury bonds Treasury bills
on deposit with the Fed
Check each of the following related to the Quantity Theory of Money. the equation of exchange is M*V = P*Q Keynesians argue that V and P are not stable Monetarists argue that fiscal (and monetary for that matter) policy are weak due to the crowding-out effect Monetarists such as Milton Friedman argue that the Fed should grow the MS at the same rate as potential increases in real GDP
the equation of exchange is M*V = P*Q Monetarists argue that fiscal (and monetary for that matter) policy are weak due to the crowding-out effect Monetarists such as Milton Friedman argue that the Fed should grow the MS at the same rate as potential increases in real GDP
Check each of the following that applies to the Federal Reserve. open-market operations are completed by the NY Fed the Board of Governors is the policy-making institution the Board of Governors is responsible for setting the discount rate and the reserve ratio (requirement) the Federal Advisory Council consists of private citizens who provide input to the Board of Governors the Board of Governors must implement the recommendations of the Federal Advisory Council the Fed reports to Congress but Congress cannot tell the Fed what to do
open-market operations are completed by the NY Fed the Board of Governors is the policy-making institution the Board of Governors is responsible for setting the discount rate and the reserve ratio (requirement) the Federal Advisory Council consists of private citizens who provide input to the Board of Governors the Fed reports to Congress but Congress cannot tell the Fed what to do
Check each of the following characteristics of money. rare has anti-counterfeit measures can only be backed by precious metals is portable can exist electronically serves as a store of value
rare has anti-counterfeit measures is portable can exist electronically serves as a store of value
The ______________ is too powerful to be changed very often because a small change is magnified throughout the banking system. (Check all that apply) reserve ratio open market operations discount rate margin requirements
reserve ratio
The Board of Governors is the policy making body at the FED and is responsible for setting the discount rate (rate of interest charged to commercial banks) and the ____________________ (the amount of customer deposits which commercial banks must hold back and not loan out). reserve requirements federal funds rate hold back excess reserves
reserve requirements
Check each of the following that are advantages of monetary policy. speed and flexibility input from president and Congress equal impact across citizens with regard to income, location, or politics unequal impact across industries
speed and flexibility equal impact across citizens with regard to income, location, or politics
Money functions as a __________________ when it is held over a period of time. (Check all that apply) store of value unit of account gold or other precious metals medium of exchange
store of value
Money functions as a __________________ when it is held over a period of time. (Check all that apply) unit of account store of value gold or other precious metals medium of exchange
store of value
An active involvement by _____ in the money creation process is often desired to assure a healthy economy. the Congress the President the Federal Reserve the Supreme Court
the Federal Reserve
An active involvement by _____ in the money creation process is often desired to assure a healthy economy. the Supreme Court the President the Federal Reserve the Congress
the Federal Reserve
Check each of the following regarding the reserve ratio (or requirement). one of the minor tools of the Fed the most powerful tool of the Fed has a "double impact" because it changes excess reserves and the money multiplier used very frequently by the Fed is the minimum percentage of depositor funds that must be retained by commercial banks in legal reserves (vault cash or stored at the Fed)
the most powerful tool of the Fed has a "double impact" because it changes excess reserves and the money multiplier is the minimum percentage of depositor funds that must be retained by commercial banks in legal reserves (vault cash or stored at the Fed)
Check each of the following that apply regarding the price of borrowing money. the price of borrowing money is called the interest rate the transaction demand for money depends heavily on interest rates the asset demand for money depends heavily on interest rates the Federal Reserve controls the demand for borrowing money consumers and investors control the demand for borrowing money the equilibrium interest rate occurs where the quantity of money demanded equals the quantity of money supplied
the price of borrowing money is called the interest rate the asset demand for money depends heavily on interest rates consumers and investors control the demand for borrowing money the equilibrium interest rate occurs where the quantity of money demanded equals the quantity of money supplied
With the complexity of economic activity the ____________ of money is not directly controlled by the Fed. velocity multiplier acceleration none of these choices are correct
velocity
Check each of the following that are contributed to the housing crisis around 2007 and 2008. very low interest rates up from the early 2000's through 2006 an oversupply of houses on the market Federal Reserve printing too much money President Bush's TARP (bailout) rising interest rates beginning around 2006
very low interest rates up from the early 2000's through 2006 an oversupply of houses on the market rising interest rates beginning around 2006
