Chapter 13 Macro Maldonado

The _____ is an example of the concept of income. a. consumer price index b. annual GDP per capita of an economy c. money multiplier d. GDP deflator

annual GDP per capita of an economy

what is the central bank?

institution that oversees the banking system and regulates the money supply

When interest rates rise, this chain of events occurs: a. investment falls, aggregate demand falls. b. investment rises, aggregate demand rises. c. investment rises, aggregate demand falls. d. investment falls, aggregate demand rises.

investment falls, aggregate demand falls.

the federal reserve system includes:

- 7 members appointed by the president and congress - 14-year terms - located in D.C. - board of governors,

what is monetary policy?

- actions that the federal reserve system takes to change interest rates and the money supply - aim is to affect GDP, inflation, and employment

expansionary policy for reserve requirements:

- decreasing the reserve requirements means banks can create more money - money multiplier increases and money supply increases

What if the fed wants to decrease the money supply and increase interest rates?

- sells t-bills - supply of reserves fall - open market sale shifts supply to the left

Which of the following is true of money and income? a. Income accrues over a period of time; money is measured at a particular point in time. b. Income is measured with regard to a particular household while c. money is measured with regard to a particular firm. c. Both income and money are measured at a particular point of time. d. Both income and money are measured over a particular period of time.

Income accrues over a period of time; money is measured at a particular point in time.

Which of the following is an argument in favor of central bank independence? a. Independence ensures that fiscal policy implemented by the Fed leads to low unemployment rates. b. Independence permits objective decisions regarding monetary policy that is not based on politics. c. Independence ensures that monetary policy reinforces inflationary fiscal policies. d. Independence permits the Fed to correct any deficits in the federal budget without government intervention.

Independence permits objective decisions regarding monetary policy that is not based on politics.

Which statement about risk is incorrect? a. A risk premium is the additional interest rate that a lender charges a borrower that has a high probability of failing to repay their loan in full or on time. b. Riskier borrowers pay a higher interest rate than safer borrowers. c. Risk spreads widen during financial crises. d. Risk premiums tend to fall during recessions

Risk premiums tend to fall during recessions

Which is not a way for the Fed to increase aggregate demand? a. The purchase of Treasury securities b. A lower discount rate c. A lower reserve requirement d. The decrease of taxes

The decrease of taxes

Which of the following is true of the market for bank reserves? a. The equilibrium price is the interest rate. b. The demand for reserves is upward sloping. c. The supply of reserves is downward sloping. d. Federal reserve policy will change the demand for reserves.

The equilibrium price is the interest rate.

what is the federal funds rate?

The interest rate one bank charges another for a loan

Which of the following makes it difficult for the Fed to perfectly predict the changes in the money supply due to open-market operations? a. The amount of deposits within the banking system b. The uncertainty with regard to government fiscal policies c. The fluctuation in the level of international trade with the rest of the world d. The variability of the interest rate

The uncertainty with regard to government fiscal policies

If _____, banks are likely to hold additional excess reserves. a. there is an open-market sale of Treasury bills by the Fed b. banks anticipate an expansionary fiscal policy c. the federal funds rate in an economy is extremely high d. bank loans to customers look risky and interest rates are low

bank loans to customers look risky and interest rates are low

The Fed's open-market operations control the money supply... a. by creating money in the Treasury to finance bonds. b. by adjusting the bond prices through major stock exchanges. c. by adjusting the reserves in the banking system. d. by forcing changes in the assets of the nonbank public.

by adjusting the reserves in the banking system.

Monetary policy tools do not include a. changes to the reserve requirement. b. changes to the discount rate. c. changes to government spending. d. open-market operations.

changes to government spending.

The Federal Open Market Committee (FOMC) a. does not include the Board of Governors. b. consists of the Board of Governors, the president of the Federal Reserve Bank of New York, and four district bank presidents. c. makes decisions regarding the GDP growth rate and federal budget deficits. d. mandatorily consults the Senate and the president while making decisions.

consists of the Board of Governors, the president of the Federal Reserve Bank of New York, and four district bank presidents.

The Federal Reserve district banks are... a. headed by officials elected by the citizens of the United States. b. banks that operate as not-for-profit organizations. c. corporations whose stockholders are the member banks. d. run by the citizens of the United States.

corporations whose stockholders are the member banks.

Suppose the Fed buys a Treasury bill from the public. It can finance this purchase by... a. borrowing funds from central banks of other countries. b. creating new reserves in bank accounts. c. generating new Federal Reserve notes and coins. d. increasing the income tax rate.

creating new reserves in bank accounts.

The Fed will most likely _____ if it wanted to increase the money supply. a. sell commodity money b. increase the repo rate c. increase the federal funds rate d. decrease the reserve requirement

decrease the reserve requirement

Given the relationship between bond prices and interest rates, when the Fed buys Treasuries, interest rates ____ and bond prices ______. a. increase, increase b. decrease, decrease c. increase, decrease d. decrease, increase

decrease, increase

The reserves supply schedule... a. has a negative slope because people need more money to finance transactions as interest rates rise. b. has a positive slope because as interest rates rise, banks will find loans more profitable. c. has a positive slope because the Fed increases money supply at higher interest rates. d. has a negative slope because the opportunity cost of holding excess reserves increases as interest rates rise.

has a positive slope because as interest rates rise, banks will find loans more profitable.

A(n) _____ is likely to cause an upward movement along the reserve demand schedule. a. increase in the price level b. decrease in real GDP c. increase in interest rates d. decrease in tax rates

increase in interest rates

When the Fed purchases Treasuries, the supply of reserves ________, and the interest rate ______. a. increases, increases b. decreases, decreases c. increases, decreases d. decreases, increases

increases, decreases

Higher price levels lead to a lower aggregate quantity demanded because a. interest rates will rise as purchasing power falls. b. interest rates fall as purchasing power increases. c. the supply of reserves rises. d. the supply of reserves falls.

interest rates will rise as purchasing power falls.

A(n) _____ will most likely increase interest rates in the short run. a. bank run initiated by the Fed b. increase in real GDP as a result of an expansionary monetary policy c. open market sale of government securities by the Fed d. decrease in the price level due to expansionary fiscal policy

open market sale of government securities by the Fed

what are interest rates on reserves?

paying interest rates on balances held

With regards to monetary expansion, the oversimplified money multiplier formula assumes that... a. consumers have no risk and banks are willing to lend all of their reserves. b. people will hold no cash and bank will hold no excess reserves. c. banks will receive higher interest rates by lending than offered by corporate bonds. d. consumers will increase their savings at banking institutions than in stock or mutual funds.

people will hold no cash and bank will hold no excess reserves.

In order to help stabilize the economy in 2008 and 2009, the Fed a. practiced extensive quantitative easing by purchasing Treasury securities and mortgage-backed securities. b. raised interest rates so that banks could recover their losses. c. performed only conventional open-market operations. d. decreased the money supply to punish banks for the credit crisis.

practiced extensive quantitative easing by purchasing Treasury securities and mortgage-backed securities.

The discount rate is... a. the interest rate commercial banks charge on loans made to the Fed. b. the rate of interest that the Fed charges on loans made to the government. c. the rate of interest the Fed pays to people holding government securities. d. the interest rate that the Fed charges on loans made to member banks.

the interest rate that the Fed charges on loans made to member banks.

Suppose the Fed sells $2 million in government securities. In this case, _____. a. the money supply will increase by less than $2 million b. the money supply will increase by more than $2 million c. the money supply will decrease by more than $2 million d. the money supply will decrease by less than $2 million

the money supply will decrease by more than $2 million

Suppose the Fed conducts an open-market purchase of Treasury bills of $50 million and the required reserve ratio is 0.20. On the basis of the oversimplified money multiplier, it can be concluded that _____. a. the money supply will decrease by about $250 million b. the money supply will increase by about $250 million c. the federal funds rate will increase d. bank reserves will decrease by $250 million

the money supply will increase by about $250 million

The federal funds rate is... a. the rate at which banks borrow and lend reserves to one another. b. the rate used to determine the present value of future cash flows of banks. c. the rate at which the Fed borrows money from the nonbank public. d. the rate at which the nonbank public borrows funds from the federal bank.

the rate at which banks borrow and lend reserves to one another.

Suppose the Fed sells a T-bill to a commercial bank. As a result of this, _____. a. there will be a decrease in money supply b. there will be an increase in the liabilities of private banks c. there will be an increase in the number of loans given by banks d. the federal funds rate will decrease

there will be a decrease in money supply

what happens to the total expenditure line if interest rates raise?

they decrease/move downwards

what happens to the total expenditure line if interest rates lower?

they increase/move upwards

A form of financial distress can become a full-blown recession if... a. increased risk leads to higher interest rates and a decreased aggregate demand. b. increased risk leads to higher interest rates and an increased aggregate demand. c. increased risk leads to lower interest rates and an increased aggregate demand. d. increased risk leads to lower interest rates and a decreased aggregate demand.

increased risk leads to higher interest rates and a decreased aggregate demand.

The Federal Reserve _____ in order to stimulate the economy during the recession of 2007-2009. a. increased the discount rate b. suspended trading on the major stock exchanges c. decreased the amount of lending to banks d. initiated open-market purchases of assets apart from Treasury bills

initiated open-market purchases of assets apart from Treasury bills

The Fed is often called a "lender of last resort" because... a. it increases interest rates when there is not enough supply of money. b. it increases lending to commercial banks when there is a bank run. c. it directly lends to central banks of other countries when other banks are unwilling to lend. d. it increases reserves when commercial banks are hesitant to lend.

it increases reserves when commercial banks are hesitant to lend.

Changes in monetary policy affect a series of variables in the order: a. money supply, interest rates, investment, and eventually aggregate demand. b. money demand, net exports, aggregate supply, and lastly price level. c. price level, net exports, interest rates, and eventually money demand. d. aggregate supply, aggregate demand, money supply, and finally inflation.

money supply, interest rates, investment, and eventually aggregate demand.

Expansionary monetary policy is implemented by the Fed to: a. reduce public's borrowings from banks. b. reduce the interest rates. c. insure deposits against bank runs. d. increase bank reserves.

reduce the interest rates.

what are reserve requirements?

regulations on the minimum amount of reserves that banks must hold against deposits

A rise in the price level in an economy will most likely... a. shift the demand for reserves inward. b. shift the demand for reserves outward. c. lead to an upward movement along the demand for reserves curve. d. lead to a downward movement along the demand for reserves curve.

shift the demand for reserves outward.

The Federal Reserve System primarily aims to... a. circulate sufficient coins and currency in the economy. b. control any deficits in the federal budget. c. stabilize the economy through appropriate monetary policy. d. increase international trade with the rest of the world.

stabilize the economy through appropriate monetary policy.

contractionary policy open market operations:

- fed sells bonds - decreases money supply which increases the federal funds rate

contractionary policy for reserve requirements:

- increasing reserve requirements means banks can't create as much money - money multiplier decreases and money supply decreases

what happens to t-bill and bank reserve graphs if the fed wants to sell? (contractionary policy)

- on t-bill, supply increases and shifts right - on bank reserves, supply shifts left

what happens to t-bill and bank reserve graphs if the fed makes a purchase? (expansionary policy)

- on t-bill, supply shifts left - on bank reserves, supply shifts right - private demand remains unchanged

how does the fed lower the federal funds rate?

- purchases t-bills - open market purchase shifts supply to the right

if the fed buys t-bills (expansionary), how does this effect each graph?

- t-bills: supply shifts left - reserves: supply shifts right - expenditure: line shifts up (bc of lower interest rates) - real GDP: demand increases

if the fed sells t-bills (contractionary), how does this effect each graph?

- t-bills: supply shifts right - reserves: supply shifts left - expenditure: line shifts down (bc of higher interest rates) - real GDP: demand decreases

what are open market operations?

- the fed buying and selling US government bonds on the open market - directed by FOMC

expansionary policy open market operations:

- the fed buys bonds - increases money supply which decreases the federal funds rate

contractionary policy for interest rates on reserves:

- the higher the interest rate on reserves, the more reserves banks will hold - an increase in the interest rate tends to increase the reserve ratio which reduces the multiplier and lowers money supply

what is the discount rate?

- the interest rate banks pay the fed when they borrow from it - fed acts as a lender of last resort - lends to banks at a discounted rate - provides banks with excess reserves

expansionary policy for interest rates on reserves:

- the lower the interest rate on reserves, the less reserves banks will hold - a decrease in the interest rate on reserves tends to decrease the reserve ratio which increase the multiplier and increases money supply

contractionary policy discount rate:

- when banks decrease borrowing, they decrease money supply - banks borrow less when discount rates are high

expansionary policy discount rate:

- when banks increase borrowing, they increase money supply - banks borrow more when discount rates are low

what are the 4 monetary policy tools?

1. discount rate 2. reserve requirements 3. interest rate on reserves 4. open market operations

what is the federal open market committee? (FOMC)

- all 12 regional bank presidents - decides monetary policy

Which of the following is true of open-market operations? a. It involves the sale and purchase of stocks and bonds by private banks. b. It involves the purchase and sale of government securities by the Fed. c. It involves the measures taken by the government to ensure adequate circulation of coins and currency. d. It involves the Fed selling Federal Reserve notes to private banks.

It involves the purchase and sale of government securities by the Fed.

Which of the following is true of the reserve demand schedule? a. It is drawn on a graph that measures the quantity of reserves along the horizontal axis and the federal funds rate on the vertical axis. b. It is drawn on a graph that measures the quantity of Treasury bills along the horizontal axis and the price level on the vertical axis. c. It is drawn on a graph that measures the quality of reserves along the horizontal axis and the real GDP level on the vertical axis. d. It is drawn on a graph that measures the quantity of reserves along the horizontal axis and repo rate on the vertical axis.

It is drawn on a graph that measures the quantity of reserves along the horizontal axis and the federal funds rate on the vertical axis.

Which of the following measures is the Fed most likely to take if it wants to reduce bank reserves? a. It will purchase securities through open-market operations. b. It will increase the price of Treasuries. c. It will raise the discount rate. d. It will lower the federal funds rate.

It will raise the discount rate.

Suppose the Fed decides to sell T-bills. Which of the following is most likely to happen? a. There will be an increase in the supply of T-bills that will result in a fall in T-bill prices and a rise in interest rates. b. There will be a decrease in the supply of T-bills that will result in a rise in T-bill prices and a rise in interest rates. c. There will be an increase in the supply of T-bills that will result in a rise in T-bill prices and a fall in interest rates. d. There will be an increase in the supply of T-bills that will result in a fall in T-bill prices and a fall in interest rates.

There will be an increase in the supply of T-bills that will result in a fall in T-bill prices and a rise in interest rates.

Which of the following is true of the members of the Board of Governors of the Fed? a. They are elected for 14-year terms by officials from the executive branches of the federal government. b. They are appointed by the president and directly report to the Congress. c. They are elected to two-year terms by the citizens of the United States d. They are appointed by the president for 14-year terms with the consent of the Senate.

They are appointed by the president for 14-year terms with the consent of the Senate.