Econ 2035 FINAL PRACTICE TEST

Suppose me Fed acts-to decrease the monetary base. In the liquidity preference framework everything else held constant, this action will cause ____ in the money supply and _______ in the equilibrium interest rate.

a decrease; an increase

When the Federal Reserve was created, its-most important role was intended to be as

a lender-of-last-resort.

If a bank's liabilities are more interest rate-sensitive than its assets, everything else held constant, then ________________in interest rates will _____________ the bank's profits.

an increase, decrease

A decrease in expected rate of inflation, everything else held constant, causes _____ in the demand for bonds and ___ in the market interest rate.

an increase; a decrease

Suppose the United-States Treasury announces that it is cancelling a scheduled auction of five-year Treasury notes. Everything else held constant, this announcement will cause _____ in the ________ five year notes and yield to maturity will _____.

an increase; demand for, decrease

which of the following actions, from a monetatist perspective, can cause inflation?

continuous increases in the growth rate of money supply

For a central bank to have the MOST effective monetary policy, it needs to have a_____ level of credibility, ______ variable as an operating target, and ______ variable as an intermediate target

high; an interest rate; an interest rate

If policy makers set a target for the unemployment rate that is too low because it is less than the natural rate of unemployment, this can result in a ______ rate of growth of the money supply and ______.

higher; demand-pull inflation

Suppose the public exp.ects AOL/Time Warner to lose $3 a share this quarter, AOL/Time Warner ends up announcing, however, that its losses are actually $2 a share, which is still the biggest loss in the history of the company. Everything else held constant, the price of AOL/Time Warner stock will ______ after the announcement is made.

increase

Because saving account are ____ liquid for the deposited than checking accounts, they earn _____ interest rates.

less, more

If the Fed wants to remove reserves from the banking system temporarily it will engage in a

matched sale-purchase transaction

Suppose, at a given moment in time, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at the level, then it should undertake an open market ______ of bonds, everything else held constant. If the Fed does nothing, howerver, the federal funds will _____.

purchase; decrease + in GDP=sale - in GDP = purchase offset = defense

Evidence from business cycle fluctuations in the United States indicicates that

recessions have been preceded by a decreases in the growth rate of the money supply

Financial innovation has caused banks to

suffer a simultaneous decline of cost and income advantages

Which of the following statements accurately describes the movements of the three different measures of the money supply M1, M2,-andM3?

the 3 measures do not necessarily move together, so they cannot be used interchangeably by policy makers

A bank will want to hold more excess reserves, everything else held constant, when

the cost of selling loans falls

Critics of the current system of Fed independence contend that

the current system is undemocratic

budget deficits are important to monetary authorities because

the financing of government budget deficits may affect the conduct of monetary policy

In which of the following situations would it be MOST advantageous to be buying bonds?

the market interest rate is 5% and the expected inflation rate is 1% to buy bonds you want the highest after you subtract HIGHTEST YTM =lowest price, highest %

Which of -the following $1,000 face-value securities has the HIGHEST yield to maturity? A) A coupon bond, with a 6 percent coupon rate and a price of '$ 1,000. B) A coupon bond with a 6 percent coupon rate and a price of $ 1, 100. C) A coupon "bond' with a 7 percent coupon rate and a price of $ 1,100. : d) A -coupon bond with a 8 percent coupon rate and a price of $i,0p0v • .E) A coupon bond with a 8 percent coupon rate and "a price of $1,100.

A coupon bond with a 8 percent coupon rate and a price of $1,000

17) The Fed lacks complete control over the money supply because it cannot perfectly predict

A.)the amount of discount borrowing by banks. B) shifts from time deposits to checkable deposits. C) the level of excess reserves held by banks. D) shifs from checkable deposits to currency.

- A bank issues liabilities to acquire funds -A bank's borrowings are a liability on its balance sheet -A bank's assets provide it with income -A bank's assets are its uses of funds

All these are TRUE

Suppose the U.S. economy is producing below potential output. Which of the following policy proposals would be supported by Keynesian (activist) to combat this situation?

An increase ing government spending ^ GDP according to Keysians: ^ gov. spending, ^ AD decrease taxes, ^ AD

Suppose the central bank of a country has a mandate to pursue only one goal: price stability. Suppose furtherlhat the economy is operating above its potential output level . In this sistuation =hich of the following is the appropriate policy action for thejpentrai bank to" take, everything else held constant?

Hold money supply growth constant

Which of the following is NOT included in the M2 measure of the money supply but IS included in the M1 measure?

M2 = M1 +saving accounts, CDs, money mkt account, money mkt, mutual fund *everything in M2 is in M1*

the legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the

McFadden Act

45) Earlier this year, the Central Bank of the Russian Federation announced that it plans to decrease the share of U.S. dollars in its foreign-exchange reserves and increase the share of other currencies. This announcement, everything else held constant, would cause ____ of the U.S. dollar.

No change in the value

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to ____ percent of its ____ reserves.

RR=10 90% TOTAL 100%. Excess

which of the following would result from a stronger U.S. dollar?

U.S. exports will cost more in foreign countries, and so foreigners will buy fewer of them

a bank failure is LESS likely to occur when

a bank has less bank capital

The problem created by asymmetric information before a transaction occurs is called _____ , while the problem created after a transaction occurs is called _____.

adverse selection; moral hazard *Adverse selection = credit risks, before a loan moral hazard = after a loan, if they will pay it back or not

Suppose an economy is producing below potential output and the government is. suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. From a Keynesian perspective, this policy action will cause ______ in the unemployment rate and _________ in the aggregate price level in the short run, everything else held constant.

an increase, a decrease

The excess reserve to checkable deposit ratio will increase with _____ in expected deposit outflows or _____ in the market interest rate.

an increase, a decrease *increase num on decrease den to make whole thing increase

Suppose the U.S. economy is producing at potential output From a Keynesian perspective, a depreciation of the dollar, everything else held constant, will cause _________ in real GDP and ________ in the aggregate price level in the short run. (Assume the depreciation has no effect on the supply side of the economy)

an increase, an increase

Suppose, in the liquidity preference framework that the yield to maturity on a bond is above the equilibrium rate. This means that there is an excess demand for ____ and overtime, the interest rate will ______, everything else held constant.

bonds; decrease

If the European Central Bank decides to decrease interest rates today, everything else held constant the expected return on euro-denominated bank deposits will ____ and euro will ____ today.

decrease, depreciate

suppose market interest rates become more stable in the united states. everything held constant, this will cause the demand for common stocks to _________ and the demand for long term bonds to ____________.

decrease, increase

Suppose the Fed is expected to increase interest rates several times in the coming months.. Everything else held constant, the expected return.on euro-denominated bank deposits will ______ and the U.S. dollar will _____.

decrease; appreciate

Suppose the FOMC sets its monetary policy in accordance with the-Taylor Rule. This means that it should lower its target for the federal funds rate when the inflation rate _____ its inflation rate target or when real GDP _____ it output target

drops below; drops below

Economists have focused more attention on the formation-of expectations in recent years. This increase in interest can best be explained by recognizing that

expectations influence the behavior of participants in the economy and thus have a major effect on macroeconomic. activity

when the federal reserve purchases a government bond from a bank, everything else held constant,

federal reserve liabilities increase *a bond is liability

the presence of transaction costs in financial markets explains, in part, why

financial intermediaries and indirect finance play such an important role in financial markets

Suppose a bank decides to hold an additional $1 in excess reserves. Everything held constant, the monetary base will

increase by $1 million MB= exactly $1 million MS= MB * unit .. so it will be more than a million

The excess reserve to checkable deposit ratio will ____ with an increase in expected deposit outflows, and will ____ with an increase in the market interest rate.

increase, decrease

The operating procedures employed by the Fed between 1979 and 1982 resulted in _____ volatility in the federal fluids rate and ____ volatility in the Ml growth rate.

increased; increased

While the federal reserve act of 1913 required all _____ banks to become members of the federal reserve system, _____ banks were given the choice of becoming members of the system.

national; state

Suppose the U.S. economy is producing at potential output. An open market sale of bonds by the Fed, everything else held constant, will cause ______ in real GDF and ________ in the aggregate price level in the long run

no change, a decrease *an open market sale = prices decrease *an open market purchase = prices increase

From a motorist perspective, an increase in taxes, everything else held constant, will cause_____ in the unemployment rate _______ in the aggregate price level in the long run.

no change, no change

Suppose the inflation rate in the United States is lower than the rate in Mexico while productivity is growing at a faster rate in the United States than in Mexico.In the long run, everything else he constant,

peso will depreciate relative to the dollar. ^ in the productivity/GDP= appreciate decrease in productivity/ GDP- depreciate

suppose at a given moment in time, there is an excess demand for reserves in the federal funds open market. if the fed wants the federal funds rate to stay at that level, then it should undertake an open market ______________ of bonds, everything held constant. if the fed does nothing, however, the federal funds rate will _____________.

purchase, decrease

If the desired .intermediate target is a-monetary aggregate, which of the following would be the most preferred operating target?

the non-borrowed monetary base