Econ 3311 - Money & Banking - Practice Exam # 2

The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks. A) 3; 3; 3 B) 4; 2; 3 C) 2; 5; 2 D) 5; 2; 2

A) 3; 3; 3

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________. A) above; falls B) below; falls C) above; rises D) below; rises

A) above; falls

Lucas argues that when policies change, expectations will change thereby A) changing the relationships in econometric models. B) causing the government to abandon its discretionary stance. C) making it easier to predict the effects of policy changes. D) forcing the Fed to keep its deliberations secret.

A) changing the relationships in econometric models.

The U.S. government can play an important role in establishing the credibility of anti-inflation policy by A) demonstrating fiscal responsibility. B) conducting fiscal policy. C) monitoring the Fed. D) all of the above.

A) demonstrating fiscal responsibility.

When output is below potential and the policy rate has hit the floor of zero, if policymakers do nothing, output will ________ and inflation will ________. A) fall; fall B) fall; rise C) rise; rise D) rise; fall

A) fall; fall

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; temporarily B) increase; permanently C) decrease; temporarily D) decrease; permanently

A) increase; temporarily

If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is $5 trillion, an increase in the money supply to $2 trillion A) increases the price level to 2. B) causes velocity to fall to 2.5. C) increases the price level to 2 and velocity to 10. D) increases real GDP to $10 trillion.

A) increases the price level to 2.

The long-run rate of unemployment to which an economy always gravitates is the A) natural rate of unemployment. B) normal rate of unemployment. C) neutral rate of unemployment. D) inflationary rate of unemployment

A) natural rate of unemployment.

Keynes's theory of the demand for money implies that velocity is A) not constant but fluctuates with movements in interest rates. B) not constant but fluctuates with movements in the time of year. C) a constant. D) not constant but fluctuates with movements in the price level.

A) not constant but fluctuates with movements in interest rates.

The case for Federal Reserve independence does NOT include the idea that A) policy is always performed better by an elite group such as the Fed. B) political pressure would impart an inflationary bias to monetary policy. C) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. D) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.

A) policy is always performed better by an elite group such as the Fed.

Open market purchases ________ reserves and the monetary base thereby ________ the money supply. A) raise; raising B) lower; raising C) lower; lowering D) raise; lowering

A) raise; raising

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent A) ten B) twenty C) eighty D) ninety

A) ten

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age

A) transactions; income

In which city is the Federal Reserve Bank that serves UHCL? A) Austin B) Dallas C) Houston D) New York City

B) Dallas

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) San Francisco. B) New York. C) Chicago. D) Boston.

B) New York.

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease

B) decrease; decrease

Inflation results in A) ease of comparing prices over time. B) difficulty interpreting relative price movements. C) lower nominal interest rates. D) ease of planning for the future.

B) difficulty interpreting relative price movements.

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________. A) not change; not change B) increase; increase C) decrease; decrease D) increase; decrease

B) increase; increase

Everything else held constant, an autonomous monetary policy easing ________ aggregate ________. A) decreases; supply B) increases; demand C) decreases; demand D) increases; supply

B) increases; demand

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. A) unemployment rate B) inflation rate C) foreign exchange rate D) interest rate

B) inflation rate

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A) increase the long term interest rates. B) lower the long term interest rates. C) lower the short term interest rates. D) increase the short term interest rates.

B) lower the long term interest rates.

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target. A) drops below; rises above B) rises above; rises above C) drops below; drops below D) rises above; drops below

B) rises above; rises above

The discount rate is A) the price banks pay the Fed for government securities. B) the interest rate the Fed charges on loans to banks. C) the price the Fed pays for government securities. D) the interest rate that banks charge their most preferred customers.

B) the interest rate the Fed charges on loans to banks.

If the money supply is $500 and nominal income is $3,000, the velocity of money is A) 1/60. B) 1/6. C) 6. D) 60

C) 6.

If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and A) demand-push inflation. B) cost-pull inflation. C) demand-pull inflation. D) cost-push inflation.

C) demand-pull inflation.

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. A) hierarchical B) secondary C) dual D) primary

C) dual

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an decrease in the currency-deposit ratio to 30% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.8 to 3.5 B) decrease from 3.25 to 2.8 C) increase from 2.8 to 3.25 D) decrease from 3.5 to 2.8

C) increase from 2.8 to 3.25

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

C) no change; an increase

Purchases and sales of government securities by the Federal Reserve are called A) federal fund transfers. B) swap transactions. C) open market operations. D) discount loans.

C) open market operations.

The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will ________ and the demand for real money balances will be ________. A) fall; lower B) rise; lower C) rise; higher D) fall; higher

C) rise; higher

If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________. A) falls; leftward B) falls; rightward C) rises; leftward D) rises; rightward

C) rises; leftward

Both ________ and ________ are Federal Reserve assets A) securities; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) currency in circulation; reserves

C) securities; loans to financial institutions

Policy makers cannot achieve both price stability and economic activity stability when facing A) permanent supply shocks. B) demand shocks. C) temporary supply shocks. D) all of the above.

C) temporary supply shocks.

Which of the following is NOT an entity of the Federal Reserve System? A) the Board of Governors B) the Federal Open Market Committee C) the Comptroller of the Currency D) Federal Reserve Banks

C) the Comptroller of the Currency

In the model of the money supply process, the bank's role in influencing the money supply process is represented by A) the currency ratio. B) only borrowed reserves. C) the excess reserve. D) both the excess reserve and the market interest rate.

C) the excess reserve.

Who is the current chairman of the Federal Reserve Board of Governors? A) Paul Voelker B) Ben Bernanke C) Janet Yellen D) Jerome Powell

D) Jerome Powell

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A) below; banks borrow reserves from the Fed B) above; banks borrow reserves from the Fed C) below; banks borrow reserves from each other D) above; banks borrow reserves from each other

D) above; banks borrow reserves from each other

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity. A) below; high B) above; high C) below; low D) above; low

D) above; low

Arguments for adopting a policy rule include A) policy makers and politicians cannot be trusted. B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. C) the time-inconsistency problem can lead to poor economic outcomes. D) all of the above

D) all of the above

The problems of raising the level of the inflation target include A) it is more difficult to stabilize the inflation rate at a higher targeting level. B) the costs of higher inflation in terms of the distortions it produces in the economy are high. C) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. D) all of the above

D) all of the above

Nonactivists of the policies believe that A) government action is unnecessary. B) wages and prices are very flexible. C) the self-correcting mechanism is very rapid. D) all of the above.

D) all of the above.

When asset prices increase above their fundamental values it is called an A) irrational bubble. B) irrational spike. C) asset-price spike. D) asset-price bubble.

D) asset-price bubble.

The three players in the money supply process include A) banks, borrowers, and the central bank. B) banks, depositors, and borrowers. C) banks, depositors, and the U.S. Treasury. D) banks, depositors, and the central bank.

D) banks, depositors, and the central bank.

One way to derive aggregate demand is by looking at its four component parts, which are A) consumer expenditures, planned investment spending, government spending, and gross exports. B) consumer expenditures, actual investment spending, government spending, and net exports. C) consumer expenditures, planned investment spending, government spending, and taxes. D) consumer expenditures, planned investment spending, government spending, and net exports.

D) consumer expenditures, planned investment spending, government spending, and net exports.

When the Federal Reserve sells a government bond to a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

D) decrease; decreases

The two types of open market operations are A) dynamic and reactionary. B) offensive and defensive. C) active and passive. D) dynamic and defensive

D) dynamic and defensive

With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A) rise; rise B) fall; fall C) rise; fall D) fall; rise

D) fall; rise

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called A) structural unemployment. B) cyclical unemployment. C) underemployment. D) frictional unemployment

D) frictional unemployment

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; rise B) increases; rise C) decreases; fall D) increases; fall

D) increases; fall

An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. A) not multiplied; not multiplied B) multiplied; multiplied C) multiplied; not multiplied D) not multiplied; multiplied

D) not multiplied; multiplied

The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves. A) positively; negatively B) negatively; not C) negatively; negatively D) positively; positively

D) positively; positively

Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A) political control of monetary policy. B) a policy of always keeping interest rates low. C) money financing of budget deficits. D) the most independent central banks.

D) the most independent central banks.

The long-run aggregate supply curve shifts to the right when there is A) an increase in the total amount of capital in the economy. B) an increase in the available technology. C) a decrease in the natural rate of unemployment. D) A and B. E) A, B, and C.

E) A, B, and C.

Approaches to establishing central bank credibility include A) central bank independence. B) nominal GDP targeting. C) appointment of a more conservative central banker. D) inflation targeting. E) all of the above

E) all of the above

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be higher. B) output will be at its potential. C) inflation will be unchanged. D) output will be unchanged. E) both A and B.

E) both A and B.

The effectiveness lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy

E) the time it takes for the policy actually to have an impact on the economy