Econ 471 Ch 14 15 16

If the Fed uses the federal funds rate as a policy​ instrument, then increases in the demand for reserves will lead to a(n) increase/decrease in the level of reserves. If the Fed uses the level of reserves as a policy​ instrument, then increases in the demand for reserves will lead to a(n)increase/decrease in the federal funds rate.

increase; increase

How does an open market sale of Treasury securities by the Fed affect the price of Treasury​ securities, the yield on Treasury​ securities, the monetary​ base, and the money​ supply? An open market sale of Treasury securities increases/decreases the price of Treasury​ securities, thereby increasing/decreasing the yield on Treasury securities. The sale of Treasury securities increases/decreases the monetary base and increases/decreases the money supply.

- decreases, increasing - decreases, decreases

Using the Taylor​ rule, calculate the target for the federal funds rate for July 2010 using the following nformation: Equilibrium real federal funds rate - 2​% Target inflation rate - 2% Current inflation rate - 1.2​% Output gap − 8​% The target for the federal funds rate for July 2010 is ?????. In your​ calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of​ 0% to​ 0.25%? A. This Taylor rule federal funds rate target is lower than the​ Fed's actual target range. B. This Taylor rule federal funds rate target fits within the​ Fed's actual target range. C. This Taylor rule federal funds rate target is higher than the​ Fed's actual target range.

-1.2% A. This Taylor rule federal funds rate target is lower than the​ Fed's actual target range.

What is​ pegging? A. The decision by a country to keep the exchange rate fixed between its currency and another​ country's currency. B. The decision by one country to fix its exchange rate to the dollar after official sanction by the IMF. C. An agreement between two or more countries to fix the exchange rate of their currencies in order to reduce transaction costs. D. A policy under which a country allows its exchange rate to​ float, but within a narrow corridor.

A. The decision by a country to keep the exchange rate fixed between its currency and another​ country's currency.

In discussing the situation of countries leaving the gold​ standard, or​ "unilaterally devaluing" during the​ 1930s, Barry Eichengreen of the University of California at Berkeley and Jeffrey Sachs of Columbia University​ argued: ​"In all cases of unilateral​ devaluation, currency depreciation increases output and employment in the devaluing​ country." How would leaving the gold standard in the 1930s lead to an increase in a​ country's output and​ employment? ​(Check all that apply.​) A. The​ country's central bank would not have to take actions to remain on the gold standard that contracted production and​ employment, such as raising interest rates. B. The​ country's central bank would not have to take actions to remain on the gold standard that contracted production and​ employment, such as lowering interest rates. C. The country was free to pursue expansionary fiscal policy. D. The country was free to pursue expansionary monetary policy.

A. The​ country's central bank would not have to take actions to remain on the gold standard that contracted production and​ employment, such as raising interest rates. D. The country was free to pursue expansionary monetary policy.

Which of the​ Fed's traditional monetary policy tools is the most​ important? A. Open market operations. B. Discount policy. C. Reserve requirements. D. They are equally important.

A. Open market operations.

Which of the following is a key difference between the simple deposit multiplier and the money​ multiplier? A. The money multiplier includes the effects of changes in the amount of excess reserves that banks want to hold relative to their checkable deposits. B. The simple deposit multiplier includes the effects of changes in banks' desire to hold excess reserves to deposits. C. The simple deposit multiplier includes the effects of the money supply process on changes in the public's desire to hold currency relative to checkable deposits. D. All of the above.

A. The money multiplier includes the effects of changes in the amount of excess reserves that banks want to hold relative to their checkable deposits.

Why must the current account balance plus the financial account balance equal​ zero? A. Because the payments received for exported goods and services must be equal to the amount paid for imported ones. B. By international agreement governments are obligated to maintain an overall balance of zero. C. In order to keep exchange rates relatively stable throughout the world. D. Because each international transaction is​ two-sided, representing an exchange of​ goods, services, or assets among​ households, businesses, or governments

D. Because each international transaction is​ two-sided, representing an exchange of​ goods, services, or assets among​ households, businesses, or governments

In medieval​ times, goldsmiths would often offer to store gold in return for a fee. They provided anyone depositing gold with a warehouse​ receipt, which represented a legal claim on the goldsmith to exchange the receipt for the amount of gold written on it. How are the medieval goldsmiths like modern​ banks? A. The goldsmiths became more like modern banks when the goldsmiths began to make loans on their holdings of gold. B. The goldsmiths became more like modern banks when the​ goldsmith's receipts, instead of the gold​ itself, began to be used as the medium of exchange. C. People asked the goldsmiths to store gold for them in return for a receipt to prove the gold was there.​ Today, we ask banks to store our paychecks and portions of our savings in return for checking and savings accounts. D. All of the above. Is multiple deposit creation possible in this​ system? Does your answer depend on whether the warehouse receipts can be bought and sold and redeemed by someone other than the person who deposited the​ gold? A. Multiple deposits would only work if other institutions accepted the gold receipts as deposits. B. Multiple deposits would work if other institutions did not accept the gold receipts as deposits. C. The more people that deposited​ gold, the less likely the possibility of multiple deposit creation. D. It is impossible for multiple deposit creation to exist under this system.

D. All of the above. A. Multiple deposits would only work if other institutions accepted the gold receipts as deposits.

An article in the Economist refers to the monetary base in China as "central ​bank-issued currency." ​ Do you agree with this​ definition? A. No, the monetary base is the currency in circulation. B. Yes, the monetary base is central​ bank-issued currency. C. Yes, the monetary base is the currency in circulation. D. No, the monetary base is the currency in circulation plus reserves.

D. No, the monetary base is the currency in circulation plus reserves.

An article in the Wall Street Journal in 2016 noted​ that: "Over ​30% of​ euro-denominated investment-grade corporate bonds trade at a negative yield ... while​ 84% yield less than ​1%." ​ What caused so many European corporate bonds to have negative interest​ rates? A. The European economy was growing at higher than normal rates. B. Central banks were slowing asset purchases. C. Inflation rates were consistently increasing. D. The European Central Bank cut interest rates to negative levels. Why would anyone buy a bond with a negative interest​ rate? A. Competing interest rates on bonds and other securities of comparable risk were low. B. A lack of availability of government bonds. C. Many of the bond purchases were made by individual investors who were wary of investing in higher risk bonds. D. A lack of availability of corporate bonds.

D. The European Central Bank cut interest rates to negative levels. A. Competing interest rates on bonds and other securities of comparable risk were low.

Briefly explain what happened to the​ currency-to-deposit ratio​ (C/D) and the excess​ reserves-to-deposit ratio​ (ER/D) during the financial crisis of 2007-2009. The​ currency-to-deposit ratio​ (C/D) (rose/fell), and the excess​ reserves-to-deposit ratio​ (ER/D) (rose/fell) during the financial crisis. What impact did these changes have on the size of the money​ multiplier? A. The increase in​ C/D was significantly larger than the decrease in​ ER/D, causing the value of the money multiplier to increase. B. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to increase. C. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to decline. D. The decrease in​ C/D was significantly larger than the increase in​ ER/D, causing the value of the money multiplier to decline.

fell, rose C. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to decline.

In a currency​ intervention, the central bank either buys foreign​ assets, which (increases/decreases) its balance​ sheet, or sells foreign​ assets, which (increases/decreases) its foreign assets. In an unsterilized currency​ intervention, the central bank (does/does not) offset the effect of the intervention on the monetary​ base, whereas with a sterilized currency intervention it (does/does not) offset the effect of the intervention on the monetary base.

increases; decreases does not; does

Use​ T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking​ system: The Fed increases discount loans by​ $2 billion. Discount​ Loans, a(n) liability/asset, increases/decreases by​ $2 billion. ​Reserves, a(n) asset/liability, increases/decreases by​ $2 billion.

- asset, increases - liability, increases

What are the​ Fed's traditional monetary policy​ tools? ​(Check all that apply.​) A. Open market operations. B. Interest on reserve balances. C. Discount policy. D. Term deposit facility. E. Reserve requirements.

A. Open market operations. C. Discount policy. E. Reserve requirements.

What is the simple deposit​ multiplier? The simple deposit multiplier is A. the ratio of the amount of new reserves to the amount of deposits created by banks. B. the ratio of the amount of deposits created by banks to the amount of already existing reserves. C. the percentage of checkable deposits that the Fed specifies that banks must hold as reserves. D. the ratio of the amount of deposits created by banks to the amount of new reserves. If the required reserve ratio is 18​%, the value of the simple deposit multiplier is ????. ​

D. the ratio of the amount of deposits created by banks to the amount of new reserves. 5.56

If the required reserve ratio required reserve ratio decreases​, the money multiplier will increase/decrease

increase

During the financial crisis of 2007-​2009, the​ Fed's discount lending expanded through the creation of ??????? that made loans to a variety of institutions including ​(Check all that apply.​) A. investors that purchase​ asset-backed securities. B. nonfinancial corporations that issue commercial paper. C. financial firms with​ mortgage-backed securities. D. secondary dealers.

temporary lending facilities A. investors that purchase​ asset-backed securities. B. nonfinancial corporations that issue commercial paper. C. financial firms with​ mortgage-backed securities.

Suppose that a bank with no excess reserves receives a deposit into a checking account of ​$18,000 in currency. If the required reserve ratio is 0.05​, what is the maximum amount that the bank can lend​ out?

$17,100

Use​ T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking​ system: The Fed carries out a​ $2 billion open market sale. Discount​ Loans, a(n) (liability/asset), (increases/decreases) by​ $2 billion. ​Reserves, a(n) (asset/liability), (increases/decreases) by​ $2 billion.

- asset, decreases - liability, decreases

Use​ T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking​ system: The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from​ DeShawn's Computer Services for​ $1 million. Discount​ Loans, a(n) liability/asset, increases/decreases by​ $1 billion. ​Reserves, a(n) asset/liability, increases/decreases by​ $1 billion.

- asset, increases - liability, increases

The Federal Reserve seeks to reduce ????? The Fed​ doesn't seek to reduce the unemployment rate to zero because the tools of monetary policy are A. ineffective in reducing the level of cyclical unemployment. B. only effective in reducing the level of frictional unemployment. C. ineffective in reducing the level of structural unemployment D. All of the above.

- cyclical unemployment C. ineffective in reducing the level of structural unemployment

Currency - $200 billion Bank reserves - $400 billion Checkable deposits - $1,200 billion Time deposits - $1,200 billion Excess reserves - $80 billion 1. The​ currency-to-deposit ratio is 2. The ratio of total reserves to deposits is 3. The monetary base is ​ 4. The M1 money multiplier is 5. The M1 money supply is

1. .17 2. .33 3. 600 4. 2.31 5. 1386

What would be the value of the M1 money multiplier if banks hold no excess​ reserves, the​ currency-to-deposit ratio is 0.94​, and the required reserve ratio for checkable deposits is 24​%?

1.64

What are the disadvantages of imposing capital​ controls? ​(Check all that apply.​) A. Increased government corruption with bribes to government officials. B. A heightened reluctance of multinational firms to expand operations in countries with capital controls. C. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls. D. Induces domestic investors to require a lower return on domestic assets compared to foreign assets.

A. Increased government corruption with bribes to government officials. B. A heightened reluctance of multinational firms to expand operations in countries with capital controls. C. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls.

The Fed sells ​$23 billion of foreign assets and sells ​$23 billion of Treasury securities. A. Monetary base decreases by ​$46 billion. B. Monetary base increases by ​$46 billion. C. Monetary base does not change.

A. Monetary base decreases by ​$46 billion.

The Fed conducts a sterilized foreign exchange intervention. A. Monetary base does not change. B. Monetary base decreases. C. Monetary base increases.

A. Monetary base does not change.

The Fed sells ​$23 billion of foreign assets and purchases ​$23 billion of Treasury securities. A. Monetary base does not change. B. Monetary base increases by ​$23 billion. C. Monetary base decreases by ​$23 billion.

A. Monetary base does not change.

What are capital​ controls? ​(Check all that apply.​) A. ​Government-imposed limitations on the substitution of capital for labor. B. ​Government-imposed restrictions on domestic investors buying foreign assets. C. ​Government-imposed restrictions on domestic investors buying domestic assets. D. ​Government-imposed restrictions on foreign investors buying domestic assets.

B. ​Government-imposed restrictions on domestic investors buying foreign assets. D. ​Government-imposed restrictions on foreign investors buying domestic assets.

How does a sterilized central bank intervention affect the demand curve for a​ country's currency? A. A sterilized central bank intervention shifts the demand curve for a​ country's currency to the right. B. A sterilized central bank intervention does not affect the demand curve for a​ country's currency. C. A sterilized central bank intervention shifts the demand curve for a​ country's currency to the left. D. A sterilized central bank intervention makes the supply curve less elastic.

B. A sterilized central bank intervention does not affect the demand curve for a​ country's currency.

Why might a country impose capital​ controls? A. In order to stimulate GDP growth. B. To encourage sharp inflows and outflows of financial investments. C. Because currency crises are fueled in part by sharp inflows and outflows of financial investments. D. To prevent foreign influence from undermining the domestic economy.

C. Because currency crises are fueled in part by sharp inflows and outflows of financial investments.

In​ 2016, Egypt was trying to keep the exchange rate between its currency​ (the Egyptian​ pound) and the U.S. dollar constant. An article in the Wall Street Journal observed that if the Egyptian government took steps to reduce the value of the​ pound, it "would boost foreign​ investors' confidence and increase the Egyptian​ market's competitiveness. It would also help reduce the strain in the balance of​ payments; Egypt's​ current-account deficit widened to more than​ 5% of gross domestic product" Why would a reduction in value of the Egyptian pound help reduce​ Egypt's current account​ deficit? A. It would increase the cost of exports. B. It would decrease net exports. C. It would increase net exports. D. It would decrease the cost of imports.

C. It would increase net exports.

During the Great​ Depression, how did the gold standard hinder economic​ recovery? During the Great​ Depression, the gold standard A. required countries to maintain a monetary base on a constant​ level, which caused an increase in inflation and therefore slowed down the economic recovery. B. obliged the government to keep the discount rate at a low level that made economic recovery impossible. C. eliminated the use of monetary​ policy, and monetary policy was the only way to overcome the depression. D. required some countries to pursue a contractionary monetary policy to maintain the gold​ standard, theryby making the reduction of unemployment difficult to achieve.

D. required some countries to pursue a contractionary monetary policy to maintain the gold​ standard, theryby making the reduction of unemployment difficult to achieve.

What would be the value of the M1 money multiplier if banks hold no excess​ reserves, the​ currency-to-deposit ratio is 0.81​, and the required reserve ratio for checkable deposits is 56​%?

M1=1.32

Currency - $720 billion Checkable deposits - $620 billion Bank reserves - $620 billion a. - The​ currency-to-deposit ratio - The ratio of total reserves to deposits - The monetary base equals ​ - The M1 money multiplier is - The M1 money supply is b. Suppose that the ratio of total reserves to deposits changes from the value you calculated in part​ (a) to 2.​ Now what is the value of the money​ multiplier?

a. - 1.16 - 1 - 1340 - 1 - 1340 b. 0.68

To reducereduce the foreign exchange value of its​ currency, would a central bank buy or sell foreign​ assets? What would be the effect on the monetary​ base? What would be the effect on domestic interest​ rates? To reduce the foreign exchange​ rate, the central bank would (buy/sell) foreign​ assets, which would (raise/reduce) the monetary​ base, and (raise/reduce) domestic interest rates.

buy; raise; reduce

Suppose that in​ equilibrium, the federal funds rate is equal to the interest rate the Fed is paying on reserves. Analyze the effect of an open market sale of Treasury securities on the equilibrium federal funds rate. An open market sale of Treasury securities by the Fed ??????, causing the federal funds rate to ???????

decrease the supply of reserves rise or remain unchanged

A "strain" on​ Egypt's balance of payments means a balance of payments (surplus/deficit) with (an increase/reduction) in international reserves.

deficit; reduction

A​ country's balance of payments might not equal to zero when the official settlements balance is (included/excluded)

excluded

Reducing​ Egypt's current account deficit would (increase/reduce) strain on its balance of payments by (increasing/reducing) ​Egypt's balance of payments deficit.

reduce; reducing

In discussing the Bretton Woodsy​ system, Michael​ Klein, an economist at Tufts​ University, observed​ that: "Investors face a​ 'one-way bet' against central banks when they perceive an increased likelihood of a devaluation." In other​ words, investors will win if the country​ devalues, while not losing if it​ doesn't devalue. Speculators would win if the country devalues by (buy/sell) the currency at the current exchange rate and (buying; selling) it back at a (lower/higher/the same) exchange rate. If the country did not​ devalue, the investors could (buy/sell) the currency back at the same exchange rate. Does the (lower/higher/same) reasoning apply to any fixed exchange rate​ system? A. ​Yes, in a​ fixed-rate exchange system if a currency becomes overvalued investors will lose if it​ doesn't devalue. B. ​No, in a​ fixed-exchange rate system if a currency becomes overvalued investors will lose if the country​ doesn't devalue. C. ​Yes, in a​ fixed-rate exchange system if a currency becomes overvalued investors will win if the country devalues. D. ​No, in a​ fixed-exchange rate system if a currency becomes overvalued investors will not win if the country devalues.

sell; buying; lower buy; the same C. ​Yes, in a​ fixed-rate exchange system if a currency becomes overvalued investors will win if the country devalues.

If the U.S. current account deficit is ​$446 ​billion, and if the statistical discrepancy is​ zero, what is the financial account​ balance? The financial account balance would be a (deficit/surplus) of ​$446 billion. Does this financial account balance represent a net capital outflow or a net capital​ inflow? The financial account balance would represent a net capital (inflow/outflow)

surplus; inflow

What is the controversy over​ China's pegging the value of the​ yuan? The value of the yuan is (overvalued/undervalued), making Chinese exports (cheaper/more expensive) and imports into China (cheaper/more expensive)

undervalued; cheaper; more expensive

Briefly answer each of the following questions about the gold​ standard: 1. Was it a fixed exchange rate system or a flexible exchange rate​ system? 2. Were countries able to pursue active monetary​ policies? 3. Did countries that ran trade deficitsdeficits experience gold inflows or gold​ outflows? 4. How would a gold inflow affect a​ country's monetary​ base? 5. How would a gold inflow affect a​ country's inflation​ rate?

1. A fixed exchange rate system 2. No 3. Gold outflows 4. Increase 5. Increase

The Fed purchases ​$23 billion of foreign assets. A. Monetary base increases by ​$23 billion. B. Monetary base decreases by ​$23 billion. C. Monetary base does not change.

A. Monetary base increases by ​$23 billion.

Which of the following are advantagesadvantages of​ pegging? ​(Check all that apply.​) A. Protection for firms that have taken out loans in foreign currencies B. The pegged currency can become overvalued C. The pegged currency can become undervalued D. A check against inflation

A. Protection for firms that have taken out loans in foreign currencies D. A check against inflation

All of the following are reasons why a central bank might undertake a currency​ intervention, except: A. increase investor confidence. B. increase the​ country's exports. C. push down the value of a currency. D. prop up the value of a falling currency.

A. increase investor confidence.

BeforeBefore ​1980, which banks could receive discount​ loans? A. Only member banks of the Federal Reserve System could receive discount loans B. All​ banks, nonbank financial​ firms, and secondary dealers could borrow overnight using​ mortgage-backed securities as collateral. C. All banks and nonbank financial firms could receive discount loans. D. All depository institutions could receive discount loans

A. Only member banks of the Federal Reserve System could receive discount loans

An article in the Wall Street Journal about the policies of the​ People's Bank of China observes​ that: "Currency intervention ... expands the central​ bank's balance sheet and adds to the money supply when left​ unsterilized, as it has been in the past." ​ A "currency intervention" is a deliberate action by a central bank​ to: A. influence the confidence in a​ country's currency. B. increase the amount of currency in circulation. C. influence the​ country's exchange rate. D. decrease the amount of currency in circulation.

C. influence the​ country's exchange rate

Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy​ action: A decrease in the interest rate paid on reserves A. This would raise the interest rate at which the supply for reserves becomes horizontal B. This would lower the interest rate at which the supply for reserves becomes horizontal. C. This would lower the interest rate at which the demand curve becomes horizontal D. This would decrease the supply of reserves

C. This would lower the interest rate at which the demand curve becomes horizontal

What do open market operations ​imply? A. Paying interest on​ banks' required reserve and excess reserve deposits. B. Regulation requiring banks to hold a fraction of checkable deposits as vault cash or deposits with the Fed C. Setting the discount rate and the terms of discount lending D. The purchase or sale of securities, typically U.S. Treasury securities, in financial markets

D. The purchase or sale of securities, typically U.S. Treasury securities, in financial markets