ECON FINAL EXAM
Bank A has checkable deposits of $140 million, vault cash equaling $1 million, and deposits at the Fed equaling $14 million. If the required reserve rate is 10 percent, what is the amount of excess reserves Bank A is holding? It does not have any excess reserves. $15 million $2 million $1 million
$1 million
Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent, what is the maximum amount Bank A could lend? $85 million $15 million $14 million $5 million
$5 million
Recent research by Fed researchers put the natural rate of interest at what level as of late 2018? −1 percent 1/2 percent 0 percent 2 percent
1/2 percent
Which one of the following statements is not correct? The point where the short-run and long-run supply curves intersect corresponds to the potential level of output. Any point on the short-run aggregate supply curve reflects current inflation equaling target inflation. Inflation and output are unrelated in the long run. In the long run, inflation is determined by monetary policy.
Any point on the short-run aggregate supply curve reflects current inflation equaling target inflation
If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then m would equal R/ER. M/MB. C + D. D - C
M/MB.
Which one of the following expresses the equation of exchange? MY = PV MV = Y MV = PY MP = VY
MV = PY
If we let Md reflect money demand, in equilibrium in the money market, we can write the equation for money demand as Md = VY. Md = PY. Md = (1/V)PY. Md = V(Y/P).
Md = (1/V)PY.
If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then RR would equal MB. D - C. M/MB. R - ER.
R - ER.
The Fed sells German bonds to commercial banks. Which one of the following best describes the impact on the Fed's and the banking system's balance sheets resulting from this transaction? The Fed's assets and liabilities increase. The banking system's assets and liabilities decrease. The Fed's assets and liabilities increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase. The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
If we look at the equation for money demand that summarizes Irving Fisher's quantity theory of money, which one of the following statements is true? Velocity does not play any role in the equation. Money demand is not a factor of nominal income. The price level does not impact money demand. There isn't an explicit role for the interest rate in the equation.
There isn't an explicit role for the interest rate in the equation.
To an economist, the term "inflation" refers to any price increases. a continually rising price level. a one-time change in the average price level. increases in prices of critical goods like food and energy.
a continually rising price level.
Inflation can be thought of as a decrease in the price of money. an increase in the price of money. no change in the price of money, just a change in the supply of money. no change in the price of money, just a change in the demand for money.
a decrease in the price of money.
Which one of the following would cause an increase in the potential output of a country? an increase in the capital stock a temporary decrease in exports an increase in the money supply a decrease in the labor force
an increase in the capital stock
A rate of inflation that exceeds the growth rate of money for a country could be explained by a growing real economy. a constant velocity of money. an increasing velocity of money. a decreasing velocity of money.
an increasing velocity of money.
In 1998 (and until 2003), the ECB explicitly assigned money a prominent role in its stability-oriented strategy by stating their inflation goal as a number. tying interest rate and exchange rate policy together explicitly. establishing a ceiling value for the broadest monetary aggregate. announcing a quantitative reference value for the growth rate of a broad monetary aggregate.
announcing a quantitative reference value for the growth rate of a broad monetary aggregate.
Based on the analysis of the equation of exchange, Irving Fisher derived the quantity theory of money which states that changes in the aggregate price level are the result of unstable velocity. are caused solely by changes in velocity. are caused solely by changes in the quantity of money. always offset changes in the product of (velocity x real GDP).
are caused solely by changes in the quantity of money
Money held for precautionary reasons is included in the demand for money as part of transactions demand. as part of portfolio demand. partly as transactions demand and partly as portfolio demand. as a third, separate category called the precautionary demand for money.
as part of transactions demand.
Targeted asset purchases are statements today about policy targets in the future. expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. asset purchases that shift the composition of the Fed's balance sheet. asset purchases that increase the reserves held by the federal government.
asset purchases that shift the composition of the Fed's balance sheet.
One key difference between reserve requirements for the Fed and the European Central Bank (ECB) is that the ECB's reserve requirements are at a much higher rate than the Fed's. more difficult for banks to predict. determined annually. based on all of a bank's liabilities.
based on all of a bank's liabilities.
If the Fed were to increase the required reserve rate from 10 percent to 20 percent, the simple deposit expansion multiplier would double. increase by 10 percent. decrease by a factor of ten. be half as large as it was before the increase.
be half as large as it was before the increase.
The debate over the causes of recessions in the United States in recent years has included arguments about monetary policy, but not higher oil prices. decreases in exports. higher oil prices, but not monetary policy. both monetary policy and higher oil prices.
both monetary policy and higher oil prices.
The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it is not controllable. is not observable. cannot be quickly changed. has a predictable impact on the economy.
cannot be quickly changed.
A decrease in the inflation target by the central bank would have no impact on the positioning of the dynamic aggregate demand curve. cause the dynamic aggregate demand curve to shift to the left. cause a movement down the dynamic aggregate demand curve to. be reflected by a movement down and along the existing dynamic aggregate demand curve.
cause the dynamic aggregate demand curve to shift to the left.
Evidence points out that since the mid-1950s just about every recession was preceded by rising interest rates. This suggests that the recessions were caused in part by the actions of the Federal Reserve. the result of changes in consumer confidence. due to increases in oil prices and other production costs. caused by simultaneous shifts in aggregate demand and aggregate supply.
caused in part by the actions of the Federal Reserve.
While GDP was once a key cyclical indicator, its usefulness has declined substantially for all of the following reasons except which one? lack of timeliness requires seasonal adjustment constant revisions for decades contains too much information
contains too much information
As of 2019, even though the ECB charges a fee for accepting excess reserves, banks have not switched from holding reserves to holding cash in their vaults. Were they to make that switch, the policy impact of the negative deposit rate would become negligible. expansionary. contractionary. indeterminate.
contractionary.
If the nominal interest rate decreases, the cost of holding money decreases. cost of holding money increases. velocity of money should increase. cost of holding money increases, and the velocity of money should decrease.
cost of holding money decreases.
The monetary base is the sum of reserves and M2. M1 and reserves. currency in the hands of the public, reserves, and M1. currency in the hands of the public and reserves in the banking system.
currency in the hands of the public and reserves in the banking system.
The economy is in both a short- and long-run equilibrium if current inflation equals expected inflation and current output equals potential output. the aggregate demand curve intersects the short-run aggregate supply curve. the long-run aggregate supply curve is at potential output. the short-run aggregate supply curve intersects the long-run aggregate supply curve at potential output.
current inflation equals expected inflation and current output equals potential output.
Each of the following factors contribute to the slope of the dynamic aggregate demand curve, except the strength of the effect of inflation on real balances. current level of technology. extent to which monetary policymakers react to a change in current inflation. size of the response of aggregate expenditures to changes in the interest rate.
current level of technology.
The intersection of the aggregate demand curve and the short-run aggregate supply curve determines current inflation, but not current output. potential output. current output, but not current inflation. current output and current inflation.
current output and current inflation.
At any point along the long-run aggregate supply curve, expected inflation equals current inflation and current output is below potential output. the economy is moving toward its potential output level. current output equals potential output and expected inflation equals current inflation. expected inflation is moving toward current inflation.
current output equals potential output and expected inflation equals current inflation.
Increases in the real interest rate in the United States will cause net exports to decrease because the dollar depreciates. increase because the dollar depreciates. decrease because the dollar appreciates. increase because the dollar appreciates.
decrease because the dollar appreciates.
Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) to determine what would happen if output in the economy were to fall by an additional one percent below potential. Then, the target federal funds rate would increase by 1.5 percent. decrease by 1.5 percent. remain at 2.5 percent. decrease by 0.5 percent.
decrease by 0.5 percent.
During economic slowdowns (recessions), the velocity of money tends to remain relatively stable. increase slightly. increase dramatically. decrease.
decrease.
During the 1990s, the money multipliers for M1 and M2 decreased. remained fairly constant even though the economy grew. the M1 multiplier decreased while the M2 multiplier increased dramatically. increased dramatically as the economy grew.
decreased.
The potential output of a country would increase as a result of each of the following, except which one? an increase in population an increase in capital per worker technological innovation that increases labor productivity depreciation of the capital stock
depreciation of the capital stock
Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact of Harry's deposit on the monetary base? The monetary base did not change. increased by $1,000. decreased by $1,000. increased by more than $1,000.
did not change.
During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers focusing directly on an objective. on multiple numerical targets. exclusively on an intermediate target that will effectively result in the final objective. on development of a new intermediate target that will effectively result in the final objective.
directly on an objective.
In the United States, loans made by Federal Reserve to banks are discount loans. reserves. discount loans and reserves. discount loans and foreign exchange reserves.
discount loans.
Which one of the following would not be considered an unconventional monetary policy tool? discount rate policy duration commitment quantitative easing credit easing
discount rate
If the Fed sees no need to engage in expansionary monetary policy, then the Fed will likely shrink its balance sheet rapidly. eventually, the Fed will shrink its balance sheet by letting securities it holds expire. it will be impossible for the Fed to shrink its balance sheet. the Fed is likely to increase the size of its balance sheet.
eventually, the Fed will shrink its balance sheet by letting securities it holds expire.
Quantitative easing is statements today about policy targets in the future. expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. asset purchases that shift the composition of the Fed's balance sheet. expansion of the demand for aggregate reserves to drive down the IOER.
expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target.
Suppose an economy is currently operating at point 0 in the following graph. This economy is experiencing a(n) recessionary gap. expansionary gap. long-run equilibrium. inflation rate below expected inflation.
expansionary gap.
Between 1970 and 2000, if the Fed had tried to hit its money growth targets, the economy would have likely experienced very high inflation. federal funds rate would have changed often and by large amounts. interest rates would have likely been more stable. economy would have likely experienced very high inflation but interest rates would have likely been more stable.
federal funds rate would have changed often and by large amounts.
The Taylor rule allows the real long-term interest rate to fluctuate with the natural rate of interest. be zero. be 5 percent less the inflation rate. be 1 percent.
fluctuate with the natural rate of interest.
If M2 is four times larger than M1, the velocity of M1 should be one-fourth of the velocity of M2. equal to the velocity of M2. equal to four. four times larger than the velocity of M2.
four times larger than the velocity of M2.
The monetary base is also known as M1. M2. high-powered money. free reserves.
high-powered money.
Inflation targeting does all of the following, except which one? increase policymakers' credibility increase policymakers' accountability communicate policymakers' objectives clearly and openly hinder economic growth
hinder economic growth
Often, central banks that employ inflation targeting have a hierarchical mandate that means that hitting the inflation target is the first priority after all other stated objectives are reached. hitting the inflation target is the only objective. the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers. hitting the inflation target comes first, and everything else comes second.
hitting the inflation target comes first, and everything else comes second.
Empirical research has shown that in the 1990s and 2000s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s. in the 1990s and 2000s, velocity was less sensitive to an increase in the opportunity cost of holding money than in the 1980s. during the 1980s and 1990s, the velocity of money was not sensitive to changes in the opportunity cost of holding money. during the 1980s and 1990s, the velocity of money actually decreased as the opportunity cost of holding money increased.
in the 1990s and 2000s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s.
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's total reserves will increase by $100,000. increase by less than $100,000. decrease. not change.
increase by $100,000.
A central bank's purchase of securities made by writing checks on itself will decrease the size of its balance sheet. have no impact at all on the balance sheet. increase the size of their balance sheet. only change the composition of its assets.
increase the size of their balance sheet.
If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to decrease. increase. not change. decrease since failing banks lost theirs.
increase.
During the Great Depression, the monetary base in the United States decreased significantly. increased. remained constant. was highly erratic.
increased.
The collapse of the Thai currency, the baht, was partially due to inaction by the Federal Reserve. actions taken by the European Central Bank. information kept hidden by the central bank of Thailand. central bankers and the Minister of Finance publishing too much information.
information kept hidden by the central bank of Thailand.
From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was that the inflation rate increased to over 18 percent in 1983. many banks failed that otherwise may not have. interest rates rose very high. inflation remained high for most of the 1980s.
interest rates rose very high.
Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be less than one. greater than one. infinity. exactly one.
less than one.
If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must target the quantity of reserves. set targets for both interest rates and the quantity of reserves. not target the interest rates. let the quantity of reserves fluctuate.
let the quantity of reserves fluctuate.
Each of the following items would appear as liabilities on the central bank's balance sheet except which one? loans currency the government's account accounts of the commercial banks
loans
Liabilities of commercial banks show up on the Fed's balance sheet as part of its liabilities. securities. foreign exchange reserves. loans.
loans.
If inflation is very high, say 50 or 100 percent a year, monetary policymakers wishing to lower it will shift their focus to controlling the long-term interest rate. the short-term interest rate. the exchange rate. money growth.
money growth.
In studying the average annual inflation and money growth in 160 countries over the three decades that began in 1980, it is startling to see that researchers found many countries that had experienced rates of inflation that averaged 0 percent a year. 20 percent a year. more than 200 percent a year. more than 1,000 percent a year.
more than 200 percent a year.
Economic researchers have found no examples of countries with high rates of money growth and low inflation rates. many examples of countries with low rates of money growth and high inflation rates. many examples of countries with high rates of money growth and low inflation rates. no relationship between rates of money growth and inflation rates.
no examples of countries with high rates of money growth and low inflation rates.
An open market sale of U.S. Treasury securities by the Fed will cause the banking system's balance sheet to show only an increase in liabilities. only a decrease in assets. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.
no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.
If the current market federal funds rate is in the target rate range and the demand for reserves decreases, the likely response in the federal funds market will be that the market federal funds rate will decrease. equal the target rate. will increase. not change because the reserve supply is so high that the market federal funds rate will be unchanged.
not change because the reserve supply is so high that the market federal funds rate will be unchanged.
The point where the central bank's target inflation rate is consistent with the long-run real interest rate lies above the monetary policy reaction curve. below the monetary policy reaction curve. on the monetary policy reaction curve. on the horizontal (inflation) axis.
on the monetary policy reaction curve.
The Fed will make a discount loan to a bank during a crisis no matter what condition the bank is in. only if the bank is sound financially and can provide collateral for the loan. but if the bank doesn't have collateral the interest rate is higher. only if the bank would fail without the loan.
only if the bank is sound financially and can provide collateral for the loan.
The European equivalent of the U.S. market federal funds rate is called the overnight cash rate. target refinancing rate. European discount rate. overnight repurchase rate.
overnight cash rate.
The portfolio demand for money reflects the money we hold for our everyday transactions. portion of wealth people desire to hold in the form of money. money we hold to purchase stocks and bonds and other financial securities. money we hold for our everyday transactions and the money we hold to purchase stocks and bonds and other financial securities.
portion of wealth people desire to hold in the form of money.
The long-run aggregate supply curve intersects the horizontal axis at the potential level of output. current level of output. expected rate of inflation. actual rate of inflation.
potential level of output.
For a three-year period from October 1979 to October 1982, the FOMC primarily targeted reserves. primarily targeted the real federal funds interest rate. primarily targeted M2. gave up targeting reserves entirely.
primarily targeted reserves.
Between 1970 and 2000, the Fed published their targets for money growth and often hit these targets. never published targets or actual amounts for money growth. published targets for money growth and rarely hit them. published actual money growth but not targets.
published targets for money growth and rarely hit them.
In the long run, with %ΔV = 0, we can conclude that the inflation rate equals the rate of money growth. rate of money growth plus growth in potential output. rate of money growth minus growth in potential output. rate of money growth plus change in velocity of money.
rate of money growth minus growth in potential output.
If the equation of exchange is MV = PY, the Y represents nominal GDP. real GDP. potential output. economic growth.
real GDP.
The only solution available to a country experiencing extremely high rates of inflation is to raise interest rates. peg your currency to another country's currency. reduce money growth. revert to a gold standard.
reduce money growth.
Evidence points out that since the mid-1950s just about every recession was preceded by low interest rates. rising interest rates. falling interest rates. negative real interest rates.
rising interest rates.
The Lucas critique focuses specifically on the relationship between Fed policy and the money supply. role that economic policymaking has on people's economic behavior. inability to measure economic performance accurately. moving away from fixed exchange rates to flexible exchange rates.
role that economic policymaking has on people's economic behavior.
As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is gold. securities. foreign exchange reserves. loans.
securities.
If most people expect the inflation rate will increase, the long-run aggregate supply curve would shift right. aggregate demand curve would shift right. short-run aggregate supply curve would shift to the right. short-run aggregate supply curve would shift to the left.
short-run aggregate supply curve would shift to the left.
Forward guidance includes statements today about policy targets in the future. expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. asset purchases that shift the composition of the Fed's balance sheet. statements of policy changes and dates those changes will take effect.
statements today about policy targets in the future.
When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will show an increase in assets and liabilities of $25,000. only show an increase in assets of $25,000. only show an increase in liabilities of $25,000. still show the same total amount of assets as before the purchase.
still show the same total amount of assets as before the purchase.
In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the economy would have been better off. target would not have been politically acceptable. target would have been a federal funds rate of 0 percent. inflation rate would have risen further.
target would not have been politically acceptable.
Potential output of the country when viewed over long periods of time rises in spurts and then starts a downward trend that can last years. is surprisingly constant. always decreases. tends to rise over time.
tends to rise over time
The money multiplier is much lower today than it was 25 years ago because people are holding less currency today. the currency-to-deposit ratio is much higher today. credit cards are more widely used. there is less currency available today.
the currency-to-deposit ratio is much higher today.
In dollar amounts, the monetary base is larger than M2, and M1 is less than M2. M1 is smaller than the monetary base, and M2 is larger than both. the monetary base is larger than M1 and M2. the monetary base is smaller than M1 and M2 is larger than M1
the monetary base is smaller than M1, and M2 is larger than M1.
One thing the Fed has learned over the past 25 years is that the money multiplier is fairly constant no matter what changes are made to the monetary base. the money multiplier is unstable over time. it should focus its attention on targeting M2. the money multiplier has a trend rate of growth that is fairly constant.
the money multiplier is unstable over time.
Given the equation of exchange, MV = PY, when central bankers control short-term nominal interest rates by adjusting the level of reserves in the banking system, their actions are expected to primarily affect the rate of growth of V. the value of V. potential Y as opposed to current Y. the rate of growth of M.
the rate of growth of M.
Crises that occasionally hit financial markets will increase the demand for money since the return on money increases. the return on financial assets increases. there is no risk with holding money. the risk of holding money relative to other financial assets decreases.
the risk of holding money relative to other financial assets decreases
When the Fed makes a discount loan, the impact on the banking system's balance sheet is an increase in liabilities with no change in assets. an increase in assets and a decrease in liabilities. a decrease in assets and an increase in liabilities. the same as that of an open market purchase.
the same as that of an open market purchase.
In the short run, the point on the aggregate demand curve where an economy will end up in equilibrium depends on the money supply. the long-run rate of inflation. potential output. the short-run aggregate supply curve.
the short-run aggregate supply curve.
All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase, then the transactions demand for money should increase. the transactions demand for money should decrease. it shouldn't impact the transactions demand for money. nominal interest rates should decrease.
the transactions demand for money should increase.
The interest rate on excess reserves is the upper bound of the federal funds target rate range. the lower bound of the federal funds target rate range. unrelated to the federal funds target rate range. equal to the target federal funds rate.
the upper bound of the federal funds target rate range.
Consider the following graph. If the Fed increases the IOER from IOER Rate0 to IOER Rate1, they are implementing what type of policy? expansionary monetary policy to increase lending throughout the economy tighter monetary controls where there is an increase in the rate at which banks are willing to lend loosening of controls such that banks are less aggressively bidding for funds to deposit with the Fed no change in monetary policy since reserve supply is so high that the market federal funds rate will be unchanged
tighter monetary controls where there is an increase in the rate at which banks are willing to lend
A good monetary policy instrument is observable only to monetary policy officials. tightly linked to monetary policy objectives. controllable and rigid. difficult to change.
tightly linked to monetary policy objectives.
In the short run, the aggregate supply curve is vertical. horizontal. upward-sloping. downward-sloping.
upward-sloping.
If output and inflation are unrelated in the long run, the long-run aggregate supply curve must be horizontal. vertical. upward-sloping. the same as short-run aggregate supply.
vertical.
One cost that potentially could result from central banks targeting money growth is high inflation. a slowdown in financial innovation. volatile interest rates. decreased independence.
volatile interest rates.
Given that velocity was more sensitive to an increase in the opportunity cost of holding money in the 1990s and 2000s as compared to the 1980s, using the relationship from the 1980s to make monetary policy in the 1990s was not possible under new leadership. would not have produced the desired results. could have created more price stability in the 1990s. would have created a period of stable economic expansion in the 1990s.
would not have produced the desired results.
Using the equation of exchange, if inflation is 1.5 percent, real output grows by 3.0 percent, and the growth rate of money is 5.0 percent, the change in the velocity of money is zero; velocity is constant. −0.5 percent. +4.5 percent. +0.5 percent.
−0.5 percent.
