Macro

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All else equal, when the Federal Reserve banks engage in a contractionary monetary policy, the prices of government bonds usually A. Fall B. rise C. remain constant D. move in the same direction as the bonds' interest rate yield

A. Fall

Checkable deposits are A. Included in M1 B. Not included in either M1 or M2 C. Considered to be a near money D. Also called time deposits

A. Included in M1

In a liquidity trap, output/ input (Y) can increase significantly without cauing a significant ______ in interest rates, given a fixed Money Supply A. Increase B. Decrease

A. Increase

Because of the increase in the IS curve, the market interest rate A. increases B. Decreases C. Stays the same

A. Increases

Recessions have contributed to the public debt by A. Reducing national income and therefore tax revenues B. Increasing real interest rates C. Increasing the international value of the dollar D. increasing national saving

A. Reducing national income and therefore tax revenues

Which of the following will increase commercial bank reserves? A. the purchase of government bonds in the open market by the Federal Reserve Banks B. a decrease in the reserve ratio C. an increase in the discount rate D. the sale of government bonds in the open market by the federal Reserve banks

A. the purchase of government bonds in the open market by the Federal Reserve Banks

Under normal circumstances the federal funds rate is determined in the market for A. US bonds B. Excess Reserves C. Mortgage bonds D. Mortgage backed securites

B. Excess reserves

Post Crisis: The interest rate on excess reserves, in theory, should act a floor for the A. discount rate B. federal funds rate C. prime market rate D. return on government debt

B. Federal funds rate

In a liquidity trap, monetary policy is A. Effective B. Ineffective

B. Ineffective

The three main societal functions of the modern day baking system are A. to supply the economy with money, facilitate the payments system, and make a profit B. to supply the economy with money, facilitate the payments system, and allocate credit C. to supply the economy with money, facilitate the payments system, and improve the economy

B. to supply the economy with money, facilitate the payments system, and allocate credit

Before the recent crisis, Federal Reserve purchases of Mortgage- backed securities were $0. After the crisis, Federal reserves purchases of mortgage-backed securities has increased to approximately? A. $1.4 thousand B. $1.4 million C. $1.4 billion D. $1.4 trillion

D. $1.4 trillion

Suppose a commercial system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20%, the banking system can expand the supply of money by the maximum amount of A. $122,000 B. $175,000 C. $300,000 D. $75,000

D. $75,000

Assume the ratio is 25% and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is A. not directly affected, but the money creating potential of the commercial banking system is increase by $12 million B. directly increased by $4 million and the money creating potential of the commercial banking system is increased by an additional $16 million C. directly reduces by $4 million and the money creating potential of the commercial banking system is decreased by an additional $12 million D. directly increased by $4 million and the money creating potential of the commercial banking system is increased by an additional $12 million

D. directly increased by $4 million and the money creating potential of the commercial banking system is increased by an additional 212 million

Which of the following is correct? A. Both the granting and repaying of bank loans expand the aggregate money supply B. Granting and repaying bank loans do not affect the money supply C. granting a bank loan destroys money; repaying a bank loan creates money D. granting a bank loan creates money; repaying a bank loan destroys money

D. granting a bank loan creates money; repaying a bank loan destroys money

In the US, the money supply (M1) is comprised of A. Coins, paper currency, checkable deposits B. Currency, checkable deposits, and Series E Bonds C. Coins, paper currency, checkable deposits, and credit balances with brokers D. Paper currency, coins, gold certificates and time deposits

A. Coins, paper currency, checkable deposits

The problem of cyclical asymmetry refers to the idea that A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply B. the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy C. cyclical downswings are typically of longer duration than cyclical upswings D. an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary policy may not achieve a contraction of the money supply

A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply

When economists say that money serves as a store of value, they mean that it is A. a way to keep wealth in a readily spendable form for future use B. a means of payment C. a monetary unit for measuring and comparing the relative value of goods D. declared as legal tender by the government

A. a way to keep wealth in a readily spendable form for future use

The Federal Funds rate is the interest rate that ______ charges_____ A. banks; other banks B. the Fed; commercial banks C. banks; their best corporate customers D. banks; on federal student loans

A. banks; other banks

The money supply is backed A. by governments ability to control the supply of money and therefore to keep its value relatively stable B. by government bonds C. dollar-for-dollar by gold and silver D. by gold reserves representing a fraction of the total value of dollars in circulation

A. by governments ability to control the supply of money and therefore to keep its value relatively stable

All else equal, when the federal reserve banks engage in an exnpansionary monetary policy, the interest rates received on government bonds usually A. fall B. rise C. remain constant D. move in the same direction as the bond's price

A. fall

If the Monetary Authority wanted to accommodate the increase in the IS curve it would _____ the money supply A. increase B. decrease C. Keep constant

A. increase

The value of money varies A. inversely with the price level B. directly with the volume of employment C. directly with the price level D. directly with the interest rate

A. inversely with the price level

The real burden of an increase in the public debt A. may be very small or conceivably zero when the economy is in a severe depression B. will be smaller when full employment exists than when the economy has large quantities of idle resources C. can be shifted to future generations if the debt is internally financed D. can best be measured by the dollar increase in the size of the debt

A. may be very small or conceivably zero when the economy is in a severe depression

When commercial banks use excess reserves to buy government securities from the public A. new money is created B. commercial banks reserves increase C. the money supply falls D. checkable deposits decline

A. new money is created

Which of the following will increase commercial bank reserves A. the purchase of government bonds in the open market by the Federal Reserve Banks B. A decrease in the reserve ratio C. increase in the discount rate D. the sale of government bonds in the open market by the federal reserve banks

A. purchase of government bonds in the open market by the federal reserve banks

Prior to the Financial Crisis, if the Federal Reserve wanted to raise market interest rates it would A. Sell bonds to baking system, removing reserves from the system, thereby increasing the Federal Funds rate B. buy bonds from the banking system, increasing reserves in the system, thereby increasing the Federal Funds Rate C. raise the interest on excess reserves D. lower the discount rate

A. sell bonds to banking system, removing reserves from the system, thereby increasing the Federal Funds rate

The liquidity trap refers to the situation where A. the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment or aggregate demand B. excessive consumer debt prevents limits the growth in consumer spending necessary to bring the economy out of recession C. the public debt is so large that Federal borrowing drives up interest rates and discourages private sector spending D. a financial crisis cause a runs on banks and the elimination of billions in excess reserves

A. the Feds adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand

Post Crisis: in theory, the federal funds rate should float between A. the discount rate and the IOER (interest on excess reserves) rate B. the prime rate and government bond rate C. the prime rate and the average 30yr mortgage rate

A. the discount rate and the IOER

If a private bank borrows money from the Federal Reserve at 1% and uses that money to purchase a U.S government bond paying 3%, the bank's net return will be A. -2% B. 2% C. -1% D. 1%

B. 2%

Loans and securities held by banks are counted as _____ on their balance sheets A. Liabilities B. Assets C. Aren't on their balance sheets

B. Assets

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in A. Expansionary Fiscal Policy B. Contractionary Fiscal Policy C. Neutral Fiscal Policy D. High interest rate Policy

B. Contractionary Fiscal Policy

An appropriate fiscal policy for a severe recession is A. Decrease in government spending B. Decrease in tax rates C. Appreciation of the dollar D. Increase in interest rates

B. Decrease in tax rates

The amount that a commercial bank can lend is determined by its A. required reserves B. excess reserves C. outstanding loans D. outstanding checkable deposits

B. Excess reserves

The Federal Budget Deficit is found by A. Subtracting government tax revenues plus government borrowing from government spending in a particular year B. Subtracting government tax revenues from government spending in a particular year C. Cumulating the differences between government spending and tax revenues from the noninvestment type government spending in a particular year

B. Subtracting government tax revenues from government spending in a particular year

Given the increase in the IS curve, this economy's new equilibrium level of output is A. Y1 B. Y2 C. Y3

B. Y2

When economists say that money serves as a medium of exchange, they mean that it is A. a way to keep wealth in a readily spendable form for future use B. a means of payment C. a monetary unit for measuring and comparing the relative values of goods D. declared as legal tender by the government

B. a means of payment

Because banking institutions allocate credit, they are engaging in A. inherently safe activities B. inherently risky investment C. creating more economic capital

B. inherently risky investment

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for A. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the term auction facility, and a budgetary surplus B. Buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the tem auction facility, and a budgetary deficit C. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus D. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary deficit

B. buying government securities, reducing reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility and a budgetary deficit

Post Crisis: Banks holding excess reserves at the Federal Reserve A. receive no income, to encourage bank lending B. earn interest on excess reserves (IOER) C. have to pay for the service provided D. get to swim in a large vault of gold coins

B. earn interest on excess reserves (IOER)

The graph represents an increase in A. Investment B. government spending C. Taxes D. Money

B. government spending

Which of the following statements is correct? A. interest rates and bond prices vary directly B. interest rates and bond prices vary inversely C. interest rates and bond prices are unrelated D. interest rates and bond prices vary directly during inflations and inversely during recessions

B. interest rates and bond prices vary inversely

The Federal Reserve system A. has the same status as the Supreme Court B. is basically an independent agency C. has the status of a Congressional committee D. is an agency of the executive branch of the Federal government

B. is basically an independent agency

An increase in nominal GDP increases the demand for money because A. interest rates will rise B. more money is needed to finance a larger volume of transactions C. bond prices will fall D. the opportunity cost of holding money will decline

B. more money is needed to finance a larger volume of transactions

The primary purpose of the legal reserve requirement is to A. prevent banks from hoarding too much vault cash B. provide a means by which the monetary authorities can influence the lending ability of commercial banks C. prevent commercial banks from earning excess profits

B. provide a means by which the monetary authorities can influence the lending ability of commercial banks

The purpose of a restrictive monetary policy is to A. alleviate recessions B. raise interest rates and restrict the availability of bank credit C. increase aggregate demand and GDP D. increase investment spending

B. raise interest rates and restrict the availability of bank credit

The discount rate is the interest A. rate at which the central banks lend to the U.S. Treasury B. rate at which the federal reserve banks lend to commercial banks C. yield on long-term government bonds D. rate at which commercial banks lend to the public

B. rate at which the federal reserve banks lend to commercial banks

Open market operations refer to A. purchase of stocks in the New York Exchange B. purchase or sale of government and other securities by the Fed C. central bank lending to commercial banks D. the specifying of loan maximums on stock purchases

B. the purchase or sale of government and other securities by the Fed

Which of the following tools of monetary policy has not been used since 1992? A. the term auction facility B. the reserve ratio C. open market operations D. the federal funds rate

B. the reserve ratio

Post Crisis: If the Federal Reserve had to raise market interest rates, but was concerned about removing extensive amounts of reserves from the banking system if could A. Sell securities back to the banking system B. Buy securities from the banking system C. Raise the interest rate on excess reserves (IOER) D. Use its pulpit to encourage banks to lend less at higher interest rates

C. Raise the interest rate on excess reserves (IOER)

A major advantage of the built in or automatic stabilizers is that they A. Simultaneously stabilize the economy and reduce the absolute size of the public debt B. Automatically produce surpluses during recessions and deficits during inflations C. Require no legislative action by Congress to be made effective D. guarantee that the Federal Budget will be balanced over the course of the business cycle

C. Require no legislative action by Congress to be made effective

In a liquidity trap interest rates are A. very high B. Mid-level C. Very low

C. Very low

The cyclically adjusted budget tells us A. That in full employment economy the Federal budget should be in balance B. That tax revenues should vary inversely with GDP C. What the size of the Federal budget deficit or surplus would be if the economy was at full employment D. The actual budget deficit or surplus realized in any given year

C. What size of the Federal budget deficit or surplus would be if the economy was at full employment

When economists say that money serves as a unit of account, they mean that it is A. a way to keep wealth in a readily spendable form for future use B. a means of payment C. a monetary unit for measuring and comparing the relative values of goods D. declared as legal tender by the government

C. a monetary unit for measuring and comparing the relative value of goods

Which of the following activities is inherently risky A. to supply economy with money B. facilitating the payments system C. allocating credit D. making a profit

C. allocating credit

Assume the economy if at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward A.an equality of tax receipts and government expenditures B. an excess of tax receipts over government expenditures C. an excess of government expenditures over tax receipts D. a reduction of subsides and transfer payments and an increase in tax rates

C. an excess of government expenditures over tax receipts

In a fractional reserve banking system A. bank panics cannot occur B. the monetary system must be backed by gold C. banks can create money through the lending process D. the Federal Reserve has no control over the enough of money in circulation

C. banks can create money through the lending process

Other things equal, if the supply of money is reduced A. the demand for money will increase B. the interest rate will fall C. bond prices will fall D. investment spending will increase

C. bond prices will fall

Commercial banks create money when they A. accept cash deposits from the public B. purchase government securities from the central banks C. create checkable deposits in exchange for IOUs D. raise their interest rates

C. create checkable deposits in exchange for IOUs

The level of excess reserves within the banking system has _____ following the crisis A. remained constant B. Increased slightly C. Increase exorbitantly ( a lot) D. Decrease slightly

C. increase exorbitantly ( a lot)

The amount of reserves that a commercial bank is required to hold is equal to A. the amount of its checkable deposits B. the sum of its checkable deposits and time deposits C. its checkable deposits multiplied by the reserve requirement D. its checkable deposits divided by its total assets

C. its checkable deposits multiplied by the reserve requirement

Monetary policy is through to be A. equally effective in moving the economy out of a depression as in controlling demand pull inflation B. more effective in moving the economy out of a depression than in controlling demand pull inflation C. more effective in controlling demand pull inflation than in moving the economy out of a recession D. only effective in moving the economy out of a depression

C. more effective in controlling demand pull inflation than in moving the economy out of a depression

Which of the following tools of monetary policy is the most important on a day to day basis? A. the discount rate B. the reserve ratio C. open market operations D. the tern auction facilit

C. open market operations

Which of the following statements is true A. The Federal Reserve sets the federal funds rate B. the Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push banks toward the target C. the Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations D. the Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy

C. the Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations

When a commercial bank borrows from a Federal Reserve bank A. the supply of money automatically increases B. it indicates that the commercial bank is unsound financially C. the commercial bank's lending ability is increased D. the commercial bank's reserves are reduced

C. the commercial bank's lending ability is increased

If the price index rises from 200 to 250, the purchasing power value of the dollar A. may either rise of fall B. will rise by 25% C. will fall by 25% D. will fall by 20%

C. will fall by 25%

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25%, what is the size of the bank's actual reserves? A. 16,000 B. 84,000 C. 24,000 D. 20,000

C.24,000

Money fuctions as A. A store of value B. A unit of account C. A medium of exchange D. All of these

D. All of these

Pre-crisis: Which of the following best describes the cause-effect chain of an expansionary monetary policy? A. A decrease in bank reserves will lower the federal funds rate, therefore lowering market interest rates; increasing investment spending, aggregate demand, and GDP B. A decrease in bank reserves will raise the federal funds rate, which will raise market interest rates; decreasing investment spending, aggregate demand and GDP C. An increase in bank reserves will raise the federal funds rate, which will raise market interest rates; decreasing investment, aggregate demand, GDP D. An increase in bank reserves will lower the federal fund rate, which will lower market interest rates; increasing investments, aggregate demand, GDP

D. An increase in bank reserves will lower the federal funds rate, which will lower the market interest rate; increasing investment spending, aggregate demand, GDP

The group that sets the Federal Reserve Systems policy on buying and selling government securities (bill, notes, and bonds) is the A. Federal Deposit Insurance Corporation B. Federal Bond Sale Advisers C. Council of Economic Advisers D. Federal Open Market Committee (FOMC)

D. Federal Open Market Committee (FOMC)

An expansionary monetary policy may be less effective than a restrictive monetary policy because A. the federal reserve banks are always willing to make loans to commercial banks which are short of reserves B. fiscal policy always works at cross purposes with an expansionary monetary policy C. changes in exchange rates complicate an expansionary monetary policy more than it does a restrictive monetary policy D. commercial banks may not be able to find loan customers

D. commercial banks may not be able to find loan customers

Which one of the following is presently a major deterrent to bank panics in the U.S? A. the legal reserve requirement B. the fractional reserve system C. the gold standard D. deposit insurance

D. deposit insurance

Excess reserves refer to A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank B. minimum amount of actual reserves must keep on hand to back up its customers deposits C. difference between actual reserves and loans D. difference between actual reserves and required reserves

D. difference between actual reserves and required reserves

Which of the following is correct when the Federal Reserve buys government securities from the public, the money supply A. Contracts and commercial bank reserves increase B. expands and commercial bank reserves decrease C. contracts and commercial bank reserves decrease D. expands and commercial bank reserves increase

D. expands and commercial bank reserves increase

To increase the Federal funds rate, the Fed can A. buy government bonds from the public B. decrease the discount rate C. decrease the prime interest rate D. sell government bonds to commercial banks

D. sell government bonds to commercial banks

In the 1990s and early 2000s, Japan's central bank reduced real interest rate to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of A. the crowding out effect B. pulling on a string C. the taylor rule D. the liquidity trap

D. the liquidity trap

Quantitative Easing refers to A. the increased selling of securities by a central bank to reduce the money supply, keep market interest rate high, and increase bank profitability. All this should stimulate economic growth B. The increased buying of securities by a central bank to improve bank balance sheets, increase reserves, and keep interest rates lower for both short and long term borrowers. C. Reducing taxes D. Shrinking the monetary base

B. The increased buying of securities by a central bank to improve bank balance sheets, increase reserves, and keep interest rates low for both short and long term borrowers

The shift in the IS curve along r1 is equal to the change in initial spending times A. the tax multiplier B. Spending multiplier C. change in investment

B. spending multiplier

Overnight loans from one bank to another for reserve purposes entail an interest rate called the A. prime rate B. discount rate C. Federal funds rate D. Treasure bill rate

C. Federal funds rate

The Federal Reserve system regulates the interest rate primarily by A. controlling the production of coins in the U.S mint B. altering the reserve requirements of commercial banks and thereby the ability of banks to make loans C. altering the reserves of commercial banks, largely through sales and purchases of government bonds D. restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply

C. altering the reserves of commercial banks, largely through sales and purchases of government bonds

Which of the following statements best describes the twelve Federal Reserve Banks A. they are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S Treasury securities B. they are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry C.they are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare D. they are privately owned and publicly controlled banks whose basic goal it to earn profits for their owners

C. they are privately owned and publically controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserves ratio is 20%, the banking system can expand the money supply of money by the maximum amount of A. 122,000 B. 175,000 C. 300,000 D. 75,000

D. 75,000

A contractionary fiscal policy is shown as a A. Rightward shift in the economy's aggregate demand curve B. Rightward shift in the economy's aggregate supply curve C. Movement along an existing aggregate demand curve D. Leftward shift in the economy's aggregate demand curve

D. Leftward shift in the economy's aggregate demand curve

Suppose the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth? A. A Congressional proposal to incur a Federal surplus to be used for the retirement of the public debt B. Reductions in agricultural subsidies and veteran's benefits C. Postponement of a highway construction program D. Reductions in Federal Tax rates on personal and corporate income

D. Reductions in Federal Tax Rates on personal and corporate income

Most modern banking systems are based on A. money of intrinsic value B. commodity money C. 100% reserves D. fractional reserves

D. fractional reserves

Suppose lenders, Entrepreneurs, and businesses are concerned about the future performance of the economy because it is currently in a recession. In response to the recession, the Federal Government engages in large scale expansionary Fiscal Policy. This end the recession, but pushes up interest rates due to increased Federal Government borrowing. Despite the increase in interest rates, overall business investment increases. Which of the following gives a valid rational for the increase in business investment? A. Businesses take advantage of the low interest rates during the recession get access to cheap money B. the end of the recession causes the investment demand curve to shift outward due to improved Expectations of economic performance. The outward shift in the investment demand curve has a greater effect on total investment than the rise in interest rates. C. The government has to borrow less due to the improved economic conditions. This eliminates the government's need to borrow and therefore frees up savings to be lent to the private sector. Crowding out is reduced and firms take advantage of the lower interest rates. D. The monetary authority increases supply of reserves in the system, thereby increasing market interest rates further. The higher interest rates entice additional borrowers to engage in high return investments.

B. The end of the recession causes the investment demand curve to shift outward due to improved expectations of economic performance. The outward shift in the investment demand curve has a greater effect on total investment than the rise in interest rates.

Built in stability means that A. An annually balanced budget will offset the pro-cyclical tendencies created by state and local finance and thereby stabilize the economy B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus C. Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity D. Government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year

B. With given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus