macro final review

if the price index rises from 100 to 120, the purchasing power value of the dollar

will fall by one-sixth

Suppose a family's income increases by 5% at the same time that inflation is 6%. Then the family's living standard:

will increase by 5 percent

Money is created when

People receive loans from their banks

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction

The supply of money is increased by $5,000

The seven members of the board of governors of the federal reserve system are

appointed by the president with the confirmation of the senate

a fractional reserve banking system

banks keep a fraction of deposits as reserves and use the rest to make loans

(Last Word) Solvent firms face the threat of bankruptcy during a financial crisis

because the value of their assets is less than the value of their debts

Disequilibrium in money market is mainly corrected via a change in

bond prices

A commercial bank can add to its actual reserves by

borrowing from a federal reserve bank

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

buying government securities, doing repos, and lowering the discount rate

which of the following is not a tool of monetary policy

changes in banking laws

Which of the following would be considered to be the most liquid?

checkable deposits

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in

commercial banks and thrift institutions

If the Fed wants to discourage commercial bank lending, it will

increase the interest paid on excess reserves held at the fed

Expansionary fiscal policy is so named because it:

is designed to expand real GDP

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,

The supply of money is increased by $5,000

Collateralized default swaps

insured holders of loan-backed securities in case the underlying loans were not repaid

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be

10 percent

the blurring of the lines separating the subsets of the financial industry started in the

1990's

if the money supply is $160, the equilibrium interest rate will be

6 percent

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be

6.67

The Federal Reserve alters the amount of the nation's money supply by

Manipulating the size of excess reserves held by commercial banks

Assets Liabilities and Net Worth Reserves $30 Checkable Deposits $300 Loans 130 Stock Shares 130 Securities 70 Property 200 Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. The commercial banking system has excess reserves of

$0 billion

Type of Deposit Reserve Requirement Checkable Deposits $7.8 - 48.3 Million 3% Over $48.3 Million 10 Noncheckable personal savings and time deposits 0 Refer to the accompanying table. If a bank has $60 million in savings deposits and $40 million in checkable deposits, then its required reserves are

$1.2 million

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are

$100,000

Assets Liabilities and Net Worth Reserves $51 Checkable Deposits $140 Loans 109 Stock Shares 130 Securities 100 Property 10 Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The maximum amount by which the commercial banking system can expand the supply of money by lending is

$30 billion

Assets Liabilities and Net Worth Reserves $30 Checkable Deposits $300 Loans 130 Stock Shares 130 Securities 70 Property 200 Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is

$90 billion

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to reduce it to AD2, they should

An increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50 billion at each price level.

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP

A commercial bank can expand its excess reserves by

Demanding and receiving payment on an overdue loan.

Money performs its function as a store of value very well, because it protects one against the erosion of purchasing power from inflation.

FALSE

The monetary multiplier can also be called the spending multiplier.

False

Other things equal, if there is an increase in nominal GDP,

Interest rate will rise

Which of the following items are included in money supply M2 but not M1?

Saving deposits

During the financial crisis of 2007-2008, the federal reserve

Served as a lender of last resort to both solvent and insolvent firms.

Which the following best describes what occurs when monetary authorities sell government securities?

There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP

TARP, created in 2008, stands for

Troubled Asset Relief Program

checkable deposits are a liability on a bank's balance sheet

True

When economists say that money serves as a medium of exchange, they mean that it is

a means of payment

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as

a medium of exchange

The problem of cyclical asymmetry refers to the idea that

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.

Which of the following is correct? When the federal reserve buys government securities from the public, the money supply

expands and commercial bank reserves increases

The market for immediately available reserve balances at the Federal Reserve is known as the

federal funds market

As it relates to Federal Reserve activities, the acronym FOMC describes the:

federal open market committee

According to the Taylor rule:

if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.

A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank. The commercial bank then lends $4,000 to a borrower. As a consequence of these transactions, the size of the money supply has

increase by $4,000

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M2 definition of money includes

items 2 3 4 6 7 and 8

A bank that assets of $85 billion and a net worth of $10 billion must have

liabilities of $75 billion

Joe deposits $200 in currency into his checking account at a bank. This deposit is treated as

no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.

The federal reserve banks buy government securities from commercial banks. As a result, the checkable deposits

of commercial banks is unchanged but their reserves increase

Insurance companies mainly acquire households' savings by

offering policies in return for periodic premiums

The federal reserve system performs the following functions except

providing banking services to the general public

The purpose of a restrictive monetary policy is to

raise interest rates and restrict the availability of bank credit.

The Federal Reserve can increase aggregate demand by

reducing the discount rate

Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, reserves in the banking system will

remain unchanged

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that

reserves lost by any particular bank will be gained by some other bank

Research for industrially advanced countries indicates that

the less independent the central bank, the higher the average annual rate of inflation

When the receipts given by goldsmiths to depositors were used to make purchases,

the receipts became in effect paper money