Macroeconomics Test 2 Meng

A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement? a. 10 percent b. 20 percent c. 30 percent d. 60 percent

a

Are outstanding credit card balances counted as part of the money supply? a. No; credit card balances reflect funds that have been borrowed. Unlike money, they cannot be used as a means of payment. b. Yes; they are used to purchase things and therefore they are included in the money supply figures. c. They are included in the M1 money supply, but not the M2 figures. d. They are included in the M2 money supply, but not the M1 figures.

a

If the Federal Reserve wants to increase the availability of money and credit, it can a. lower the discount rate. b. raise the reserve requirements. c. sell government bonds to the public. d. encourage banks to increase their prime lending rate.

a

If the federal government were to run a budget deficit, this would a. increase the size of the national debt. b. reduce the size of the national debt. c. leave the size of the national debt unchanged. d. increase the national debt only if the government also expands the supply of money.

a

If the public decides to hold more currency and fewer deposits in banks, bank reserves a. decrease and the money supply eventually decreases. b. decrease but the money supply does not change. c. increase and the money supply eventually increases. d. increase but the money supply does not change

a

Open market operations is the a. tool most often used by the Fed to alter the money supply. b. least effective tool the Fed has to alter the money supply. c. tool used by the Treasury to raise tax revenues. d. tool used by the Fed to regulate stock market activities.

a

When the Fed sells Treasury Bonds on the open market, it will tend to a. decrease the money supply and raise interest rates. b. decrease the money supply and lower interest rates. c. increase the money supply and raise interest rates. d. increase the money supply and lower interest rates.

a

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order? a. Commodity prices are falling, and the dollar is appreciating. b. Commodity prices are rising, and the dollar is appreciating. c. Commodity prices are rising, and the dollar is depreciating. d. Commodity prices are falling, and the dollar is depreciating.

a

Which of the following is true of deficit spending and government debt? a. The opportunity costs of government spending must be incurred today and cannot be passed on through deficit spending. b. Because of the national debt, future generations will incur liabilities without any corresponding benefits. c. Financing government spending with debt allows the government to pass the opportunity costs of government spending along to future generations. d. All of the public debt is owed to foreigners because the people who pay taxes are U.S. citizens.

a

Which of the following would cause the money supply in the United States to decrease? a. An increase in reserve requirements. b. A decrease in the discount rate. c. A purchase of bonds by the Federal Reserve. d. An increase in the world supply of gold.

a

Deficit spending and a large national debt can have important effects on future generations because they a. make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations. b. can significantly impact spending on capital formation. c. will pass interest obligations on to future generations with no corresponding benefits. d. will cause the government to go bankrupt.

b

During the 1950s and 1960s, the national debt as a percent of GDP in the United States a. soared to an all-time high. b. declined. c. increased. d. was virtually unchanged

b

If you have a checking account at a local bank, your bank account there is a. an asset to the bank and an asset to you. b. a liability of the bank and a liability of yours. c. a liability of the bank and an asset to you. d. an asset to the bank and a liability of yours.

c

Suppose the Fed purchases $100 million of U.S. government securities from the public. How will this affect the money supply and the national debt? a. The money supply will increase; the national debt will decline. b. The money supply will decline; the national debt will increase. c. The money supply will increase; the national debt will be unaffected. d. The money supply will decrease; the national debt will be unaffected.

c

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called a. excess reserves. b. fractional reserves. c. required reserves. d. certificates of deposit.

c

The immediate effect of a member bank's sale of U.S. government securities to the Fed is a. an increase in that bank's required reserves. b. a decrease in that bank's required reserves. c. an increase in that bank's excess reserves. d. a decrease in that bank's excess reserves.

c

The national debt is the a. difference between a nation's exports and imports of goods and services. b. sum of the personal debt of all citizens in the United States. c. indebtedness of the federal government in the form of outstanding interest-earning bonds. d. sum of the net personal debts of Americans to foreigners.

c

The sum of all past budget deficits and surpluses of the federal government is the a. budget deficit. b. budget surplus. c. national debt. d. trade deficit

c

Which of the following is the primary tool the Fed uses to control the supply of money? a. The discount rate. b. The reserve requirements. c. Open market operations. d. The 30-year home-mortgage interest rate

c

If a number of people suddenly deposit into their checking accounts a great deal of cash previously kept in their pockets or at home, other things constant, their actions will a. create excess reserves and place banks in a position to extend additional loans, which will reduce the money supply. b. create excess reserves and place banks in a position to extend additional loans, which will expand the money supply. c. lead to higher interest rates. d. force the Fed to reduce its discount rate.

b

If many people were to suddenly deposit into their checking accounts large sums of cash previously held in their homes and/or wallets, and there were no offsetting actions by the Fed or change in institutional policies, this would a. decrease the M1 money supply but increase the M2 money supply. b. increase the excess reserves of banks and expand the money supply if these reserves are used to make additional loans. c. reduce the excess reserves of banks and indirectly decrease the M1 money supply. d. reduce the excess reserves of banks and indirectly increase the M1 money supply.

b

If one subtracts the amount of bonds held by agencies of the federal government and the Federal Reserve from the national debt, what remains is known as the a. external debt. b. privately held government debt. c. trade deficit. d. budget deficit.

b

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the interest rate paid on excess reserves encouraging banks to extend more loans. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. d. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

b

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the reserve requirements imposed on commercial banks. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. sell U.S. government securities and other financial assets that it is currently holding. d. raise the interest rate on loans extended to banks and other financial institutions.

b

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the reserve requirements. b. buy U.S. securities on the open market. c. raise the discount rate. d. sell U.S. securities on the open market

b

If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased? a. $250 billion b. $200 billion c. $50 billion d. $25 billion

b

In practice, money supply and short-term interest rates are determined by the a. Treasury and Commerce departments. b. Federal Open Market Committee. c. Board of Governors. d. House and Senate

b

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the Union Bank has no excess reserves. If a new customer deposits $50,000, the bank could extend new loans up to a maximum of a. $10,000. b. $40,000. c. $50,000. d. $250,000.

b

Suppose the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, who deposits the money with First National Bank. If the required reserve ratio is 20 percent, this transaction will increase the excess reserves of First National Bank by a. $8,000. b. $32,000. c. $40,000. d. $200,000.

b

The effectiveness of monetary policy as a stabilization tool is limited by a. activist economists, who exert pressure on politicians. b. the inability to forecast the future and time policy changes in a stabilizing manner. c. Congressional attempts to offset changes in monetary policy with modifications in fiscal policy. d. the inability of the Federal Reserve to alter the money supply.

b

The large increase in the excess reserves held by the commercial banking system during the second half of 2008, a. increases the likelihood of a sharp contraction in the money supply, which would increase the length and severity of the recession. b. increases the likelihood of a rapid increase in the money supply, potentially leading to future inflation. c. is merely a continuation of the trend present since 1990. d. reduces the ability of banks to extend additional loans.

b

Historically, the excess reserves of banks have been ________ relative to checkable deposits, but during the crisis of 2008 the excess reserves of banks ________. (Fill in the blanks) a. large; declined sharply b. small; fell sharply c. small; increased sharply d. large; increased sharply

c

If a country with a large government debt uses money creation to service and repay the debt, this will lead to a. lower interest rates. b. an appreciation of the nation's currency in the foreign exchange market. c. inflation, higher interest rates, and a financial crisis. d. rapid economic growth, as the expansionary monetary policy stimulates the economy and generates the additional tax revenue to service the larger debt.

c

Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008? a. The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major cause of the recession. b. The Fed continued to focus only on price stability and therefore it expanded the money supply at a slow and steady rate throughout the recession. c. The Fed introduced several new procedures for the conduct of monetary policy and it increased the monetary base rapidly as the recession worsened. d. The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open market operations to control the money supply.

c

Which of the following will be classified as a liability on the balance sheet of a commercial bank? a. vault cash b. loans extended to customers c. checking deposits of customers d. deposits held at a Federal Reserve bank

c

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank? a. The money supply increases, and the reserves of your bank decline. b. Both money supply and the reserves of your bank increase. c. There is no change in the money supply, and the reserves of your bank decline. d. The money supply decreases, and the reserves of your bank increase.

c

External debt is that portion of the national debt a. held by private investors. b. held by the Federal Reserve. c. that the United States does not intend to repay. d. held by foreigners.

d

In order to increase the money supply, the banking system must have a. required reserves. b. the authority to buy corporate stocks. c. the authority to print U.S. currency. d. excess reserves. e. the authority to engage in interstate banking

d

The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the a. federal deposit insurance premium. b. vault cash quota. c. excess reserve requirement. d. required reserve ratio.

d

The main source of profit for financial institutions is a. their ownership of stocks in commercial corporations. b. their ownership of real assets received in foreclosures on loans to households. c. the fees charged for holding and servicing checking accounts. d. the difference between interest paid on deposits and interest received on loans. e. the difference between the cost of creating new money and the interest paid on loans.

d

The term "open market operations" refers to the a. loan-making activities of commercial banks. b. effect of expansionary monetary policy on interest rates. c. operation of competitive markets in the banking industry as the result of deregulation. d. buying and selling of government securities by the Federal Reserve

d

Which of the following actions of the Fed would increase the money supply? a. The purchase of U.S. government securities. b. A reduction in the discount rate. c. A reduction in the required reserve ratio. d. All of the above are correct.

d

Which one of the following accurately states the view of activists who favor discretionary stabilization policy? a. Neither monetary nor fiscal policy will exert an impact on the real level of economic activity. b. Since we have only limited ability to forecast the future direction of the economy, the best policy is to do nothing. c. Our ability to forecast the future direction of economic activity is quite good, and therefore, discretionary macroeconomic policy is now capable of eliminating fluctuations in the business cycle if policy makers would follow the advice of leading economists. d. The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.

d

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is a. $100,000. b. $80,000. c. $300,000. d. $20,000. e. $200,000.

e

The main purpose of the Fed is to a. serve as the bankers' bank for member banks. b. regulate interest rates. c. print Federal Reserve Notes. d. regulate financial institutions. e. maintain the proper functioning of our money system.

e