Macroeconomics: The Banking System
The money supply is backed:
by the government's ability to control the supply of money and therefore to keep its value relatively stable
The basic policy-making body in the US banking system is the:
Board of Governors of the Federal Reserve
Currency in circulation is part of:
both M1 and M2
The design of mortgage-backed securities, or securitization, refers to:
bundling mortgages into new securities
The Federal Reserve System performs many functions, but its most important one is:
controlling the money supply
The Federal backing for money in the United States comes from:
controlling the money supply in order to keep the value of money relatively stable over time
Other things equal, an increase in taxes on businesses will:
decrease aggregate supply and decrease aggregate demand, and cause real GDP to fall
Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:
decrease by $120 billion with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million
If the interest rate increases, there will be a(n):
decrease in the amount of money held as assets
The reserves of a commerical bank consist of:
deposits at the Federal Reserve Bank and vault cash
The amount that a commercial bank can lend is determined by its:
excess reserves
Maximum checkable-deposit expansion is equal to:
excess reserves times the monetary multiplier
The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:
exchange rate
Prior to the financial crisis, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in targets for the:
federal funds rate
Moral hazard created during the financial crisis occurred because:
federal government bailed out large firms AND Federal Reserve took a variety of actions as a lender of last resort (A and B)
An increase in nominal GDP will:
increase the transactions demand and the total demand for money
Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day, Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts ahs the supply of money changed?
increased by $2,000
Prior to the financial crisis a contraction of the money supply:
increased the interest rate and decreased aggregate demand
The Fed can induce banks to increase their reserve holdings by:
increasing the interest on reserves
If the amount of money demanded exceeds the amount supplied, the:
interest rate will rise
The purchasing power of money and the price level vary:
inversely
When paper money is designated as legal tender, it means that:
it is a means of payment by law
After the financial crisis if the Fed wanted to contract the money supply:
it would raise the interest rate on excess reserves and use reverse repos to purchase any non-banks excess cash
Which is considered a strength of monetary policy compared to fiscal policy?
its protection from political pressure
A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of:
liabilities
Money is destroyed when:
loans are repaid
Which of the following functions of money enables society to gain the benefits of geographic and labor specialization?
medium of exchange
When commercial banks use excess reserves to buy government securities from the public:
new money is created
When one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?
open-market operations
When there is inflation in the economy, it implies that the:
price index is rising and the purchasing power of money is falling
The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the:
prime interest rate
The reason for the Fed being set up as an independent agency of government is to:
protect it from political pressure
The primary purpose of the legal reserve requirement is to:
provide a means by which the monetary authorities can influence the lending ability of commercial banks
The use of monetary policy to shift aggregate demand to the right in a severe recession is like:
pushing on a string
The opportunity cost of holding money:
varies directly with the interest rate
The asset demand for money:
varies inversely with the rate of interest
Stabilizing a nation's price level and the purchasing power of its money can be achieved:
with both fiscal and monetary policy
If product prices were stated in terms of marbles, then marbles would be functioning primarily as:
a unit of account
Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion at a time when the reserve ratio is 25 percent. If the reserve ratio is lowered to 20 percent, we can conclude that the:
banking system now has excess reserves of $3 billion
What is one significant characteristic of fractional reserve banking?
banks can create money through lending their reserves
What is one significant characteristic of fractional reserve baning?
Banks can create money through lending their reserves
A commercial bank has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are, respecitvely:
$50,000 and $200,000
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:
$600 million, but by $800 million if the securities are purchased directly from commercial banks
The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $100, what will be the interest rate yield to a new buyer of the bond?
16.7 percent
According to the Taylor rule, when real GDP is equal to potential GDP, and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be:
4 percent and this implies a real interest rate of 2 percent
Assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances monetary multiplier for the commercial banking is:
5
When the Fed acts as a "lender of last resort" as it did in the financial crisis of 2007-2008, it is performing its role of:
being the bankers' bank
As it related to Federal Reserve activities, the acronym FOMC describes the:
Federal Open Market Committee
The conduct of monetary policy in the United States is the main responsibility of the:
Federal Reserve System
Which of the following statements is true?
The prime interest rate is higher than the Federal funds rate
Which of the following statements best describes the 12 Federal Reserve Banks?
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
Money is "created" when:
a bank grants a loan to a customer
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 principal advantage money has over barter is its function as:
a medium of exchange
What function is money serving when you use it when you go shopping?
a medium of exchange
When economists say that money serves as a unit of account, they mean that it is:
a monetary unit for measuring and comparing the relative values of goods
Checkable deposits are money because they are:
acceptable as payment
Bank owns a 10-story office building. In the bank's balance sheet, this would be an example of:
an asset
In the consolidated balance sheet of the Federal Reserve Banks, loans to commercial banks are:
an asset of the Federal Reserve Banks and a liability for commercial banks
In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:
an increase in the money supply will decrease the rate of interest
Members of the Federal Reserve Board of Governors are:
appointed by the president to staggered 14-year terms
Bank panics:
are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently
Which of the following describes the identity embodied in a balance sheet?
assets equal liabilities plus net worth
A bank that has liabilities of $150 billion and a net worth of $20 billion must have:
assets of $170 billion
The Federal Reserve System of the United States is the country's:
central bank
Which of the following would be considered to be the most liquid?
checkable deposits
When a check is cleared against a bank, it will lose:
checkable deposits and reserves
In the Untied States, the money supply (M1) includes:
coins, paper currency, and checkable deposits
If the Fed buys government securities from commercial banks in the open market:
commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
If the monetary authorities want to reduce the monetary multiplier, they should:
raise the required reserve ratio
A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicated that the Federal Reserve is most likely trying to:
reduce inflationary pressure in the economy
The Federal Open Market Committee (FOMC):
sets policy on the sale and purchase of government bonds by the Fed
A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:
stimulate the economy
The level of GDP will tend to increase when:
the Federal Reserve buys government securities in the open market
In which case would the quantity of money demanded by the public tend to increase by the greatest amount?
the interest rate decreases and nominal GDP increases
Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?
the money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase
Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?
the purchase of government securities in the open market and an increase in government spending
The Federal Open Market Committee (FOMC) is made up of:
the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a roating basis
Other things equal, if the required reserve ratio was lowered:
the size of the monetary multiplier would increase
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
To say that coins are "token money" means that:
their face value is greater than their intrinsic value
Checkable deposits are classified as money because:
they can be readily used in purchasing goods and paying debts
The currency, or money, of the United States, like those of other countries, is:
token money
Stock market price quotations best exemplify money serving as a:
unit of account
A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20 percent. The excess reserves of the bank are:
$10,000
Which of the following would reduce the money supply?
commercial banks sell government bonds to the public
