MB FINAL1. 1) The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate

. B) when the funds rate equals the interest rate paid on excess reserves.

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

2.3

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-checkable deposit ratio is

A) 0.001.

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

A) 2.5.

Which is the most important category of Fed assets?

A) Securities

Which of the following are duties of the Board of Governors of the Federal Reserve System?

A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.

The Fedʹs holdings of securities consist primarily of ________, but also in the past have included ________.

A) Treasury securities; bankersʹ acceptances

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart

A) an inflationary bias to monetary policy.

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to

A) boost output in the short run.

The monetary base minus RESERVES equals

A) currency in circulation.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant.

A) decreases; demand

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant.

A) decreases; lowering

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

A) defensive; sale

When the FED buys $100 worth of bonds from First National Bank, reserves in the banking system

A) increase by $100.

Assuming initially that r = 10%, c = 40%, and e = 0, a decrease in r to 5% causes the M1 money multiplier to ________, everything else held constant.

A) increase from 2.8 to 3.11

7. 8) When a BANK SELLS a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A) increase; increases

When the FEDeral Reserve PURCHASES a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A) increase; increases

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate

A) increases the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves

A) increases the federal funds rate.

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section, lowering the interest rate paid on excess reserves

A) increases the federal funds rate.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant

A) increases; supply

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule.

A) inflation rate

Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%

A) lowers the federal funds rate.

Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

A) purchase; decrease

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

A) quasi-public; private commercial banks in the district where the Reserve Bank is located

The monetary base minus CURRENCY in circulation equals

A) reserves.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.

A) sale decreases

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

A) the Federal Reserve System.

The discount rate is

A) the interest rate the Fed charges on loans to banks.

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.

B) $1200

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is

B) $480.8 billion

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is

B) $480.8 billion.

If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is

B) 0.10.

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency ratio is

B) 0.50.

Which of the following are not current duties of the Board of Governors of the Federal Reserve System?

B) Setting the maximum interest rates payable on certain types of time deposits under Regulation

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

B) above, falls

Discount policy affects the money supply by affecting the volume of ________ and the ________.

B) borrowed reserves; monetary base

In the model of the money supply process, the BANKS role in influencing the money supply process is represented by

B) both the excess reserve ratio and the market interest rate.

An important function of the regional Federal Reserve Banks is.

B) clearing checks.

Assuming initially that r = 10%, c = 40%, and e = 0, an increase in r to 15% causes the M1 money multiplier to ________, everything else held constant.

B) decrease from 2.8 to 2.55

The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies.

B) expansionary; a higher inflation rate; contractionary

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves.

B) has no effect on; increases

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.

B) increase; less

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise, everything else held constant.

B) increases; demand

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

B) lowers the federal funds rate.

The Fed uses three policy tools to manipulate the money supply: ________, which affect reserves and the monetary base; changes in ________, which affect the monetary base; and changes in ________, which affect the money multiplier.

B) open market operations; borrowed reserves; reserve requirements

The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

B) primary

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2%

B) raises the federal funds rate.

If a person selling bonds to the Fed cashes the Fedʹs check, then reserves ________ and currency in circulation ________, everything else held constant

B) remain unchanged; increases

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant.

B) rise; increases

The two most important categories of assets on the Fedʹs balance sheet are ________ and ________ because they earn interest.

B) securities; discount loans

In the model of the money supply process, the Federal Reserveʹs role in influencing the money supply is represented by

B) the required reserve ratio, nonborrowed reserves, borrowed reserves, and the market interest rate.

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

B) time-inconsistency

Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate

B) when the funds rate equals the discount rate.

An If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of

C) $21,000.

If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of

C) $21,000.

If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of

C) $31,000.

Which of the following statements about central bank structure and independence are true?

C) Both theory and experience suggest that more independent central banks produce better monetary policy.

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

C) Federal Open Market Committee.

Which of the following functions are NOT performed by any of the twelve regional Federal Reserve Banks?

C) Setting interest rates payable on time deposits

Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant.

C) a decrease of $19.95

The three players in the money supply process include

C) banks, depositors, and the central bank.

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.

C) currency; deposits

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant.

C) decline; lowering

When the FED sells $100 worth of bonds to First National Bank, reserves in the banking system.

C) decrease by $100.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

C) decreases; supply

Individuals that lend funds to a bank by opening a checking account are called

C) depositors.

The volume of loans that the Fed makes to banks is affected by the Fedʹs setting of the interest rate on these loans, called the

C) discount rate.

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserveʹs federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

C) dynamic; sale

The Federal Open Market Committee usually meets ________ times a year.

C) eight

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves

C) has no effect on the federal funds rate.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.

C) increases; raising

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.

C) increases; rise

The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the ________; changes in borrowed reserves, which affect the ________; and changes in reserve requirements, which affect the ________.

C) monetary base; monetary base; money multiplier

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy

C) on a discretionary, day-by-day basis.

Monetary policy is considered time-inconsistent because

C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.

The most common type of discount lending that the Fed extends to banks is called

C) primary credit.

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

C) purchased $200 in government bonds.

The Federal Open Market Committee consists of the

C) seven members of the Board of Governors and five presidents of the regional Fed banks.

In the model of the money supply process, the DEPOSITORS role in influencing the money supply is represented by

C) the currency ratio, excess reserve ratio, and the market interest rate.

The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the

C) time-inconsistency problem.

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

D) 0.20

If the required reserve ratio is 10 percent, the simple deposit multiplier is

D) 10.0

The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks.

D) 3; 3; 3

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant.

D) decline; decreases

9) When a BANK BUYS a government bond from the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant.

D) decrease; decreases

When the FEDeral Reserve SELLS a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant.

D) decrease; decreases

The opportunity cost of holding excess reserves is the federal funds rate ________.

D) minus the interest rate paid on excess reserves

In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is ________.

D) negatively sloped

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

D) purchased $100 in government bonds.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant.

D) rise; raising

Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.

D) six; three

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.

nine