unit 4

The interest rate the Fed charges commercial banks for loans is the

discount rate

A customer's checkable deposits would be entered on a bank's balance sheet as

liabilities

Which of the following is a function of money? I. A medium of exchange II. A store of value III. A unit of account

I,II,III

The components of M1 consist of I. checkable deposits II. travelers' checks III. currency IV. government bonds V. non-checkable savings accounts

I,II,III onl

The reserve requirement is determined by the

Federal Reserve

The kind of currency used in the United States today can be best described as

Flat Money

The Fed's functions include all of the following EXCEPT

accepting deposits of individual businesses and corporations

The primary purpose of the reserve requirement is to

limit the lending ability of commercial banks

Which combination of fiscal and monetary policy actions would be most effective in reducing an inflationary gap?

Decreasing government spending and the Fed selling bonds

Customer deposits at commercial banks are insured by the

Federal Deposit Insurance Corporation

The M1 money supply is controlled by I. the Federal Reserve System II. the World Bank III. commercial banks IV. thrift institutions V. the International Monetary Fund

I only

When the Fed engages in open market operations, it buys bonds from I. the public II. commercial banks and thrifts III. the federal government IV. corporations

I, II only

When the Fed purchases a bond from I. a commercial bank, the excess reserves increase by the full amount of the bond purchase II. a commercial bank, the money supply increases III. the public, the excess reserves increase by the amount of the bond purchase minus the reserve requirement IV. the public, the money supply decreases

I, II, III only

The balance sheet of a commercial bank is a statement of I. what is owned by the bank II. what is owed to the bank III. all claims on what is owned by or owed to the bank

I,II,III

The money supply would fail to fully expand to its potential growth if I. customers chose to hold their money in cash rather than re-deposit funds into banks II. customers chose not to take out loans from banks III. banks chose not to loan out all of their excess reserves

I,II,III

In addition to the components of M1, M2 consists of the following additional components I. non-checkable savings accounts II. money market deposit accounts III. small denominated time deposits IV. money market mutual funds

I,II,III,IV

A higher reserve requirement will cause I. a larger money multiplier II. a smaller potential growth of the money supply III. a larger percentage of each checkable deposit to be loaned

II only

The Federal Reserve's most important influence on the economy is its power to cause short-run changes in I. aggregate supply II. the money supply III. fiscal policy IV. interest rates

II, IV only

Each of the following statements about the Federal Reserve System is correct EXCEPT

The President has power to remove Governors who fail to carry out the President's policy objectives

Stabilization of the money supply is important to an economy becaus I. too much money will increase the purchasing power of the dollar II. too little money will hurt economic growth III. too much money will cause rapid inflation

II,III only

If the Federal Reserve sells bonds on the open market, the

money supply decreases and the interest rate increases

The most commonly used tool of monetary policy is

open market operations

The components of the M1 money supply are distinguished from the additional components of the M2 money supply because M1 money is

perfectly liquid

Expansionary monetary policy is most appropriate when

real GDP is falling

Which of the following policies would be inappropriate if the Federal Reserve is trying toreduce the inflation rate?

reducing the federal funds rate

Open market operations consist of

the central bank buying and selling government bonds on the open market

In the money market,

the demand for money consists of asset and transactions demand

A fractional reserve system requires banks to keep a fraction of demand deposits in

vault cash or deposits at a Federal Reserve Bank

If the reserve requirement is 25% and a customer deposits $2000 into a demand deposit account, the bank's required reserves will increase by

$500

f the reserve requirement is 25% and a customer deposits $2000 in a demand deposit, what is the largest possible expansion of the money supply?

$6,000

Assume a bank has no excess reserves and the reserve requirement is 20 percent. If a customer deposits $20,000 in currency into his checking account, what is the maximum amount by which banks will increase the money supply through multiple deposit expansion in the banking system?

$80,000

The central bank buys $1,000 of government securities only from commercial banks. The maximum change in excess reserves, banking system loans, and the total money supply will be Excess Reserves Banking System Loans Total Money Supply

$800, $4,000, $5,000

Assume the reserve requirement is 15 percent and a bank initially has no excess reserves. If a customer deposits $1,000, how much of that deposit can be loaned?

$850

If the reserve requirement is 25% and a customer deposits $2000 in a demand deposit account, the bank's excess reserves will increase by

$1,500

The central bank's required reserve ratio is 10 percent. XYZ Bank Balance Sheet ASSETS LIABILITIES Current Assets 350,000 Current Liabilities 100,000 Cash in Bank 110,000 Checkable Deposits 100,000 Property 240,000 Shareholder's Equity 250,000 Capital Stock 250,000 XYZ Bank would have to keep as reserves XYZ Bank's excess reserves would be

$10,000 and $90,000

Assets Liabilities Total Reserves $35,000 Demand Deposits $100,000 Loans $10,000 Securities $55,000 The balance sheet above shows the current financial status of Horvath National Bank. If the reserve requirement is 20 percent and the bank does not sell any securities, by how much could it increase loans?

$15,000

QXR bank suddenly acquires excess reserves of $10,000 and decides to lend an amount equal to its newly acquired excess reserves. If the required reserve ratio is 20 percent, the total amount of new money created will be

$40,000

If the reserve requirement is 25%, what is the money multiplier?

4

A customer deposits $2,000 into a checkable account. The receiving bank holds no excess reserves and issues loans to the full amount of $1,200. The reserve requirement is

40%

The central bank purchase of $1,000 of government securities will create the following changes to money demand, money supply, and nominal interest rates. Money Demand Money Supply Nominal Interest Rates

Constant, increase, decrease

The portion of demand deposits banks are legally allowed to loan are known as

Excess Reserves

Money is created or destroyed whenever I. checks are deposited into checkable accounts at commercial banks II. checks are drawn against checkable accounts at commercial banks III. loans are made by commercial banks that are then converted into checkable deposits IV. loans at commercial banks are repaid by borrowers

III,IV only

If the Fed wanted to pursue a contractionary monetary policy, which of the following options might it consider? I. Decrease the discount rate. II. Increase personal income taxes. III. Purchase government securities. IV. Sell government securities. V. Decrease government spending.

IV only

Which of the following policy combinations would be most effective in promoting long-run economic growth? Taxes Reserve Requirement Open Market Operations

Increase, decrease, buy

The value of fiat money as a medium of exchange is backed by

It's purchasing power

An increase in the required reserve ratio has all of the following effects EXCEPT

aggregate demand increases

Commercial banks increase the money supply by

buying bonds from the public

The Federal Reserve increases the money supply when it

buys bonds

The stable value of money depends on all of the following EXCEPT the

commitment of the government to issue all of the money citizens want to purchase goods and services

The primary role of the Federal Reserve is to

control the money supply

If the Fed increases the discount rate, the money supply, interest rate, capital investment, and aggregate demand would change in the following ways. Money Supply Interest Rate Capital Investment Aggregate Demand

decrease, increase, decrease, decrease

If the Federal Reserve increases the money supply, how will interest rates, capitalinvestment, and aggregate demand be affected? Interest Rates Capital Investment Aggregate Demand

decrease, increase, increase

During a period of inflation, the purchasing power of money

decreases

When interest rates increase, asset demand for money

decreases because the opportunity cost of holding money as an asset increases

When a customer deposits $200 cash into his checking account at the bank, the money supply

does not change

When interest rates rise, current bond prices

fall because the fixed interest rate on current bonds is lower than the interest rate on newly-issued bonds

How will the Fed's purchase of bonds likely affect real output, employment, and price level? Real Output Employment Price Level

increase, increase, increase

Assume that price levels for goods and services rise 10 percent and the money supply remains constant. Money demand, interest rates, transaction demand, and asset demand will most likely change in the following ways. Money Demand, Nominal Interest Rate, Transaction Demand, Asset Demand

increase, increase, increases, decreases

The federal funds rate is the

interest rate banks charge each other for short-term loans

When individuals decide to hold money as currency and not deposit it in banks, the growth of the money supply will be

less than potential

Which of the following policies would be appropriate to resolve a recession?

lowering the reserve requirements

Commercial banks create money by

making loans