AP Econ Ch 15

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:

$1,000

Refer to the above balance sheets. The commercial banks have excess reserves of:

$12

Refer to the above data. If the Fed reduced the reserve requirement from 20 percent to 16 percent, excess reserves in the commercial banking system would increase by _____ and the monetary multiplier would rise to ____.

$40 billion; 6.25

Refer to the above balance sheets. The maximum money-creating potential of the commercial banking system is:

$48

Refer to the above data. If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier would fall to ____.

$50 billion; 4

Refer to the above table. The amount of investment that will be forthcoming in this economy is:

$500

The sale of government bonds by the Federal Reserve Banks to commercial banks will:

decrease aggregate demand

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by drawing checks. As a result, commercial bank reserves will:

decrease by $2 billion

Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3, labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 8 percent and the goal of the Fed is full-employment output of Qf, it should:

decrease the interest rate from 8 to 6 percent.

Refer to the above 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:

decrease the money supply from $120 to $100.

Assume the economy is operating at less than full employment. An easy money policy will cause interest rates to ________. which will ___________ investment spending.

decrease; increase

An increase in the legal reserve ratio:

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

An increase in the reserve ratio

decreases the size of the monetary multiplier.

Refer to the above balance sheets. Suppose the Federal Reserve Banks buy $2 in securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money will:

directly increase by $2 and the money-creating potential of the commercial banking system will increase by $6

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $12 million.

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the:

discount rate

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:

discount rate

The Fed can change the money supply by

doing all of the above

When the Federal Reserve buys government securities from the public, the money supply:

expands and commercial bank reserves increase.

All else equal, when the Federal Reserve Banks engage in a tight money policy, the prices of government bonds usually:

fall

All else equal, when the Federal Reserve Banks engage in an easy money policy, the interest rates received on government bonds usually:

fall

If the Fed were to increase the legal reserve ratio, we would expect:

higher interest rates, a contracted GDP, and appreciation of the dollar.

Refer to the above data. Suppose the Fed bought $20 billion of U.S. securities from the banks. This would:

increase bank reserves to $80 billion, reduce bank-held securities to $120 billion, and increase the money supply (checkable deposits) by $200 billion.

Suppose that, for every 1-percentage point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will:

increase by $.5 billion and the money supply will increase by $2.5 billion.

Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will:

increase by $1 billion and the money supply will increase by $10 billion.

If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will:

increase the interest rate and reduce the price level, assuming it is flexible downward.

Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to undo demand-pull inflation, it should:

increase the interest rate from 4 percent to 6 percent.

Refer to the above 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 the money supply is Ms1 and the goal of the monetary authorities is full-employment output Qf, they should:

increase the money supply from $80 to $100

When the required reserve ratio is decreased, the excess reserves of member banks are

increased and the multiple by which the commercial banking system can lend is increased.

Assuming no currency drains, when the Federal Reserve Banks purchase government securities the reserves of commercial banks are:

increased by the amount of the purchase.

When the Fed lends money to a commercial bank, the bank:

increases its reserves and enhances its ability to extend credit to bank customers.

A contraction of the money supply:

increases the interest rate and decreases aggregate demand.

If the amount of money demanded exceeds the amount supplied, the:

interest rate will rise.

Refer to the above balance sheets. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction the supply of money:

is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8.

If the Federal Reserve System buys government securities from commercial banks and the public

it will be easier to obtain loans at commercial banks

Changes in the discount rate are:

less important than open-market operations in implementing monetary policy.

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

loans to commercial banks

An increase in the money supply will:

lower interest rates and increase the equilibrium GDP.

If the Fed were to purchase government securities in the open market, we would anticipate:

lower interest rates, an expanded GDP, and depreciation of the dollar.

Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 6 percent and the goal of the Fed is full-employment output of Qf, it should:

maintain the interest rate at 6 percent.

The price of government bonds and the interest rate received by a bond buyer are:

negatively related

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:

neither an excess nor a deficiency of reserves.

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase

The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase

Which of the following is a tool of monetary policy?

open market operations

Refer to the above 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. Which of the following would shift the money supply curve from Ms1 to Ms3?

purchases of U.S. securities by the Fed in the open market

Which of the following actions by the Fed would cause the money supply to increase?

purchases of government bonds from banks

The purpose of a tight money policy is to:

raise interest rates and restrict the availability of bank credit.

The discount rate is the interest:

rate at which the Federal Reserve Banks lend to commercial banks.

Refer to the above data. Suppose the Fed sold $10 billion of U.S. securities to the banks. This would:

reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and decrease the money supply (checkable deposits) by $100 billion

When the required reserve ratio is increased, the excess reserves of member banks are

reduced and the multiple by which the commercial banking system can lend is reduced.

The legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the above transactions, reserves in the banking system will:

remain unchanged

The legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the above transactions, the supply of money in the economy will:

remain unchanged

Upon which of the following industries is a tight money policy likely to be most effective?

residential construction

Refer to the above table. Suppose the legal reserve requirement is 10 percent and initially there are no excess reserves in the banking system. If the Fed wished to reduce the interest rate by 1 percentage point, it would:

sell $10 of government bonds in the open market.

Refer to the above data. Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation. To accomplish this it could:

sell $40 billion of U.S. securities to the banks.

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:

sell government securities, raise reserve requirements, and raise the discount rate.

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government:

surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

Commercial banks and thrifts usually hold only small amounts of excess reserves because:

the Fed does not pay interest on reserves.

According to studies and recent experience:

the Fed has retained its ability to control the money supply and affect interest rates, even in the face of globalization of financial markets and the declining role of banks and thrifts in financial markets.

When a commercial bank borrows from a Federal Reserve Bank

the commercial bank's lending ability is increased

The three main tools of monetary policy are:

the discount rate, the reserve ratio, and open-market operations.

When the reserve requirement is increased:

the excess reserves of member banks are reduced.

The purchase of government securities from the public by the Fed will cause

the money supply to increase

Which of the following will increase commercial bank reserves?

the purchase of government bonds in the open market by the Federal Reserve Banks

Open-market operations refer to

the purchase or sale of government securities by the Fed.

Which of the following has bolstered the case for active monetary policy?

the success of monetary policy in helping the economy emerge from the 1990-1991 recession and sustain economic growth through the 1990s

Refer to the above table. An interest rate of 2 percent is not sustainable because:

the supply of bonds in the bond market will rise and the interest rate will rise.

Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed:

will have to increase the money supply to keep the price level from falling.

Refer to the above data. The commercial banking system has excess reserves of

zero

Refer to the above data. The commercial banking system has excess reserves of:

zero.

The securities held as assets by the Federal Reserve Banks consist mainly of:

Treasury bills and Treasury bonds.

Federal Reserve Notes in circulation are

a liability as viewed by the Federal Reserve Banks

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

a tax increase and an increase in the money supply

A tight money policy is designed to shift the:

aggregate demand curve leftward

The purpose of an easy money policy is to shift the:

aggregate demand curve rightward.

Reserves must be deposited in the Federal Reserve Banks by:

all depository institutions, that is, all commercial banks and thrift institutions

The Federal Reserve System regulates the money supply primarily by:

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

A decrease in the reserve ratio increases the:

amount of excess reserves in the banking system.

Refer to the above 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 the MPC for the economy described by the figures is .8:

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

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

and reserves of commercial banks both decrease

A commercial bank can add to its actual reserves by:

borrowing from a Federal Reserve Bank.

Refer to the above data. Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. To accomplish this it could:

buy $40 billion of U.S. securities from the banks.

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

buy bonds in the open market

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.

One of the strengths of monetary policy relative to fiscal policy is that monetary policy:

can be implemented more quickly.

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result

commercial bank reserves are increased by $10,000

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and cash in the hands of the public does not change?

commercial bank reserves will increase

Open-market operations change

commercial bank reserves, but not the size of the monetary multiplier.

Which of the following statements is correct?

Excess reserves are the amount by which actual reserves exceed required reserves.

The discount rate is the rate of interest at which:

Federal Reserve Banks lend to commercial banks.

Monetary policy is expected to have its greatest impact on:

Ig

Refer to the above data. The monetary multiplier for the commercial banking system is:

10

Refer to the above data. Suppose the Fed wants to increase the money supply by $1000 billion to drive down interest rates and stimulate the economy. To accomplish this it could lower the reserve requirement from 20 percent to:

10 percent

Refer to the above data. Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation. To accomplish this it could increase the reserve requirement from 20 percent to:

25 percent

Refer to the above table. The equilibrium interest rate in this economy is:

4 percent

Refer to the above data. The monetary multiplier for the commercial banking system is

5

Which of the following best describes the cause-effect chain of a tight money policy?

A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

Which of the following best describes the cause-effect chain of an easy money policy?

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

In the United States monetary policy is the responsibility of the:

Board of Governors of the Federal Reserve System