Eco 029 Midterm 2
When money is used to account for value, it is being used as a ________.
unit of account
Given that, in billions of U.S. dollars, we have 1063.2 in currency, 513.5 in demand deposits, 4.3 in traveler's checks, 5637.8 in savings deposits, and 319 in other checkable deposits. The total M1 amount in this economy is $
1900.00
Suppose $100,000 is deposited at a bank. The required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total reserves? Total reserves are $
20000
Suppose $200,000 is deposited at a bank. The required reserve ratio is 25 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total reserves? Total reserves are $
50000
Critics of Fed independence argue that: A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the Fed, since it does not face a binding budget constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct
A
How does the Federal Reserve have a high degree of instrument independence? A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. B. The Federal Reserve is able to set the goals of monetary policy. C. The Federal Reserve is not subject to the influence of Congress. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.
A
The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB is: A. more independent. B. less independent. C. equally independent.
A
The federal funds interest rate is determined by the: A. equilibrium of supply and demand in the market for reserves. B. equilibrium of supply and demand in the money market. C. equilibrium of supply and demand in the bond market. D. FOMC.
A
The graph on the right shows a relationship between a measure of central bank independence and macroeconomic performance for 17 countries. On the horizontal axis is an index of central bank independence. The 17 central banks are rated from 1 (least independent) to 4 (most independent.). On the vertical axis is the average annual inflation rate measured over the years 1980-1988. Based on this graph, one would conclude that central bank independence and inflation are: A. negatively related; countries with low ratings have generally produced higher inflation B. positively related; countries with low ratings have generally produced lower inflation C. not related; there is no general relationship shown between independence and inflation
A
The portion of checkable deposits that banks are required to hold is called: A. required reserves. B. excess reserves. C. currency outstanding. D. vault cash.
A
The primary reason for the creation of the Federal Reserve System was: A. to reduce or eliminate future bank panics. B. to eliminate state-chartered banks. C. to create a single central bank similar to the Bank of England. D. to stabilize short-term interest rates.
A
Which of the following is not included in the M1 monetary aggregate? A. money market deposit accounts B. traveler's checks C. NOW accounts D. currency E. demand deposits
A
Which of the following statements about the liquidity of the assets in the monetary aggregates is true? A. The assets in M1 are more liquid than the assets in M2 B. The assets in M2 are more liquid than the assets in M1. C. The only liquid asset in the monetary aggregates is currency. D. All of the assets in the monetary aggregates have equal liquidity.
A
Which of the following statements about the monetary aggregates is true? A. When you transfer funds from your savings account to your checking account, M1 increases and M2 stays the same. B. When the growth rate of M2 increases, the growth rate of M1 must also increase. C. The growth rates of M1 and M2 always track each other closely. D. M1 is greater than M2.
A
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves? A. The presence of overnight loan markets reduces the costs associated with deposit outflows. B. Banks find it more profitable to loan out their excess reserves in the overnight market. C. This new market has led to an increase in interest rates, thus raising the opportunity cost of holding excess reserves. D. The overnight loan market has supplanted the Fed as the lender of last resort.
A
"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base." Is this statement true, false, or uncertain? Explain your answer. A. False. Since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base. B. True. Because the Fed can alter the monetary base through its open market operations, it effectively gives the Fed perfect control of the monetary base. C. True. By controlling the discount rate, the Fed is able to accurately predict banks' borrowings from the Fed, which allows the Fed to control the amount of reserves in the banking system and hence the monetary base. D. Uncertain. Perfect control of the monetary base is only guaranteed if MBn = MB − BR.
A
A decrease in the discount rate does not normally lead to an increase in borrowed reserves because: A. setting the discount rate below the equilibrium rate is forbidden by law, since a clear arbitrage opportunity would exist. B. the equilibrium interest rate will still fall below the discount rate. C. there is often a time lag between a decrease in the discount rate and the market reaction to it. D. a decrease in the discount rate usually leads to an increase in nonborrowed reserves.
B
Although neither _____ nor the _____ is officially set by the Federal Open Market Committee , decisions concerning these policy tools are effectively made by the committee. A. reserve requirements; federal funds rate B. reserve requirements; discount rate C. margin requirements; federal funds rate D. margin requirements; discount rate
B
Following the global financial crisis in 2008, assets on the Federal Reserve's balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011. Many of the assets held are longer-term securities acquired through various loan programs instituted as a result of the crisis. In this situation, how could reverse repos (matched sale-purchase transactions) help the Fed reduce its assets held in an orderly fashion, while reducing potential inflationary problems in the future? A. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to further increase its balance sheet, thus increasing the money supply and lowering short-term interest rates. B. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance sheet, thus decreasing the money supply and raising short-term interest rates. C. Reverse repos serve as dynamic open market operations that are intended to permanently reduce the Federal Reserve's balance sheet, thus limiting fluctuations in the money supply. D. In this situation, the Fed should engage in repurchase agreements (a repo) rather than reverse repos, as this would further expand reserves and the monetary base.
B
If borrowers with the most risky investment projects are more likely to seek bank loans as compared to those borrowers with the safest investment projects, banks are said to face the problem of: A. adverse credit risk B. adverse selection C. risk satiation D. moral hazard
B
If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence? A. The Fed can choose any method it wants in order to achieve the assigned goal. B. The Fed is free to interpret exactly what these objectives mean. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.
B
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans? A. You would want to make short-term loans since there is no guarantee that the interest rate will rise as expected. B. You would want to make short-term loans so you can reinvest the funds at higher interest rates after their maturity. C. You would want to make long-term loans to secure the higher interest rate for an extended period of time. D. Both short-term and long-term loans will be profitable with an expected interest rate increase.
B
The Federal Reserve System is the ___________ for the United States, which is defined as the government agency responsible for __________. A. Treasury; carrying out open market exchanges of government securities B. central bank; the conduct of monetary policy C. financial comptroller; regulatory oversight of government reserves D. national bank; ensuring money demand equals money supply
B
The president of the United States can exert influence over the Federal Reserve in all of the following ways except: A. appointing a new chairman to the Board of Governors. B. reducing the Fed's net earnings. C. appointing new members to the Board of Governors. D. influencing congressional decisions that might reduce the independence of the Fed.
B
Under 100% reserve banking, the money multiplier will be: A. 0 B. 1 C. 10 D. 100 E. infinite
B
Which of the following is not part of the checks and balances of the Federal Reserve System? A. The ability of the twelve regional banks to affect discount policy. B. The requirement that all depository institutions keep deposits at the Fed. C. The provision for three types of directors to district banks (A, B, and C) that would represent different groups (professional bankers, business people, and the public). D. The Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.
B
Why is paying interest on reserves an important tool for the Federal Reserve to manage crises? A. It allows for fluctuations in the federal funds rate, making monetary policy more flexible. B. It allows the Fed to increase its lending as much as it wants without reducing the federal funds rate. C. It allows the Fed to increase the money supply to support excessive demand for goods and services. D. It allows the Fed to increase the effective tax on deposits, thereby increasing economic efficiency.
B
"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? A. True. Seeking the highest return possible will always prevent a bank failure. B. False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold. C. True. The highest return possible on assets will guarantee the highest income for the bank. D. Uncertain. This statement is true only if the bank has more rate-sensitive liabilities than assets.
B
"The federal funds rate can sometimes be above the discount rate." Is this statement true, false, or uncertain? A. False. Once the federal funds rate reaches the discount rate, banks borrow directly from the Fed, preventing the federal funds rate from a further rise. B. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.
B
Classify the following transaction as affecting either assets, a liabilities, or neither for each of the "players" in the money supply process—the Federal Reserve, banks, and depositors. The Fed provides an emergency loan to a bank for $1,000,000. A. Assets and liabilities of the banking system as a whole are unaffected, however, individual bank balance sheets will change. B. Depositors: Assets rise and are offset by a fall in assets due to lower checking account balances. Banks: Reserve assets decrease and checkable deposit liabilities decrease. C. Banks: Assets and liabilities increase. Fed: Assets and liabilities increase. D. Depositors: Assets rise and liabilities rise. Banks: Assets rise comma but this is offset by a decrease in reserve assets.
C
If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why? A. M1 increases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more B. M1 increases because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account C. M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account D. M1 decreases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more
C
If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base rather than an outright purchase of bonds? A. Changes in float tend to be longer term. B. The Fed only uses repurchase agreements. C. Changes in float tend to be temporary. D. None of the above are correct.
C
The ability of a central bank to set monetary policy instruments is ___________, while the ability of a central bank to set goals of monetary policy is _______. A. policy independence; target independence B. goal independence; target independence C. instrument independence; goal independence D. target independence; policy independence
C
The federal funds interest rate is determined by the: A. equilibrium of supply and demand in the bond market. B. equilibrium of supply and demand in the money market. C. equilibrium of supply and demand in the market for reserves. D. FOMC.
C
The presidents of each of the district Federal Reserve banks (including the New York Federal Reserve bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is appropriate? A. No. Because private banks can influence the appointment of their district Federal Reserve president, the benefits of eliminating this potential conflict of interest far outweigh the costs of the approval process. B. Yes. Since only five of the Federal Reserve bank presidents have a vote, they are not able to influence policy matters, thus a formal political appointment and approval process is unnecessary. C. Maybe. A formal approval process is lengthy, which might leave some Federal Reserve districts without leadership, possibly creating more problems than it solves.
C
When the Fed increases reserve requirements, it reduces the money supply by causing: A. reserves to fall. B. the monetary base to fall. C. the money multiplier to fall. D. Both A and B are correct.
C
Which of the following entities in the Federal Reserve System controls the discount rate? A. Member commercial banks B. The FDIC C. The Board of Governors D. The Federal Advisory Council
C
Which of the following entities in the Federal Reserve System controls the discount rate? A. The Federal Advisory Council B. Member commercial banks C. The Board of Governors D. The FDIC
C
Which of the following entities in the Federal Reserve System directs open market operations? A. The Federal Advisory Council B. Member commercial banks C. The FOMC D. The Board of Governors
C
Which of the following functions is not performed by the twelve Federal Reserve Banks? A. Withdrawing damaged currency and issuing new currency. B. Clearing checks. C. Setting the reserve requirement. D. Acting as liaisons with the business community.
C
Which of the following is measured as a flow per unit of time? A. wealth B. money C. income D. money supply
C
Which of the following is not included in M2? A. savings deposits B. currency C. large-denomination time deposits D. small-denomination time deposits
C
Which of the following is not part of the checks and balances of the Federal Reserve System? A. The provision for three types of directors to district banks (A, B, and C) that would represent different groups (professional bankers, business people, and the public). B. The ability of the twelve regional banks to affect discount policy. C. The requirement that all depository institutions keep deposits at the Fed. D. The Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.
C
Why is the Twelfth Federal Reserve district so geographically large, while the Second Federal Reserve district is so small by comparison? A. The size of the district reflects its relative importance in the Federal Reserve system: The smaller Second district is economically less important than the very large Twelfth district. B. The larger size of the Twelfth Federal Reserve district is the result of lobbying by bankers and business people. C. The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created. D. The size of the Second Federal Reserve district reflects its importance and special role in the Federal Reserve System.
C
Why is the composition of the Fed's balance sheet a potentially important aspect of monetary policy during a crisis? A. When the Fed provides liquidity to a particular segment of the credit market, it can freeze the market and hence decrease inflation. B. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. C. The Fed can influence interest rates and provide more targeted liquidity. D. A consistent composition of the Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future.
C
Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the Fed? A. Non-member banks can only borrow from the Fed by paying additional loan origination fees. B. Other banks are willing to lend reserves for free within the banking community. C. Borrowing from the Fed might invite greater supervisory scrutiny from the central bank. D. The Fed charges a lending rate much higher than market rates.
C
"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount rate." Is this statement true, false, or uncertain? Explain your answer. A. False. The Fed can also engage in open market operations. B. True. The Fed uses only the discount rate to adjust the amount of discount loans made. C. False. The Fed can also limit the amount of discount loans that an individual bank can have. D. Uncertain. It depends on whether the discount rate is set lower than the federal funds rate target.
C
Although neither _____ nor the _____ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee. A. margin requirements; discount rate B. margin requirements; federal funds rate C. reserve requirements; federal funds rate D. reserve requirements; discount rate
D
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available for you to provide the funds your customer needs? A. Yes. Although excess reserve are not the only source of new lending, the cost of acquiring the excess reserves for lending are higher than the expected return on the loan. B. Yes. In response to the subprime mortgage meltdown, the Federal Lending Act of 2008 stipulates that excess reserves are the only source of new lending. C. No. There are only two sources of funds that can used to acquire reserves. The bank can borrow at the discount window or in the federal funds market. D. No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs.
D
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant? Assume the required reserve ratio is 10% and banks do not hold any excess reserves. A. Checkable deposits fall by $1,000. B. Checkable deposits fall by $100. C. Checkable deposits increase by $100. D. Checkable deposits increase by $1,000. E. Checkable deposits do not change.
D
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy? A. By having members serve on the Federal Advisory Council. B. By having five of their presidents sit on the FOMC. C. Through their administration of the discount facilities at each bank. D. All of the above are correct.
D
Increasing the independence of a central bank would probably: A. allow the central bank to more easily pursue monetary policies that directly oppose the government's fiscal policies B. hinder the coordination of monetary and fiscal policy C. reduce pressures to pursue inflationary policies D. All of the above are correct
D
Money may serve as an instrument that allows for comparison of the relative worth of various goods and services. What function of money does this describe? A. Store of value B. Medium of exchange C. Standard of deferred payment D. Unit of account
D
Reserves are: A. liabilities for the Fed. B. assets for banks. C. deposits at the Fed plus vault cash. D. All of the above are correct. E. None of the above are correct.
D
The Federal Reserve System is the ___________ for the United States, which is defined as the government agency responsible for __________. A. Treasury; carrying out open market exchanges of government securities B. national bank; ensuring money demand equals money supply C. financial comptroller; regulatory oversight of government reserves D. central bank; the conduct of monetary policy
D
The monetary base is affected by: A. the Federal Reserve through open market operations. B. the Federal Reserve through its extension of discount loans. C. float and Treasury deposits at the Federal Reserve. D. All of the above are correct. E. None of the above are correct.
D
The portion of checkable deposits that banks are required to hold is called: A. currency outstanding. B. vault cash. C. excess reserves. D. required reserves.
D
The primary reason for the creation of the Federal Reserve System was: A. to stabilize short-term interest rates. B. to create a single central bank similar to the Bank of England. C. to eliminate state-chartered banks. D. to reduce or eliminate future bank panics.
D
The ratio of the money supply to the monetary base is called: A. high-powered money B. the required reserve ratio C. the currency ratio D. the money multiplier
D
What is the main advantage of an unconditional policy commitment? A. It represents a tacit commitment by the central bank, which determines the policy's stability and effectiveness. B. It does not really have any advantages over a conditional policy commitment. C. Such a commitment is expected to be abandoned and so it will have a large effect on long-term interest rates. D. It provides a significant amount of transparency and certainty for markets and households.
D
Which of the following entities in the Federal Reserve System directs open market operations? A. Member commercial banks B. The Federal Advisory Council C. The Board of Governors D. The FOMC
D
Which of the following entities in the Federal Reserve System sets reserve requirements? A. Member commercial banks B. The Federal Advisory Council C. The FDIC D. The Board of Governors
D
Which of the following is a strategy banks could use to eliminate a capital shortfall? A. Payout higher dividends to shareholders B. Buyback shares of bank stock C. Purchase more securities D. Make fewer loans
D
Why is the composition of the Fed's balance sheet a potentially important aspect of monetary policy during a crisis? A. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. B. When the Fed provides liquidity to a particular segment of the credit market, it can freeze the market and hence decrease inflation. C. A consistent composition of the Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future. D. The Fed can influence interest rates and provide more targeted liquidity.
D
Why, considering most float changes are temporary, do repurchase agreements fit better than outright purchases? A. Repurchase agreements are used more often for defensive operations. B. Repurchase agreements can be easily counteracted if the float changes again. C. Repurchase agreements are temporary in their time frame. D. All of the above are correct.
D
1. Earnings received from working, property rentals, entrepreneurship, or the ownership of financial assets. 2. A tool used to facilitate transactions, store wealth, or to be used as a yardstick to compare values. 3. What you own—the total collection of assets that serve to store value. This includes not only money but also other assets such as bonds, common stock, art, land, furniture, cars, and houses. 4. The difference between what is earned and what is spent. This adds to total wealth. 5. What you owe—the accumulation of spending over and above periodic earnings.
Debt 5 Money 2 Income 1 Savings 4 Wealth 3
By definition, when the Fed conducts an open market purchase, it is: A. decreasing the quantity of reserves. B. buying bonds. C. increasing the quantity of reserves. D. selling bonds. E. Both B and C are correct.
E
Why is the New York Federal Reserve always a voting member on the FOMC? A. It is the only Federal Reserve bank that is a member of the Bank for International Settlements (BIS). B. The New York Federal Reserve district contains many of the largest commercial banks in the United States. C. The New York Federal Reserve is actively involved in the bond and foreign exchange markets. D. Only A and C are correct. E. All of the above are correct.
E
'The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true? A. The president can appoint a new chairman of the Board of Governors every four years B. The legislation that structures the Fed is written by Congress and is subject to change C. The Fed has to report to Congress on a semiannual basis to explain its actions D. Only A and B are correct E. All of the above are correct
E
_________ is the relative ease and speed with which an asset can be converted into cash.
Liquidity
___________ is the most liquid store of value in the economy.
Money
___________ is the total collection of pieces of property that serves to store value.
Wealth
Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the same, M1 will __________ and M2 will ________.
decrease stay the same
If there is a sharp rise in the currency ratio, then people begin to hold __________ deposits relative to currency and the level of multiple deposit expansion ________. This causes the money multiplier to _________, which in turn causes the money supply to _______.
fewer decrease fall decrease
When money is used as acceptance for payment of goods and services, it is being used as a _________.
medium of exchange
In ancient Greece, what property made gold a more likely candidate for use as money than wine? Gold's property as a _____________ made it a more likely candidate for use as money when compared to wine.
store of value
When money is used to hold purchasing power for future use, it is being used as a _____________.
store of value