ECON 2035 Exam 3
Suppose that a bank with no excess reserves receives a deposit into a checking account of $19,000 in currency. If the required reserve ratio is 0.05, what is the maximum amount that the bank can lend out?
$18,050
An article on marketwatch.com in mid-2020 observed: "Growth in the balance sheet has been slowing as the Fed has tapered the pace of its asset purchases." What types of asset purchases is the article referring to? The article is referring to the Fed's purchases of ________. A. U.S. Treasury securities B. bank reserves C. physical assets, such as machinery D. all of the above
A
What was Kaplan referring to as the "second part of the dual mandate"? A. High exchange rates B. High employment C. Low interest rates D. Low taxes
B
Why was the Federal Reserve System split into 12 districts? A. The Federal Reserve System was split into 12 districts because communications among regions was so poor that having a single central bank was not feasible. B. The Federal Reserve System was split into 12 districts because there was opposition in Congress to establishing a single, unified central bank. C. The Federal Reserve System was split into 12 districts so that the 12 states with the largest populations would each have a district bank. D. The Federal Reserve System was split into districts based on state borders.
B
If the Fed uses the federal funds rate as a policy instrument, then increases in the demand for reserves will lead to an ___ in the level of reserves. Part 2 If the Fed uses the level of reserves as a policy instrument, then decreases in the demand for reserves will lead to a ___ in the federal funds rate.
increase, decrease
A reduction in the reserve ratio would ___the money multiplier. A reduction in currency in circulation would ___, bank reserves. Both of these factors would ___ the money multiplier, ___the money supply while the monetary base ___.
increase, increase, increase, increasing, remained the same
"Extraordinary easing measures" would end deflation by greatly ___ aggregate demand and thus pushing prices ___.
increasing, upward
The Fed's inability to observe instantaneously changes in GDP, inflation, or other economic variables is referred to as the ___ lag, and the time that is required for monetary policy changes to affect output, employment, or inflation is known as the ___ lag.
information, impact
Suppose that Bank of America pays a 4% annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate of 0.3% on its holdings of reserves and that Bank of America can earn 8% on its loans and other investments. How do reserve requirements affect the amount that Bank of America can earn on $1,000 in checking account deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors. The 10% reserve requirement reduces the amount Bank of America can earn on $1,000 by $___. (Enter your answer rounded to two decimal places.)
7.70
A Federal Reserve publication notes that when economists analyze the money supply process, they typically assume that the money multiplier is "independent of the policy actions of the central bank." Briefly explain what this assumption means? A. The money multiplier is determined by a variety of factors over which the central bank has no control. B. The money multiplier is not affected by central bank actions. C. The money multiplier has nothing to do with the money supply. D. The Fed rarely changes the money multiplier so economists typically assume that it will remain constant.
A
As of March 2020, the Fed no longer required banks to hold required reserves. Did that change mean that after March 2020, the monetary base consisted only of currency in M1? A. No, banks still hold reserves, especially large banks that need to satisfy the Basel accord requirements. B. Yes, since March 2020, banks have opted to hold no reserves and loan out any liquid assets. C. No, small banks still hold reserves under the Basel accord requirements, but large banks are
A
At what interest rate does the demand curve for reserves become perfectly elastic? A. At the interest rate the Fed pays on banks' reserve balances. B. At the discount rate the Fed sets. C. At the equilibrium federal funds rate. D. The demand curve for reserves never becomes perfectly elastic.
A
Currency is a liability to the Fed rather than an asset, even though currency is considered valuable, because: A. the Fed is responsible for maintaining the value of currency and a holder of currency could exchange it at the Fed. B. the holder of currency can take it to the Fed and request an equal value back in gold. C. the Fed is required to ensure there is enough currency in the economy to allow for all transactions to occur. D. All of the above.
A
Did the Fed's asset purchases also cause the monetary base to rise? A. Yes, because the asset purchases would have increased reserves or currency in circulation. B. Yes, because the asset purchases would have increased the level of discount loans. C. No, because the asset purchases would have impacted only the Fed's assets, not its liabilities. D. No, because the asset purchases would have decreased both reserves and currency in circulation.
A
Has the tension been resolved in the modern Fed? A. The board has much more power today, but the tension remains. B. The tension has been resolved by the Consumer Protection Act. C. The tension has been resolved by the FOMC. D. The tension has been resolved by the Dodd-Frank Act.
A
How are the principal-agent view and the public interest view connected to the theory of the political business cycle? A. The political business cycle would be more likely with the principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. B. These views are unrelated to the theory of the political business cycle. C. The political business cycle would be more likely with the public interest view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. D. Under the both views the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.
A
How can the Taylor rule be used as a guide to evaluating Federal Reserve monetary policy over time? A. Using the Taylor rule, it is possible to compare the actual federal funds rate with the federal funds rate target. B. With the Taylor rule, it is possible to compare the actual inflation rate with the inflation rate target. C. If the federal funds rate using the Taylor rule is positive over time, then Federal Reserve monetary policy is accurate. D. Using the Taylor rule, it is possible to compare the actual reserve rate with the reserve rate target.
A
Is it easier for a central bank to be independent in a high-income country or in a low-income country? A. It is often difficult for a central bank to act independently in a low-income country. B. The independence of a central bank does not depend on the level of a country's income. C. It is often difficult for a central bank to act independently in a high-income country. D. Low-income countries rarely have central banks.
A
The term "extraordinary easing measures" refers to A. the Fed using all possible methods to engage in quantative easing. B. the Fed using general open market operations to increase reserves. C. the Fed selling government securitites to banks and financial institutions. D. All of the above.
A
Was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of 2007-2009? A. Because the financial crisis was unfolding so quickly, one could argue that Bernanke was justified in evading the Sunshine Act. B. Fed Chairman Bernanke was justified in evading the requirements of this act because secrecy was essential for stabilizing the financial crisis. C. Given the importance of FOMC meetings, he was not justified in evading the Sunshine Act. D. Because of the impact of the financial crisis on the public, it is not possible to justify in evading the Sunshine Act.
A
What are agency residential and commercial mortgage-backed securities (MBS)? A. Securities that are issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac B. Mortgages bundled together with other mortgages that are used by banks as collateral in the federal funds market C. Mortgages bundled together as a security that are used to increase or decrease the Fed's balance sheet D. Loans that allow borrowers to bundle their mortgages with other mortgages in order to receive a lower interest rate
A
What are repurchase agreements? A. A short-term loan backed by collateral such as U.S. Treasury notes B. A long-term loan backed by collateral such as U.S. Treasury notes C. The opportunity for banks to buy back any bonds that they sell to the Fed D. A promise by the Fed to buy back mortgage-backed securities should the borrowers default
A
What is the main problem with having a central bank that is not independent of the rest of the government? A. Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low. B. Research studies have shown that the most independent central banks had the highest average rates of inflation during the 1970s and 1980s. C. Less independent central banks tend to lead to lower interest rates. D. Less independent central banks tend to lead to higher unemployment.
A
What is the purpose of the Government in the Sunshine Act? A. The Government in the Sunshine Act, which required government agencies to post meetings before they happened, was created to promote public awareness. B. The Government in the Sunshine Act, which required Congress to make all monetary policy meetings open to the public, was created to make monetary policy more transparent. C. The Government in the Sunshine Act, which required the FMOC to make all monetary policy meetings open to the public, was created to make monetary policy more transparent. D. The Government in the Sunshine Act, which required the Fed to make all monetary policy meetings open to the public, was created to make monetary policy more transparent.
A
What is the relationship between the federal funds rate and the interest rates on 30-year mortgages and on Aaa and Baa rated corporate bonds? These rates generally ________. A. move together, although the federal funds rate often increases and decreases more than these long-term rates. B. move independent of each other—that is, there is no direct correlation between these long-term rates. C. move in opposite directions—that is, if the federal funds rate increases, then these long-term rates would decrease. D. move in an inderminate manner—that is, it is not possible to determine if any relationship exists because the target for the federal funds rate is subject to change.
A
Which of the following is NOT a supportive argument that the Fed's dual mandate should be replaced with a single mandate of price stability? A. Monetary policy can sometimes be used to stimulate the economy quickly in times of large decreases in demand which can reduce unemployment in the economy. B. Monetary policy has been shown to be effective at affecting inflation in both the short-run and the long-run, while estimation on the effectiveness monetary policy impacts on employment and output have been mixed. C. Having a dual-mandate can lead to problematic policies and central bank created bubbles as the unemployment goal often is counter to the price stability goal. D. Countries in which the central bank has one primary goal of price stability have been shown to have lower and more consistently stable inflation than countries that do not have the one goal of price stability.
A
Why did Congress decided to establish the Federal Reserve System in 1913? A. A panic and economic recession in 1907. B. To replace the Third Bank of the United States. C. J.P. Morgan offered to establish a central bank. D. Arizona joined the United States, establishing the need for a continental bank.
A
Why did the Fed begin purchasing mortgage-backed securities? A. The Fed wanted to push down the interest rate on mortgages to make it easier for people to buy houses. B. The Fed wanted to push up the interest rate on mortgages to deal with the zero lower bound problem. C. The Fed wanted to raise money for its fiscal policy objectives that were left unfunded. D. The Fed wanted to increase the profitability of GSEs that were not eligible to borrow in the federal funds market.
A
Why does the Fed charge different interest rates on the three categories of discount loans? A. The interest rates are based on the level of risk associated with the banks seeking funds. B. The interest rates are based on the policy goals that the Fed hopes to achieve from lending the funds. C. The interest rates are based on the location of the Federal Reserve district in which the banks are seeking funds. D. All of the above are correct.
A
Why does the supply curve have a horizontal segment? A. Because the discount rate sets a ceiling on the federal funds rate. B. Because the federal funds rate sets a ceiling on the discount rate. C. Because the interest rate that the Fed pays on reserves sets a ceiling on the federal funds rate. D. Because the interest rate that the Fed pays on excess reserves sets a ceiling on the discount rate.
A
Why does the Fed's purchase of Treasury bills lead to "multiple deposit creation"? A. The Fed's purchase of Treasury bills increases the amount of reserves at banks. B. The purchase of Treasury bills raises the interest rate that investors can earn on Treasury bills, which increases the public's desire to hold more Treasury bills. C. The Fed's purchase of Treasury bills creates a direct increase in the value of the deposit multiplier, which changes the public's desire
A
Why was the Fed engaging in repurchase agreement operations? A. Large excess reserves made open market operations less effective at stimulating the economy. B. Large excess reserves made it too expensive for the Fed to pay interest on bank reserve balances. C. The Fed was hoping to discourage banks from lending at a higher rate in the federal funds market. D. The Fed had purchased too many securities and needed to shrink its balance sheet.
A
Why would the Fed slowing the rate at which it is purchasing these assets result in the growth of the monetary base slowing? When the Fed purchases these assets, it causes ________. This means that if the Fed stops buying these assets, the growth rate of the monetary base would slow. A. bank reserves and currency in circulation to increase B. loans provided by banks to decrease C. bank reserves to decrease D. all of the above
A
Why did Congress set up a system that had this tension between the Reserve Banks and the Federal Reserve Board? (Check all that apply.) A. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. B. Tension was created to ensure that various interests would have input into the conduct of monetary policy. C. Tension was necessary to improve the competitiveness of the U.S. banking system. D. Tension was created in order to make the Fed more centralized.
A, B
Before the financial crisis of 2007-2009, what were the monetary policy tools that the Fed relied on? (Check all that apply.) A. Discount policy B. Open market operations C. Reserve requirements D. Interest rate on reserve balances E. Term deposit facility
A, B, C
If you owned a firm that did business internationally, why would excess fluctuations in the foreign exchange value of the dollar make planning for business and financial transactions more difficult? (Check all that apply.) A. They make it difficult to know the cost of your products abroad. B. They make it difficult to know the dollar value of foreign assets. C. They make it difficult to know the cost of domestic intermediate goods. D. They make it difficult to know the cost of imported intermediate goods.
A, B, D
Why is the process of the multiple expansion of deposits so important to understanding how the banking system operates? (Check all that apply) A. The Fed can accurately control the monetary base, however, the Fed does not control the actions of the other particpants in the money supply process which is greatly affected by the banking system. B. Banks play a large role in the economy as a major source of lending to most borrowers. Since banks make so many loans, the effects from these create additional impacts in the banking system. C. The monetary base is made up of currency and deposits, so any changes to deposits will impact the monetary base. D. Because the monetary system operates under a fractional-reserve banking system, banks can create money on their own through the deposit creation process.
A, B, D
What are the new tools the Fed has used in recent years when facing the zero lower bound problem? (Check all that apply.) A. Purchasing long-term securities—quantitative easing B. Fixing the dollar to the euro—focusing on exchange rates in foreign exchange markets C. Providing insight on future Fed policies—forward guidance D. Providing loans to insolvent banks—discount lending
A, C
The behavior of which three groups is included in the money supply process? (Check all that apply.) A. The banking system B. Congress C. The nonbank public D. The Federal Reserve
A, C, D
What are the main arguments against the Fed's independence? (Check all that apply.) A. The public is unable to hold Fed officials accountable for their policies, unlike elected officials. B. Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake. C. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. D. It would be more democratic for elected officials to control monetary policy.
A, D
What two monetary policy tools does the Fed now rely on in changing its target for the federal funds rate? Briefly describe how the Fed can use these tools to lower its target for the federal funds rate. (Choose two from the list below.) If the Fed uses these two new policy tools to manage the federal funds rate, it can lower its target rate by _______. A. lowering the interest rate it pays on overnight reverse repurchase facilities B. increasing the interest rate it pays on banks' excess reserves C. raising the interest rate it pays on overnight reverse repurchase facilities D. decreasing the interest rate it pays on banks' excess reserves E. using a policy of quantitative easing to buy long-term securities
A, D
Do the funds the Fed uses to buy Treasury bonds represent "new money"? If not, how does the money supply increase as a result of the Fed buying Treasury bonds? A. No, the Fed purchases Treasury bonds from banks using foreign currency, causing the money supply to increase. B. No, the money supply grows as a result of the money multiplying process through continual deposits and loans. C. Yes, otherwise the money supply would not increase when the Fed purchases Treasury bonds. D. No, it is reserves that the Fed is holding, so it is not counted in the money supply.
B
Economic well-being is typically determined by the A. cost of goods and services that individuals can enjoy. B. quantity and quality of goods and services that individuals can enjoy. C. institutional framework that defines the deliberate incentive structure of a society. D. stock of human knowledge particularly as applied to the human command over nature.
B
Given that inflation erodes the value of money, should the Federal Reserve pursue a goal of deflation? A. Yes, deflation increases the value of money, which encourages consumers to increase spending, resulting in faster growth. B. No, deflation encourages consumers to delay consumption, which can cause the economy to contract. C. Yes, deflation lowers real interest rates, which benefits everyone. D. No, deflation erodes the value of money more quickly than inflation.
B
If Congress agreed that the Fed was acting to "thwart the policies of elected officials," what actions could Congress take? A. Congress could exert considerable control over the Fed by limiting the funds sent to the Fed from the federal budget. B. Congress could amend the Federal Reserve Act to change how the Fed operates or it could even abolish the Fed. C. Only the president has direct control over the Fed, so Congress must petition the president regarding any proposed changes. D. Congress has no direct influence over the Fed, but it could influence the Fed by approving or rejecting new nominees to the Board of Governors.
B
If the Fed wishes to contract the total value of checkable deposits in the banking system, what action can it take? A. The Fed can decrease the interest rate it pays banks to hold excess reserves. B. The Fed can sell Treasury bills to financial institutions. C. The Fed can lower the required reserve ratio. D. The Fed can purchase Treasury bills from individuals instead of banks.
B
In the modern Fed, would it be possible for a Reserve Bank to act as the New York Fed did in 1929? A. Yes. In the modern Fed a Reserve Bank can use open market purchases and liberal discount window lending independently. B. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors. C. Yes. In the modern Fed a Reserve Bank can act independently in case of a severe crisis in order to improve the economic situation. D. No. In the modern Fed a Reserve Bank is not able to use open market purchases and liberal discount window lending at all.
B
In what sense is the Federal Reserve System both accountable to the government and independent of it? A. Regulatory requirements are set by the federal and state governments, but banks are owned by private shareholders. B. The Board of Governors is a federal government agency, while the Federal Reserve Banks are legally the equivalent of private corporations. C. The Board of Governors is the legal equivalent of a private corporation while the Federal Reserve Banks are government agencies. D. Member banks have to complete annual government reporting requirements but are owned by private shareholders.
B
Michael McAvoy's explanation of how the Federal Reserve Bank cities were selected is more consistent with a _______ of how the decision was made since he finds that locations were determined based on _______. A. principal-agent view: a random selection of cities within each region B. public interest view: sound economic reasons C. public interest view: public opinion polls D. principal-agent view: political favoritism
B
The Fed doesn't seek to reduce the unemployment rate to zero because the tools of monetary policy are A. ineffective in reducing the level of cyclical unemployment. B. ineffective in reducing the level of frictional unemployment. C. only effective in reducing the level of frictional unemployment. D. All of the above.
B
This statement shows the FOMC using a monetary policy tool. Briefly explain which monetary policy tool it was. A. Dollar exchange rate, since the Fed plans to manage the dollar exchange rate in order to keep the federal funds rate at its target rate. B. Open market operations, since the Fed plans to keep buying securities to keep the federal funds rate at its target rate. C. Income taxation, since the Fed plans to continue increasing income tax rates in order to keep the federal funds rate at its target rate. D. Setting the reserve requirement, since the Fed plans to keep raising the required reserve ratio to help keep the federal funds rate at its target rate.
B
What are the arguments for a Federal Reserve Bank operating independently? A. A regional Federal Reserve Bank's actions might exacerbate a crisis. B. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. C. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. D. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system.
B
What do open market operations imply? A. Setting the discount rate and the terms of discount lending B. The purchase or sale of securities , typically U.S. Treasury securities comma in financial markets C. Requiring banks to hold a fraction of checkable deposits as vault cash or deposits with the Fed D. Paying interest on banks' required reserve and excess reserve deposits
B
What does the editorial mean by "pricing and allocating capital"? In what way does buying corporate bonds involve a central bank in pricing and allocating capital? A. When a central bank buys bonds, it decreases the demand for bonds, causing bond prices to fall and their interest rates to rise. B. When a central bank buys bonds, it increases the demand for bonds, causing bond prices to rise and their interest rates to drop. C. When a central bank buys bonds, it increases the supply of bonds, causing bond prices and their interest rates to fall. D. When a central bank buys bonds, it decreases the supply of bonds, causing bond prices and their interest rates to rise.
B
What is he referring to with this statement? A. The Fed was initially not allowed to provide discount loans to member banks. B. The Fed's power was initially too decentralized, spread across 12 districts, to respond effectively to a national crisis. C. The Fed was initially set up to collect and remit taxes to Congress and had no interaction with the financial sector. D. The Fed's power was initially too centralized in New York City to respond effectively to a national crisis.
B
What is the Taylor rule? A. A monetary policy guideline used to determine a target for the inflation rate B. A monetary policy guideline developed by economist John Taylor for determining the target for the federal funds rate C. A monetary policy guideline developed by economist John Taylor to assist the Fed in setting discount policy D. A monetary policy guideline developed by economist John Taylor for determining the target for the reserve rate
B
What is the simple deposit multiplier? A. It is the ratio of the amount of new reserves to the amount of deposits created by banks. B. It is the ratio of the amount of deposits created by banks to the amount of new reserves. C. It is the ratio of the amount of deposits created by banks to the amount of already existing reserves. D. It is the percentage of checkable deposits that the Fed specifies banks must hold as reserves.
B
What trade-offs does the Fed face, particularly in the short run, in attempting to reach its goals? A. In attempting to reach high economic growth, the Fed would pursue contractionary monetary policy, but this policy could cause higher unemployment. B. In attempting to reach high economic growth or high employment, the Fed would pursue expansionary monetary policy, but this policy could cause higher inflation. C. In attempting to reach high economic growth, the Fed would pursue expansionary monetary policy, but this policy could cause higher unemployment. D. In attempting to reach high employment, the Fed would pursue expansionary monetary policy, but this policy could cause lower economic growth.
B
When Congress gave the Fed a dual mandate, why did they choose these two monetary policy goals? A. It is not possible to achieve these goals with fiscal policy; they only respond to monetary policy. B. When the Fed achieves these two policy goals, it usually also leads to achieving its other goals. C. When the Fed achieves these two policy goals, it eliminates the need to achieve its other goals. D. These are the only two goals that allow policymakers to accurately assess the economic well-being of the population.
B
When examining the Fed's balance sheet, in most periods, the two most important liabilities are: A. Currency in circulation and Treasury Deposits. B. Currency in circulation and Reserve balances of banks. C. Currency in circulation and Reverse repurchase agreements. D. Reverse repurchase agreements and Reserve balances of banks.
B
Which of the following is NOT a reason the banking system is able to multiply loans and deposits when an individual bank is unable to do so? A. An individual bank does not have the network to affect the entire aggregate economy's lending and deposit sytem. B. The banking system is directly controlled by the Fed. Therefore, the amount of lending and deposits are directly determined by Fed policy. C. The banking system is made up of many banks. Therefore, it has a network that allows for a great deal of lending across the economy. D. An individual bank does not have the capacity to continually increase the amount of loans it makes as it resources are limited.
B
Which of the following might be a reason to explain the difficultly in identifying inflated asset prices? A. The tax effect on corporate profitability is often challenging to identify prior to reporting corporate results. B. Reasonable investors can have widely varying expectations of future profitability. C. It is difficult to discriminate the effect of inflation on asset prices. D. It is difficult to discriminate the effect of interest rates on asset prices.
B
Why did the United States have no central bank between 1836 and 1913? A. The country did not yet have a need for a central bank. B. The authorization for a central bank expired. C. The IMF served as the central bank for the United States. D. The country hadn't yet established a central bank.
B
Why might the Fed want to switch from having a target for the inflation rate to having a target for the growth rate of nominal GDP? A. Targeting the growth rate of nominal GDP allows the Fed to focus on a single goal—reducing real interest rates. B. Targeting the growth rate of nominal GDP allows monetary policy to respond to changes in both inflation and GDP. C. Unlike inflation targeting, nominal GDP targeting gives the Fed direct control over real GDP and the price level. D. Nominal GDP targeting forces the Fed into a single monetary policy rule, making it less subject to political influence.
B
Why would the Fed's buying Treasury securities and mortgage-backed securities keep "financial market conditions easy"? A. It causes the money supply to decrease, making it easier for banks to lend money. B. It increases bank reserves, resulting in lower interest rates, making it easier to borrow and spend in the economy. C. It decreases bank reserves, resulting in lower interest rates, making it easier for banks to remain profitable.
B
What are the main arguments for the Fed's independence? (Check all that apply.) A. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. B. Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake. C. An independent Fed makes a political business cycle less likely. D. It would be less democratic for elected officials to control monetary policy.
B, C
What are the reasons banks demand reserves? (Check all that apply.) A. To hold excess reserves to meet their long-term liquidity needs. B. To meet their legal obligation to hold required reserves. C. To hold excess reserves to meet their short-term liquidity needs. D. To make money by earning interest on reserve balances.
B, C
Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of income? (Check all that apply.) A. Unanticipated deflation redistributes income just as unanticipated inflation does, with lower-income households losing purchasing power to higher-income households. B. Deflation, just like inflation, complicates the ability to distinguish overall price changes from relative price changes, which determine resource allocation. C. Unanticipated deflation redistributes income just as unanticipated inflation does, but from borrowers to lenders rather than from lenders to borrowers. D. Deflation does not create any problems for the economy. On the contrary, it helps spur economic growth, which benefits everyone.
B, C
What are the arguments against a Federal Reserve Bank operating independently? (Check all that apply.) A. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. B. A regional Federal Reserve Bank's actions might exacerbate a crisis. C. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. D. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system.
B, D
Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy action: An increase in the discount rate. A. This would lower the interest rate at which the supply for reserves becomes horizontal. B. This would decrease the demand for reserves. C. This would raise the interest rate at which the supply for reserves becomes horizontal. D. This would decrease the supply of reserves.
C
In what sense is the Federal Reserve System a "public-private partnership"? A. While formed by private banks, it is owned by the government. B. It is a partnership made up of both government and private entities. C. While authorized by the government, it is owned by private banks. D. While owned by the government, private banks have a legal claim on the profits of the District banks.
C
In what ways does the Fed's purchases of Treasury securities and mortgage-backed securities lead to "smooth market functioning"? A. It can reduce the moral hazard problem by encouraging banks to restrict credit to all but the safest borrowers. B. It can increase the Fed's profitability, thus allowing it to conduct more broad fiscal and monetary policy. C. Sellers of these securities can find buyers and can, therefore, continue to fund their operations. D. It can serve as a guarantee to banks that they will not go bankrupt and can, therefore, stabilize the flow of funds.
C
Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low inflation? A. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high. B. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower. C. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high. D. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower.
C
What implications does your answer have for what the average inflation rate is likely to be in high-income countries as opposed to low-income countries? A. Research has shown that the rate of inflation does not depend on the level of the central bank's independence. B. The average inflation rate will be higher in low-income countries, but only because of the limited ability of the economy to expand production. C. Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate in less-developed countries to be higher than in industrial countries. D. Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate in less-developed countries to be lower than in industrial countries
C
What is the likeliest explanation for why the arrival in Argentina of the Covid-19 pandemic resulted in an increase in the country's monetary base? A. The government had likely decreased its fiscal spending to stabilize the economy, causing the monetary base to increase. B. The central bank had likely decreased the money supply to stabilize the economy, causing the monetary base to increase. C. Its central bank was likely purchasing large amounts of government securities, causi
C
What is the public interest view of the Fed's motivation? A. A theory of central bank decision making that holds that officials act in the best interests of the shareholders. B. A theory of central banking that holds that officials maximize their personal well-being rather than that of the general public. C. A theory of central bank decision making that holds that officials act in the best interests of the public. D. A theory of central banking that holds that officials maximize the public's interest in (and attitude toward) the affairs of the monetary authority.
C
What is the "Constitutional question" involved here? Is the existence of the Fed constitutional? A. The Constitution explicitly calls for the establishment of a central bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. B. The Constitution explicitly forbids establishing a central bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. C. The Constitution does not directly discuss a central banking system; however, the Fed's constitutionality was confirmed by the Supreme Court. D. The Constitution allows for the creation of a central banking system only if it remains fully independent of the government. The Supreme Court has upheld that the Fed meets this criteria.
C
What is the principal-agent view? A. A theory of central bank decision making that holds that officials act in the best interest of the public. B. A theory of central banking that holds that officials maximize the general public's well-being rather than their personal well-being. C. A theory of central banking that holds that officials maximize their personal well-being rather than that of the general public. D. A theory of central bank decision making that holds that officials act in the best interest of the shareholders.
C
When economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to? A. It is when banks choose to hold no excess reserves, making it impossible for the Fed to lower the discount rate. B. It is when economic growth in the economy has reached zero percent and the Fed must use aggressive monetary policy. C. It is when short-term interest rates are close to zero, meaning the Fed can no longer use changes in interest rates to stimulate the economy. D. It is when the Fed has sold all the securities on its balance sheet and can no longer impact the money supply using open market operations.
C
Which body is more important within the Federal Reserve System, the Board of Governors or the Federal Open Market Committee? A. The Federal Open Market Committee since they are the main policy making arm of the Federal Reserve System and took over control of monetary policy from the Board of Governors during the 2007-2009 financial crisis. B. The Board of Governors since it is made up of the top 7 of the 12 Federal Reserve branch bank presidents who directly control monetary policy in their regions. C. The Board of Governors since they control reserve requirements, the discount rate, and hold a majority of the seats on the Federal Open Market Committee. D. The Federal Open Market Committee since they control reserve requirements, the discount rate, and are independent of any influence from Congress.
C
Which of the Fed's traditional monetary policy tools was the most important? A. Reserve requirements B. Discount policy C. Open market operations D. They are all equally important.
C
Who are the Class A directors? A. leaders in industry B. leaders in commerce C. bankers D. leaders in agriculture
C
Why does the Fed set the discount rate higher than the federal funds rate? A. The Fed sets the discount rate higher to entice banks to become members of the Federal Reserve System. B. The Fed sets the discount rate higher because it is more costly for the Fed to make loans than it is for other banks. C. The Fed sets the discount rate higher because it wants to be considered the lender of last resort. D. All of the above are correct.
C
In what ways is the Fed subject to external pressure? (Check all that apply.) A. The Congress scrutinizes Fed's budgetary requests and can reduce the amounts requested if the Fed has fallen out of favor with key members of the House or Senate. B. Through negative reporting journalists can rally public sentiment against Fed policies. C. The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years. D. The Congress can amend the Fed's charter and powers or even abolish it entirely.
C, D
The supply of reserves is determined by A. borrowed reserves in the form of regular loans. B. the Fed's manipulation of reserve requirements. C. borrowed reserves in the form of discount loans from the Fed. D. the Fed's provision of non-borrowed reserves through open market operations.
C, D
Which groups would likely benefit from deflation? Which groups would likely be hurt? ___ would likely gain from deflation and ___ would likely lose.
Creditors, borrowers
Briefly discuss potential drawbacks to making this switch. A. Measures of real GDP may be based on inaccurate data and need revising. B. It focuses solely on inflation without considering changes in real GDP. C. Nominal GDP targeting is less understood, so it may be ineffective at communicating the Fed's intentions. D. Only A and C are correct. E. All of the above are correct.
D
By a "principal-agent problem," economists mean ________. A. when there is no individual in charge of making decisions, since everyone is treated equally in the organization B. when a person with the final say in all decisions is not employed by the organization that those decisions impact C. when everyone in the organization focuses on profit without considering potential externalities D. when the goals and priorities of those in charge do not match the goals and priorities of the people they oversee
D
Deflation would be "potentially highly damaging" because of all of the following EXCEPT? A. It would further reduce demand and output below the natural rate and could have extreme recessionary impacts. B. It would increase the cost of labor for firms in real terms, making it more costly for firms to produce. C. It would raise the costs of paying back loans, making it more difficult for debtors to spend. D. It would make prices fall, so goods would become less expensive.
D
If there is a conflict of interest in the governance structure of the Federal Reserve Banks, why did Congress establish this structure when it passed the Federal Reserve Act in 1913? A. To maintain power within a single constituency. B. To ensure the cooperation of federal banks. C. To ensure the cooperation of state banks. D. To prevent one constituency from exploiting the central bank's economic power at the expense of another constituency.
D
Is it correct to describe the Fed as "an unelected agency of government officials"? A. No, similar to the president, members of the Fed are elected at the national level—they just serve longer terms. B. Yes, since members of the Fed are appointed by member banks and serve life-long terms, the quote is correct. C. No, similar to members of Congress, members of the Fed are elected at the state level—they just serve longer terms. D. Yes, it is true that Fed officials are not elected, so in some sense the quote is correct.
D
Monetary policy aims to A. encourage a financial crisis. B. keep the level of inflation at zero. C. determine the correct allocation of social benefits among citizens. D. advance the economic well-being of the country's citizens.
D
What potential conflicts of interest is this document referring to? A. the setting of reserve requirements B. the setting of inter-bank interest rates C. the supervision of the Federal Reserve Board D. the supervision of member banks
D
What were the main responsibilities of the Fed when Congress first established it? Are those still the Fed's most important responsibilities? The Fed was initially tasked to ________. Since that time, the responsibilities of the Fed have ________. A. provide short-run liquidity to banks, oversee the banking system, and manage the money supply; decreased considerably B. collect and remit income taxes, monitor and adjust exchange rates, and manage interest rates; expanded greatly C. collect and remit income taxes, monitor and adjust exchange rates, and manage interest rates; remained the same D. provide short-run liquidity to banks, oversee the banking system, and manage the money supply; expanded greatly
D
Which of the following is not one of the three categories of discount loans? A. Seasonal credit B. Secondary credit C. Primary credit D. Emergency credit
D
Why do fluctuations in interest rates make investment decisions by households and firms more difficult? A. Because interest rate fluctuations reduce investment risks. B. Because fluctuating interest rates cause bubbles in asset markets. C. Because investment becomes less profitable. D. Because the cost of borrowing becomes more uncertain.
D
Why does Congress directly control fiscal policy—the federal government's decisions with respect to spending and taxes—but delegate the authority over monetary policy to the Federal Reserve? A. Member banks refused to join the Federal Reserve System unless they had authority over monetary policy. B. Congress wasn't able to agree on a monetary policy. C. Congress doesn't have the expertise to set monetary policy. D. Congress wanted the Federal Reserve to operate independently of external political pressures.
D
Why would buying corporate bonds expose a central bank to more political pressure than would buying bonds issued by a government? Buying bonds in a particular industry ________ that industry and can lead to politicians ________. A. punishes; losing money on investments in this industry B. supports; losing money on investments in this industry C. punishes; asking central banks to buy bonds in industries they support D. supports; asking central banks to buy bonds in industries they support
D
During the 2007-2009 financial crisis and the 2020 Covid-19 pandemic, the actual federal funds rate was ___ the rate predicted by the Taylor rule since these crises were very ___. Between 2010 and 2019, the actual federal funds rate was ___ the rate predicted by the Taylor rule since the Fed wanted to promote ___.
above, severe, below, growth
The Fed carries out a $2 billion open market sale. Discount Loans, ___ ___, ___ by $2 billion. Reserves, ___ ___, ___ by $2 billion.
an asset, decreases; a liability, decreases
The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from DeShawn's Computer Services for $1 million. Discount Loans, ___ ___, ___ by $1 million. Reserves, ___ ___, ___by $1 million.
an asset, increases; a liability, increases
The Fed increases discount loans by $2 billion. Discount Loans, ___ ___, ___ by $2 billion. Reserves, ___ ___, ___ by $2 billion.
an asset, increases; a liability, increases
Why would these asset purchases cause the Fed's balance sheet to rise? The size of the Fed's balance sheet is usually based on the value of the Fed's total ___.
assets
The Federal Reserve seeks to reduce ___ unemployment.
cyclical
Why does a decrease in the federal funds rate increase the quantity of reserves demanded? As the federal funds rate decreases, the opportunity cost to banks of holding excess reserves ___ because the return they could earn from lending out those reserves goes ___.
decreases, down
It would be ___ for the Fed to have a set policy of deflating asset bubbles when it being so ___ to determine whether asset prices are inflated above their fundamental value or not
hard, hard
If the excess reserves−to−deposit ratio (ER/D) decreases, the money multiplier will ___.
increase
How does the monetary base differ from the money supply? You must multiply the monetary base by the ___ ___ to find the size of the money supply. For the Fed to be able to control the money supply by controlling the monetary base, the ___ ___ must be stable.
money multiplier; money multiplier
From the most influence to the least influence: policy ___, policy ___, intermediate ___, policy ___.
tools, instruments, targets, goals
