ECON 485

Consider the following data about the economy: currency outstanding (C) = $1 trillion, ​total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy?

1.33

At its inception, the power of the Federal Reserve rested in the

12 independent regional Federal Reserve banks

Joe has a $1,000 debt. He is a plumber and earns $50 per hour. The real burden of Joe's debt is

20 hours of work.

Federal government budget surpluses can lead to a "crowding out" effect, which pushes interest rates upward. T/F

False

The Federal Reserve is part of the US Treasury. ​T/F

False

​The most powerful entity in the Federal Reserve is the board of governors. T/F

False

​When the US Treasury decides to reduce the value of the US dollar relative to the British pound, there will be a decline in the monetary base in the United States. T/F

False

Following the Great Depression, the power of the Fed shifted to the

Federal Open Market Committee

Damon goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?​

The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.

An increase in consumer income tends to cause an increase in the demand for money. T/F

True

Bank reluctance to loan out excess reserves limited the effectiveness of the Federal Reserve's policy of quantitative easing in 2008.​ T/F

True

One of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market. T/F

True

The primary responsibility of all central banks is monetary policy.​ T/F

True

The rise of sweep accounts and the increasing popularity of ATMs have resulted in a decline in the potential effectiveness of the reserve requirement as a tool of monetary policy. T/F

True

​Among the responsibilities of the Fed is

acting as the fiscal agent of the US Treasury

​The Federal Reserve operates as

an independent entity.

​In the 1990s, dot-com companies flourished and their valuations rose dramatically. This phenomenon has been referred to as a(n)

asset bubble.

Which of the following is the most liquid of a bank's assets?​

cash

​Today in the Federal Reserve system, the power rests with the

chair of the Federal Reserve

​Monetary policy has the best chance of influencing the level of __________ unemployment.

cyclical

When the Federal Reserve increases the reserve ratio, the impact will be to

decrease the size of the money multiplier.

During the Great Recession, the price level in the United States

fell sharply.

​The three governing bodies of the European Central Bank are the

governing council, general council, and executive board.

When the economy is caught in a liquidity trap, expansionary monetary policy will

have little impact on the economy.

When a central bank wants to pursue a contractionary monetary policy​, it should

increase the required reserve ratio.

If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to

increase the supply of money.

During a credit crunch, the excess reserve ratio will

increase.

​One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.

information and impact

An advantage of inflation rate targeting is

it reduces inflationary expectations.

The biggest change in the Federal Reserve's balance sheet between May 2007 and March 2013 was the __________ on the __________ side of the balance sheet.

jump in depository institution deposits; liability

Federal Reserve notes are considered to be

liabilities of the Federal Reserve.

When borrowers are hesitant to borrow to finance purchases because of pessimism about the future and banks are hesitant to lend because of a fear that borrowers will default on their loans, the economy is said to be experiencing a(n) __________ trap.

liquidity

​A mortgage loan is an example of a __________ loan.

long-term consumer

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to

lower interest rates.

When the Federal Reserve was created in 1913,​ its two primary purposes were to

maintain the gold standard and be a "lender of last resort" to commercial banks

The responsibilities of the European Central Bank include

monetary policy, foreign exchange operations, and maintenance of the payments system.

As a country's financial markets become more highly developed, we can expect monetary policy to be

more effective.

One of the concerns about the Federal Reserve targeting high employment is that it might

neglect the goal of stable prices.

​Savings accounts and certificates of deposit are commonly referred to as __________ accounts.

nontransaction

Banks want to hold as little cash as possible because holding cash

offers a minimal rate of return.

The most often used of the Federal Reserve's monetary tools is

open market operations.

Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to

overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets.

The Dodd-Frank Act allowed banks, for the first time, to

pay interest on demand deposits.

​In modern times, the primary goal of central banks is

price stability.

The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute a

repurchase agreement to provide a short-term boost to the money supply.

Actual bank reserves are equal to

required reserves + excess reserves

​By far, the largest asset on the Federal Reserve's balance sheet is

securities

An unsecured personal loan is an example of a __________ loan.

short-term consumer

Banks basically do two things: __________ and __________.

take deposits; make loans

Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as​

the monetary base.

In its early days, the Fed's role as a lender of last resort was subject to

the real bills doctrine

Asset bubbles make it plain that monetary policy must be made in a world full of

uncertainty.

When the currency ratio increases, the impact of changes in the monetary base on the money supply is

weakened.

Banks must weigh the risk versus the return in deciding

what to hold in their portfolio of assets.

Liquidity is important to banks because it

​allows them to meet the cash needs of their depositers.

​A potential problem of a more politically controlled central bank is that

​politicians may want to pursue monetary policies that are good in the short run but bad in the long run.