Econ Chapter 14-17 Exam

If a bank has $1 million in assets and $50,000 in net worth, its liabilities must equal

$950,000

Those of the rational expectations school

favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed

Banks borrow excess reserves from each other on a day-to-day basis in the

federal funds market

Velocity measures

how quickly money changes hands

A new policy is actually put in force during the

implementation lag

If the Fed purchases government securities on the open market, the money supply will

increase through the commercial banking system regardless of who the seller is

To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________.

increase; decrease the interest rate and increase investment

If the Fed buys bonds, then the money supply

increases, the interest rate falls, and the quantity of money demanded increases

Monetary policy is

insulated from politics since the term of only two members of the Board of Governors expire during the tenure of any modern President of the U.S.

Banks earn a profit on the difference between

interest charged on loans and interest paid on deposits

The opportunity cost of holding money is measured by the

interest rate

When the demand for money is shown on a graph, the __________ is on the vertical axis, and the __________ is on the horizontal axis.

interest rate; quantity of money

Those who favor a passive approach to policy believe that

lags associated with implementing policies are too long and unstable for discretionary policy to be effective

An increase in the money supply will

lead people to try to exchange money for interest-bearing assets

Banks create new deposits by

lending out excess reserves

If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases, the economy will (in the long run)

move toward point f

To favor a passive approach to policy is to believe that the private sector is

relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor

A decrease in the money supply causes interest rates to __________, investment spending to __________ and Gross Domestic Product to __________.

rise; fall; fall

The members of the Board of Governors of the Fed are

selected by the President with the approval of the Senate

In the situation shown in Exhibit 15-1, how could the Fed return the economy to potential output?

sell U.S. government bonds to banks

The Fed can reduce the money supply by

selling securities

The Board of Governors consists of

seven members appointed by the president

According to the active policy position, eliminating a contractionary gap

should be accomplished by stimulating aggregate demand

Commodity money is something

that has an intrinsic value

Discretionary policy advocates believe

that self-correction forces work slowly

Of the following, the major influence on the supply of money is

the Fed

The discount rate is the interest rate that

the Fed charges on loans to depository institutions

Open-market operations involve

the Fed's purchase and sale of government securities

As the interest rate decreases,

there is a downward movement along the demand for investment curve

Economist A. W. Phillips believed that

there is an inverse relationship between inflation and unemployment

If the demand for money increases,

there will be a rightward shift of the money demand curve

Problems facing active policy decisions include

timing problems related to lags and self-correction; that the natural unemployment rate is uncertain

An important implication of the natural rate hypothesis is that regardless of concerns about __________, the government policy that results in __________ is generally the optimal long-run policy.

unemployment; low inflation

The long-run Phillips curve is

vertical

An economy in which actual GDP is $10 billion below potential GDP

will have the short run aggregate supply shifting outward, if the passive approach is correct

Suppose that a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2. If the bank wishes to hold no excess reserves, its actual reserves will be

$1,200

Suppose that a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2. If actual reserves equal $3,000, then excess reserves equal

$1,400

If the money supply is $1,000, the price level is 3, and real income (or output) is $5,000, then the velocity of money is

15

If the simple money multiplier is 5, the required reserve ratio must be

20 percent

A bank's assets include all but one of the following. Which one is the exception? A.) checkable deposits B.) loans C.) securities D.) mortgages E.) cash

A.) checkable deposits

Which of the following is not an activity of the Fed? A.) making loans to the public B.) clearing banks' checks C.) lending funds to the federal government D.) purchasing U.S. government securities E.) holding deposits of the U.S. Treasury

A.) making loans to the public

Suppose that the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true? A.) Required reserves on the new deposits are $12,000. B.) Excess reserves on the new deposits are $500,000. C.) Required reserves on the new deposits are $60,000. D.) Excess reserves on the new deposits are $12,000. E.) Total reserves on the new deposits are $440,000.

C.) Required reserves on the new deposits are $60,000.

Which of the following is an example of a contractionary monetary policy? A.) Transfer payments to poor families are reduced. B.) The Fed buys government securities in the open market. C.) The discount rate is raised. D.) The required reserve ratio is lowered. E.) Anything the Fed does to shift the money supply to the right is a contractionary policy.

C.) The discount rate is raised.

If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably occur? A.) The demand for money will increase and the interest rate will rise. B.) The money supply will increase and the interest rate will fall. C.) The interest rate will rise and the quantity of money demanded will fall. D.) The money supply will decrease and the interest rate will fall. E.) The interest rate will fall and the quantity of money demanded will increase.

C.) The interest rate will rise and the quantity of money demanded will fall.

Which of the following is not a depository institution? A.) a commercial bank B.) a thrift institution C.) a pension fund D.) a savings and loan institution E.) a credit union

C.) a pension fund

All of the following are goals of the Fed except one. Which is the exception? A.) a high level of employment B.) stability in interest rates C.) rising prices (to encourage production) D.) stability in financial markets E.) stability in foreign-exchange markets

C.) rising prices (to encourage production)

Which of the following is associated with the problem of hyperinflation? A.) Money is in short supply. B.) The value of money rises dramatically. C.) The government runs out of money. D.) People look for alternatives to using money. E.) People start to hold onto money for long periods of time.

D.) People look for alternatives to using money.

Which of the following is not true of Federal Reserve notes? A.) They are fiat money. B.) They are a liability of the Fed. C.) They are redeemable for other Federal Reserve notes. D.) They are redeemable for gold. E.) They are counted as currency in the money supply.

D.) They are redeemable for gold.

The Fed performs all of the following functions except one. Which is the exception? A.) making loans to banks B.) clearing checks for banks C.) holding deposits of banks D.) minting U.S. coins E.) holding deposits of the U.S. Treasury

D.) minting U.S. coins

Which of the following is not consistent with a self-correcting economy? A.) Market forces work relatively well in pushing the economy to potential GDP. B.) Prices and wages are flexible. C.) A contractionary gap is corrected through falling wages and prices. D.) The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP. E.) An active approach to a recession or depression.

E.) An active approach to a recession or depression.

Which of the following is not a function of the Federal Reserve System? A.) holding deposits of member banks B.) clearing checks C.) making loans to member banks D.) serving as a bank to the Federal government E.) making loans to the public

E.) making loans to the public

Which of the following is not a function of money? A.) to act as a medium of exchange B.) to act as a unit of account C.) to act as a store of value D.) to facilitate trade E.) to provide a double coincidence of wants

E.) to provide a double coincidence of wants

According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-2 attain equilibrium at potential output?

Either the money supply or government spending should be decreased.

According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-1 attain equilibrium at potential output?

Either the money supply or government spending should be increased.

An increase in the money supply will cause a decrease in planned investment spending.

False

The supply of money is depicted diagrammatically as a vertical line because the quantity of money supplied is totally dependent on the rate of interest.

False

When people exchange money for financial assets, the interest rate rises.

False

Open market operations involve

buying and selling government securities in the open market

What is the effect of an expansionary monetary policy on the demand for investment curve?

It causes downward movement along the curve.

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier?

It increases by $50,000.

The equation of exchange is

M ´ V = P ´ Y

M2 is defined as

M1 plus savings accounts, small time deposits, and money market mutual funds

If the advice of those who favor a passive approach to policy is correct, how would a contractionary gap eventually close?

The short-run aggregate supply curve would shift rightward.

Long lags make discretionary policy less effective because

by the time the impact of a policy is felt, the problem it was meant to cure may have been corrected

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-2 attain equilibrium at potential output?

The SRAS curve will shift to the left.

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-1 attain equilibrium at potential output?

The SRAS curve will shift to the right.

As a result of expansionary monetary policy,

The interest rate will rise and the quantity of money demanded will fall

According to the rational expectations school, when monetary policy makers do exactly what is expected of them, their efforts to stimulate the economy will have no effect either on output or employment.

True

Some economists believe that in the long run the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line.

True

The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.

True

The first checks were probably notes written to a goldsmith asking him to transfer ownership of some designated amount of gold from the writer of the note to its bearer.

True

The long-run Phillips curve is located at the natural rate of unemployment.

True

Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is.

True

The largest component of the Federal Reserve's asset portfolio is

U.S. government securities

Each member of the Board of Governors serves

a fourteen-year term

The rational expectations school advocates

a passive approach to policy

The short-run Phillips curve shows that

a reduction in unemployment comes at the expense of higher inflation

Mary Ellen deposits $100 into her savings account every month. Her daughter Carolyn keeps all her pennies in a piggy bank. These are examples of money functioning as

a store of value

If the natural unemployment rate cannot easily be estimated, __________ policy making becomes more difficult.

active

In deciding how much money to hold, you should compare the

advantage of liquidity with the disadvantage of losing interest

According to the rational expectations school, people base their expectations about inflation on

all information available to them

The FDIC insures deposits in

any banking institution that purchases FDIC insurance

The equilibrium interest rate is determined by

both the supply of and demand for money

Banks are financial intermediaries because they

bring together the two sides of the market-savers and borrowers

The Federal Reserve System has the power to

buy and sell federal government securities

If self-correction works, a policy that continually increases aggregate demand will

cause permanent inflation

The M1 money supply consists of

coins and currency held by the nonbank public, checkable deposits, and traveler's checks

The Fed's most important monetary policy tool is

conducting open market operations

The banking system creates money in the sense that it

creates loans from excess reserves

The selection of a new policy takes place during a period of time known as the

decision-making lag

In the situation shown in Exhibit 15-1, how could the Fed return the economy to potential output?

decrease the money supply

To increase the money supply, the Fed might

decrease the reserve requirement and the discount rate

As the price level rises, money __________ causing interest rates to __________ and investment spending to __________.

demand rises; rise; fall

Bank reserves can be held in the form of

deposits with the Fed and cash in the bank's vault

The simple money multiplier

equals the reciprocal of the required reserve ratio

The Fed's purchase of U.S. government securities constitutes a(n)

expansionary policy because it raises the amount of total reserves in the banking system

If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.

fall; greater

On a bank's balance sheet, the value of its assets must equal

liabilities plus net worth

Congressional control over the Fed is

limited because the Fed is not dependent on Congress for the funds to support its operations

If an economy is at potential GDP and an expansionary policy is correctly anticipated, the result will be

little or no increase in GDP

If the Fed wants to close a contractionary gap, it might

lower the discount rate

An important function of commercial banks is to

make loans

The deregulation of U.S. banking in the 1980s led to

many bank failures as banks began to hold riskier assets

To maximize its profit, a bank will

minimize excess reserves

When self-correcting forces cure a contractionary gap,

money wages and real wages both decrease

Consider Exhibit 16-4. If the economy is initially at point c and aggregate demand increases, the economy will (in the long run)

move toward point a

The equation of exchange states that the quantity of money multiplied by the velocity of money equals

nominal Gross Domestic Product

Fiat money is backed by

nothing

Money market mutual funds

offer higher rates of interest than bank checking accounts and also offer check writing privileges

The federal funds rate is the interest rate paid when

one bank borrows reserves from another bank

If the price level increases more rapidly than expected,

output will increase

According to the rational expectations school,

people form expectations, in part, by considering the probable future actions of government policy makers

If prices and wages are not flexible, an adverse supply shock is most likely to be followed by

persistent unemployment

If the Fed sells government securities to banks, eventually we expect

planned investment expenditures to decrease

The time it takes to identify and examine the nature and seriousness of an economic problem is the

recognition lag

The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________.

reducing, unemployment, inflation

Over the past 40 years, the most frequent target for the Fed's monetary policy has been

the federal funds rate

Money is legal tender if

the government says it is

If the Fed increases the money supply, then

the interest rate declines and the quantity of money demanded increases

The opportunity cost of holding money increases when

the interest rate rises

The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.

the interest rate; investment

According to a recent study of central banks around the world,

the more independent the central bank, the lower is that country's inflation rate

According to the natural rate hypothesis, the economy tends toward

the natural rate of unemployment in the long run

Gresham's Law states that when different forms of commodity money circulate simultaneously (e.g., $1 gold coins and $1 silver coins),

the one with the more intrinsic ("commodity") value will disappear from circulation

The reserve requirement is

the percentage of deposits that banks are required to hold as reserves

Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if

the policy is totally unexpected