econ quiz4
The potential money multiplier is equal to
1 divided by the reserve ratio.
In an economy, the growth rate of GDP is known to be 2%, the growth rate of the money supply is 12%, and the velocity of money is constant. According to the quantity theory of money and prices, in this economy, the inflation rate must be
10%.
If the total money supply is $45 billion, real GDP is $60 billion, and the price level is 3, the income velocity of money is
4.
The reserve ratio is 12 percent. What is the value of the potential money multiplier?
8.33
As a result of monetary policy of the Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this outcome?
A Fed sale of bonds to brokers and banks.
What type of relationship exists between the growth of the money supply and changes in the inflation rate?
A direct relationship.
Which of the following assets is the least liquid?
A house.
Which of the following does not describe some of the functions of the Federal Reserve Bank? When the Fed acts as the lender of the "last resort" it means that
Acts as a medium of exchange, a unit of accounting, a store of value and a standard of deferred payment. the Fed lends to depository institutions it deems should not fail.
Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.
Aggregate demand curve shifts to the right
Since the financial meltdown of the late 2000s, the Fed has launched a credit policy which consists of
All of the above.
The equation of exchange
All of the above.
The Fed's credit policy since 2008 has
All of the above.
To eliminate the deficit (and halt the growth of the net public debt), a politician suggests that "we should tax the rich." Suppose the politician defines "the rich" as people with annual taxable incomes exceeding $1 million per year. Given "the rich" rarely earn a combined taxable income exceeding $1 trillion, yet the federal deficit has regularly exceeded $1 trillion in recent years, which of the following must be true?
All of the above.
An increase in the money supply will An increase in the money supply will
All of the above. All of the above.
An example of a fiduciary monetary system is
American one-dollar bills.
Which of the following assets is the most liquid?
A traveler's check.
Which of the following statements is true concerning a fractional reserve banking system?
Banks maintain a fraction of deposits on hand to meet the daily needs of their customers.
Which of the following is an example of the precautionary demand for money?
Carla keeps $2000 in the bank for emergencies
What are the features of federal deposit insurance?
Depository institutions' premiums are based on the value of their deposits with the funds being held for use in the case of a failed bank so that depositors can be reimbursed.
Data supports the idea that tax increases can completely eliminate actual deficits.
False
The market price of existing bonds is directly related to the rate of interest.
False
With contractionary monetary policy, the net export effect results in a depreciation of the dollar, where the international price of the dollar falls. If the Federal Reserve implements an expansionary monetary policy that reduces the market interest rate, this will tend to ________ foreign investment in U.S. financial assets and ________ U.S. net exports.
False discourage, increase
intermediaries, including depository institutions such as commercial banks and savings institutions, insurance companies, mutual funds, and pension funds, transfer funds from ultimate lenders (savers) to ultimate borrowers.
Financial asymmetric adverse selection moral hazard
Which of the following is a reason why the public debt may impose a burden on future generations?
Government borrowing to finance the debt may drive up interest rates, crowding out investment and consumption
Which of the following is not a duty of the a central bank?
Guarantee the savings of its citizens.
Which of the functions of the Federal Reserve is appropriately matched with its correct institution?
Holds reserve balances for depository institutions, The Federal Reserve Bank.
What happens to the net public debt if the federal government operates next year with a: a. budget deficit? b. balanced budget? c. budget surplus?
Increases Remains unchanged Decreases
The liquidity approach to measuring money defines the M2 money supply as
M1 plus near monies.
Which of the following is not a reason people choose to hold money balances?
Money holdings are good assets during periods of inflation.
The U.S. federal government has contemplated ways to reduce its national debt. Which of the following suggestions would best enable the government to achieve this goal? Entitlements in the U.S. are
Reduce government spending, raise taxes, or both. non-discretionary expenditures that have been legislated by Congress.
of depository institutions consist of their vault cash and deposits that they hold with
Reserves Federal Reserve reserve ratio potential money multiplier
The reserve requirement is 10%. Suppose that Jack deposits $30,000 in cash in a checking account at First Bank. Which of the following best describes the initial effect on First Bank's balance sheet?
Reserves increase by $30,000 and transactions deposits increase by $30,000
Which of the following is not a function of the Federal Reserve System?
Taking deposits of small lenders to pool savings and make loans.
Which of the following is a true statement?
The FDIC has reduced the number of depositors who have lost savings, but in doing so, has inadvertently encouraged banks to make riskier loans.
Which of the following actions would cause an increase in the level of reserves in the banking system?
The FOMC instructs the NY trading desk to purchase government bonds on the open market.
Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run? In what way might society gain if the Fed implements an anti-recessionary policy instead of simply permitting long-run adjustments to take place?
The Fed can increase the money supply through an open market purchase of Treasury securities. All of the above.
Which of the following is a major reason why financial intermediaries, such as banks, exist?
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
Which of the following statements is true when considering the expenditures of the U.S. federal government?
The expenditures are used for all these purposes.
Which of the following statements is true when considering liquidity?
The most liquid assets typically earn no or little interest.
Which of the following statements is true when considering budget deficits and the national debt?
The national debt is a stock variable and a federal budget deficit is a flow variable.
What is the relationship between the gross public debt and the net public debt?
The net public debt only included government debt held by the public.
Which of the following statements is incorrect?
There are a total of 25 Federal Reserve district banks.
According to the Keynesian approach, an increase in the money supply increases real GDP by lowering interest rates, which increases investment.
True
All deposits in U.S. banks are insured by the Federal Deposit Insurance Corporation.
True
Entitlements are growing faster than any other part of the federal government budget.
True
Entitlements are the most important component of the federal budget.
True
Federal deposit insurance currently covers up to $250,000 per depositor per institution.
True
Individuals purchasing new bonds issued by a corporation is an example of direct finance for the corporation.
True
The net public debt has continually risen since the year 2000.
True
When the money supply increases, aggregate demand rises.
True
In the presence of a short-run recessionary gap, government deficit spending can influence both real GDP and employment. In the long run, higher government budget deficits resulting from increased government spending and/or tax cuts will do all of the following except
True increase equilibrium real GDP.
More than 50 percent of U.S. public debt is owned by foreign residents. If the rate of return on public investments exceeds the interest rate paid on the bonds issued to finance the investments,
True present and future generations will be economically better off.
The federal government has its best opportunity to lower its national debt when it has
a budget surplus.
A monetary policy action that could eliminate a recessionary gap in the short run is If Fed implements the short run monetary policy option instead of simply waiting for the long -run adjustments to take place, then it
a decrease in the required reserve ratio benefits the society as unemployment is reduced quickly.
In an open economy, if the federal government has a budget deficit, the trade balance is more likely to be
a deficit.
A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses
a moral hazard problem an adverse selection problem a moral hazard problem
From the end of WWII through 1983 the U.S. government had consistently experienced
a trade surplus.
According to the quantity theory of money and prices, a % change in the money supply, holding other variables constant, leads to
a % change in the price level.
In order to be successful, money in a fiduciary monetary system must have
acceptability and predictability of value.
When a temporarily illiquid bank which is otherwise in good financial condition borrows money from the Fed in an attempt to prevent a loss of confidence in the bank or in other banks, this is an example of the Fed
acting as the lender of last resort.
Consider the following items on a commercial bank's balance sheet An auto loan to an individual is Funds borrowed from a credit union in the federal funds market is A customer's savings deposit is The bank's required reserve is
an asset a liability a liability an asset
A monetary policy action that could eliminate an inflationary gap in the short run is If Fed implements the short run monetary policy option instead of simply waiting for the long-run adjustments to take place, then it
an open market sale of government securities benefits the society as the inflationary pressures are removed quickly.
Required reserves
are the minimum amount of legal reserves that a depository institution must have to back up its checkable deposits.
Open market operations
are the purchase and sale of existing U.S. government securities by the Federal Reserve.
Excess reserves
are zero if required reserves equal legal reserves. are negative if legal reserves are not sufficient to cover required reserves. are minimized by profit-maximizing banks since they generate no income. All of the above.
Consider the following items on a bank's balance sheet. Loans to a private company are Borrowings from a Federal Reserve district bank are Deposits with a Federal Reserve district bank are U.S. Treasury bills are Vault cash is Loans to other banks in the federal funds market are Transactions deposits are
assets liabilities assets assets an asset assets liabilities
Since 1970 the U.S. government's budget deficit as a percentage of real GDP has
averaged approximately 3%.
A $20 Federal Reserve note is counted in A $500 time deposit is counted in A $50 traveler's check is counted in A $25,000 money market deposit account is counted in
both M1and M2 M2 only both M1 and M2 M2 only
If a government spends more than it receives during a year, then during this year it experiences a ________, and if it spends less than it receives, it experiences a ________.
budget deficit, budget surplus
In each of the past few years, the federal government has regularly borrowed funds to pay for at least one-third of expenditures that tax revenues were insufficient to cover. More than 60 percent of all federal expenditures now go for entitlement spending.
by borrowing.
In the short run, increased government budget deficits
can influence real GDP, the price level, and employment
Ancient goldsmiths are credited with
creating paper notes that could purchase goods and services. developing deposit slips for gold and silver. the creation of the fraction reserve banking system. All of the above.
If the only debt that you have is with one or more credit cards, and you pay them off monthly, you run a monthly___, but you do not have any___
deficit, debt
One way to reduce federal budget___ is to increase taxes. Another way to decrease federal budget___ is to cut back on government spending, particularly on___, defined as benefits guaranteed under government programs such as Social Security and Medicare.
deficits deficits entitlements
To use money, people must hold money. Therefore, they have a
demand transactions
The effect of an increase in the money supply arises because people desire to spend more on real goods and services when they have excess money balances.
direct indirect a reduction lower negative more more fewer decrease an increase
Why have the Fed's remittances to the Treasury recently increased? During and after the financial crisis and recession of 20072009, the Fed __________.
engaged in very large open market purchases while paying little interest on reserve holdings and no interest on currency.
The___states that the expenditures by some people will equal income receipts by others, (money supply times velocity equals nominal GDP).
equation of exchange true spent received money supply price level
At present, the policy strategy of the Federal Open Market Committee (FOMC) focuses on aiming for a target value of the
federal funds open market operations Directive New York credit loans credit failures monitor credit
Suppose the dollar value of imports to the U.S. exceed the dollar value of exports from the US. This implies that If foreigners have an excess supply of dollars after trading goods and services they will likely
foreigners are holding an excess supply of dollars. buy more U.S. Treasury bonds.
The net public debt is equal to
gross government debt minus all government interagency borrowing.
The accumulation of borrowing by all federal government agencies is referred to as the When considering the gross public debt, one can argue that it is overstated because
gross public debt. the federal government owes itself money.
To implement a credit policy intended to expand liquidity of the banking system, the Fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action? The Fed should
increase increase
Explain the difference between direct and indirect finance. The difference is that
indirect finance is the process through which ultimate lenders channel funds to ultimate borrowers through financial intermediaries, while direct finance does not include financial intermediaries.
The demand for money
is a downward sloping function of the interest rate.
A credit card is not considered money because
it simply defers rather than completes transactions that ultimately involve the use of money. it is not a store of value. it is not a unit of accounting.
According to the equation of exchange, if velocity is constant and output is fixed at the full employment level, then any percentage increase in the money supply will
lead to an equal percentage increase in the price level.
When the Fed sells bonds, it must offer them at a
lower higher an inverse a decrease an increase a decrease
In an open economy, the net export effect
may offset an expansionary fiscal policy but enhance an expansionary monetary policy.
When sellers accept money as payment in market transactions, money is serving as a
medium of exchange.
Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The bank, as a financial intermediary, is facing a problem of
moral hazard.
To obtain the dollars required to purchase newly issued U.S. government bonds, foreign residents must sell
more exceed deficit a recessionary above privately government
Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments, then the Fed will engage in
open market sales, increasing the reserve requirement, and increasing the discount rate.
In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve banks, since 2008 the Fed has
paid banks an interest rate that is higher than the federal funds rate on their reserves.
If the U.S. federal government operates with a budget deficit it must borrow. In order to entice people to lend money to finance this deficit, the U.S. government must As the interest rate or yield on U.S. bonds increases, foreigners
pay a higher rate of interest on the bonds it sells. buy more U.S. bonds and fewer U.S. goods and services.
A currency will cease to function as money if
people think that they will not be able to use it to exchange for goods and services later.
Many economists believe that the growth of the money supply is
positively related to the growth of real GDP.
Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open market, increases the discount rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will
raise the interest rate, increase the inflows of international capital, increase the value of the dollar, decrease exports, and as a consequence real GDP will decline even further.
A contractionary monetary policy lowers equilibrium real GDP in the short run, by increasing the interest rate. In an open economy, the net export effect
reinforces the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, lowers U.S. exports and causes the real GDP to fall.
On a bank's balance sheet, ________ are assets and ________ are liabilities.
reserves and loans transactions deposits
Since the 1940s, more often than not, the U.S. federal government has
run a budget deficit.
Since 2001, more often than not, the U.S. federal government has Which of the following is a reason for this resurgence in federal government budget deficits?
run a budget deficit. Tax revenue not keeping pace with growth in spending.
The M1 measurement of the money supply includes all of the following components except The M2 measurement of the money supply includes all of M1 plus several other highly liquid assets. Which of the following is not one of those assets which is included in M2?
savings deposits. credit card balances
If the federal government has a budget deficit it can finance its spending by... Which of the following statements is true regarding the national debt and federal government deficits?
selling Treasury bonds. There is a positive relationship between the national debt and a federal government budget deficit.
The federal budget deficit is the year-to-year
short fall in tax revenues relative to government spending. The federal government debt is the accumulation of all past deficits.
When money is used as a means of settling debts maturing in the future, it is serving as a
standard of deferred payment.
When money is set aside to be used for future purchases, it is serving as a
store of value.
To eliminate the deficit (and halt the growth of the net public debt), a politician suggests that "we should tax the rich." The politician makes a simple arithmetic calculation in which he applies the higher tax rate to the total income reported by "the rich" in a previous year. He says that this is how much the government could receive from increasing taxes on "the rich." This argument has been proved wrong because of all the following statements, except
that taxing "the rich," since they have higher earnings, is the answer to solving the problem of a growing deficit.
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset.
The federal deficit-to-GDP percentage is calculated by dividing BLANK by BLANK and multiplying by 100. Since the dollar magnitudes of federal government deficits were very large immediately after 2008, the BLANK was very large. During an economic contraction, real GDP falls below the long-run level consistent with LRAS curve. Consequently, the BLANK , which also BLANK the percentage somewhat
the budget deficit GDP numerator denominator declines increases
A trade deficit implies that Generally a larger US trade deficit is accompanied by a
the dollar value of imports exceeds the dollar value of exports. a larger US federal government budget deficit.
Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by
the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.
In a fiduciary monetary system, the value of money is based on
the public's faith that the money can be exchanged for goods and services.
The Fed began paying banks interest on excess reserves in late 2008. What did it hope to accomplish by establishing this policy strategy? The Fed's goal was
to encourage banks to hold all of the reserves that the Fed had created via its credit policy and quantitative easing.
Holding money as a medium of exchange to make payments is known as
transactions demand.
The largest component of the M1 money supply is The largest component of M2 is
transactions deposits. savings and money market deposits at depository institutions.
Financial intermediaries
transfer funds from savers to investors.
When money is used as a standard of value that allows people to compare the relative worth of various goods and services, it is serving as a
unit of accounting.
The Federal Deposit Insurance Corporation (FDIC)
was created in 1933 to prevent bank runs that had been plaguing the economy during the Great Depression. creates moral hazard problems in that big banks take on more risk knowing the FDIC will consider them "too big to fail." assures depositors that their deposits will be fully recoverable (up to a maximum of $250,000 per depositor per institution) regardless of how serious a bank's financial situation may be. All of the above.
If federal budget deficits increase, then a part of that deficit
will be financed by foreign dollar holders, who will buy fewer U.S. exports, thus increasing the U.S. trade deficit.
If the Fed increases the discount rate, relative to the federal funds rate, then this
would increase the cost of funds for institutions borrowing from the Fed
True or false. When domestic taxpayers make interest payments to foreign owners of domestic government bonds, it necessarily creates a burden on future generations.
False, because if the interest rate paid on the debt is less than the rate of return earned on projects financed by that debt, future generations will be better off.
If the Fed engages in an open market sale with a bond dealer, the bond dealer's bank's transactions deposits liabilities will ________ and the money supply will ________.
decrease, decrease
When the Fed makes an open market purchase, the supply curve for bonds in the private market shifts to the ________ and the price of bonds ________.
left, increases