Econ Test 3
Assume that the banks do not hold any excess reserves, and the reserve ratio is 20%. If Sarah deposits $5000 in cash in her checking account, the money supply can potentially increase by
$20,000.
The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.
$200
If the required reserve ratio is 25%, and the money supply increases by $100,000 after a one time open market transaction. Keeping all other things constant, the minimum possible initial reserve injection by Federal Reserve was:
$25,000.
Scenario: First National Bank First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, $55 million in loans and $5 million in government bonds. Consider the information for First National Bank. Given the bank's minimum reserve ratio of 20%, how much can the bank issue in loans?
$4 million
First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, $55 million in loans and $5 million in government bonds. Consider the information for First National Bank. The bank has liabilities of:
$80 million.
Suppose your grandma sends you $100 cash for your birthday and you deposit $100 into your checking account at the local bank and the local bank puts all of your $100 deposits in their reserves at that day. Also assume that the reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____. If the bank, later on, lends all excess reserves, the money supply could potentially grow by as much as _____.
$90; $900
Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is:
0.33.
If a checking account has an interest rate of 1% and a government Treasury bill has an interest rate of 2%, the opportunity cost of holding the checking account as money is:
1%.
According to the accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.
6% to 8%; rise
Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%, then which of the following will likely follow?
Excess reserves will decrease by $20,000
Suppose an economy has $200,000 of demand deposits with a 20% required reserve ratio. If the monetary authorities lower the required reserve ratio to 10%, then which of the following will likely follow?
Excess reserves will increase by $20,000.
A budget deficit necessarily indicates that fiscal policy is expansionary.
False
To increase the money supply, the central bank could make open-market purchases.
TRUE
If the economy is operating well below potential output, which of the following is likely?
The cyclically-adjusted budget balance deficit is smaller than the actual budget balance.
Suppose the Federal Reserve were to engage in open-market operations by buying $100 million worth of U.S. Treasury bills from the banking sector. Which of the following would be a potential long run result of such an action in normal conditions with regular banking practices?
The money supply would increase by more than $100 million.
The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of loanable funds of $150? (Hint: try to identify the shock as demand or supply shock)
There has been an increase in capital inflows from other nations.
Most economists oppose an annually balanced budget because it would undermine automatic stabilizers.
True
Which of the following assets is an example of money?
a $20 bill under your pillow.
Which of the following does NOT cause the money demand curve to shift?
a change in the interest rate
According to the theory of liquidity preferences, a decrease in the demand for money (a left-ward shift on money demand curve) would result from:
a decrease in the aggregate price level.
Which of the following actions would allow banks to lend out more money?
a decrease in the discount rate
Which of the following actions would allow commercial banks to lend out more money?
a decrease in the discount rate
If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change in the money supply is:
a decrease of $50 million.
If the Fed conducts a $10 million worth of open-market sale and the reserve requirement is 20%, the maximum possible change in the money supply is:
a decrease of $50 million.
A decrease in the supply of money, with no change in demand for money curve, will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.
a decrease; an increase
If Congress places a $5 tax on each credit card transaction, then according to the theory of liquidity preferences, there will likely be:
a shift to the right of the money demand curve.
The cyclically-adjusted budget balance is:
an estimate of what the budget balance would be if real GDP was exactly equal to potential output.
Social Security and Medicare
are examples of implicit liabilities.
If the Fed conducts an open-market purchase:
bank reserves will initially increase and the money supply will potentially increase.
The discount rate is the interest rate the Fed charges on loans to:
banks.
Open-market operations occur when the Fed:
buys or sells existing U.S. Treasury bills.
If the economy is experiencing an inflationary gap, to close the output gap, the Fed should conduct ______ monetary policy to ______ aggregate demand.
contractionary; decrease
In the T-account of the Fed, the main liabilities are:
currency and bank reserves.
The Fed's main liabilities are:
currency and bank reserves.
Which of the following is a component of BOTH the monetary base and the money supply?
currency in circulation
The main objective of contractionary monetary policy is to:
decrease aggregate demand.
If the required reserve ratio is 10%, and a depositor withdraws $500 from her checkable deposit, the money supply will ______ if the banking system does NOT hold any excess reserves and the people does not change their desired level of currency holdings (In other words, the basic two assumptions we mentioned in class hold)
decrease by $4,500 at the maximum.
According to the theory of liquidity preferences, the introduction of ATM machines:
decreased the demand for cash.
The difference between budget deficit and government debt is that:
deficit is the amount by which government spending exceeds tax revenues whereas debt is the amount the government owes.
A relatively low saving rate affects productivity growth by:
depriving investment spending of the funds needed to increase the physical capital.
The money demand curve is _________ because a lower interest rate ___________.
downward-slopping; decreases the opportunity cost of holding money
If the economy is suffering from a recessionary caused by a negative demand shock, to stabilize output, the Fed should conduct _______ monetary policy by _________ the money supply.
expansionary; increasing
States that are required by their constitutions to have annually balanced budgets are likely to:
experience more severe business cycles than those not required to balance their budgets.
If the government in a closed economy is running a budget deficit of $300 billion and finances the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the equilibrium interest rate will:
fall to 12%.
When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.
falls; falls; rises
If legislation were introduced to require the budget to be balanced at all times:
fiscal policy could not operate as an automatic stabilizer of the business cycle.
If a bank has deposits of $100,000, also has $10,000 in their vault and $15,000 on deposit on their account at the Federal Reserve Bank of NY, and the required reserve ratio is 0.20, then the bank:
has excess reserves of $5,000.
If a bank has deposits of $100,000, cash on hand of $10,000 and $15,000 on deposit at the Federal Reserve, and the required reserve ratio is 0.20, then the bank:
has excess reserves of $5,000.
If the average retirement age decreases:
implicit liabilities will increase.
Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:
implicit liabilities.
All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):
important economic forecast predicting solid economic growth.
If the required reserve ratio is 25% and a customer deposits $300 into her checkable deposit, the money supply will ______ if the banking system does NOT hold any excess reserves and the people does not change their desired level of currency holdings (In other words, the basic two assumptions we mentioned in class hold).
increase by $900 at the maximum
If the Federal Reserve wants to discourage commercial banks from borrowing directly from the Fed and thus indirectly decrease the monetary base, the Fed would likely:
increase the discount rate.
Suppose the Fed buys bonds. We can expect this transaction to: (Hint: anytime the demand for money is not equal to money supply, people will whether sell or buy bonds (non-monetary assets), hence bond prices will be affected accordingly. Another approach is to look at what would happen to bond prices after the Fed starts buying bonds.)
increase the money supply, raise bond prices, and lower interest rates.
Suppose the Fed buys $50 million in Treasury bills from commercial banks. If the reserve ratio is 10%, the monetary supply might eventually ____ by _____.
increase; $500 million
If in an open economy, the government's budget deficit increases at the same time as the trade deficit grows, this will lead to a(n) _________ in the demand and a(n) ________ in the supply of loanable funds in domestic markets.
increase; increase
To _______ the money supply, the Fed could ________.
increase; lower the reserve requirements
If the actual federal funds rate is greater than the target federal funds rate, the Fed will ________ the money supply by making an open-market ________ of Treasury bills, which will ______ the money supply and push the money supply curve to the _____, thereby ______ the interest rate in the money market.
increase; purchase; increase; right; lowering
Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash into her checking account and her bank lends $600 of it to Freda and puts the remaining $400 in their bank reserves. As a result of this, the money supply
increases by $600.
According to the loanable funds model, expansionary monetary policy:
increases the supply of loanable funds.
Fed policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government bonds.
increases; demand for
Among the factors that could cause money demand to shift are all of the following EXCEPT:
interest rates.
The cyclically-adjusted budget deficit fluctuates ______ the actual budget deficit.
less than
If the Federal Reserve wants to increase the money supply, it will:
lower the reserve requirement.
Banks create money when they:
make loans.
If banks were required to keep 100% of deposits in reserves, they could:
make no loans.
Expansionary fiscal policies:
make the budget surplus smaller.
A bank run occurs when:
many bank depositors are trying to withdraw their funds from the bank.
All of the following are responsibilities of the Fed EXCEPT:
mint bills and coins.
If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, and the required reserve ratio is 10%, then, at the maximum, the money supply will:
potentially increase by $2,500 million.
Crowding out means:
private investment decreases when the government borrows.
When the economy is producing at a short-run level of aggregate output that is less than potential output, it is most likely that the Fed will engage in open-market
purchase of T-bills.
Suppose the Fed has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate in the federal funds market, then the Fed should:
purchase treasury bills in the open market, increase money supply, shift the supply of money curve to the right, and lower the interest rate in the money market.
The Federal Reserve tends to _____ interest rates when the output gap is positive and rising, and ____ interest rates when the output gap is falling and negative.
raise; lower
A sale of bonds by the Fed:
raises interest rates and reduces the money supply.
Suppose the Fed sells bonds. We can expect this transaction to:
reduce the money supply, reduce bond prices, and increase interest rates.
The three main monetary policy tools are:
reserve requirements, the discount rate, and open-market purchases
If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:
rise to 18%.
The money supply curve shifts to the left. The most likely cause for this shift is the FOMC's open-market:
sale of
If the target rate of interest is higher than the current equilibrium interest rate in the money market, the Fed will:
sell treasury bills in the open market, decrease the supply of money, and increase the interest rate back to the target rate
The Federal Reserve's Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ the money _____ curve in the money market.
sell; decrease; supply
Reserve requirements:
set the minimum amount of reserves a bank must hold.
All other things unchanged, a general decrease in the amount of government borrowing will typically:
shift the loanable funds demand curve to the left.
According to the loanable funds model, contractionary monetary policy:
shifts the supply curve for loanable funds to the left.
Bank reserves are:
the currency held at bank vaults plus bank deposits at the Federal Reserve.
If there is an increase in the government budget deficit:
the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.
If there is an increase in the government budget deficit:
the demand for loanable funds will increase, interest rates will increase, and the quantity of loanable funds will increase.
U.S. banks did not offer interest on checking accounts, until the beginning of the 1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds, as a result:
the demand for money rose and shifted the money demand curve to the right.
Suppose the economy experiences price inflation such that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:
the demand for money to shift outward (to the right)
The Fed controls:
the discount rate, the monetary base, and the required reserve ratio.
The Fisher Effect states that:
the expected real rate of interest is unaffected by the change in expected inflation.
All of the following are examples of bank regulations designed to prevent bank runs EXCEPT:
the federal funds rate.
All of the following are examples of bank regulations or practices designed to prevent bank runs EXCEPT:
the federal funds rate.
A firm does NOT want to borrow money for a project when:
the interest rate is greater than the rate of return on the project.
According to the theory of liquidity preferences, the demand for money is negatively related to _______ and positively related to _______.
the interest rate; real GDP
Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:
the money demand curve to shift inward.
If the Fed increases the discount rate:
the money supply is likely to decrease.
The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.
upward; savers; decreasing
If at the current interest rate the demand for money is $100 billion and the supply of money is $200 billion, then, according to the theory of liquidity preferences, in the money market, the current interest rate:
will gradually fall until the money market reaches to the equilibrium.
