Exam 4

Which of the following would cause the money supply in the United States to decrease? An increase in reserve requirements. A decrease in the discount rate. A purchase of bonds by the Federal Reserve. An increase in the world supply of gold.

An increase in reserve requirements

Which of the following lists two things that both increase the money supply? Make open market purchases and raise the reserve requirement ratio. Make open market purchases and lower the reserve requirement ratio. Make open market sales and raise the reserve requirement ratio. Make open market sales and lower the reserve requirement ratio.

Make open market purchases and lower the reserve requirement ratio.

Which of the following provides the best explanation of why money is valuable? Money is valuable because it is declared legal tender by the government issuing it. Money is valuable because it is scarce relative to the demand for the services it provides. Money is valuable because it is backed by precious metals, primarily gold and silver. Money is valuable because it has intrinsic value, independent of its use as a means of exchange.

Money is valuable because it is scarce relative to the demand for the services it provides.

What effect does restrictive monetary policy have on short-term real interest rates? Restrictive monetary policy tends to push short-term interest rates upward. Restrictive monetary policy tends to push short-term interest rates downward. The effect of restrictive monetary policy on short-term interest rates is unpredictable. Restrictive monetary policy has no effect on short-term interest rates.

Restrictive monetary policy tends to push short-term interest rates upward.

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply? The reserve requirements mandated by the Fed. The number of commercial bank charters issued by the Fed. The dollar value of the bonds issued by the U.S. Treasury. The federal funds interest rate that commercial banks pay (and receive) for short-term loanable funds.

The reserve requirements mandated by the Fed.

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank? The money supply increases, and the reserves of your bank decline. Both money supply and the reserves of your bank increase. There is no change in the money supply, and the reserves of your bank decline. The money supply decreases, and the reserves of your bank increase.

There is no change in the money supply, and the reserves of your bank decline.

Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank? There is no change in the supply of money; your bank's excess reserves are reduced by $800. There is no change in the supply of money; your bank's excess reserves are reduced by $200. The money supply increases by $1,000, and the excess reserves of your bank are reduced by $800. The money supply increases by $1,000, and the excess reserves of your bank are reduced by $200.

There is no change in the supply of money; your bank's excess reserves are reduced by $800.

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy? a higher price level a higher level of real output both a higher price level and a higher level of real output a lower price level a lower level of real output

a higher price level

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for a sharp contraction in the money supply, which is likely to increase the length and severity of the recession. a rapid increase in the money supply, potentially leading to inflation. a gradual increase in the money supply, following the trend of the previous decade. a reduction in the ability of banks to extend additional loans.

a rapid increase in the money supply, potentially leading to inflation

An increase in the required reserve ratio would be a restrictive policy because it lowers the amount of total reserves in the banking system. a restrictive policy because it lowers the amount of excess reserves in the banking system. an expansionary policy because it raises the amount of total reserves in the banking system. an expansionary policy because it raises the amount of excess reserves in the banking system. an expansionary policy because it raises the amount of required reserves in the banking system.

a restrictive policy because it lowers the amount of excess reserves in the banking system.

Which of the following contributed to the financial crisis of 2008? The housing price boom (2002-2005), followed by a housing price bust (2007-2008). A sharp reduction in stock prices in 2008. A sharp increase in the price of crude oil from January 2007 to mid-year 2008. All of the above.

all of the above

Other things constant, if the Fed decreased the discount rate, the earnings of the Fed would increase. the incentive of commercial banks to borrow from the Fed would be reduced. the prime interest rate would automatically decline. commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.

commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.

Which of the following would cause the money supply in the United States to expand? A decrease in reserve requirements. An increase in the discount rate. The sale of bonds by a Federal Reserve bank. An increase in the world supply of gold.

decrease in reserve requirements

The short run sequence of events following an unanticipated shift to a more restrictive monetary policy would be lower interest rates, decrease in aggregate demand, and a reduction in output. lower interest rates, increase in aggregate demand, and an expansion in output. Correct! higher interest rates, decrease in aggregate demand, and a reduction in output. higher interest rates, increase in aggregate demand, and an expansion in output.

higher interest rates, decrease in aggregate demand, and a reduction in output.

When an expansionary monetary policy leads to an acceleration in the rate of inflation, it will also result in lower nominal interest rates. higher nominal interest rates. an appreciation of the dollar in the foreign exchange market. lower money wages.

higher nominal interest rates

When a customer deposits $100 into a checking account, the effect is to increase the bank's liabilities. decrease the bank's liabilities. increase the bank's assets. decrease the bank's assets. increase both the bank's liabilities and its assets.

increase both the bank's liabilities and its assets.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could increase the interest rate paid on excess reserves encouraging banks to extend more loans. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

Demographic changes that increase the number of people in the lending phase (for example, age 50 to 75) and reduce the number in the borrowing phase (under age 50), will increase the demand for loanable funds relative to supply and lead to lower interest rates. reduce the demand for loanable funds relative to supply and lead to higher interest rates. increase the supply of loanable funds relative to demand and lead to lower interest rates. decrease the supply of loanable funds relative to demand and lead to lower interest rates.

increase the supply of loanable funds relative to demand and lead to lower interest rates.

f the Federal Reserve wants to increase the availability of money and credit, it can lower the discount rate. raise the reserve requirements. sell government bonds to the public. encourage banks to increase their prime lending rate.

lower discount rate

A decrease in the money supply lowers the interest rate, causing a decrease in investment and a decrease in GDP. lowers the interest rate, causing a decrease in investment and an increase in GDP. raises the interest rate, causing an increase in investment and a decrease in GDP. raises the interest rate, causing an increase in investment and an increase in GDP. raises the interest rate, causing a decrease in investment and a decrease in GDP.

raises the interest rate, causing a decrease in investment and a decrease in GDP.

Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase prices and unemployment in the long run. real output in the short run but not in the long run. real output in the long run but not in the short run. real output in both the long run and the short run.

real output in the short run but not in the long run.

The money multiplier will be larger if banks hold on to excess reserves but smaller if private citizens hold on to cash. smaller if banks hold on to excess reserves but larger if private citizens hold on to cash. smaller if either banks hold on to excess reserves or private citizens hold on to cash. larger if either banks hold on to excess reserves or private citizens hold on to cash. constant whether or not banks and citizens try to alter their holdings of excess reserves and cash.

smaller if either banks hold on to excess reserves or private citizens hold on to cash.

Shifts in monetary policy will stimulate output and employment almost immediately, and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. stimulate output and employment almost immediately, and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.

stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stabilit

The primary source of earnings of commercial banks is income derived from the checking account services provided to customers. the use of deposits to extend loans and undertake investments. vault cash and deposits held with the Fed. services provided to the U.S. Treasury.

the use of deposits to extend loans and undertake investments.

Compared to a barter economy, using money increases efficiency by reducing transaction costs. the need to exchange goods. the need to specialize. inflation.

transaction cost