Exam 4

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for

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

In the short run, an unanticipated shift to a more restrictive monetary policy is most likely to result in

a reduction in the growth rate of real GDP.

In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated increase in the money supply will be

lower real interest rates and an increase in aggregate demand.

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

several months will typically pass before the shift in policy exerts much impact on output and employment.

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

It would buy U.S. securities.

Which of the following assets can a commercial bank count as reserves?

Its vault cash and deposits with the Fed

In the long run, the primary effect of rapid monetary growth is

inflation.

When the Fed buys bonds and injects additional reserves into the banking system, this action will

place downward pressure on short-term interest rates.

Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

$500 million decrease.

A decrease in the money supply will have which of the following effects?

It will raise the interest rate, causing a decrease in investment and a decrease in GDP.

A shift to a more expansionary monetary policy will

Stimulate output and employment, but only after a time lag that is generally long and variable.

Which of the following will cause the U.S. money supply to expand?

A commercial bank uses excess reserves to extend a loan to a customer.

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

An increase in real output.

If the Fed lends to member banks, what happens to reserves and the money supply?

Both increase.

When the Federal Reserve System wants to increase the money supply, what does it typically do?

It purchases U.S. government securities.

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

Sell some of its holdings of government bonds.

Which of the following indicates the primary mechanism by which the money supply expands?

The Fed purchases additional bonds, which increases the reserves available to the banking system.

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

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

Which of the following is a primary action of modern banks?

They hold only a fraction of their assets in the form of required reserves relative to their deposits.

If the Federal Reserve wanted to expand the money supply in order to increase output, it should

buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise.

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably

buying government securities from the public.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

If the Fed unexpectedly decreases the money supply, real GDP

decreases because the resulting increase in the interest rate leads to a decrease in investment.

If you deposit $100 of cash into a checking account at a bank, this action by itself

does not change the money supply.