macro review test 2
during 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.
false
To affect economic variables such as real GDP or the price level, the monetary policy target the Federal Reserve has generally focused on is the
federal fund rate
By raising the discount rate, the Fed leads banks to make _____ loans to households and firms, which will ______ checking account deposits and the money supply
fewer; decrease
The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:
high unemployment
The M1 measure of money supply includes which of the following components?
holdings of traveler's checks currency in circulation checking account deposit in banks
There is a strong link between changes in the money supply and inflation
in the long run
Saving account balances, small-denomination time deposits, and non-institutional money market fund shares are
included only in M2
With an expansionary monetary policy, investment, consumption, and net exports all ________, which results in the aggregate demand curve shifting to the ________, increasing real GDP and the price level.
increase; right
What is fiat money?
money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
As interest rates decline, stocks become a __________ attractive investment relative to bonds, which causes the demand for stocks and their prices to __________.
more; rise
Credit cards are
not part of the money supply
The Fed conducts monetary policy primarily through:
open market operations
When we say that money serves as a unit of account, we mean that:
prices are quoted in terms of money
Money serves as a unit of account when
prices of goods and services are stated in terms of money
The Federal Reserve System is
the central bank of the United States
Which of the following events was an important cause of the 2007-2009 recession?
the collapse of a housing bubble
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. the Fed cannot target both the money supply and the interest rate simultaneously
Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial crisis?
The Fed expanded the eligibility for discount loans to firms other than commercial banks. The Fed purchased large amounts of mortgage-backed securities. The Fed provided loans directly to corporations by purchasing commercial paper.
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
Which of the following statements is true about the Fed's monetary policy targets?
The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.
Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Federal Open Market Committee
If the Fed decides to carry out an expansionary monetary policy because it believes aggregate demand will not increase enough to keep the economy at potential GDP, the inflation rate will most likely be lower than it would have been without the policy.
false
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________.
expands; contracts
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy
Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:
each additional dollar of reserves creates $5 of deposits
For the Fed to succeed in reducing the severity of business cycles, it must act precisely when a recession or an acceleration of inflation can be seen in the economic data.
fasle
The interest rate that banks charge each other for overnight loans is called the
federal funds rate
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
households, firms, and banks
Which of these predictions can be made using the growth rates associated with the quantity equation?
if the money supply grows at a faster rate than real GDP, there will be inflation
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
open market purchase of government securities
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money
Which of these facts is true about the creation of the Federal Reserve System (the Fed)?
the Fed was created in 1913
Who is the chairperson of the Federal Open Market Committee (FOMC)?
the chairperson of the board of governors
a double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
Two government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
true
Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:
$400
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves
Velocity is defined as
(P × Y)/M.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
1.8 billion
How many Federal Reserve Districts are there?
12
There are ______ members of the Board of Governors, who the President of the United States appoints to _______. One of the Board members is appointed Chairman for _________
7; 14-year nonrenewable terms; a 4-year renewable term
The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD2 to AD Subscript 2, policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:
Expansion monetary policy increases does not change increases decreases
________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
Hyperinflation
The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.
Monetary policy
In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?
Increase interest rates Open market sale of government securities Contractionary policy
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate= growth rate of the money supply- growth rate of real output
How do investment banks differ from commercial banks?
Investment banks do not take deposits investment bank generally do not lend to households
Which of the following is true with respect to hyperinflation?
It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. It can be hundreds-even thousands-of percentage points per year. In the presence of hyperinflation, firms and households avoid holding money.
The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:
M1
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100
If the FOMC orders the trading desk to sell Treasury securities:
The money supply curve will shift to the left and the equilibrium interests rates will rise
The figure to the right illustrates the economy using the dynamic aggregate demand and aggregate supply model if actual real GDP in 2016 occurs at point B and potential GDP occurs at LRAS06 we would expect the Federal Reserve Bank to pursue _________ monetary policy If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP Potential real GDP Price level Unemployment
a contractionary decreases does not change decreases increases
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be
a higher target federal funds rate
Which of the following is NOT a function of money?
acceptability
The decline in housing prices that began in 2006 led to rising defaults among which borrowers?
alt-A and subprime borrowers borrowers with adjustable-rate mortgages borrowers who had made only small down payments
The money multiplier for the United States is
between 2 and 3
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to
buy U.S. Treasury securities
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public
An initial decrease in a bank's reserves will decrease checkable deposits
by an amount greater than the decrease in reserves
In the figure to the right, when the money supply increased from MS1 to MS2, the equilibrium interest rate fell from 4% to 3% why?
increased demand for Treasury securities drives down their interest rate initially, firms hold more money than they want relative to other financial assets increased demand for Treasury securities drives up their prices
When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced level, it is using
inflation targeting
If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then
inflation will be higher than if the Fed had not acted
A countercyclical policy is one that
is used to attempt to stabilize the economy
The Taylor rule for federal funds rate targeting does which of the following?
it links the Fed''s target for the federal funds rate to economic variables
If the economy moves into recession, monetarists argue that the Fed should
keep the money supply growing at a constant rate
On the balance sheet of a bank:
loans are the most important asset
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low; high
A bank panic occurs when
many banks experience runs at the same time
The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called the:
quantity theory of money
The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed is _______
required reserves
The process of _________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets
securitization
Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates.
sell; decreasing; increasing
When the Fed conducts monetary policy, the most relevant interest rate is the
short-term nominal interest rate
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
the federal funds rate
Which of the following conditions make a good suitable for use as a medium of exchange
the good should be of standardized quality, so that any two units are identical the goods should be durable, valuable relative to its weight and divisible the good must be acceptable to (that is, useable by) most buyers and sellers
The simple deposit multiplier equals
the inverse, or reciprocal of the required reserve ratio, the ratio of the amount of deposits created by banks to the amount of new reserves, & the formula used to calculate the total increase in checking account deposits from an increase in bank reserves.
If the price level decreases,
the money demand curve shifts to the left.
If real GDP increases,
the money demand curve shifts to the right.
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
When many depositors decide simultaneously to withdraw their money from a bank, there is __________.
a bank run
In the definition of the money supply, where do credit cars belong?
credit cards are not included in the definition of the money supply
A higher required reserve ratio _________ the value of the simple deposit multiplier.
decreases
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier
decreases
Which of the following is not a factor that helped lead to the financial crisis of 2007-2009
deposit insurance for commercial banks
Which of the following is the largest liability of a typical bank?
deposits
