MacroEconomics 12

When the reserve ratio is 20%, the Fed buys $500,000 worth of government bonds in the open market. What is the maximum amount that the money supply could increase? $500,000 $100,000 $250,000 $25,000 $2.5 million

$2.5 million

*When the central bank raises the reserve ratio from 20% to 25%, the multiplier goes from _ to _. 120% to 125% 5 to 4 5 to 2 .2 to .25 4 to 5

5 to 4

What is the main reason that the Federal Reserve requires commercial banks to maintain reserves with them? - It prevents banks from holding too much cash. - It gives the Federal Reserve more control over the money supply and interest rates. - It gives the Federal Reserve the ability to increase taxes when necessary. - It prevent banks from making too much profit. - It allows banks to make speculative loans.

It gives the Federal Reserve more control over the money supply and interest rates.h.

Which of the following is false about monetary tools of the Federal Reserve? - It includes buying treasury securities. - It includes selling treasury securities. - It includes changing the reserve ratio. - It includes changing the discount rate. - It includes changing tariffs on imported goods.

It includes changing tariffs on imported goods.

Which of the following is NOT an accurate description of The Federal Reserve? - It is the central bank. - It is the government's bank. - It is the lender of last resort. - It is the banker's bank. - It is the US mint.

It is the US mint.

The purchases and sales of government securities in the open market by the Federal Reserve are referred to as - Budget Deficit - Open Market Operations - Fiscal Policy - The Federal Funds Rate - The Discount Rate

Open Market Operations

What is the interest rate the Federal Reserve charges on loans it makes to member banks called? - The reserve ratio. - The federal funds rate. - The discount rate. - The money market rate. - The prime rate.

The discount rate. .

What is the prime rate? - The rate banks charge on home loans. - The rate the Federal Reserve charges to banks who borrow. - The rate the Federal Reserve charges to the US government. - The rate that banks charge to other banks who borrow. - The rate banks charge to their best customers.

The rate banks charge to their best customers.

What is the federal funds rate? - It is the same as the discount rate. - The same as the prime interest rate. - The rate the Fed charges the government, and the rate - Feds pay when they borrow from the banks. - The rate targeted by the Fed, the rate banks pay when they borrow from the Fed, and the basis for all other rates. - The rate that is purely theoretical.

The rate targeted by the Fed, the rate banks pay when they borrow from the Fed, and the basis for all other rates.

What happens if the Federal Reserve sells a large amount of government securities in the open market? - The total amount of loans in the banking system will increase. - The money supply will increase. - Interest rates will remain unchanged. - Interest rates will decrease. - The total amount of loans in the banking system will decrease.

The total amount of loans in the banking system will decrease.

Economists illustrate a decrease in the money supply as - a rightward shift of the upward sloping money supply curve - a rightward shift of the vertical money supply curve - a leftward shift of the upward sloping money supply curve - a leftward shift of the vertical money supply curve - a leftward shift of the production possibilities curve

a leftward shift of the vertical money supply curve

Which of the following correctly defines hyperinflation? - a temporary increase in prices that is double the average over the last decade - a rise in total economic output with lower tax rates - a rise in prices of more than 5000% during the year - a stagnant economy accompanied with rising prices - a rise in prices exceeding 50% per month

a rise in prices exceeding 50% per month

According to economist Milton Friedman, inflation is - the result of lower tax rates. - the result of high tax rates. - higher consumption of products. - always and everywhere a monetary phenomenon. - lower consumption.

always and everywhere a monetary phenomenon.

When the Fed lowers the discount rate, what will happen? - banks borrow less from the Fed, so reserves increase - banks borrow more from the Fed, so reserves decrease - banks borrow more, but reserves do not change - banks borrow less from the Fed, so reserves decrease - banks borrow more from the Fed, so reserves increase

banks borrow more from the Fed, so reserves increase

The Fed is referred to as 'the lender of last resort' because - this is the first place that banks choose to go when they need to borrow money - banks can always find other banks to loan money to them - banks can always borrow directly from the Fed when other banks will not lend to them - individuals and businesses can always borrow from the Fed in a crisis - the Fed owns a vacation resort where its key leaders go to relax each year

banks can always borrow directly from the Fed when other banks will not lend to them

The Federal Reserve achieves its monetary goals by: - controlling the long-run aggregate supply curve - controlling prices - controlling the process of printing the paper currency - controlling the money supply and interest rates - controlling the demand for money

controlling the money supply and interest rates

An increase in the money supply will likely - increase the interest rate, increase investment spending, and increase aggregate demand - decrease the interest rate, increase investment spending, and increase aggregate demand - increase the interest rate, decrease investment spending and decrease aggregate demand - increase the interest rate, increase investment spending and decrease aggregate demand - decrease the interest rate, decrease investment spending and decrease aggregate demand

decrease the interest rate, increase investment spending, and increase aggregate demand

* When the reserve requirement is 20% and banks hold no excess reserves, an open market sale of $500,000 of government securities by the Fed will - decrease the money supply by up to $100,000. - increase the money supply by up to $900,000. - decrease the money supply by up to $2.5 million. - increase the money supply by up to $2.5 million. - increase the money supply by up to $100,000.

decrease the money supply by up to $2.5 million

*If the Federal Reserve lowers reserve requirements, nominal GDP will most likely _. - stay the same - decrease - not enough information to answer this question - increase - fall at first, then rise

increase

Assume that the Federal Reserve increases the monetary base by $1 billion when the reserve requirement is 10 percent. As a result, the money supply will: - increase by $100,000. - increase by $10 billion. - increase by $1 billion. - decrease by $100,000. - decrease by $10 billion.

increase by $10 billion.

* The purchase of government bonds from the public in the open market by the central bank will - increase the discount rate. - decrease the money supply. - increase interest rates. - increase the money supply. - decrease the currency in circulation.

increase the money supply.

If the Federal Reserve suddenly decreases the growth rate of the money supply from 6 percent to 4 percent per year, interest rates will , aggregate demand will , and real gross domestic product (GDP) will _ in the short-run. - decrease; increase; increase - decrease; increase;decrease - decrease; decrease; decrease - increase; increase; increase - increase; decrease; decrease

increase; decrease; decrease

In a fractional reserve banking system, a decrease in reserve requirements - decreases the money multiplier and the money supply. - decreases the money multiplier, which increases the money supply. - decreases the money multiplier and therefore the money supply. - increases the money multiplier but decreases the money supply. -increases the money multiplier and therefore the money supply.

increases the money multiplier and therefore the money supply.

* Hyperinflation is usually associated with - lower real GDP - currency appreciation - investment in human capital - rapid growth in the money supply - higher productivity of labor

rapid growth in the money supply

The Fed's monetary policy will have the greatest effect on Real GDP when - interest rates are high and taxes are low - reserve requirements are high and prices are constant - the savings rate is negative - interest rates are low and the interest rate has a large effect on investment spending - government spending is at a minimum and when aggregate demand is low

interest rates are low and the interest rate has a large effect on investment spending

Which of the following statements is not true regarding the discount rate? - it is the rate charged on loans extended by the Fed - as a monetary policy tool, it is not as powerful as open market operations - it is one of the three main monetary policy tools - the Federal Reserve can choose to raise it or lower it - it is the rate that banks charge to other banks when they need more reserves

it is the rate that banks charge to other banks when they need more reserves

Which of the following is NOT true regarding the Federal Reserve? - It supervises member banks. - It controls the money supply. - It is called the lender of last resort. - It issues debit cards. - It provides check-clearing services

it issues debit cards

If a nation tried to pay off its national debt by printing more money, the result would be - much lower real GDP - deflation - lower inflation - lower production possibilities - low-value currency

low-value currency

An increase in the money supply leads to greater economic output because - higher interest rates encourage additional borrowing and investment, leading to higher aggregate demand - higher tax rates, which create new jobs - price controls protect domestic workers - lower interest rates encourage additional borrowing and investment, leading to higher aggregate demand - lower tax rates, which create new jobs

lower interest rates encourage additional borrowing and investment, leading to higher aggregate demand

All other things equal, an increase in the quantity of money - does not affect interest rates - lowers the interest rate - raises or lowers the interest rate - does not change the interest rate - raises the interest rate

lowers the interest rate

The objectives of the Fed include: - maximum employment, stable prices, and moderate interest rates - maximum employment, high prices, and low taxes - stable employment, declining prices, and high interest rates - falling employment, falling prices, and falling rates - constant employment, constant prices, and constant interest rates

maximum employment, stable prices, and moderate interest rates

Banks choose to borrow directly from the Fed when they - are instructed by Congress - need additional reserves and cannot borrow from other banks - have enough reserves to meet all requirements - want to earn a greater return on their reserves - have more reserves than they need

need additional reserves and cannot borrow from other banks

Which of the following accurately describes the discount rate? - the interest rate charged on short-term overnight loans - the interest rate member banks pay when they borrow directly from the Fed - the interest rate charged by the banks on 30-year mortgages - the discount paid as a result of becoming a member of AARP - the interest rate charged to the banks' best customers

the interest rate member banks pay when they borrow directly from the Fed

The reserve ratio is - the dollar amount of a bank's account with the Federal Reserve. - a bank's ratio of good loans to bad loans. - the proportion of customers' deposits a bank is required to hold in reserve. - the proportion of customers' deposits a bank is required to reserve for paying taxes. - the proportion of a bank's deposits that must be loaned out.

the proportion of customers' deposits a bank is required to hold in reserve.

Economists use the ___________ to explain the link between inflation and the money supply. - the money market - the production possibilities curve - the quantity theory of money - the Phillips Curve - the aggregate supply aggregate demand model

the quantity theory of money

If the Federal Reserve sells a significant amount of government securities in the open market, - government spending will rise by an equal and opposing amount. - the total amount of loans made by commercial banks will decrease. - higher earnings in corporate America will drive stock prices up. - the government budget deficit will triple. - the total amount of loans made by commercial banks will increase

the total amount of loans made by commercial banks will decrease.