Money and Banking Final Exam

Open Market operations as a monetary policy tool have the advantages that a) they are flexible and precise b) they can be implemented quickly without administrative delays c) they are not easily reversed d) all of the above e) only A and B above

e) only A and B above

Before WWI, the economy operated under a gold standard. Under this international financial system if the British pound began to appreciate relative to the dollar, a) American importers would increasingly purchase British imports with gold b) Britain would gain international reserves c) the British monetary base would begin to fall d) all of the above e) only A and B of the above

e) only A and B of the above

If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will ___ and the interest rate will ____.

fall; rise

Tying currencies to gold results in an international financial system with

fixed exchange rates between countries

When you deposit a $50 bill in the Security Pacific National Bank,

its reserves increase by $50, its assets increase by $50

The most important advantage of discount policy is that the Fed can use it to

perform its role as lender of last resort

An increase in reserve requirements reduces the money supply since it causes

the money multiplier to fall

Bank reserves include

vault cash and deposits at the Fed.

The return on a 5 percent coupon bond that initially sells for $1000 and sells for $1100 next year (after paying the holder his annual coupon payment is:

15%

If net exports increase by 100 and the mpc is 0.75, equilibrium out increases by a) 100 b)750 c)250 d)400 3) cannot be determined

400

Money is:

Anything that is generally accepted in payment for goods and services or in the repayment of debt

Kenya's hypothesized that the transactions component of money demand was primarily a) income b) interest rates c) stock market prices d) velocity

a) income

Baumol- Tobin analysis suggests that a) transactions component of the demand for money is negatively related to the level of interest rates b) velocity is negatively related to changes in interest rates c) the speculative component of the demand for money is positively related to the level of interest rates d) only A and B of the above

a) transactions component of the demand for money is negatively related to the level of interest rates

For a given level of the monetary base, a decrease in currency - checkable deposit ratio will mean

an increase in money supply

If the consumption function is expressed as C= a + mpc * YD, then "a" represents

autonomous consumer expenditure

the IS curve shifts to the left when: a) government spending increases b) taxes increase c) money supply increases d) all of the above occur e) both A & B of the above occur

b) taxes increase

Bretton Woods system was one in which central banks

bought and sold their own currencies to keep their exchange rates fixed

If aggregate demand falls short of current output,

business firms will cut production to keep from accumulating inventories

When the Fed wants to decrease the level of resources in the banking system, it can a) purchase government bonds b) extend discount loans to banks c) sell government bonds d) do both A and C

c) sell government bonds

Friedman's argument that competition among banks will tend to keep the difference between the return on bonds and money relatively constant implies that

changes in the interest rates will have little effect on the demand for money

Factors that increase the demand for bonds include:

1. an increase in the volatility of stock prices 2. a decrease in the inflation rate 3. a decrease in the expected returns on stocks

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is:

3%

If the required reserve ration is 15%, the simple deposit multiplier is approximately

6.67

Factors that can cause the supply curve for bonds to shift to the left include:

a decrease in expected inflation

Money is:

frequently, but incorrectly, used synonymously with wealth

The classical quantity theory of money suggests that the demand for money is purely a function of ___, and ___ have no effect on the demand for money

income; interest rates

The conversion of a barter economy to one that uses money

increases efficiency by reducing transactions costs

When an economy grows out of a recession, normally the demand for bonds ___ and the supply of bonds ____.

increases; increases

As aggregate output rises, the demand for money ___ and the interest rates ___, so that money demanded equals money supplied and the money market is in equilibrium

increases; rises

Keynes's liquidity preference theory indicates that the demand for money is

negatively related to interest rates

In a liquidity trap, monetary policy has ___ effect on aggregate spending because a change in the money supply has ____ effect on interest rates

no; no

When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ___ and the interest rate ____.

right; falls

During business cycle expansions when income and wealth are rising, the demand for bonds _____ and the demand curve shifts to the _____.

rises; right

The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as: a) complete crowding out b) a recession c) inflation d) fiscal neutrality

a) complete crowding out

Macroeconomics equilibrium requires: a) equilibrium in both the goods and money markets b) equil. in the goods market c) equil. in neither the goods nor the money market d) equil. in the money market

a) equil. in both the goods and money markets

The ___ describes points for which the goods market is in equilibrium a) consumption function b) IS curve c) LM curve d) investment schedule

b) IS curve

Keynes's mentioned two factors that influenced planned investment spending: a) disposable income and business expectations about the future b) interest rates and business expectations about inflation c) interest rates and business expectations about the future d) interest rates and disposable income

c) interest rates and business expectations about the future

If the money supply is $20 trillion and velocity is 2, the nominal GDP is a) $100 trillion b) $20 trillion c) $2 trillion d) $40 trillion e) $10 trillion

d) $40 trillion

The objectives of the Federal Reserve in its conduct of monetary policy include a) high employment b) economic growth c) price stability d) all of the above

d) all of the above

Which of the following are true for a coupon bond: a) the yield to maturity is greater than the coupon rate when the bond price is below the par value b) when the coupon bond is priced at its face value, the yield to maturity equals the coupon rate c) the price of a coupon bond and the yield to maturity are negatively related d) all of the above are true e) only A and B of the above are true

d) all of the above are true

The Keynesian framework indicates the government can play an important role in determining aggregate out by a) changing the money supply and interest rates b) raising consumer confidence c) raising investor confidence d) changing the level of government spending or taxes

d) changing the level of government spending or taxes

Supporters of the current system of Fed independence believe that a less autonomous Fed would... a) be more likely to create a political business cycle b) pursue overly expansionary monetary policies c) adopt a short-run bias toward policymaking d) do each of the above e) do only B and C above

d) do each of the above

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow - bank failure? a) bank capital b) treasury securities c) excess reserves d) mortgages

d) mortgages

Tobin's model of the speculative demand for money improves on Keyne's analysis by showing that a) people will hold money or bonds but not both b) that transaction demand of money in interest insensitive c) the speculative demand for money is interest insensitive d) people will hold a diversified portfolio

d) people will hold a diversified portfolio

An increase in autonomous consumer expenditure causes the equil. level of aggregate output to ____ at any given interest rate and shifts the ____ curve to the ____. a) fall; LM; left b) rise; LM; right c) fall; IS; right d) rise; IS; right e) rise; IS; left

d) rise; IS; right

Keynes's reasoned that consumer expenditure is related to

disposable income

The interest rate that economists consider to be the most accurate measure is the

yield to maturity