Money and Banking Final Exam

Actual bank reserves are equal to a. deposits at the Fed + excess reserves. b. required reserves + excess reserves. c. vault cash + required reserves. d. deposits at the Fed + required reserves.

b - Actual bank reserves are made up of required reserves, based on the required reserve ratio, plus excess reserves-reserves held in addition to, or in excess of, required reserves.

If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to a. decrease the supply of money. b. increase the supply of money. c. hold the supply of money constant. d. decrease the demand for money.

b - All else equal, an increase in the demand for money will cause interest rates to rise. In order to keep interest rates constant, the Federal Reserve must counteract an increase in the demand for money with an increase in the supply of money.

The loan application process that banks require potential borrowers to go through is an attempt to deal with a. adverse hazard. b. adverse selection. c. free-riders. d. moral selection

b - Banks deal with asymmetric information and try to overcome the adverse selection that follows by collecting a great deal of information about potential borrowers through an application process.

The biggest change in the Federal Reserve's balance sheet between March 2007 and May 2013 was the __________ on the __________ side of the balance sheet. a. increase in gold; asset b. jump in depository institution deposits; liability c. increase in currency outstanding; liability d. decrease in repurchase agreements; asset

b - Deposits of depository institutions at the Fed grew tremendously between March 2007 and May 2013 as banks were very hesitant to make loans during such a time of uncertainty in the economy.

Rosa goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as a. a medium of exchange. b. barter. c. a store of value. d. a unit of account.

A - Medium of exchange

In sixteenth century Europe, commodity money was almost exclusively gold and silver coins. After the Spanish conquest of Latin America, there was a sudden influx of additional gold and silver. This resulted in which scenario? a. The European economy of that day was greatly enhanced. b. The European economy of that day suffered from periods of horrible inflation. c. The European economy of that day remained fairly stable, as other factors offset the influx of new money. d. The European economy of that day underwent periods of debasement

B

Financial markets bring together __________ and __________. a. households; banks b. borrowers; lenders c. lenders; savers d. firms; households

B - Borrowers, lenders

Assets accepted for repayment of debt to the government as well as private transactions are known as a. fiat money. b. dollarization. c. money aggregates d. legal tender

D - legal tender

In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control. Select one: True False

False - In the early 1980s, Paul Volcker used a tight monetary policy to bring inflation under control.

An increase in the price of bonds will cause a decrease in the demand for bonds. Select one: True False

False - Increasing price of bonds will increase quantity of bonds demanded

A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate. Select one: True False

False - The municipal bond is a better deal for an investor because the interest income is tax-free so the after-tax rate of return on the municipal bond will be higher.

In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using a. a restrictive covenant to mitigate the problem of moral hazard. b. a deductible to try to mitigate the problem of moral hazard. c. incentives to overcome the principal-agent problem. d. screening to overcome the adverse selection problem

b - Insurance companies will typically use deductibles as part of their insurance policies in order to mitigate the problem of moral hazard.

Which of these groups of people is most hurt by inflation? a. The very wealthy b. Lenders and working class people c. Working class people d. Borrowers and the wealthy

b - Lenders (savers) are hurt because the returns they receive are worth less than previously; working class people suffer because wages and salaries usually fail to keep up with inflation.

Which of these statements is true of the board of governors of the Fed? a. The board of governors is appointed by the chair and serves a four-year term. b. The board of governors consists of six members plus the chair; the term length for members is fourteen years. c. The board of governors consists of six members; the term length is four years. d. The board of governors is elected once every eight years by the citizens of the United States.

b - The board of governors is appointed to a term of fourteen years; there are six members plus the chair.

Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will increase by a. $1.00 billion. b. $1.63 billion. c. $2.06 billion. d. $3.15 billion.

b - The money multiplier is equal to (1 + k)/(k + r + r ), where k is the currency ratio, r is the required reserve ratio, and r is the excess reserve ratio. In this case, the money multiplier = (1 + 1.33)/(1.33 + 0.1 + 0.00133) = 2.33/1.43133 = 1.63. A $1 billion increase in the monetary base will result in a $1.63 billion increase in the money supply.

How many different prices would there be in a barter economy with 100 goods? a. 6,559 b. 100 c. 4,950 d. 300

c - 4,950

If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be a. $1,055. b. $1,005. c. $1,500. d. $1,050.

d - $1050

What best represents an increase in supply?

A shift in the entire supply curve to the right

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to a. pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years. b. pay the bondholder $500 every year for the first nine years and also a $10,000 payment in 10 years. c. make a single payment to the bondholder of $10,500 in 10 years. d. make a payment to the bondholder of $500 in the first year and $10,000 in 10 years.

a - $500 every year for 10 years plus $10,000 in 10 years

Inflation is a benefit in the short run to a. lenders. b. no one. c. borrowers. d. both borrowers and lenders.

c - Inflation favors borrowers as they are able to pay off their loans with dollars whose purchasing power has declined. In the long run, borrowers will also suffer from the negative impact of that same inflation.

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is a. positive. b. neutral. c. inverse. d. direct.

c - Inverse. The aggregate demand curve slopes downward indicating an inverse relationship between the economy-wide price level and the level of real GDP.

For an asset to function as commodity money, it must be easily divisible, easily standardized, easy to carry around, physically attractive, and broadly demanded. Select one: True False

False. (Must be easily divisible, easily standardized, easy to carry around, physically durable, and broadly demanded)

Money is most accurately defined by which of the following statements? a. Money is whatever a nation's government declares it to be. b. Money is anything generally accepted in exchange for goods and services. c. Money is a measure of the wealth of a nation. d. Money is currency printed by the local government.

B - Generally accepted in exchange for goods and services

Commercial banks face competition from a variety of institutions, including a. central banks, private equity companies, and finance companies. b. mutual funds, investment banks, and private equity partnerships. c. government, finance companies, and mutual funds. d. government, central banks, and investment banks.

B - Mutual funds, investment banks, and private equity partnerships

Financial assets include intangibles that can change in value, such as stocks and bonds. Select one: True False

True

When resource markets are efficient, recessionary gaps close by themselves without any government intervention. Select one: True False

True

A significant fault of the bond rating system is the free-rider problem. Select one: True False

True - Bond ratings are relatively easy to find and understand. This creates the free-rider problem, where some members of society benefit from the consumption of a good or service without paying for the good or service.

A flight to quality is most likely to have which of these effects? a. It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs. b. It will be easier for both individuals and businesses that want to sell high-risk bonds. c. It will decrease the default risk premium that higher risk borrowers have to pay and may bring about economic growth. d. It will be more difficult for individual borrowers to borrow, but ease borrowing for businesses.

a - A flight to quality occurs when investors move financial resources from financial instruments with a high default risk to those with a lower risk of default. The impact of this is that it will tend to increase the default risk premium that higher risk borrowers will have to pay. This may include some businesses, which would likely result in cost-cutting measures.

If the public's confidence in the banking system is shaken, it may cause a. a run on banks. b. adverse selection. c. moral hazard. d. an increase in banking regulation.

a - A loss in confidence can cause a run on the banking system, where depositors all descend on banks at the same time to withdraw their deposits.

Which of these would cause a decrease in aggregate demand? a. An increase in imports b. An increase in net exports c. An increase in exports d. A decrease in imports

a - An increase in imports, or a net decrease in exports, will cause a leftward shift in the aggregate demand curve; if exports decrease, that indicates a smaller GDP.

In the early days of the Fed, the discount rate, the rate at which the regional Federal Reserve banks would lend to commercial banks, was determined by the a. regional Federal Reserve banks. b. board of governors. c. secretary of the treasury. d. Federal Reserve bank of New York.

a - In the Fed's early days, each regional Federal Reserve bank set its own discount rate.

Regulation Q, passed following the Great Depression, set a a. maximum on the interest rate that banks can pay on deposits. b. maximum on the quantity of money that the US Treasury can print. c. maximum on the interest rates banks can charge. d. floor on the interest rate that banks can pay on deposits.

a - Maximum on the interest rate that banks can pay on deposits

What was the primary lesson learned from the Panic of 1907? a. The need for a central bank and laws and regulations for banking b. The need for deregulation of financial markets and tighter control of monopolies c. The need to eliminate federal oversight of banks and return oversight to the level of states d. The importance of wealthy families in the banking industry

a - The Panic of 1907 highlighted the need for a central bank and laws and oversights for banking throughout the country.

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate a. increases. b. remains unchanged. c. is eliminated. d. decreases.

a - The higher the marginal tax rate, the greater the advantage of municipal bonds over corporate bonds becomes, because the income earned on municipal bonds is tax exempt.

When a central bank wants to pursue an expansionary monetary policy, it can do which of these things? a. Raise interest rates b. Increase the required reserve ratio c. Pump excess reserves into the banking system d. Loan money to banks only if they promise to loan it to consumers

c - Pump excess reserves into the banking system. If the Federal Reserve wishes to pursue an expansionary monetary policy, it can do so by increasing the amount of money available to lend; it cannot force lending, however.

Consider the following data about the economy: currency outstanding (C) = $2 trillion, total deposits (D) = $1 trillion, total reserves (R) = $60 billion, and the required reserve ratio (RR ratio) = 5%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will a. increase by $1.00 billion. b. decrease by $1.00 billion. c. increase by $1.46 billion. d. decrease by $1.46 billion.

c - The money multiplier is equal to (1 + k)/(k + r + r ), where k is the currency ratio, r is the required reserve ratio, and r is the excess reserve ratio. In this case, the money multiplier = (1 + 2)/(2 + 0.05 + 0.01) = 3/2.06 = 1.46. A $1 billion increase in the monetary base will result in a $1.46 billion increase in the money supply.

A financially healthy bank borrowing overnight from the Federal Reserve is known as a. seasonal credit. b. secondary credit. c. primary credit. d. discount window borrowing.

c - When healthy banks borrow from the Federal Reserve overnight, it is known as primary credit.

Trevor goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base? a. The monetary base will increase with the increase in currency in circulation. b. The monetary base will decline as bank reserves fall. c. The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves. d. The monetary base will increase by less than the size of the withdrawal as the increase in the currency in circulation will not be completely offset by a decrease in bank reserves.

c - When the $500 withdrawal is made from the ATM machine, the currency in circulation increases by $500, and at the same time bank reserves decrease by $500, so the monetary base remains unchanged.

Christopher buys a US Treasury security from the Federal Reserve in the secondary market. He pays cash. What is the result of this transaction? a. The monetary base will increase, and the Federal Reserve will have a new asset. b. Both the monetary base and bank reserves will increase. c. The monetary base will decrease, and bank reserves will stay the same. d. Both the monetary base and bank reserves will decrease.

c - When the Federal Reserve sells US Treasury securities to the nonbank public and is paid in cash, bank reserves remain unchanged but currency in circulation declines, decreasing the monetary base. The cash received by the Fed is a liability, a promise to pay.

If the US Treasury engages in a foreign exchange intervention to increase the value of the dollar relative to the yuan renminbi by having the Federal Reserve buy dollars and sell yuan renminbi in the foreign market, how will this affect the monetary base? a. There will be no impact on the monetary base. b. The monetary base will increase. c. The monetary base will decline. d. The composition of the monetary base will change with no impact on the overall size of the monetary base.

c - When the Federal Reserve sells yuan renminbi, it will do so by selling to commercial banks. This will result in a decrease in dollar deposits in commercial banks, decreasing reserves, and therefore the monetary base will decline.

What problem may occur if an economy has too few banks or none at all? a. The economy may "overheat" and inflation may become a problem. b. The economy will be subject to periods of high unemployment alternating with periods of high employment but very high inflation. c. The economy will be underdeveloped, with a possible increase in unemployment and business failures. d. The economy will support nearly the same standard of living as banks.

c - Without banks, economic studies have demonstrated that there can be related problems in overall economic development, including high unemployment and business failures.

Carlos is considering buying either a corporate bond or a municipal bond that are exactly the same except for their yield. Carlos is in the 33% marginal tax bracket, and the municipal bond he is considering pays a 4% interest rate. To make Carlos indifferent between the two bonds, the corporate bond must offer an interest rate of how much? a. 5.52%. b. 6.52%. c. 5.97%. d. 4.97%.

c - iBT = i AT/(1 - z), where i is the before-tax interest rate, iAT is the after-tax interest rate, and z is the marginal tax rate. In this case, iBT = 0.04/(1 - 0.33) = 0.597, or 5.97%.

Your good friend Megan is starting a new business and you decide to invest with $20,000. If you get back $2,000, what is your rate of return? a. 5%. b. 50%. c. 20%. d. 10%.

d - 10%

Which of these is an example of asymmetric information in banking? a. Borrowers' goals are short-term while lenders' goals are long-term. b. Lenders know more about the capacity of borrowers to repay loans than borrowers. c. Borrowers and lenders have different expectations about financial markets. d. Borrowers know more about their capacity to repay loans than lenders.

d - Borrowers know more about their capacity to repay loans than lenders do, meaning that there is asymmetric information in this relationship.

A one-time deposit in a bank will result in a. no expansion in the money supply. b. an expansion in the money supply that is smaller than the size of the one-time deposit. c. an expansion in the money supply that is equal in size to the one-time deposit. d. an expansion in the money supply that is larger than the size of the one-time deposit.

d - Expansion in the money supply that is larger than the size of the one-time deposit

Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy? a. 0.10 b. 0.50 c. 0.75 d. 1.33

d - The currency ratio is the ratio of currency to deposits, or $1 trillion/$750 billion = 1.33.

The sum of Federal Reserve notes in circulation, plus US coins, plus bank reserves is collectively referred to by which of these designations? a. M1 b. M2 c. The money base d. The monetary base

d - The monetary base, one of the narrowest measurements of the money supply, is the sum of paper currency in circulation (dollars), bank reserves, and US Treasury coins in circulation.

In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve first created a. the discount window. b. quantitative easing. c. the Federal Open Market Committee (FOMC). d. the term auction facility (TAF).

d - The term auction facility was created by the Federal Reserve following the 2007 financial crisis to inject liquidity into financial markets and allow banks to avoid the stigma associated with borrowing.

Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of a. undisclosed information. b. the free-rider problem. c. the principal-agent problem. d. adverse selection.

c - A CEO functions as an agent of a company's shareholders, entrusted to act in their best interest. When an agent acts in his or her own self-interest instead of in the interest of the principal, it is known as the principal-agent problem.

A yield curve illustrates the relationship between the a. rate of inflation and the real rate of return on bonds. b. marginal tax rate and the after-tax interest rate of return on taxable bonds. c. term to maturity of bonds and the interest rate they pay, at a particular point of time. d. default risk associated with bonds of a given maturity and the interest rate they pay, at a particular point of time

c - A yield curve is the relationship between the term to maturity of bonds and the interest rate they pay, at a particular point in time.

An inverted yield occurs when a. short-term interest rates are lower than mid-term interest rates, which are higher than long-term interest rates. b. long-term interest rates are the same as short-term interest rates. c. long-term interest rates are lower than short-term interest rates. d. long-term interest rates are higher than short-term interest rates.

c - Long-term interest rates are lower than short-term rates.

Imagine you live in a country experiencing a decrease in societal wealth, with a decline in expected returns to bonds relative to other assets, and an increase in the relative riskiness of bonds. Consider the figure below. Which of the following shows the change in demand for bonds?

Shift curve to the left

Your friend Jacob is looking at a steep yield curve and makes an attempt to understand the implications using segmented market theory. He says more information will be needed to make economic predictions, as this type of yield curve could be either good news or bad news. Are his comments about this yield curve, using segmented market theory, true or false? Select one: True False

True - According to segmented market theory, Jacob is right to say that a steep yield curve can be either good news or bad news. For example, a steep yield curve can be caused by an expansionary monetary policy, which would result in lower short-term interest rates. This is clearly bad news for some lenders but might be good news for the overall economy (or bad news if the lower rates reflect an impending economic slowdown).

What would cause a leftward shift in the demand curve for bonds? a. A decrease in social wealth b. A sudden and sustained decline in stock prices c. A decrease in default risk associated with bonds d. A decline in the cost of information in the bond market

A - a decrease in social wealth. Decreases demand for bonds: 1. Decrease in social wealth 2. Decline in expected returns relative to other assets 3. An increase in the riskiness of the bond 4. Decrease in the liquidity of bonds 5. An increase in information costs in the bond market

Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds? a. This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds. b. This will make her more likely to buy municipal bonds rather than corporate bonds because she is wealthier. c. This will make her neither more nor less likely to buy municipal bonds rather than corporate bonds. d. This will make her less likely to buy municipal bonds rather than corporate bonds because the increase in taxes will reduce her wealth.

a - The higher the tax bracket a person is in, the greater the advantage of municipal bonds relative to corporate bonds.

The securities that the Federal Reserve holds on its balance sheet include a. US Treasury securities, federal agency debt, and privately issued mortgage-backed securities. b. privately issued stocks, US Treasury securities, and federal agency debt. c. municipal bonds, privately issued stocks, and US Treasury securities. d. US Treasury securities, municipal bonds, and federal agency debt.

a - The primary securities that the Fed holds on its balance sheet are US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.

In the late 1970s and early 1980s, as the Federal Reserve squeezed the growth of the money supply, interest rates shot up and a. the unemployment rate shot up as well. b. profits began to increase dramatically. c. the unemployment rate plummeted. d. the economy began to recover.

a - The unemployment rate shot up as well

Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the level of excess reserves for this economy? a. $1 billion b. $10 billion c. $75 billion d. $76 billion

a - With a required reserve ratio of 10% and the level of deposits equal to $750 billion, the level of required reserves is 0.1 × $750 billion = $75 billion. With actual reserves of $76 billion, excess reserves are equal to $76 billion - $75 billion = $1 billion.

Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a a. compensating balance as a way to mitigate the problem of moral hazard. b. compensating balance as a way to mitigate the problem of adverse selection. c. restrictive covenant as a way to mitigate the problem of moral hazard. d. deductible as a way to mitigate the problem of moral hazard.

a - compensating balance as a way to mitigate the problem of moral hazard Banks will sometimes require a borrower to maintain a minimal balance in an account with the bank, known as a compensating balance, as a way to mitigate the problem of moral hazard.

How did business firms respond to the stock market crash of 1929 and the subsequent Depression? a. In general, business firms cut prices to stimulate sales; when this was not successful, they stopped borrowing from banks. b. In general, business firms began to borrow more money from banks in an effort to simply stay in business. c. In general, business firms raised prices slightly to make up for decreased sales; when this was not successful, they stopped borrowing from banks. d. In general, business firms began to borrow more money from banks in an attempt to increase production and stimulate sales.

a. In general, business firms cut prices to stimulate sales; when this was not successful, they stopped borrowing from banks.

Currently, the power of the Federal Reserve rests with a. an elected board of governors of the Federal Reserve. b. the chair of the Federal Reserve and a board of six governors. c. the chair of the Fed and the board of the New York Federal Reserve Bank. d. 24 member banks.

b - In today's Federal Reserve system, the chair wields the most power, supported by a board of six governors (and the chair functioning as part of that board, too). Some call the chair of the Federal Reserve the second most powerful person in the world.

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________. a. downward sloping; vertical b. horizontal; vertical c. upward sloping; vertical d. upward sloping; horizontal

b - Keynes's original conception of the aggregate supply curve was a horizontal segment until the economy reaches full employment, at which time it becomes vertical.

When the Federal Reserve was created in response to the Panic of 1907, it operated under a doctrine meant to correct the previous problems that led to the panic. Which of these statements best names and describes that doctrine? a. The gold standard doctrine meant that central banks would only lend money to commercial banks if the commercial banks had gold as collateral. b. The real bills doctrine meant that central banks should lend money to commercial banks with collateral only if those banks, in turn, would support "real" but not speculative economic activity. c. The real bills doctrine meant that central banks should lend money to commercial banks when the commercial banks had paper bills as collateral. d. The gold standard doctrine meant that commercial banks would have little incentive to engage in speculative activities.

b - The real bills doctrine meant that central banks should lend money to commercial banks that had "real bills" as collateral and also stipulated that the commercial banks should only lend out to support the creation of goods and services; no speculative lending was to be done.

If GDP is $20 trillion and the money supply is $4 trillion, what is the velocity of money? a. 2 b. 5 c. 16 d. 80

b - The velocity of money is the number of times each unit of money would be used in a year; $20 trillion/$4 trillion = 5.

Open market operations in which the European Central Bank specifies an interest rate at which it will lend and then participating banks submit bids on the amount of money they wish to borrow at that rate are known as __________ tenders. a. fixed-rate reverse b. fixed-rate standard c. variable-rate standard d. variable-rate reverse

b - Transactions in which the European Central Bank specifies an interest rate at which it will lend and then participating banks submit bids for the amount of money they would like to borrow at that rate are known as fixed-rate standard tenders.

Suppose the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro. The Fed sells dollars and buys euros in the foreign market. How will this affect the monetary base? a. There will be no impact on the monetary base. b. The monetary base will increase. c. The monetary base will decline. d. The composition of the monetary base will change with no impact on the overall size of the monetary base.

b - When the Federal Reserve buys euros, it will do so from commercial banks. This will result in an increase in dollar deposits in commercial banks, increasing reserves, and therefore the monetary base will expand.

Today, in the United States, several assets function as money. Which of the following would NOT be considered money? a. Currency b. Credit cards c. Demand deposits d. Checkable deposits

b - credit cards

Irving Fisher's equation of exchange led to the conclusion that the __________ is a function of the level of __________ income in the economy. a. demand for money; real b. demand for money; nominal c. supply of money; real d. supply of money; nominal

b - demand for money, nominal. Irving Fisher's equation of exchange led to the conclusion that the demand for money is a function of the level of nominal income in the economy.

Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the a. discount rate. b. discount rate plus a penalty. c. federal funds rate. d. federal funds rate plus a penalty.

b - discount rate plus a penalty. Banks with some financial difficulty can still borrow from the Federal Reserve in what is known as secondary credit but must pay an interest rate equal to the discount rate plus a penalty.

What is the term for removal of funds from a financial intermediary (e.g., a bank) to invest them directly, as through a mutual fund? a. Debanking b. Disintermediation c. Dollarization d. Allocation

b - disintermediation

The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as a. qualitative easing. b. quantitative easing. c. a repurchase agreement. d. liquidity easing.

b - quantitative easing - In order to inject liquidity into financial markets, the Federal Reserve engaged in the purchase of direct debt and mortgage-backed securities in a policy called quantitative easing.

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve? a. An upward-sloping initial segment, followed by an upward-sloping segment until full-employment GDP is reached, and finally followed by another flat segment beyond full-employment GDP b. A flat initial segment, followed by a modestly upward-sloping middle segment until full-employment GDP is reached, and finally a more steeply upward-sloping segment beyond full-employment GDP c. A flat initial segment until full-employment is reached, followed by a vertical segment at full-employment GDP, and finally followed by another flat segment once the full-employment price level is reached d. A flat initial segment, followed by an upwardsloping middle segment until full-employment GDP is reached, and finally a vertical segment at full-employment GDP

d - The three-part aggregate supply curve has a flat segment until some, but not all, resource markets begin to experience shortages, at which point the AS curve begins to slope upward until full-employment GDP is achieved. At that point, the curve becomes vertical.

When the economy is caught in a liquidity trap, expansionary monetary policy will a. result in inflation. b. result in a significant contraction in economic activity. c. result in a significant expansion of economic activity. d. have little impact on the economy

d - When experiencing a liquidity trap, expansionary monetary policy will fail to stimulate the economy because of a high level of savings and a lack of borrowing in financial markets. "Pushing on a string"

When the Federal Reserve increases the required reserve ratio, the impact will be to a. increase the size of the spending multiplier. b. decrease the size of the spending multiplier. c. increase the size of the money multiplier. d. decrease the size of the money multiplier.

d - When the Federal Reserve increases the reserve ratio, the money multiplier will decline.

Shifting the SRAS - AD intersection to the right of the Potential GDP causes a: a. a depression b. stagflationary pressure c. recessionary pressure d. inflationary pressure

d - When the equilibrium between SRAS and AD (real GDP) is to the right of the Potential GDP, we are experiencing inflationary pressure

To achieve its goal of monetary stability, the Bank of England sets a target a. interest rate of 2%. b. economic growth rate of 2% per year. c. zero business failures d. inflation rate of 2% per year

d - inflation rate of 2% per year

What is the term for using all available information to form expectations about the future to make decisions in the present? a. Informed expectations b. Adaptive planning c. Ex ante planning d. Rational expectations

d - rational expectations The term "rational expectations" refers to an approach where people use all available information to form expectations about the future, and then use those expectations in their current decision-making process.

(can't do pics )In the figure below, the loanable funds market is in equilibrium at C with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the selling of US Treasury securities on the open market, which causes a. no change in the loanable funds market, so the equilibrium interest rate remains at IR1. b. the demand for loanable funds to decrease to D, causing the equilibrium interest rate to decrease to IR3. c. both the demand for loanable funds and the supply of loanable funds to decrease to D and S, respectively, keeping the equilibrium interest rate at IR1. d. the supply of loanable funds to decrease to S, causing the equilibrium interest rate to increase to IR2.

d. The sale of US Treasury securities by the Federal Reserve decreases the supply of loanable funds to S, causing the equilibrium interest rate to rise to IR . SHIFTS SUPPLY CURVE TO LEFT

If the SRAS and AD curve is in equilibrium to the left of the Potential GDP, the economy is in a(n): a. inflationary gap b. resource gap c. overheated economy d. recessionary gap

d. recessionary gap