Unit 4 Ch 14-16

In the United States, monetary policy is the responsibility of the: U.S. Treasury. Department of Commerce. Board of Governors of the Federal Reserve System. U.S. Congress.

Board of Governors of the Federal Reserve System

Federal Reserve Notes in circulation are: an asset as viewed by the Federal Reserve Banks. a liability as viewed by the Federal Reserve Banks. neither an asset nor a liability as viewed by the Federal Reserve Banks. part of M1 but not of M2.

a liability as viewed by the Federal Reserve Banks

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as: a medium of exchange. a store of value. a unit of account. an economic investment.

a medium of exchange

Purchasing common stock by writing a check best exemplifies money serving as a: store of value. unit of account. a medium of exchange. index of satisfaction.

a medium of exchange

If you are estimating your total expenses for school next semester, you are using money primarily as: a medium of exchange. a store of value. a unit of account. an economic investment.

a unit of account

The federal funds market is the market in which: banks borrow from the Federal Reserve Banks. U.S. securities are bought and sold. banks borrow reserves from one another on an overnight basis. Federal Reserve Banks borrow from one another.

banks borrow reserves from one another on an overnight basis

The federal funds rate is the interest rate that _______ charge(s) _______. banks; other banks the Fed; commercial banks banks; their best corporate customers banks; on federal student loans

banks; other banks

To reduce the federal funds rate, the Fed can: buy government bonds from the public. increase the discount rate. increase the prime interest rate. sell government bonds to commercial banks.

buy government bonds from the public

The money supply is backed: by the government's ability to control the supply of money and therefore to keep its value relatively stable. by government bonds. dollar-for-dollar by gold and silver. by gold reserves representing a fraction of the total value of dollars in circulation.

by the government's ability to control the supply of money and therefore to keep its value relatively stable

Commercial banks create money when they: Answers: accept cash deposits from the public. purchase government securities from the central banks. create checkable deposits in exchange for IOUs. raise their interest rates.

create checkable deposits in exchange for IOUs

Suppose that, for every 1-percentage-point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will: increase by $0.5 billion and the money supply will increase by $2.5 billion. decline by $0.5 billion and the money supply will decline by $2.5 billion. increase by $0.75 billion and the money supply will increase by $3.75 billion. increase by $1 billion and the money supply will increase by $5 billion.

decline by $0.5 billion and the money supply will decline by $2.5 billion

An increase in the legal reserve ratio increases the money supply by increasing excess reserves and increasing the monetary multiplier. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier

Which of the following statements is correct? Other things equal: a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged. deflation will shift both the transactions demand curve for money and the total money demand curve to the left. inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.

deflation will shift both the transactions demand curve for money and the total money demand curve to the left

The amount of reserves that a commercial bank is required to hold is equal to: the amount of its checkable deposits. the sum of its checkable deposits and time deposits. its checkable deposits multiplied by the reserve requirement. its checkable deposits divided by its total assets.

its checkable deposits multiplied by the reserve requirement

The transactions demand for money is most closely related to money functioning as a: unit of account. medium of exchange. store of value. measure of value.

medium of exchange

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has: excess reserves of $2 billion. neither an excess nor a deficiency of reserves. a deficiency of reserves of $.5 billion. excess reserves of only $.5 billion.

neither an excess nor a deficiency of reserves

The Fed directly sets: the prime interest rate but not the federal funds rate. both the federal funds rate and the prime interest rate. neither the federal funds rate nor the prime interest rate. the discount rate and the prime interest rate.

neither the federal funds rate nor the prime interest rate

When commercial banks use excess reserves to buy government securities from the public: new money is created. commercial bank reserves increase. the money supply falls. checkable deposits decline.

new money is created

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits: of commercial banks are unchanged, but their reserves increase. and reserves of commercial banks both decrease. of commercial banks are unchanged, but their reserves decrease. and reserves of commercial banks are both unchanged.

of commercial banks are unchanged, but their reserves increase

The primary purpose of the legal reserve requirement is to: prevent banks from hoarding too much vault cash. provide a means by which the monetary authorities can influence the lending ability of commercial banks. prevent commercial banks from earning excess profits. provide a dependable source of interest income for commercial banks.

provide a means by which the monetary authorities can influence the lending ability of commercial banks

If the demand for money and the supply of money both decrease, the equilibrium: interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. quantity of money and the equilibrium interest rate will both increase. quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

quantity of money will decline, but we cannot predict the change in the equilibrium interest rate

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should: grow the money supply at a rate of 6 percent per year. raise the real federal funds rate by 6 percentage points. raise the real federal funds rate by 3 percentage points. raise the real federal funds rate by 12 percentage points.

raise the real federal funds rate by 3 percentage points

If the monetary authorities want to reduce the monetary multiplier, they should: lower the required reserve ratio. raise the required reserve ratio. increase bank reserves. lower interest rates.

raise the required reserve ratio

The discount rate is the interest: rate at which the central banks lend to the U.S. Treasury. rate at which the Federal Reserve Banks lend to commercial banks. yield on long-term government bonds. rate at which commercial banks lend to the public.

rate at which the Federal Reserve Banks lend to commercial banks

When the Fed lends money to a commercial bank, the bank: rate at which the central banks lend to the U.S. Treasury. rate at which the Federal Reserve Banks lend to commercial banks. yield on long-term government bonds. rate at which commercial banks lend to the public.

rate at which the Federal Reserve Banks lend to commercial banks

If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should: raise the real federal funds rate by 1 percentage point. reduce the real federal funds rate by 1 percentage point. raise the inflation rate by 1 percentage point. change the real federal funds rate until inflation hits the target rate of 4 percent.

reduce the real federal funds rate by 1 percentage point

answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, reserves in the banking system will: remain unchanged. rise by $100. fall by $100. rise by $1,000.

remain unchanged

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: reserves lost by any particular bank will be gained by some other bank. the central banks follow policies that prevent reserves from falling below the level required by law. the MPC of borrowers is greater than zero but less than 1. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

reserves lost by any particular bank will be gained by some other bank

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. Refer to the given information. If the price of this bond falls by $200, the interest rate will: rise by 2.5 percentage points. rise by 5 percentage points. fall by 2.5 percentage points. fall by 5 percentage points.

rise by 2.5 percentage points

Open-market operations refer to: purchases of stocks in the New York Stock Exchange. the purchase or sale of government securities by the Fed. central bank lending to commercial banks. the specifying of loan maximums on stock purchases.

the purchase or sale of government securities by the Fed

Other things equal, if the required reserve ratio was lowered: banks would have to reduce their lending. the size of the monetary multiplier would increase. the actual reserves of banks would increase. the federal funds interest rate would rise.

the size of the monetary multiplier would increase

To say that coins are "token money" means that: their face value is less than their intrinsic value. their face value is greater than their intrinsic value. their face value is equal to their intrinsic value. they are not legal tender.

their face value is greater than their intrinsic value

Stabilizing a nation's price level and the purchasing power of its money can be achieved: only with fiscal policy. only with monetary policy. with both fiscal and monetary policy. with neither fiscal nor monetary policy.

with both fiscal and monetary policy

Overnight loans from one bank to another for reserve purposes entail an interest rate called the: prime rate. discount rate. federal funds rate. treasury bill rate.

federal funds rate

Most modern banking systems are based on: money of intrinsic value. commodity money. 100 percent reserves. fractional reserves

fractional reserves

Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0. $160 billion. $200 billion. $40 billion. $128 billion.

$160 billion

A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: $1,250. $120,000. $5,000. $3,750.

$3,750

If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is: 10. 4. 5. 2.

5

Which of the following best describes the cause-effect chain of an expansionary monetary policy? A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP

Which of the following describes the identity embodied in a balance sheet? Net worth plus assets equal liabilities. Assets plus liabilities equal net worth. Assets equal liabilities plus net worth. Assets plus reserves equal net worth.

Assets equal liabilities plus net worth

In the U.S. economy, the money supply is controlled by the: U.S. Treasury. Federal Reserve System. Senate Committee on Banking and Finance. Congress.

Federal Reserve System

Assuming no other changes, if balances in money market deposit accounts increase by $50 billion and small-denominated time deposits decrease by $50 billion, the: M1 and M2 money supplies will not change. M2 money supply will increase. M1 money supply will decline. M2 money supply will increase and the M1 money supply will decrease.

M1 and M2 money supplies will not change

Money market deposit accounts are included in: M1 only. M2 only. neither M1 nor M2. both M1 and M2.

M2 only

In which of the following situations is it certain that the quantity of money demanded by the public will decrease? Nominal GDP decreases and the interest rate decreases. Nominal GDP increases and the interest rate decreases. Nominal GDP decreases and the interest rate increases. Nominal GDP increases and the interest rate increases.

Nominal GDP decreases and the interest rate increases

Which of the following is correct? The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. The asset demand for money is downsloping because bond prices and the interest rate are directly related.

The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises

Which one of the following is true about the U.S. Federal Reserve System? There are 12 regional Federal Reserve Banks. The head of the U.S. Treasury also chairs the Federal Reserve Board. There are 14 members of the Federal Reserve Board. The Open Market Committee is smaller in size than the Federal Reserve Board.

There are 12 regional Federal Reserve Banks

The securities held as assets by the Federal Reserve Banks consist mainly of: corporate bonds. Treasury bills, Treasury notes, and Treasury bonds. common stock. certificates of deposit.

Treasury bills, Treasury notes, and Treasury bonds

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by: horizontally adding the transactions and the asset demand for money. vertically subtracting the transactions demand from the asset demand for money. horizontally subtracting the asset demand from the transactions demand for money. vertically adding the transactions and the asset demand for money.

horizontally adding the transactions and the asset demand for money

According to the Taylor rule: for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP. growth in the money supply should be limited to the long-run average growth rate of real GDP. if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point. the rate of money growth should be set at 4 percent per year.

if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system: m = R - 1. R = m/1. R = m - 1. m = 1/R.

m = 1/R

When a commercial bank borrows from a Federal Reserve Bank: the supply of money automatically increases. it indicates that the commercial bank is unsound financially. the commercial bank's lending ability is increased. the commercial bank's reserves are reduced.

the commercial bank's lending ability is increased

When the receipts given by goldsmiths to depositors were used to make purchases: the gold standard was created. existing banking laws were violated. the receipts became in effect paper money. a fractional reserve banking system was created.

the receipts became in effect paper money