question
150,000
answer
A bank with $1,500,000 in deposits has required reserves of $________ if the required reserve ratio is 10%.
question
50
answer
If the bank in number 1 has total reserves of $200,000, then the bank has excess reserves of $_____.
question
15
answer
The required reserve ratio is _____% if banks are required to hold $60 billion in reserves to support $440 billion in deposits.
question
75
answer
If Bank A is holding $15 million in reserves, then Bank A has chackable deposits equal to $_____, if excess reserves are currently equal to zero and the required reserve ratio is 20%.
question
7.5
answer
Checkable deposits are equal to $75 with $0 in excess reserves and a 20% reserve ratio. If the required reserve ratio decreases to 10%, excess reserves would become $_____.
question
37.5
answer
If the required reserve ratio is 25% and Bank B has $150,000 in checkable deposits, then Bank B's required reserves are equal to $_____.
question
800,000
answer
Required reserves are $________ when total reserves are $800,000, the required reserve ratio is 20%, and the total checkable deposits are $4,000,000.
question
12.5
answer
The required reserve ratio is _____% if banks are required to hold $125 billion in reserves to support $1,000 billion in deposits.
question
4 million
answer
If the required reserve ratio is 10% and Bank C is holding $400,000 in reserves, then Bank C's checkable deposits are $________ if Bank C has excess reserves currently equal to zero.
question
C
answer
Money is best defined as:
A) Anything you can trade in exchange for other goods and services.
B) A debt incurred when payment is deffered when making a purchase on credit.
C) An asset that is generally accepted as a means of payment for goods and services.
D) As asset that serves as the best possible store of value over time.
A) Anything you can trade in exchange for other goods and services.
B) A debt incurred when payment is deffered when making a purchase on credit.
C) An asset that is generally accepted as a means of payment for goods and services.
D) As asset that serves as the best possible store of value over time.
question
C
answer
The three main functions of money are:
A) Unit of exchange, method of saving, and medium of acounting.
B) Protection against inflation, store of value, and medium of exchange.
C) Store of value, unit of account, and medium of exchange.
D) Unit of account, protection against inflation, and unit of exchange.
A) Unit of exchange, method of saving, and medium of acounting.
B) Protection against inflation, store of value, and medium of exchange.
C) Store of value, unit of account, and medium of exchange.
D) Unit of account, protection against inflation, and unit of exchange.
question
C
answer
You are using money as a unit of account when you:
A) Purchase an ice cream cone.
B) Save for a vacation.
C) Tell a friend how much you paid for your new car.
D) Buy something on sale and get good value for your money.
A) Purchase an ice cream cone.
B) Save for a vacation.
C) Tell a friend how much you paid for your new car.
D) Buy something on sale and get good value for your money.
question
B
answer
Money is more efficient than barter for conducting transactions because:
A) Using money requires satisfying a double coincidence of wants, which increases transacion times.
B) Using money does not require statisfying a double coincidence of wants, which reduces transaction time.
C) Most money is made of paper that is difficult to counterfeit.
D) Barter does not use any specific material so it cannot be counterfeited.
A) Using money requires satisfying a double coincidence of wants, which increases transacion times.
B) Using money does not require statisfying a double coincidence of wants, which reduces transaction time.
C) Most money is made of paper that is difficult to counterfeit.
D) Barter does not use any specific material so it cannot be counterfeited.
question
B
answer
Since the U.S. government has decreed that U.S. currency is legal tender:
A) It is illegal for people to make trades with anything else.
B) People are more likely to accept the dollar as a medium of exchange.
C) The government must hold enough gold to redeem all curency.
D) All of the above are correct.
A) It is illegal for people to make trades with anything else.
B) People are more likely to accept the dollar as a medium of exchange.
C) The government must hold enough gold to redeem all curency.
D) All of the above are correct.
question
A
answer
When dispositors move funds from their checking accounts into their saving accounts:
A) M1 decreases, M2 stays the same, and the system becomes less liquid.
B) M1 decreases, M2 increases, and the system becomes less liquid.
C) M2 increases, M1 increases, and the system becomes more liquid.
D) M2 stays the same, M1 increases, and the system becomes more liquid.
A) M1 decreases, M2 stays the same, and the system becomes less liquid.
B) M1 decreases, M2 increases, and the system becomes less liquid.
C) M2 increases, M1 increases, and the system becomes more liquid.
D) M2 stays the same, M1 increases, and the system becomes more liquid.
question
C
answer
M1 is the most liquid measure of the money supply because its components:
A) Cannot be used to purchase goods and services directly.
B) Retain their real value over time and serve as a hedge against inflation.
C) May be used to purchase goods and services directly.
D) Do not retain their real value over time and do not serve as a hedge against inflation.
A) Cannot be used to purchase goods and services directly.
B) Retain their real value over time and serve as a hedge against inflation.
C) May be used to purchase goods and services directly.
D) Do not retain their real value over time and do not serve as a hedge against inflation.
question
C
answer
The "liquidity" of an asset refers to:
A) How well the asset serves as a store of value.
B) The rate of return earned by the holder of the asset.
C) The ease with which the asset may be converted into a medium of exchange without loss of value.
D) How well the asset serves as a hedge against inflation.
A) How well the asset serves as a store of value.
B) The rate of return earned by the holder of the asset.
C) The ease with which the asset may be converted into a medium of exchange without loss of value.
D) How well the asset serves as a hedge against inflation.
question
B
answer
In the U.S. banking system, banks are required to hold:
A) Enough cash to back every dollar of deposits.
B) A fraction of total deposits on reserve.
C) A multiple of total deposits on reserve.
D) Whatever amount of cash they feel is prudent.
A) Enough cash to back every dollar of deposits.
B) A fraction of total deposits on reserve.
C) A multiple of total deposits on reserve.
D) Whatever amount of cash they feel is prudent.
question
D
answer
In the U.S. banking system, depository institutions (banks) may hold required reserves:
A) Only as vault cash.
B) Only on deposit at a Federal Reserve Bank.
C) As government bonds so they can be easily liquidated.
D) As either vault cash or on deposit at a Federal Reserve Bank.
A) Only as vault cash.
B) Only on deposit at a Federal Reserve Bank.
C) As government bonds so they can be easily liquidated.
D) As either vault cash or on deposit at a Federal Reserve Bank.
question
C
answer
In a fractional reserve banking system, money is created when:
A) Banks accept cash deposits.
B) The Treasury Department prints new coins.
C) Banks make new loans.
D) The U.S. Mint issues new paper money.
A) Banks accept cash deposits.
B) The Treasury Department prints new coins.
C) Banks make new loans.
D) The U.S. Mint issues new paper money.
question
C
answer
The primary responsibility of the Federal Reserve System is to:
A) Make loans to businesses and consumers.
B) Provide currency to banks and automated teller machines (ATMs).
C) Control the nation's money supply and add stability to the financial system.
D) Issue government bonds to finance the government budget deficit.
A) Make loans to businesses and consumers.
B) Provide currency to banks and automated teller machines (ATMs).
C) Control the nation's money supply and add stability to the financial system.
D) Issue government bonds to finance the government budget deficit.
question
C
answer
The Federal Reserve:
A) Determines U.S. fiscal policy.
B) Cannot legally provide loans to banks.
C) Is responsible for monetary policy in the United States.
D) Is responsible for tax policy in the United States.
A) Determines U.S. fiscal policy.
B) Cannot legally provide loans to banks.
C) Is responsible for monetary policy in the United States.
D) Is responsible for tax policy in the United States.
question
D
answer
The Federal Reserve System consists of _____ Federal Reserve Districts:
A) 50
B) 24
C) 14
D) 12
A) 50
B) 24
C) 14
D) 12
question
A
answer
All of the following are functions of the Federal Reserve District Banks except:
A) Accepting deposits from individuals.
B) Clearing checks.
C) Providing currency to banks.
D) Making loans to banks.
A) Accepting deposits from individuals.
B) Clearing checks.
C) Providing currency to banks.
D) Making loans to banks.
question
B
answer
The Federal Reserve Board of Governors consists of:
A) 7 members elected by Congress to lifetime terms.
B) 7 members appointed by the U.S. President to 14-year terms.
C) 12 members appointed by the U.S. President to 14-year terms.
D) 12 members appointed by the Senate to lifetime terms.
A) 7 members elected by Congress to lifetime terms.
B) 7 members appointed by the U.S. President to 14-year terms.
C) 12 members appointed by the U.S. President to 14-year terms.
D) 12 members appointed by the Senate to lifetime terms.
question
A
answer
The Federal Open Market Committee (FOMC) includes:
A) 7 Federal Reserve Governors plus 5 Federal Reserve Bank Presidents.
B) 5 Federal Reserve Governors plus 7 Federal Reserve Bank Presidents.
C) One banker from each Congressional district.
D) One banker from eah of the 10 Federal Reserve Districts.
A) 7 Federal Reserve Governors plus 5 Federal Reserve Bank Presidents.
B) 5 Federal Reserve Governors plus 7 Federal Reserve Bank Presidents.
C) One banker from each Congressional district.
D) One banker from eah of the 10 Federal Reserve Districts.
question
C
answer
The Federal Reserve controls the creation of money and the money supply by:
A) Raising and lowering the prime rate.
B) Setting the interest rate for new bank loans to the public.
C) Influening the amount of reserves in the banking system.
D) Altering the required reserve ratio in order to change interest rates.
A) Raising and lowering the prime rate.
B) Setting the interest rate for new bank loans to the public.
C) Influening the amount of reserves in the banking system.
D) Altering the required reserve ratio in order to change interest rates.
question
D
answer
In March 2014 the chairman of the Federal Reserve Board of Governors was:
A) Alan Greenspan.
B) Hillary Clinton.
C) Ben Bernanke.
D) Janet Yellen.
A) Alan Greenspan.
B) Hillary Clinton.
C) Ben Bernanke.
D) Janet Yellen.
question
B
answer
When it was first created by Congress in 1913, the primary role of the Federal Reserve System was to:
A) Make loans to small businesses and farmers in the agricultural sector of the economy.
B) Act as lender of last resort to the banking community.
C) Regulate business practices by granting loans only to those businesses that met federal competitive guidelines.
D) Provide a safe bank for the government to store the tax revenue it collected as a result of the establishment of a permanent federal income tax.
A) Make loans to small businesses and farmers in the agricultural sector of the economy.
B) Act as lender of last resort to the banking community.
C) Regulate business practices by granting loans only to those businesses that met federal competitive guidelines.
D) Provide a safe bank for the government to store the tax revenue it collected as a result of the establishment of a permanent federal income tax.
question
B
answer
If the required reserve ratio is 10%, then:
A) Banks must hold a maximum of 10% of deposits in the for of vault cash or in deposits at Federal Reserve Banks.
B) Banks must hold a minimum of 10% of deposits in the form of vault cash or in deposits at Federal Reserve Banks.
C) Banks are required to reserve 10% of deposits in order to make low-interest loans.
D) Banks are required to reserve 10% of outstanding stock for sale to the public.
A) Banks must hold a maximum of 10% of deposits in the for of vault cash or in deposits at Federal Reserve Banks.
B) Banks must hold a minimum of 10% of deposits in the form of vault cash or in deposits at Federal Reserve Banks.
C) Banks are required to reserve 10% of deposits in order to make low-interest loans.
D) Banks are required to reserve 10% of outstanding stock for sale to the public.
question
D
answer
If the banking system holds $50 billion in total reserves and the required reserve ratio is 10%, then the maximum amount of checkable deposits the system can legally support is:
A) $10 billion.
B) $50 billion.
C) $250 billion.
D) $500 billion.
A) $10 billion.
B) $50 billion.
C) $250 billion.
D) $500 billion.
question
B
answer
Ceteris paribus, a decrease in the required reserve ratio will:
A) Nullify the value of the simple deposit multiplier.
B) Increase the value of the simple deposit multiplier.
C) Decrease tbe value of the simple deposit multiplier.
D) Have no impact on the value of the simple deposit multiplier.
A) Nullify the value of the simple deposit multiplier.
B) Increase the value of the simple deposit multiplier.
C) Decrease tbe value of the simple deposit multiplier.
D) Have no impact on the value of the simple deposit multiplier.
question
B
answer
Total checkable deposits in the banking systen will equal total bank reserves times the simple deposit multiplier as long as:
A) The public holds at least part of all newly-created money in the form of cash.
B) There are no currency leakages and each bank holds zero excess reserves.
C) There are no currency leakages and each bank holds positive excess reserves.
D) Banks are not profit-maximizers.
A) The public holds at least part of all newly-created money in the form of cash.
B) There are no currency leakages and each bank holds zero excess reserves.
C) There are no currency leakages and each bank holds positive excess reserves.
D) Banks are not profit-maximizers.
question
D
answer
If Sue Jones deposits $1,000 of previously circulating currency into her checking account and the required reserve ratio is 10%, the money supply:
A) Increases by $900.
B) Increases by $1,000.
C) Does not change immediately, but can potentially increase by as much as $10,000.
D) Does not change immediately, but can potentially increase by as much as $9,000.
A) Increases by $900.
B) Increases by $1,000.
C) Does not change immediately, but can potentially increase by as much as $10,000.
D) Does not change immediately, but can potentially increase by as much as $9,000.
question
B
answer
When the Fed buys bonds in the open market, ceteris paribus:
A) Nothing happens to the monetary base, bank loans, or the money supply.
B) The monetary base, bank loans, and the money supply increase.
C) The monetary base and bank loans increase, and the money supply decreases.
D) Bank loans are not affected, but the monetary base and the money supply increase.
A) Nothing happens to the monetary base, bank loans, or the money supply.
B) The monetary base, bank loans, and the money supply increase.
C) The monetary base and bank loans increase, and the money supply decreases.
D) Bank loans are not affected, but the monetary base and the money supply increase.
question
A
answer
Suppose the Board of Governors has determined that continued increases in consumption and investment spending are likely to be inflationary. To control inflation, the Fed would most likely pursue polices that promote:
A) Higher interest rates and a contraction of bank lending activity.
B) Higher interest rates and an expansion of bank lending activity.
C) Lower interest rates and a contraction of bank lending activity.
D) Lower interest rates and an expansion of bank lending activity.
A) Higher interest rates and a contraction of bank lending activity.
B) Higher interest rates and an expansion of bank lending activity.
C) Lower interest rates and a contraction of bank lending activity.
D) Lower interest rates and an expansion of bank lending activity.
question
D
answer
Banks pay the ________ rate to borrow reserves from the Federal Reserve. Banks pay the ________ rate to borrow reserves from other banks.
A) Federal Funds; Prime.
B) Federal Funds; Discount.
C) Discount; Prime.
D) Discount; Federal Funds.
A) Federal Funds; Prime.
B) Federal Funds; Discount.
C) Discount; Prime.
D) Discount; Federal Funds.
question
B
answer
The discount rate is the rate of interest that:
A) Depositors earn on Eurodollars.
B) A bank pays to the Fed for an overnight loan of reserves.
C) One bank pays another for an overnight loan of reserves.
D) The best corportate customers pay on short-term business loans.
A) Depositors earn on Eurodollars.
B) A bank pays to the Fed for an overnight loan of reserves.
C) One bank pays another for an overnight loan of reserves.
D) The best corportate customers pay on short-term business loans.
question
C
answer
The federal funds rate is the rate of interest that:
A) Depositors earns on Eurodollars.
B) A bank pays to the Fed for an overnight loan of reserves.
C) One bank pays another for an overnight loan of reserves.
D) The best corporate customers pay on short-term business loans.
A) Depositors earns on Eurodollars.
B) A bank pays to the Fed for an overnight loan of reserves.
C) One bank pays another for an overnight loan of reserves.
D) The best corporate customers pay on short-term business loans.
question
A
answer
Suppose the Fed desires to decrease the money supply. This would likely involve:
A) An announcement that the targeted federal funds rate has been raised.
B) A loosening of credit conditions due to a lower required reserve ratio
C) An announcement that interest rates in the open market are likely to fall.
D) The purchase of government bonds by the Fed.
A) An announcement that the targeted federal funds rate has been raised.
B) A loosening of credit conditions due to a lower required reserve ratio
C) An announcement that interest rates in the open market are likely to fall.
D) The purchase of government bonds by the Fed.
question
A
answer
Which of the following would likely cause the money supply to increase?
A) An open market bond purchase by the Fed.
B) An increase in the federal funds rate target.
C) An increase in the required resereve ratio.
D)A decision on the part of the public to increase their holdings of cash by removing money from checkable deposits.
A) An open market bond purchase by the Fed.
B) An increase in the federal funds rate target.
C) An increase in the required resereve ratio.
D)A decision on the part of the public to increase their holdings of cash by removing money from checkable deposits.
question
C
answer
The monetary tool of the Fed that has been used least often in recent years is:
A) Changing the discount rate.
B) Changing the federal funds rate target.
C) Changing the required reserve ratio.
D) Buying or selling government bonds in the open market.
A) Changing the discount rate.
B) Changing the federal funds rate target.
C) Changing the required reserve ratio.
D) Buying or selling government bonds in the open market.
question
B
answer
The most important and most frequently used tool of the Fed for controlling the money supply is:
A) The discount rate.
B) Open market operations.
C) The prime rate.
D) The required reserve ratio.
A) The discount rate.
B) Open market operations.
C) The prime rate.
D) The required reserve ratio.
question
C
answer
The Federal Reserve uses open market operations to control the money supply when it:
A) Issues government bonds to finance the federal government's deficit.
B) Purchases government bonds to decrease the money supply.
C) Purchases government bonds to increase the money supply.
D) Sells government bonds to increase the money supply.
A) Issues government bonds to finance the federal government's deficit.
B) Purchases government bonds to decrease the money supply.
C) Purchases government bonds to increase the money supply.
D) Sells government bonds to increase the money supply.
question
C
answer
If a bond with a face value of $5,000 and coupon rate of 6% sells for $4,000, the current yield on the bond:
A) Is 4.8%.
B) Is 6%.
C) Is 7.5%.
D) Cannot be calculated from the information given.
A) Is 4.8%.
B) Is 6%.
C) Is 7.5%.
D) Cannot be calculated from the information given.
question
D
answer
If the Fed's goal is to decrease the growth rate of the money supply, it would most likely decide to:
A) Lower the required reserve ratio.
B) Lower the federal funds rate target.
C) Lower the discount rate.
D) Sell government bonds in the open market.
A) Lower the required reserve ratio.
B) Lower the federal funds rate target.
C) Lower the discount rate.
D) Sell government bonds in the open market.
question
D
answer
Ceteris paribus, if bond prices rise, then:
A) The Federal Reserve must be pursing contractionary monetary policy.
B) There is no effect on bond yields (interest rates).
C) Bond yields (interest rates) will increase as well.
D) Bond yields (interest rates) will fall.
A) The Federal Reserve must be pursing contractionary monetary policy.
B) There is no effect on bond yields (interest rates).
C) Bond yields (interest rates) will increase as well.
D) Bond yields (interest rates) will fall.
question
A
answer
The equation of exchange can be expressed algebraically as:
A) MV = PQ.
B) MQ = PV.
C) M/V = P/Q.
D) M/V = PQ.
A) MV = PQ.
B) MQ = PV.
C) M/V = P/Q.
D) M/V = PQ.
question
B
answer
According to Monetarists, the most important determinant of inflation in U.S. history has been:
A) Decisions by Congress to raise income tax rates.
B) Decisions by the Fed to allow the money supply to grow too quickly.
C) Supply shocks such as OPEC activity leading to higher energy prices.
D) Attempts by labor unions to raise wages.
A) Decisions by Congress to raise income tax rates.
B) Decisions by the Fed to allow the money supply to grow too quickly.
C) Supply shocks such as OPEC activity leading to higher energy prices.
D) Attempts by labor unions to raise wages.
question
A
answer
Monetarists argue that continual increases in the growth rate of the money supply that are greater than the growth rate of real GDP will:
A) Increase the price level in the long run.
B) Increase real GDP in the short run and in the long run.
C) Increase real GDP without affecting the price level in the long run.
D) Decrease real GDP in the short run but increase real GDP in the long run.
A) Increase the price level in the long run.
B) Increase real GDP in the short run and in the long run.
C) Increase real GDP without affecting the price level in the long run.
D) Decrease real GDP in the short run but increase real GDP in the long run.
question
B
answer
According to Monetarists, sustainable and long-yerm economic growth is the result of:
A) Expansionary fiscal and monetary policies.
B) Improvements in resource productivity and technology.
C) Contractionary fiscal and monetary policies.
D) Only policies that are designed to reduce the economy's rate of unemployment.
A) Expansionary fiscal and monetary policies.
B) Improvements in resource productivity and technology.
C) Contractionary fiscal and monetary policies.
D) Only policies that are designed to reduce the economy's rate of unemployment.
question
A
answer
The notion that the Fed should adhere to a policy of steady and predictable expansion of the money supply represents:
A) The monetary rule put forth by Monetarists.
B) The fiscal rule put forth by Monetarists.
C) The monetary rule put forth by Keynesians.
D) The fiscal rule put forth by Keynesians.
A) The monetary rule put forth by Monetarists.
B) The fiscal rule put forth by Monetarists.
C) The monetary rule put forth by Keynesians.
D) The fiscal rule put forth by Keynesians.
question
A
answer
The Monetarists argue that one of the keys to economic stability is:
A) Stable money growth.
B) Continual adjustment of nomial interest rates to keep the real inteerst rate equal to zero.
C) Requiring the Federal Reserve to use the equation of exchange to determine the appropriate required reserve ratio.
D) Using discretionary fiscal policy to fine-tune the economy.
A) Stable money growth.
B) Continual adjustment of nomial interest rates to keep the real inteerst rate equal to zero.
C) Requiring the Federal Reserve to use the equation of exchange to determine the appropriate required reserve ratio.
D) Using discretionary fiscal policy to fine-tune the economy.
question
B
answer
Suppose the money market is initally in equilibrium. If the Fed lowers the discount rate and buys bonds on the open market, then, ceteris paribus:
A) The money supply will increase and the interest rate will rise.
B) The money supply will increase and the interest rate will fall.
C) The money supply will decrease and the interest rate will rise.
D) The money supply will decrease and the interest rate will fall.
A) The money supply will increase and the interest rate will rise.
B) The money supply will increase and the interest rate will fall.
C) The money supply will decrease and the interest rate will rise.
D) The money supply will decrease and the interest rate will fall.
question
C
answer
The short-run impact of the Fed pursuing an expansionary monetary policy is:
A) An increase in interest rates and an increase in spending.
B) An increase in interest rates and a decrease in spending.
C) A decrease in interest rates and an increase in spending.
D) A decrease in interest rates and a decrease in spending.
A) An increase in interest rates and an increase in spending.
B) An increase in interest rates and a decrease in spending.
C) A decrease in interest rates and an increase in spending.
D) A decrease in interest rates and a decrease in spending.
question
B
answer
The short-run impact of the Fed pursuing a contractionary monetary policy is:
A) An increase in interest rates and an increase in spending.
B) An increase in interest rates and a decrease in spending.
C) A decrease in interest rates and an increase in spending.
D) A decrease in interest rates and a decrease in spending.
A) An increase in interest rates and an increase in spending.
B) An increase in interest rates and a decrease in spending.
C) A decrease in interest rates and an increase in spending.
D) A decrease in interest rates and a decrease in spending.
question
D
answer
The nominal rate of interest is equal to the expected or desired real rate of interest:
A) Divided by the expected inflation rate.
B) Multiplied by the expected inflation rate.
C) Minus the expected inflation rate.
D) Plus the expected inflation rate.
A) Divided by the expected inflation rate.
B) Multiplied by the expected inflation rate.
C) Minus the expected inflation rate.
D) Plus the expected inflation rate.
question
B
answer
If the nominal rate of interest s 6 percent and the inflation rate is 2.5 percent, then the actual real rate of interest is equal to:
A) 2.5 percent.
B) 3.5 percent.
C) 6 percent.
D) 8.5 percent.
A) 2.5 percent.
B) 3.5 percent.
C) 6 percent.
D) 8.5 percent.
question
A
answer
If the nominal rate of interest is 7.5 percent and the expected real rate of interest is 4.5 percent, then the expected inflation rate is equal to:
A) 3 percent.
B) 4.5 percent.
C) 7.5 percent.
D) 12 percent.
A) 3 percent.
B) 4.5 percent.
C) 7.5 percent.
D) 12 percent.
question
A
answer
If the nominal interest rate was 8 percent, expected inflation was 2 percent, and actual inflation was 4 percent, then:
A) Lenders expected to earn a 6 percent real rate of interest, but they actually earned a 4 percent real rate of interest.
B) Lenders expected to earn a 4 percent real rate of interest, but they actually earned a 2 percent real rate of interest.
C) Lenders earned a 6 percent real rate of interest, as expected.
D) Lenders earned a 4 percent real rate of interest, as expected.
A) Lenders expected to earn a 6 percent real rate of interest, but they actually earned a 4 percent real rate of interest.
B) Lenders expected to earn a 4 percent real rate of interest, but they actually earned a 2 percent real rate of interest.
C) Lenders earned a 6 percent real rate of interest, as expected.
D) Lenders earned a 4 percent real rate of interest, as expected.
question
C
answer
If interest rates rise, ceteris paribus:
A) The demand for money will shift to the right.
B) The demand for money will shift to the left.
C) People will want to hold less money and more interest-earning assests, like bonds.
D) People will want to hold more money and less interest-earning assets, like bonds.
A) The demand for money will shift to the right.
B) The demand for money will shift to the left.
C) People will want to hold less money and more interest-earning assests, like bonds.
D) People will want to hold more money and less interest-earning assets, like bonds.
question
D
answer
If the Fed sells government bonds in the open market, ceteris paribus:
A) Money demand will shift to the right, causing interest rates to rise.
B) Money demand will shift to the left, causing interest rates to fall.
C) Money supply will shift to the right, causing interest rates to rise.
D) Money supply will shift to the left, causing interest rates to fall.
A) Money demand will shift to the right, causing interest rates to rise.
B) Money demand will shift to the left, causing interest rates to fall.
C) Money supply will shift to the right, causing interest rates to rise.
D) Money supply will shift to the left, causing interest rates to fall.
question
C
answer
If the Fed announces a lower federal funds rate target, this most likely means that the Fed will act to:
A) Decrease bank reserves, which will likely increase borrowing and spending.
B) Decrease bank reserves, which will likely reduce borrowing and spending.
C) Increase bank reserves, which will likely increase borrowing and spending.
D) Increase bank reserves, which will likely reduce borrowing and spending.
A) Decrease bank reserves, which will likely increase borrowing and spending.
B) Decrease bank reserves, which will likely reduce borrowing and spending.
C) Increase bank reserves, which will likely increase borrowing and spending.
D) Increase bank reserves, which will likely reduce borrowing and spending.
question
B
answer
The Keynesian view argues that:
A) Investment and consumer spending vary directly with the interest rate, so raising the interest rate is likely to lead to an increase in business and cinsumer borrowing and spending.
B) Investment spending and some consumer spending depend on the current interest rate, which means a decrease in the interest rate may lead to an increase in aggregate demand.
C) Investment and consumer spending depend on disposable income, which means businesses and consumers do not alter their borrowing and spending in response to changes in the interest rate.
D) Investment spending is likely to increase in the current period if businesses develop pessimisti expectations regarding future economic conditions.
A) Investment and consumer spending vary directly with the interest rate, so raising the interest rate is likely to lead to an increase in business and cinsumer borrowing and spending.
B) Investment spending and some consumer spending depend on the current interest rate, which means a decrease in the interest rate may lead to an increase in aggregate demand.
C) Investment and consumer spending depend on disposable income, which means businesses and consumers do not alter their borrowing and spending in response to changes in the interest rate.
D) Investment spending is likely to increase in the current period if businesses develop pessimisti expectations regarding future economic conditions.
question
D
answer
The investment demand function is assumed to be:
A) Downward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower.
B) Upward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower.
C) Upward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower.
D) Downward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower.
A) Downward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower.
B) Upward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower.
C) Upward sloping because firms will likely undertake fewer investment projects when the cost of borrowing is lower.
D) Downward sloping because firms will likely undertake more investment projects when the cost of borrowing is lower.
question
B
answer
The investment demand function would most likely shift to the right as a result of:
A) More pessimistic business expectations.
B) More optimistic business expectations.
C) An increase in interest rates.
D) A decrease in interest rates.
A) More pessimistic business expectations.
B) More optimistic business expectations.
C) An increase in interest rates.
D) A decrease in interest rates.
question
C
answer
Ceteris paribus, a decrease in money demand would cause:
A) An increase in the interest rate and a decrease in investment spending.
B) An increase in the interest rate and an increase in investment spending.
C) A decrease in the interest rate and an increase in investment spending.
D) A decrease in the interest rate and a decrease in investment spending.
A) An increase in the interest rate and a decrease in investment spending.
B) An increase in the interest rate and an increase in investment spending.
C) A decrease in the interest rate and an increase in investment spending.
D) A decrease in the interest rate and a decrease in investment spending.
question
A
answer
If investment spending is not sensitive to changes in interest rates, then:
A) Expansionary moneary policy may not lead to an increase in aggregate demand.
B) Contractionary monetary policy will be more effective than contractionary fiscal policy for closing a recessionary gap.
C) The investment demand function will be a horizontal line.
D) The Fed will increase interest rates so that savers will earn higher rates of interest.
A) Expansionary moneary policy may not lead to an increase in aggregate demand.
B) Contractionary monetary policy will be more effective than contractionary fiscal policy for closing a recessionary gap.
C) The investment demand function will be a horizontal line.
D) The Fed will increase interest rates so that savers will earn higher rates of interest.
question
D
answer
Which of the following best describes the Keynesian perspective on how contractionary monetary policy affects the economy?
A) Higher interest rates, higher investment and consumption expenditures, and a higher price level.
B) Lower interest rates, lower investment and consumption expenditures, and a lower price level.
C) Lower interest rates, higher investment and consumption expenditures, and a higher price level.
D) Higher interest rates, lower investment and consumption expenditures, and a lower price level.
A) Higher interest rates, higher investment and consumption expenditures, and a higher price level.
B) Lower interest rates, lower investment and consumption expenditures, and a lower price level.
C) Lower interest rates, higher investment and consumption expenditures, and a higher price level.
D) Higher interest rates, lower investment and consumption expenditures, and a lower price level.
question
C
answer
Which of the following best describes the Keynesian perspective on how expansionary monetary policy affects the economy?
A) Higher interest rates, higher investment and consumption expenditures, and higher real GDP.
B) Lower interest rates, lower investment and consumption expenditures, and lower real GDP.
C) Lower interest rates, higher investment and consumption expenditures, and higher real GDP
D) Higher interest rates, lower investment and consumption expenditures, and lower real GDP.
A) Higher interest rates, higher investment and consumption expenditures, and higher real GDP.
B) Lower interest rates, lower investment and consumption expenditures, and lower real GDP.
C) Lower interest rates, higher investment and consumption expenditures, and higher real GDP
D) Higher interest rates, lower investment and consumption expenditures, and lower real GDP.
question
D
answer
According to Keynesian monetary theory:
A) Monetary policy is ineffective if the economy is ina liquidity trap.
B) The effectiveness of monetary poliy depends on the sensitivity of interest rates to changes in the money supply.
C) The effectiveness of monetary policy depends ont he sensitivity of investment spending to changes in the interest rate.
D) All of the above are correct.
E) Only (b) and (c) are correct.
A) Monetary policy is ineffective if the economy is ina liquidity trap.
B) The effectiveness of monetary poliy depends on the sensitivity of interest rates to changes in the money supply.
C) The effectiveness of monetary policy depends ont he sensitivity of investment spending to changes in the interest rate.
D) All of the above are correct.
E) Only (b) and (c) are correct.
question
D
answer
The liquidity trap is:
A) The vertical portion of the money demand curve.
B) The horizontal portion of the investment demand curve.
C) The vertical portion of the investment demand curve.
D) The horizontal portion of the money demand curve.
A) The vertical portion of the money demand curve.
B) The horizontal portion of the investment demand curve.
C) The vertical portion of the investment demand curve.
D) The horizontal portion of the money demand curve.
question
A
answer
If the Fed increases the money supply but the economy is in a liquidity trap, then:
A) There will be no change in interest rates or aggregate expenditures.
B) Money demand will shift and cancel out the change in the money supply.
C) Interest rates will fall and aggregate expenditures will rise.
D) Interest rates will rise and aggregate expenditures will fall.
A) There will be no change in interest rates or aggregate expenditures.
B) Money demand will shift and cancel out the change in the money supply.
C) Interest rates will fall and aggregate expenditures will rise.
D) Interest rates will rise and aggregate expenditures will fall.
question
Money
answer
Any good that is widely accepted for purposes of exchange and the repayment of debt.
question
Barter
answer
Exchanging goods and services for other goods and services without the use of money.
question
Medium of Exchange
answer
Anything that is generally acceptable in exchange for goods and services; a function of money.
question
Unit of Account
answer
A common measure in which relative values are expressed; a function of money.
question
Store of Value
answer
The ability of an item to hold value over time; a function of money.
question
Double Coincidence of Wants
answer
In a barter economy, a requirment, which must be met before a trade can be made. It specifies that a trader must find another trader who at the same time is willing to trade what the first trader wantrs and wants what the first trader has.
question
M1
answer
Currency held outside banks plus checkable depostis plus traveler's checks.
question
Currency
answer
Coins and paper money.
question
Federal Reserve Notes
answer
Paper money issued by the Federal Reserve.
question
Checkable Deposits
answer
Deposits on which checks can be written.
question
M2
answer
M1 plus savings deposits (including money market deposit accounts) plus small-denomination time deposits plus money market mutual funds (retail).
question
Savings Deposit
answer
An interest-earning account at a commercial bank or thrift institution. Normally, checks cannot be written on these, and the funds in it can be withdrawn at any time without a penalty payment.
question
Time Deposit
answer
An interest-earning deposit with a specified maturity date. They are subject to penalties for early withdrawal, that is, withdrawal before the maturity date. Small-denomination ones are less than $100,000.
question
Money Market Deposit Account
answer
An interest-earning account at a bank or thrift institution, for which a minimum balance is usually required and most of which offer limited check-writing privileges.
question
Money Market Mutual Fund
answer
An interest-earning account at a mutual fund company, for which a minimum balance is usually required and most of which offer limited check-writing privileges. Only retail ones are part of M2.
question
Fractional Reserve Banking
answer
A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.
question
Federal Reserve System
answer
The central bank of the United States.
question
Reserves
answer
The sum of bank deposits at the Fed and vault cash.
question
Required Reserve Ratio
answer
A percentage of each dollar deposited that must be held in reserve form (specifically, as bank deposits at the Fed or vault cash).
question
Required Reserves
answer
The minimum dollar amount of reserves that a bank must hold against its checkable deposits, as mandated by the Fed.
question
Reserve Requirement
answer
The Fed rule that specifies the amount of reserves a bank must hold to back up deposits.
question
RR = DD(rr)
answer
What is the formula to find Required Reserves?
question
Excess Reserves
answer
Any reserves held beyond the required amount; the difference between (total) reserves and required reserves.
question
TR = RR+XR
answer
What is the formula to find Total Reserves?
question
change in the spending multiplier = 1/rr(change in XR)
answer
What is the formula to find the change in the spending multiplier?
question
Direct Finance
answer
Borrowers and lenders come together in a market setting, such as in the bond market.
question
Indirect Finance
answer
Funds are loans and borrowed through a financial intermediary.
question
Financial Intermediary
answer
A financial intermediary transders funds from those who want to lend funds to those who want to borrow them.
question
Asymmetric Information
answer
Related to an economic agent on one side of a transaction having information that an economic agent on the other sied of the transaction does not have.
question
Adverse Selection
answer
A phenomenon that occurs when the parties on one side of the market, who have information not known to others, seld-select in a way that adversely affects the parties on the other side of the market.
question
Moral Hazard
answer
A condition that exists when one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party.
question
Balance Sheet
answer
A record of the assets and liabilities of a bank.
question
Asset
answer
Anything of value that is owned or that one has claim to.
question
Liability
answer
Anything that is owed to someone else.
question
Net worth = Assets - Liabilities
answer
What is the formula for the Bank Capital (or net worth)?
question
Insolvency
answer
A condition in which one's liabilities are greater than one's assets.
question
Board of Governors
answer
The governing body of the Federak Reserve System.
question
FOMC
answer
The 12-member policy-making group in the Fed. The committee has the quthority to conduct open market operations.
question
Open Market Operations
answer
The buying and selling of government securities by the Fed.
question
Monetary Policy
answer
Changes in the money supply or in the rate of change of the money supply, intended to achieve stated macroeconomic goals.
question
8
answer
How many functions does the Fed have?
question
E
answer
Which of the following is not a function of the Fed?
A) Controlling the Money Supply.
B) Supplying the Economy with Paper Money (Federal Reserve Notes).
C) Providing Check-Clearing services.
D) Holding Depository Institutions' Reserves.
E) Not supervising Member Banks.
F) Serving as the Government's Banker.
G) Serving as the Lender of Last Resort.
H) Handling the Sale of U.S. Treasury Securities (Auctions).
A) Controlling the Money Supply.
B) Supplying the Economy with Paper Money (Federal Reserve Notes).
C) Providing Check-Clearing services.
D) Holding Depository Institutions' Reserves.
E) Not supervising Member Banks.
F) Serving as the Government's Banker.
G) Serving as the Lender of Last Resort.
H) Handling the Sale of U.S. Treasury Securities (Auctions).
question
Open Market Purchase
answer
The buying of government securities by the Fed.
question
Cash Leakage
answer
Occurs when funds are held as currency instead of deposited into a checking account.
question
Simple Deposit Multiplier
answer
The reciprocal of the required reserve ratio, 1/r.
question
Open Market Sale
answer
The selling of government securities by the Fed.
question
Reserve Deficient
answer
The situation that exists when a bank holds fewer reserves than specified by the reserve requirement.
question
Increase
answer
Lowering the required reserve ratio will ________ the money supply.
question
Decrease
answer
Raising the requires reserve ratio will ________ the money supply.
question
Yield = Annual Interest Payment / Price of Bond
answer
What is the formula to find the Yield?
question
Discount Loan
answer
A loan the Fed makes to a commercial bank.
question
Discount Rate
answer
The interest rate the Fed charges depository institutions that borrow reserves from it; the interest rate charged on a discount loan.
question
Federal Funds Market
answer
A market where banks lend reserves to one another, usually for short periods.
question
Federal Funds Rate
answer
The interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves.
question
Federal Funds Rate Target
answer
The interest rate that the Fed wants the federal funds market rate to be.
question
TAF
answer
A program under which the Fed auctions funds to depository institutions. Each auction is for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).
question
Equation of Exchange
answer
An identity stating that the money supply (M) times velocity (V) must be equal to the price level (P) times Real GDP (Q).
question
Velocity
answer
The average number of times a dollar is spent to buy final goods and services in year.
question
Simple Quantity Theory of Money
answer
The theory assuming that velocity (V) and Real GDP (Q) are constant and predicting that changes in the money supply (M) lead to strictly proportional changes in the price level (P).
question
MV = TE
answer
What is the formula for Total Expenditures?
question
Increase, Right
answer
An increase in the money supply will ________ aggregate demand and shift the AD curve to the _____.
question
Decrease, Left
answer
A decrease in the money supply will ________ aggregate demand and shirt the AD curve to the _____.
question
Increase, Right
answer
An increase in velocity will ________ aggregate demand and shift the AD curve to the _____.
question
Decrease, Left
answer
A decrease in velocity will ________ aggregate demand and shift the AD curve to the _____.
question
A
answer
Which of these is false?
A) Velocity changes in an unpredictable way.
B) Aggregate demand depends on the money supply and on velocity.
C) The SRAS Curve is upward sloping.
D) The economy is self-regulating (prices and wages are flexible).
A) Velocity changes in an unpredictable way.
B) Aggregate demand depends on the money supply and on velocity.
C) The SRAS Curve is upward sloping.
D) The economy is self-regulating (prices and wages are flexible).
question
One-Shot Inflation
answer
A one-time increase in the price level; an increase in the price level that does not continue.
question
Continued Inflation
answer
A continued increase in the price level.
question
Money Supply
answer
What is the only factor that can continually increase without causing a reduction in consumption, investment, government purchases, or net exports?
question
E
answer
Changes in the money supply can affect all of the following except:
A) The supply of loans.
B) Real GDP.
C) The price level.
D) The expected inflation rate.
E) The expected recession rate.
A) The supply of loans.
B) Real GDP.
C) The price level.
D) The expected inflation rate.
E) The expected recession rate.
question
Liquidity Effect
answer
The change in the interest rate due to a change in the supply of loanable funds.
question
Income Effect
answer
The change in the interest rate due to a change in Real GDP.
question
Price-Level Effect
answer
The change in the interest rate due to a change in the price level.
question
Expectations Effect
answer
The change in the interest rate due to a change in the expected inflation rate.
question
Nominal Interest Rate
answer
The interst rate actually charged (or paid) in the market; the market interest rate:
________ = Real interest rate + Expected inflation rate
________ = Real interest rate + Expected inflation rate
question
Real Interest Rate
answer
The nominal interest rate minus the expected inflation rate. When the expected inflation rate is zero, the real interest rate equals the nominal interest rate.
question
Transmission Mechanism
answer
The routes, or channels, traveled by the ripple effects that the money market creates and that affect the goods and services market (represented by the aggregate demand and aggregate supply curves in the AD-AS framework).
question
Demand for Money (Balances)
answer
The inverse relationship between the quantity demanded of money balances and the price of holding money balances.
question
Liquidity Trap
answer
The horizontal portion of the demand curve for money.
question
Expansionary Monetary Policy
answer
The policy by which the Fed increases the money supply.
question
Contractionary Monetary Policy
answer
The policy by which the Fed decreases the money supply.
question
Activists
answer
Persons who argue that monetary and fiscal policies should be deliberately used to smooth out the business-cycle.
question
Fine-Tuning
answer
The (usually frequent) use if monetary anf fiscal policies to counteract even small undesurable movements in economic activity.
question
Nonactivists
answer
Persons who argue against the deliberate use of discretionary fiscal and monetary policies. They believe in a permanent, stable, ruke-oriented monetary and fiscal framework.
question
C
answer
Which one of these claims is incorrect in the case of activists?
A) The economy does not always equilibrate quickly enough at Natural Real GDP>
B) Activist monetary policy works; it is effective at smoothing out the business cycle.
C) Activist monetary policy is not flexible; nonactivist (rules-based) monetary policy is not.
A) The economy does not always equilibrate quickly enough at Natural Real GDP>
B) Activist monetary policy works; it is effective at smoothing out the business cycle.
C) Activist monetary policy is not flexible; nonactivist (rules-based) monetary policy is not.
question
A
answer
Which one of these claims is incorrect in the case of nonactivists?
A) In modern economies, wages and prices are not sufficiently flexible and cannot allow the economy to equilibrate at reasonable speed at Natual Real GDP.
B) Activist monetary policies may not work.
C) Acitivist monetary polivies are likely to be destablishing rather than stabilizing; they are likely to make matters worse, not better.
A) In modern economies, wages and prices are not sufficiently flexible and cannot allow the economy to equilibrate at reasonable speed at Natual Real GDP.
B) Activist monetary policies may not work.
C) Acitivist monetary polivies are likely to be destablishing rather than stabilizing; they are likely to make matters worse, not better.
question
C
answer
Which of these nonactivist monetary proposals is incorrect?
A) Constant-money-growth-rate-rule.
B) Predetermined-money-growth- rate-rule.
C) Not using the Taylor rule.
D) Inflation targeting.
E) (Nominal) GDP targeting.
A) Constant-money-growth-rate-rule.
B) Predetermined-money-growth- rate-rule.
C) Not using the Taylor rule.
D) Inflation targeting.
E) (Nominal) GDP targeting.
question
Inflation Targeting
answer
Targeting that requires the Fed to keep the inflation rate near a predetermined level.
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