Deck 17: The fed, money, and credit

Question 1

The introduction of federal deposit insurance after the Great Depression caused

A)an increase in the excess reserve ratio
B)an increase in the currency-deposit ratio
C)a decrease in the size of the money multiplier
D)the money multiplier to become more stable
E)all of the above

Answer 1

the money multiplier to become more stable

Question 2

In which of the following years was the discount rate (also known as the primary credit rate) at its lowest level?

A)1985
B)1991
C)1995
D)2000
E)2008

Answer 2

2008

Question 3

The size of the money multiplier is likely to increase

A)as market interest rates increase
B)as market interest rates decrease
C)as the Fed undertakes open market purchases
D)as the Fed undertakes open market sales
E)as the currency-deposit ratio increases

Answer 3

as market interest rates increase

Question 4

The assumption that banks hold less excess reserves and consumers hold less currency when market interest rates increase implies that

A)the size of the money multiplier decreases as interest rates rise
B)the Fed has total control over the supply of money
C)changes in money supply occur as economic conditions change
D)monetary policy is totally ineffective
E)none of the above

Question 5

If the currency-deposit ratio is 20%, the reserve-deposit ratio is 10% and the stock of high-powered money is H = 400, money supply is

A)1,000
B)1,200
C)1,600
D)2,000
E)4,000

Question 6

The relationship between the stock of money and the monetary base is

A)determined solely by the reserve-deposit ratio
B)determined solely by the currency-deposit ratio
C)between zero and one
D)the money multiplier
E)the income velocity of money

Question 7

The size of the money multiplier

A)cannot be influenced by actions of the Fed
B)declines with a decrease in high-powered money
C)declines as the currency-deposit ratio decreases
D)increases as the reserve-deposit ratio decreases
E)increases as the reserve requirement is increased

Question 8

Which of the following is NOT an instrument of the Fed for controlling money supply?

A)the excess reserve ratio
B)the required reserve ratio
C)changes in the discount rate (the primary credit rate)
D)open market operations
E)both A and D

Question 9

Banks have an incentive to minimize their excess reserves since

A)they earn only a very low interest rate on the reserves they hold at the Fed
B)larger reserves mean less liquidity
C)deposits are bank assets while reserves are not
D)the higher the reserve-deposit ratio, the weaker the bank's financial position
E)it makes banks less vulnerable in case there is a run on banks

Question 10

Which of the following occurred in the U.S.between 2006 and 2013?

A)required bank reserves increased from $42.77 billion to $111.42 billion
B)excess bank reserves increased from $1.82 billion to $1,519.46 billion
C)the monetary base increased from $801.96 billion to $2,740.90 billion
D)all of the above
E)none of the above

Question 11

The formula for the money multiplier (mm) is

A)mm = (1 + re)/(cu + re)
B)mm = (1 + cu)/(cu + re)
C)mm = (1 - cu)/(cu + re)
D)mm = (cu + re)/(1 - cu)
E)mm =1/(cu + re )

Question 12

If the currency-deposit ratio is 23% and the reserve-deposit ratio is 7%, the size of the money multiplier is

A)0)3
B)2)0
C)3)0
D)3)3
E)4)1

Question 13

While the Fed can influence the money stock, the ratio of currency to deposits in the country at any given time is determined

A)by banks
B)jointly by the Treasury and the Fed
C)only by lending institutions which provide banking services
D)only by the actions of the Treasury Department
E)by the public, as households and businesses hold money in the form they prefer

Question 14

Other things remaining the same, the smaller the currency-deposit ratio,

A)the larger the reserve-deposit ratio
B)the smaller the reserve-deposit ratio
C)the larger the money multiplier
D)the smaller the money multiplier
E)the larger the monetary base

Question 15

The reserve-deposit ratio is likely to increase whenever

A)uncertainty about the net flow of bank deposits increases
B)the market interest rate increases
C)the Fed lowers reserve requirements
D)the Fed increases the discount rate
E)the Fed undertakes open market sales

Question 16

The stock of high-powered money is increased when the Fed

A)sells securities in the open market
B)increases the reserve requirement
C)sells foreign exchange (francs, yen, etc.)
D)makes loans to banks
E)none of the above

Question 17

Banks tend to hold some excess reserves

A)for precautionary purposes to reduce the probability of illiquidity
B)to avoid the costs of borrowing from other banks at the federal funds rate
C)to avoid the costs of borrowing from the Fed at the discount rate
D)all of the above
E)none of the above

Question 18

High-powered money

A)earns more interest than other forms of money
B)consists of currency held by the public and bank reserves
C)consists of currency held by the public and demand deposits at banks
D)includes time and demand deposits held at banks
E)is created whenever the Fed sells government bonds

Question 19

Assume many more stores agree to accept credit and debit cards.Which of the following will be a likely outcome?

A)the money multiplier will decrease
B)the money multiplier will increase
C)money supply will decrease, given a fixed monetary base
D)the currency-deposit ratio will increase
E)the reserve-deposit ratio will decrease

Question 20

An increase in the market interest rate will increase the size of the money multiplier since

A)the reserve-deposit ratio will decrease
B)the currency-deposit ratio will increase
C)the demand for money will decrease
D)banks will earn more interest on their existing assets
E)banks will get more interest on the deposits they hold at the Fed

Question 21

If the Fed imposed a 100% reserve requirement, it would imply that

A)the Fed had no control over money supply
B) the Fed would no longer be able to conduct any open market operations
C) the money multiplier would be equal to one
D)the money multiplier would be equal to zero
E)banks would become completely obsolete

Question 22

If the Fed decreases the reserve requirement,

A)market interest rates will go up
B)national income is likely to decrease at least in the short run
C)the Fed is probably trying to fight inflation
D)bank profits are likely to increase
E)all of the above

Question 23

The stock of high-powered money is reduced when

A)the Fed buys foreign currency in the foreign exchange market
B)the Fed lends to member banks
C)the Treasury deposits funds in its account at the Fed
D)the Fed buys government securities from the public
E)all of the above

Question 24

If most economic disturbances are the result of shifts in money demand, the Fed should

A)target money supply to regain economic stability
B)sell government securities whenever interest rates increase
C)conduct open market purchases whenever interest rates increase
D)target the total amount of reserves available to the banking system
E)none of the above

Question 25

The federal funds rate

A)is not affected by open market operations
B)is also known as the primary credit rate
C)is the rate that banks have to pay if they borrow from the Fed
D)is the rate a bank has to pay if it borrows funds temporarily from another bank
E)none of the above

Question 26

Over which of the following does the Fed have the most control?

A)the stock of money
B)the stock of bank reserves
C)the amount of excess reserves held by banks
D)the size of the money multiplier
E)the currency-deposit ratio

Question 27

Assume that the currency-deposit ratio is 32%, the required reserve ratio is 7%, the excess reserve ratio is 1%, and total money supply is $1,320 billion.What is the amount of high-powered money?

A)$132 billion
B)$165 billion
C)$330 billion
D)$400 billion
E)$800 billion

Question 28

The federal funds rate is the rate that

A)banks are charged if they borrow funds from the Fed
B)the Fed pays on reserves held as deposits in its account
C)banks charge each other, usually for large overnight loans
D)banks charge their best customers
E)the FDIC charges to insure deposits

Question 29

If money supply is M = 1,200, currency outstanding is Cu = 380, and the monetary base (high-powered money) is H = 480,

A)the money multiplier is 2.5 and bank deposits are D = 820
B)the money multiplier is 2.5 and bank deposits are D = 720
C)the money multiplier is 1.4 and bank deposits are D = 860
D)the money multiplier is 1.4 and bank deposits are D = 820
E)the money multiplier is 1.7 and bank deposits are D = 720

Question 30

If the Fed wanted to keep income at the original level after a tax increase, it would need to

A)buy government securities in open market operations
B)sell government securities in open market operations
C)raise reserve requirements
D)raise the primary credit rate (the discount rate)
E)raise the currency-deposit ratio

Question 31

When the central bank intervenes in the foreign exchange market by purchasing foreign currency, it also routinely engages in open market sales of government securities.Why?

A)it has to sell securities to acquire the necessary funds
B)to avoid a recession that may be caused by the reduction in money supply resulting from the purchase of foreign currency
C)it wants to isolate the domestic economy from foreign competition
D)to increase the profitability of its portfolio
E)to prevent its intervention in the foreign exchange market from having a direct effect upon the domestic money supply

Question 32

If the Fed wanted to maintain a constant interest rate after an increase in government spending, it would need to

A)buy government securities in open market operations
B)sell government securities in open market operations
C)raise reserve requirements
D)increase the primary credit rate (the discount rate)
E)increase the currency-deposit ratio

Question 33

If the Federal Reserve wanted to reduce inflation, the most effective policies would be to

A)sell government securities and raise reserve requirements
B) sell government securities and lower reserve requirements
C) buy government securities and lower reserve requirements
D)buy government securities and raise reserve requirements
E)buy government securities and keep reserve requirements the same

Question 34

Assume money supply is $1,200 billion, bank deposits are $800 billion, and the reserve-deposit ratio is 10%.By how much is money supply likely to change if the Fed conducts an open market sale valued at $40 million?

A)-$100 billion
B)-$60 billion
C)+$40 billion
D)+$60 billion
E) +$100 billion

Question 35

If money supply is M = 1,200, bank deposits are D = 800, and the monetary base (high-powered money) is H = 480,

A)the reserve-deposit ratio is 40% and the money multiplier is 4
B) the reserve-deposit ratio is 40% and the money multiplier is 2.5
C) the reserve-deposit ratio is 10% and the money multiplier is 4
D)the reserve-deposit ratio is 10% and the money-multiplier is 2.5
E)the reserve-deposit ratio is 10% and the money multiplier is 1.5

Question 36

The effect of an increase in government spending on aggregate demand is greatest if the government finances it by

A)increasing taxes
B)borrowing from the domestic public
C)borrowing indirectly from the Fed
D)selling Treasury bills to banks
E)issuing long-term government bonds

Question 37

Which are the three channels by which the Federal Reserve can reduce money supply?

A)buy government securities, lower reserve requirements, and lower the discount rate
B)buy government securities, raise reserve requirements, and raise the discount rate
C)buy government securities, lower reserve requirements, and raise the discount rate
D)sell government securities, raise reserve requirements, and raise the discount rate
E)sell government securities, lower reserve requirements, and raise the discount rate

Question 38

The Federal Reserve can decrease bank reserves by

A)selling bonds to the public
B)lowering the reserve requirements
C)lowering the discount rate (the primary credit rate)
D)buying foreign exchange
E)making open market purchases

Question 39

Difficulties for the Fed in conducting successful monetary policy arise from the fact that

A)the Fed has no good control over the primary credit rate (the discount rate)
B)the Fed often has to follow orders from the Treasury department
C)changes in some of the variables that are important to monetary policy (e.g., velocity) cannot always be accurately anticipated
D)FOMC has to vote on policy changes before they are implemented
E)both C and D

Question 40

If the Fed were to abolish reserve requirements,

A)it could no longer exert any influence over money supply
B) the size of the money multiplier would become infinite
C)the size of the money multiplier would become 1
D)both A and B
E)none of the above

Question 41

If the Fed is trying to peg the interest rate, it

A)needs to sell government securities whenever interest rates go up
B)needs to tie the discount rate to the three-month Treasury-bill rate
C)loses control over money supply
D)needs to restrict money supply whenever interest rates increase
E)none of the above

Question 42

If the monetary growth rate is far above the target range previously announced by the Fed, financial investors are likely to assume that future interest rates will increase since

A)the Fed is likely to reduce money supply soon
B)inflation will start to increase
C)borrowing will increase in anticipation of higher inflation
D)all of these are possible
E)none of these are possible

Question 43

If a central bank were to set an interest rate target and stick to it,

A)much of the economy's instability would be eliminated
B)the central bank would no longer be able to control money supply
C)the central bank would never be able to provide sufficient money for economic growth to get the economy out of a recession
D)inflation would no longer be a problem since the central bank would have credibility
E)velocity would become very stable even in the short run

Question 44

When conducting monetary policy, the Fed should not just look at the total amount of money but also at the total amount of credit, since

A)the link between money and nominal GDP is insignificant
B)if not enough credit is available investment will be reduced, affecting GDP negatively
C)banks can ration credit, affecting the impact of monetary policy
D)all of the above
E)only B)and C)

Question 45

Which of the following is an intermediate target of the Fed?

A)high-powered money
B)bank reserves
C)the federal funds rate
D)money supply
E)price stability

Question 46

One of the problems that the Fed has when conducting monetary policy is that

A)it can control the supply of high-powered money but cannot always accurately predict the size of the money multiplier
B)it can control the size of the money multiplier but cannot always control the amount of high-powered money
C)it cannot influence the federal funds rate by its open market operations
D)it can set the discount rate but cannot influence the federal funds rate, which is determined by banks
E)velocity is stable in the short run but not in the long run

Question 47

Between 1990 and 1992, the Fed conducted monetary policy almost entirely with reference to interest rates since

A)banks rationed credit
B) the economy grew at a very fast pace
C)the growth rates of different monetary aggregates diverged widely
D)the objective was to increase the profitability of banks
E)the objective was to keep money supply stable

Question 48

If most disturbances in our economy are coming from the expenditure sector, the Fed should

A)buy government securities whenever interest rates go up to keep income stable
B)sell government securities whenever interest rates go up to keep interest rates stable
C)follow money supply targets rather than interest rate targets
D)follow interest rate targets rather than money supply targets
E)change reserve requirements more frequently

Question 49

Assume that the Fed's goal is to stabilize national income.Under what conditions would a money supply target be more desirable than an interest rate target?

A)when money demand is very interest inelastic and investment is very interest elastic
B)when money demand is very interest elastic and investment is very interest inelastic
C)when consumer spending is very predictable
D)when uncertainties and fluctuations are coming mainly from the expenditure sector
E)when uncertainties and fluctuations are coming mainly from changes in money demand

Question 50

During the financial crisis that started in 2008, the Fed

A)lowered short-term interest rates until they reached almost zero percent
B)bought some non-traditional assets to intervene in long-term markets and drive long-term interest rates down
C)started to pay interest to banks on the reserves they held with the Fed
D)all of the above
E)none of the above