Deck 14: Monetary Policy and the Federal Reserve System

Question 1

The currency-deposit ratio is determined by

A)banks.
B)the public.
C)the Federal Reserve.
D)Congress.

Answer 1

B

Question 2

Fractional reserve banking is the system that

A)allows banks not to insure their deposits.
B)allows banks not to join the Federal Reserve System.
C)limits banks' activities from crossing state lines.
D)allows banks to keep smaller reserves than their deposits.

Answer 2

D

Question 3

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?

A)1.5
B)2.0
C)2.6
D)5.0

Answer 3

C

Question 4

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is

A)$3 million.
B)$12 million.
C)$15 million.
D)$20 million.

Question 5

Assume that the reserve-deposit ratio is 0.4.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?

A)0.2
B)0.3
C)0.4
D)0.5

Question 6

The monetary base is defined as

A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Question 7

The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to

A)$2 million.
B)$2.4 million.
C)$2.6 million.
D)$4 million.

Question 8

Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?

A)0.25
B)0.35
C)0.40
D)0.50

Question 9

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

A)decreased; decreased
B)decreased; increased
C)increased; decreased
D)increased; increased

Question 10

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by

A)$1 million.
B)$2 million.
C)$3 million.
D)$4 million.

Question 11

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to

A)2.5.
B)3.0.
C)4.0.
D)5.0.

Question 12

High-powered money consists of

A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Question 13

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 14

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank deposits are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 15

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.

A)decrease; lower
B)decrease; raise
C)increase; lower
D)increase; raise

Question 16

Banks hold some deposits on reserve at the Fed because

A)the Fed requires every bank to hold at least $100 million on deposit at all times.
B)the Fed will insure those deposits,but will not insure regular bank deposits.
C)these are membership dues for being a member bank.
D)these deposits meet the reserve requirements of the Fed.

Question 17

Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?

A)0.2
B)0.3
C)0.4
D)0.5

Question 18

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is

A)1 - res.
B)1 + res.
C)1/res.
D)res²

Question 19

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to

A)$2 million.
B)$3 million.
C)$5 million.
D)$10 million.

Question 20

Which of the following are depository institutions?

A)The Federal Reserve Banks of New York and Chicago
B)The U.S.Treasury and the IRS
C)Banks and thrifts
D)Investment banks and finance companies

Question 21

Who determines the open-market operations of the Federal Reserve System?

A)Board of Governors
B)FDIC
C)FHLBB
D)FOMC

Question 22

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2 i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money multiplier equals

A)2.00.
B)2.40.
C)3.00.
D)4.00.

Question 23

The money supply is $12.5 million,currency held by the nonbank public is $2.5 million,and the reserve-deposit ratio is 0.25.
(a)What is the quantity of bank deposits?
(b)What is the quantity of bank reserves?
(c)What is the quantity of the monetary base?
(d)What is the money multiplier (give a number)?

Question 24

The current chairman of the Board of Governors of the Federal Reserve System is

A)Milton Friedman.
B)Alan Greenspan.
C)Ben Bernanke.
D)Paul Volcker.

Question 25

Which of the following is the Federal Reserve most likely to use to change the nation's money supply?

A)Open-market operations
B)Reserve requirements
C)Discount lending
D)Credit controls

Question 26

The Fed can reduce the money supply by reducing

A)the currency-deposit ratio.
B)the monetary base.
C)reserve requirements.
D)the discount rate.

Question 27

The leadership of the Federal Reserve System is provided by

A)the Board of Governors.
B)the Federal Advisory Committee.
C)the Federal Open Market Committee.
D)the directors of the twelve Federal Reserve banks.

Question 28

A bank run is

A)a large-scale,panicky withdrawal of deposits from a bank.
B)the transfer of funds from one bank to another.
C)a situation when a bank borrows from the Fed's discount window.
D)a situation in which a bank borrows at the Federal funds rate.

Question 29

Suppose the reserve-deposit ratio is
res = 0.5 - 2 i,
where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10 i,
where Y is real output.Currently the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume the price level P is equal to 1.
(a)Calculate the money multiplier.
(b)Calculate the reserve-deposit ratio.
(c)Calculate the money supply.
(d)Calculate the value of output Y that clears the asset market.

Question 30

How many Federal Reserve Banks are there?

A)7
B)12
C)15
D)5,500 (approximately)

Question 31

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money supply equals

A)200.
B)240.
C)300.
D)400.

Question 32

If the money multiplier is 10,the sale of $1 billion of securities by the Fed on the open market causes a

A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Question 33

The Federal Open Market Committee consists of all the following people EXCEPT

A)the Board of Governors of the Federal Reserve System.
B)five presidents of Federal Reserve Banks,on a rotating basis.
C)the chairman of the President's Council of Economic Advisors.
D)the President of the Federal Reserve Bank of New York.

Question 34

Suppose the following statistics are available for the economy:
CU = $60 billion
RES = $100 billion
DEP = $1000 billion
(a)Calculate the size of the monetary base,the money supply,the reserve-deposit ratio,the currency-deposit ratio,and the money multiplier.
(b)Suppose the currency-deposit ratio rises to .10,while the reserve-deposit ratio and monetary base remain unchanged.Calculate the money multiplier,the money supply,and the new values of CU,RES,and DEP.

Question 35

Suppose that bank reserves (res)are a function of the nominal interest rate (i):
res = 0.3 - 3i.
The money multiplier is (cu + 1)/(cu + res),where cu is the currency-deposit ratio.Initially,suppose the real interest rate (r)equals 0.03,the expected inflation rate (p^e)equals 0.03,and the currency-deposit ratio equals :
cu = 0.4 - (10 × p^e).
The real money demand function is L(Y,i)= 0.8Y - 1500i,where Y is the level of output.The monetary base equals 100.The price level equals 1.0 initially and will not change in the short run,but will adjust in the long run.
(a)Calculate the currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output.Assume that this level of output equals full-employment output,so you are assuming that the economy is in general equilibrium with the price level equal to 1.0.Show your work.
(b)Suppose financial innovation causes the reserve-deposit ratio to decline to res = 0.2 - 3i.Calculate the new currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output in the short run,assuming a Keynesian model with the price level fixed in the short run.Show your work.
(c)Calculate the equilibrium price level in the long run.Show your work.

Question 36

Last year,the currency-deposit ratio was 0.2 and the reserve-deposit ratio was 0.2.Over the past year,the public changed its currency-deposit ratio,to which the Fed responded by reducing the reserve-deposit ratio to 0.15,to keep the money supply from changing and keeping the same monetary base.Calculate the new currency-deposit ratio.Show your work.

Question 37

The Federal Reserve is

A)a Kentucky bourbon.
B)a wild game preserve.
C)an express mail service.
D)the central bank of the United States.

Question 38

If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a

A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Question 39

If the Fed decreases the monetary base by $100 million and the money multiplier is 4,M1 will

A)rise by $400 million.
B)fall by $400 million.
C)rise by $25 million.
D)fall by $25 million.

Question 40

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $30 million,and bank deposits are $100 million.The money multiplier is equal to

A)2.5.
B)3.0.
C)4.0.
D)5.0.

Question 41

In the Keynesian model,suppose the Fed sets a target for the money supply.If the IS curve shifts to the left,and the Fed wants to keep output unchanged,what should the Fed do?

A)reduce taxes.
B)reduce the money supply.
C)increase taxes.
D)increase the money supply.

Question 42

Which of the following might the Fed rely on as an intermediate target?

A)The monetary base
B)The discount rate
C)M2
D)The exchange rate of the dollar

Question 43

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts down and to the left,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,it will

A)shift the LR curve up.
B)not shift the LR curve.
C)shift the LR curve down.
D)shift the IS curve up and to the right.

Question 44

Since the 1930s,the Fed's most important tool for controlling the money supply has been

A)setting the discount rate.
B)setting reserve requirements.
C)moral suasion.
D)open-market operations.

Question 45

The new monetary policy tool that the Fed began using in 2008 is

A)changing the interest rate paid on reserves
B)imposing a surcharge on credit cards
C)putting a tax on all financial transactions
D)borrowing from China

Question 46

The Federal funds market is a market for trading funds between

A)a bank and a multinational corporation.
B)a bank and the government.
C)a bank and another bank.
D)a bank and the Federal Reserve Bank.

Question 47

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts down and to the left,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,what should the Fed do? Use the LR curve to formulate your answer.

Question 48

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts up and to the right,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,it will

A)shift the LR curve up.
B)not shift the LR curve.
C)shift the LR curve down.
D)shift the IS curve up and to the right.

Question 49

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts up and to the right,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,what should the Fed do? Use the LR curve to formulate your answer.

Question 50

The Federal Reserve System's largest asset among the assets listed below is

A)gold.
B)loans to depository institutions.
C)deposits of depository institutions.
D)U.S.Treasury securities.

Question 51

In the Keynesian model,suppose the Fed wants to keep output unchanged.If the IS curve shifts to the left,and the Fed acts to keep output unchanged,then

A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.

Question 52

In response to an unanticipated tightening of monetary policy,the Fed funds rate ________ at first,then ________ after 6 to 12 months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 53

The primary purpose of the discount window is to

A)influence the nation's money supply.
B)fulfill the bank's lender of last resort role.
C)control banks' excess reserves.
D)influence the amount of loans that banks provide to the public.

Question 54

Changes in reserve requirements directly and immediately affect

A)the monetary base.
B)banks' holdings of securities.
C)the Fed's holdings of foreign exchange.
D)the money multiplier.

Question 55

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts to the left,and the Fed wants to keep output unchanged,

A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.

Question 56

Which of the following best describes the relationship between the Fed funds rate and the discount rate,beginning in 2003?

A)The Fed funds rate is usually lower than the discount rate.
B)The two rates are equal.
C)The discount rate is usually lower than the Fed funds rate.
D)There is no relationship between the two rates.

Question 57

When U.S.banks borrow from one another,they must pay the

A)discount rate.
B)prime rate.
C)Fed funds rate.
D)Interbank Offer Rate.

Question 58

Which of the following variables is likely to serve as an intermediate target for monetary policy?

A)Money supply
B)Inflation rate
C)Open-market operations
D)Unemployment rate

Question 59

Which of the Fed's instruments is most frequently used?

A)Changing reserve requirements
B)Open-market operations
C)Changing the discount rate
D)Changing margin requirements for the stock market

Question 60

If a bank borrows from a Federal Reserve Bank,the interest rate is called

A)the prime rate.
B)the discount rate.
C)the Fed funds rate.
D)the reserve availability rate.

Question 61

In response to an unanticipated easing of monetary policy,output ________ at first,then ________ after about 4 months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 62

In response to an unanticipated tightening of monetary policy,the price level ________ at first,then ________ after a year.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; begins to rise
D)remains roughly unchanged; begins to fall

Question 63

When the effects of monetary policy on the economy work through changes in real interest rates,the effect is called

A)disintermediation.
B)the interest rate channel.
C)the credit channel.
D)the fiscal channel.

Question 64

Which of the following statements would Milton Friedman disagree with?

A)Monetary policy has few short-run effects on the real economy.
B)In the long run,changes in the money supply primarily affect the price level.
C)In practice,there is little scope for using monetary policy actively to smooth out business cycles.
D)The Federal Reserve cannot be relied on to effectively smooth out business cycles.

Question 65

Describe,in general terms,the strategy of monetary policy,explaining how monetary-policy tools are used to achieve the goals of monetary policy.What intermediate stages are important in going from tools to goals? What are the links between the different stages? How does the Federal Reserve use this strategy today?

Question 66

Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.

Question 67

Monetarists suggest doing which of the following?

A)Maintain a steady growth rate of the money supply.
B)Use fiscal policy to combat unemployment in the short run.
C)Use monetary policy to combat unemployment in the long run.
D)Use fiscal policy to combat inflation in the long run.

Question 68

When monetary policy works by affecting the supply and demand for credit,the mechanism is referred to as

A)the exchange rate channel.
B)the interest rate channel.
C)the credit channel.
D)the fiscal channel.

Question 69

Milton Friedman would eliminate the destabilizing effect of the Federal Reserve's monetary policy by

A)eliminating the Federal Reserve.
B)removing the Federal Reserve's political independence.
C)requiring that the Federal Reserve choose a monetary aggregate and increase it at a fixed percentage rate each year.
D)eliminating the Federal Reserve's right to carry out open-market operations.

Question 70

Describe the difference between a primary credit discount rate and the secondary credit discount rate,including who can borrow at which rate and how such lending is managed by the Fed.

Question 71

Which of the following is not a major channel of monetary policy transmission?

A)Interest rate channel
B)Exchange rate channel
C)Fiscal channel
D)Credit channel

Question 72

Evidence on the existence of a credit channel for monetary policy transmission shows that on the supply side of the credit market,the credit channel was ________ in the 1960s and 1970s,and has ________ more recently.

A)powerful; weakened
B)powerful; become stronger
C)weak; become stronger
D)weak; disappeared completely

Question 73

Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?

A)Information lags are short,enabling the central bank to respond quickly to changes in the economy.
B)There is little uncertainty over the effect of a change in the money supply on the economy.
C)There are long and variable lags between monetary policy actions and their economic results.
D)Wage and price adjustments are relatively slow,so changing the money supply will have a minimal impact on the real economy.

Question 74

Suppose the Fed cares only about keeping the economy close to full-employment output.The Fed can target the real money supply (thus keeping the LM curve fixed)or it can target the real interest rate,changing the money supply and shifting the LM curve however is necessary to prevent a change in the real interest rate.
(a)Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why.Illustrate with a diagram.
(b)Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why.Illustrate with a diagram.

Question 75

Bernanke suggested methods for monetary policy to deal with the lower bound,including all of the following except:

A)affecting interest rate expectations.
B)altering the composition of assets held by the central bank.
C)tightening monetary policy more aggressively.
D)expanding the size of the central bank balance sheet.

Question 76

Describe,in general terms,the lags in the effects of monetary policy on interest rates,output,and prices.Be sure to note how long it takes each variable to respond to policy changes.

Question 77

Worries about the zero bound from 2002 to 2005 led the Fed to

A)increase reserve requirements on banks.
B)make more discount loans than usual.
C)tighten monetary policy.
D)keep the Federal funds rate below the inflation rate.

Question 78

The credit channel of monetary policy transmission works in two ways.On the supply side of the credit market,tight monetary policy leads to ________ lending by banks; on the demand side of the credit market,tight monetary policy leads to ________ in the credit-worthiness of borrowers.

A)increased; an increase
B)increased; a decrease
C)reduced; a decrease
D)reduced; an increase

Question 79

Suppose the Fed has just learned that some foreign economies are headed for recession,which will reduce U.S.exports.This is an economic shock that shifts the IS curve down.What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases?
(a)You use the classical (RBC)model.
(b)You use the Keynesian (efficiency wage)model.
(c)You use the extended classical model with misperceptions.
In each case,show the IS-LM-FE diagram associated with your answer.

Question 80

When monetary policy works through changes in the real exchange rate,the effect is called

A)disintermediation.
B)the interest rate channel.
C)the credit channel.
D)the exchange rate channel.