Economics Chapters 12-14

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Macroeconomics

Instructor: Jen Dinsmore Hanson

Homework Assignment

Chapter 14

Multiple Choice Questions

1. When there is a great deal of inflation the Fed will

A. sell securities on the open market.

B. buy securities on the open market.

C. both sell and buy securities on the open market.

D. not sell nor buy securities on the open market.

2. Which statement is false?

A. The main job of the Fed is to control the rate of monetary growth.

B. The Fed is more effective at fighting inflation than recession.

C. Open market operations are carried out for the Fed by private government bond dealers.

D. None of the statements are false.

3. If you wrote a check for $37.55 to pay your phone bill and sent it to Verizon,

A. your bank's deposits will go down by $37.55 and its reserves would go up by $37.55.

B. your bank's deposits would go up by $37.55 and its reserves would go down by $37.55.

C. your bank's deposits would go down by $37.55 and its reserves would go down by $37.55.

D. your bank's deposits would go up by $37.55 and its reserves would go up by $37.55.

4. Which statement is true?

A. The Federal Reserve buys nearly all its United States government securities directly from the Treasury.

B. Open market operations are the buying and selling of United States government securities in the open market

by the Federal Reserve.

C. The least important policy tool used by the Federal Reserve to control the money supply is open market

operations.

D. None of the choices/statements are true.

5. Which statement is true?

A. The chairman of the Federal Reserve Board is appointed to that position for one 14-year term.

B. The chairman may be fired at any time by the President.

C. Most presidents get to appoint all the members of the Federal Reserve Board.

D. None of the statements are true.

6. Which statement is true?

A. The Federal Open Market Committee has very little power.

B. The Federal Reserve rarely raises or lowers the discount rate.

C. Our money supply grows at a rate of between three and four percent a year.

D. The Federal Reserve rarely changes the reserve requirements.

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7. Which statement is true?

A. Open market operations are carried out by the President and Congress.

B. The rate of growth of our money supply is set by law.

C. The most powerful policy weapon of the Federal Reserve is raising and lowering the discount rate.

D. The President's appointment of the chairman of the Federal Reserve must be approved by Congress.

8. Which statement is true?

A. We have had a central bank since 1789.

B. We have never had a central bank.

C. Our central bank was formed in 1913.

D. We did not have a central bank prior to the Federal Reserve.

9. Statement I: The president basically makes monetary policy.

Statement II: The Board of Governors of the Fed serves at the president's pleasure and can be summarily

dismissed.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

10. Required reserves are

A. equal to total reserves minus excess reserves.

B. equal to total reserves minus checkable deposits.

C. always less than total reserves.

D. determined by multiplying the level of checkable deposits times the discount rate.

E. always equal to outstanding loans times the reserve requirement ratio.

11. The Federal Open Market Committee has _____ members.

A. 7

B. 10

C. 12

D. 14

E. 17

12. Which of the following statements best describes the twelve Federal Reserve Banks?

A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and

orderly market for United States Treasury securities.

B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks

in commercial banking in order to make it a reasonably profitable industry.

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money

supply and interest rates in promoting the general economic welfare.

D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their

owners.

E. They are publicly owned and publicly controlled central banks whose basic goal is to provide income for the

Treasury.

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13. The Depository Institutions Deregulation and Monetary Control Act of 1980 accomplished which one of the

following reforms?

A. Established a uniform set of reserve requirements for all depository institutions.

B. Established maximum and minimum interest rates which depository institutions were permitted to pay on

checkable deposits.

C. Shifted to the United States Treasury the responsibility for setting the discount rate.

D. Provided presidential veto power over setting reserve requirements.

14. The Federal Reserve System was NOT

A. established with the 1913 passage of the Federal Reserve Act.

B. the first attempt to have a United States central bank.

C. intended to act as a "lender of last resort."

D. designed to lend money to inherently sound banks so that they can survive financial panics.

15. The Federal Open Market Committee is made up of all of the following, except

A. the board of governors.

B. the chairman of the board of governors.

C. the president of the United States.

D. the president of the Federal Reserve Bank of New York.

E. the presidents of four Federal Reserve Banks other than the New York Bank.

16. The reserve requirement ratio is equal to

A. required reserves divided by excess reserves.

B. legal required reserves times the deposit multiplier.

C. total checkable deposits times the deposit multiplier.

D. total checkable deposits times the excess reserve ratio.

E. legal required reserves divided by total checkable deposits.

17. When the Fed buys United States bonds,

A. excess reserves in commercial banks are increased immediately.

B. the banking system will decrease the number of loans that are made.

C. total bank reserves are decreased.

D. the value of the money multiplier slowly declines to a new stationary level.

E. the money supply will eventually decline as banks are forced to call loans due to meet reserve requirements.

18. Which of the following was a result of the Depository Institutions Deregulation and Monetary Control Act

of 1980 (DIDMCA)?

A. All checkable deposits, whether at commercial banks, savings banks, savings and loan associations, or credit

unions will have the same reserve requirements.

B. The Fed has the power to change the reserve requirement on checkable deposits at commercial banks but not

credit unions.

C. The Fed has the power to set the reserve requirement on checkable deposits at credit unions, but once set, the

reserve requirement cannot be changed for two years.

D. Commercial and savings banks are regulated by the Fed, but credit unions and state banks are not subject to

regulations, but must pay dues to the Fed.

E. Credit unions and state banks must abide by Fed reserve requirements, but are denied access to borrowing at

the discount window.

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19. Monetary policy consists of

A. actions taken by both the legislative and executive branches of government to control the nation's money

supply.

B. actions taken by Congress to control the nation's money supply.

C. actions taken by the Federal Reserve System to control the nation's money supply.

D. actions taken by the executive branch of government to control the nation's money supply.

20. Which statement is true?

A. The Federal Reserve has an excellent record as a "lender of last resort."

B. There is little debate about whether or not the Federal Reserve Board should be independent.

C. The power of the Federal Reserve is centered largely in its Board of Governors.

D. The stockholders in the Federal Reserve receive large profits.

21. The most powerful (but seldom used) tool at the Federal Reserve's disposal is

A. the ability to set reserve requirements.

B. the discount rate.

C. open market operations.

D. margin requirements on stock purchases.

22. Bank panics were the result of

A. banks holding 100% of their deposits on reserve.

B. depositors attempting to withdraw more deposits than the banks held in reserve.

C. banks hoarding greenbacks during the Civil War.

D. the United States going off the gold standard in 1933.

E. money circulating too slowly.

23. The discount rate refers to

A. the penalty paid by risky bank borrowers; that is, the amount of interest they pay in excess of the prime rate.

B. the rate at which banks write off bad loans.

C. the rate at which assets lose their real value as a result of inflation.

D. the rate at which money loses its value as a result of inflation.

E. the rate of interest that the Fed charges on loans to commercial banks and thrift institutions.

24. Which of the following will increase commercial bank reserves?

A. The purchase of government bonds in the open market by the Federal Reserve Banks

B. An increase in the reserve ratio

C. An increase in the discount rate

D. The sale of government bonds in the open market by the Federal Reserve Banks

25. The Federal Reserve System controls the money supply primarily through

A. open market operations.

B. accounting operations.

C. reserve requirement changes.

D. jawboning.

E. changing the discount rate.

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26. Statement I: An expansionary monetary policy tends to raise our net exports.

Statement II: Higher interest rates in the United States tend to raise the United States dollar relative to foreign

currencies.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

27. When the Fed issues currency

A. this increases our money supply only if it replaces old, worn-out currency.

B. this increases our money supply only if it is used to accommodate the public's desire to hold more currency.

C. this increases our money supply either if it replaces old, worn currency, or if it is used to accommodate the

public's desire to hold more currency.

D. this does not increase our money supply.

28. When the Federal Reserve sells U.S. government securities on the open market, this tends to ____ banks

reserves and ______ the money supply.

A. raise; raise

B. lower; lower

C. raise; lower

D. lower; raise

29. If the monetary authorities want to lower the size of the monetary multiplier, they should

A. lower the legal reserve ratio.

B. raise the legal reserve ratio.

C. take actions to increase bank reserves.

D. take none of these actions.

30. The most powerful individual in the Federal Reserve System is the

A. senior member of the Federal Open Market Committee.

B. Superintendent of the Board of Governors.

C. Chairman of the Federal Reserve Board.

D. New York District Bank President.

31. If Suntrust Banks have demand deposits of $10 billion, actual reserves of $2 billion, and the reserve

requirement is 18%, the bank's excess reserves are

A. $180 million.

B. $200 million.

C. $360 million.

D. $400 million.

E. $1 billion.

32. If the current equilibrium output level is above the full-employment output level, the Fed should consider

A. selling government securities, raising the discount rate, and raising the required reserve ratio.

B. selling government securities, lowering the discount rate, and raising the required reserve ratio.

C. buying government securities, lowering the discount rate, and raising the required reserve ratio.

D. buying government securities, raising the discount rate, and raising the required reserve ratio.

E. selling government securities, raising the discount rate, and lowering the required reserve ratio.

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33. The federal funds rate is the interest rate for

A. reserves that banks borrow from the Fed.

B. the preferred customers of the banks.

C. reserves borrowed by one bank from another bank.

D. banks belonging to the Federal Reserve System.

34. Statement I: If a bank has negative excess reserves, its required reserves are greater than its actual reserves.

Statement II: Ideally banks prefer to keep zero excess reserves.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

35. Suppose the required reserve ratio is 10% and a commercial bank has $2 million in checkable deposits

appearing on the liability side of its balance sheet. How much vault cash does the bank have?

A. $2 million

B. $20,000

C. $200,000

D. Vault cash cannot be determined by the information given.

36. During a depression, the best strategy of the Federal Reserve is to

A. sell government bonds, to make low-risk, sound assets available for commercial banks to buy.

B. sell government bonds, in order to reduce the size of the government's deficits.

C. sell government bonds, in order to increase aggregate demand.

D. buy government securities.

37. If the Fed sells government bonds on the open market, which of the following will NOT occur?

A. The money supply will contract.

B. The market rate of interest on corporate bonds will increase.

C. The market rate of interest on government bonds will increase.

D. The interest rate will fall.

38. A major factor contributing to the recession of 1981-1982 was

A. an increase in interest rates.

B. an increase in exports.

C. the multiplier effect.

D. an increase in unemployment.

39. An individual bank can create deposits to the extent of its

A. excess reserves.

B. required reserves.

C. total reserves.

D. deposits.

E. net worth.

40. The independence of the Fed

A. allows it to run a monetary policy different from that which elected officials might demand.

B. means that the Fed frequently pursues policies quite different from what the President asks for.

C. is widely agreed to be best for the nation's welfare.

D. is not real, since Congress must approve its policy.

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41. The Federal Reserve CANNOT do which one of the following?

A. Change the tax rate on profits

B. Change the discount rate

C. Change the required reserve ratio

D. Change margin requirements

E. Buy securities on the open market

42. The Federal Reserve System

A. has regional Federal Reserve Banks that make most of the decisions.

B. makes decisions subject to the approval of the President.

C. makes its major policy decisions in its Open Market Committee.

D. makes decisions subject to the approval of Congress.

43. If the Fed buys $30 million in government securities, paying for them with new deposit balances at the Fed,

the money supply will end up

A. decreasing by $30 million.

B. decreasing by much more than $30 million.

C. increasing by $30 million.

D. increasing by much more than $30 million.

44. Statement I: The interest rate charged by the Fed on loans to depositary institutions is called the short-term

rate.

Statement II: Changes in the reserve requirements are the most frequently used forms of monetary policy

available to the Fed.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

45. Assume that a bank has $2 million in reserves and checkable deposits of $10 million and the required

reserve ratio on checkable deposits is 20%. The maximum amount of new loans this bank can make is

A. $500,000.

B. $1 million.

C. $200,000.

D. zero.

E. $700,000.

46. Which of the following cities in NOT the location of a Federal Reserve Bank?

A. Salt Lake City

B. Kansas City

C. St. Louis

D. San Francisco

E. Boston

47. Which of the following policy actions by the Fed is likely to cause the money supply to decrease?

A. An open market purchase

B. A decrease in required reserve ratios

C. A decrease in the discount rate

D. An open market sale

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48. Statement I: Banks try to carry large excess reserves.

Statement II: Actual reserves minus excess reserves = required reserves.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

49. Which of the following policy action by the Fed is likely to cause the money supply to increase?

A. An open market sale.

B. An increase in required reserve ratios.

C. An increase in the discount rate.

D. An open market purchase.

50. During a recession, banks are likely to

A. experience a deficit.

B. decrease deposits.

C. hold excess reserves.

D. Banks are likely to do all of these choices.