Macro Chapter 13 study guide questions

Transcription

1 Macro Chapter 13 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. If the Fed wants to use "open market operations" to decrease the money supply, it would a. increase the federal funds rate. b. issue more federal government debt. c. sell U.S. government securities (bonds) to the general public. d. increase the required reserve ratio. 2. Suppose the Fed buys $10 million of U.S. securities from the public. Assume a reserve requirement of 5 percent and that all banks hold no excess reserves. The total impact of this action on the money supply will be a. an increase of $200 million. b. a decrease of $200 million. c. a decrease of $10 million. d. an increase of $10 million. 3. In the United States, the control of the money supply is the responsibility of the a. Federal Reserve System (the Fed). b. the president. c. the U.S. Treasury. d. the U.S. Congress. 4. The nature and measurement of the money supply has become more difficult in recent years because of a. the reduced use of pennies in transactions. b. actions of the U.S. Congress that have reduced the power of the Fed to control the money supply. c. legislation prohibiting the circulation of the dollar outside of the United States. d. financial innovations, such as the introduction of interest-earning checking accounts and money market mutual funds. 5. Suppose a bank receives a new deposit of $500. The bank extends a new loan of $400 because it is required to hold the other $100 on reserve. What is the legal required reserve ratio? a. 10 percent b. 15 percent c. 20 percent d. 25 percent 6. Fiat money is defined as a. the money of U.S. citizens deposited at banks and other financial institutions outside the United States. b. money spent on Italian sports cars. c. money that has little intrinsic value; it is neither backed by nor convertible to a commodity of value. d. vault cash plus deposits at the Fed. 7. The tool used most frequently by the Fed to control the money supply is a. changes in the premiums charged for FDIC deposit insurance. b. open market operations. c. changes in the discount rate. d. changes in reserve requirements.

2 8. The federal funds rate is the interest rate a. banks pay when they borrow money from each other for short periods of time. b. the federal government pays on the national debt. c. the Fed charges banks when banks need to borrow from the Fed. d. the federal government charges foreign banks. 9. The three basic functions of money are a. fiat, seigniorage, and debt. b. a medium of exchange, a store of value, and a unit of account. c. a standard of pay, a coincidence of wants, and a measure of the value of time. d. demand deposits, other checkable deposits, and time deposits. 10. If the Federal Reserve wanted to expand the supply of money to head off a recession, it could a. decrease the reserve requirements. b. lower taxes. c. sell U.S. securities in the open market. d. increase the discount rate. 11. The larger the reserve requirement, the a. larger the potential deposit multiplier. b. smaller the potential deposit multiplier. c. more profitable the banks will be. d. larger the proportion of an additional deposit that is available to the bank for the extension of additional loans. 12. The total expansion in the money supply can be less than is predicted by the deposit expansion multiplier if a. banks choose to hold some excess reserves rather than lending all excess reserves. b. some individuals prefer to hold cash instead of depositing their money in banks. c. instead of a monopoly banking system, there are many banks. d. both a and b are correct. 13. When economists say that money serves as a unit of account, they mean that money a. allows people to avoid barter (trading goods for other goods) by using money. b. is always issued in fixed denominations (for example $1, $5, $10, $20 bills). c. allows people to value all goods and services in terms of one commodity (money), rather than in terms of several commodities. d. makes it easier for people to maintain value across time by letting them save it in the form of money, rather than in the form of physical goods that might depreciate over time. 14. The value (purchasing power) of each unit of money a. does not depend on the amount of money in circulation. b. tends to increase as the money supply expands. c. increases as prices rise. d. is inversely related to prices (in other words, money's value falls as prices rise and vice versa). 15. The difference between the total reserves that a bank holds and the amount that is required by law are called a. excess reserves. b. nonborrowed reserves. c. borrowed reserves. d. actual reserves.

3 16. A reserve requirement of 20 percent implies a potential money deposit multiplier of a. 1. b. 5. c. 20. d Suppose the Fed sells $100 million of U.S. government securities (bonds) to the public. How will this affect the money supply and the national debt? a. The money supply will increase; the national debt will decrease. b. The money supply will decrease; the national debt will increase. c. The money supply will increase; the national debt will be unaffected. d. The money supply will decrease; the national debt will be unaffected. 18. Suppose the U.S. Treasury issues and sells $100 million of U.S. government securities (bonds) to the public. How will this affect the money supply and the national debt? a. The money supply will increase; the national debt will decrease. b. The money supply will decrease; the national debt will increase. c. The money supply will be unaffected; the national debt will increase. d. The money supply will be unaffected; the national debt will decrease. 19. As the Fed increased its asset holdings and the volume of loans to financial institutions during the latter half of 2008, the result was a. a vast increase in the monetary base and in the excess reserves of the commercial banking system. b. a substantial increase in short term interest rates. c. a sharp decrease in the monetary base, as well as a depletion of the excess reserves of the commercial banking system. d. an increase in the volume of loans extended by commercial banks and a sharp increase in the inflation rate. 20. Which of the following correctly indicates how the Fed could use the interest rate it pays commercial banks on their excess reserves to influence the money supply? a. If the Fed wanted to increase the money supply, it could increase the interest rate it pays banks on their excess reserves. b. When the Fed reduces the interest rate paid on excess reserves, it increases the incentive of commercial banks to hold excess reserves. c. If the Fed wanted to decrease the money supply, it could increase the interest rate paid on excess reserves. d. When the Fed increases the interest rate it pays on excess reserves, this encourages banks to extend more loans and thereby increase the money supply. 21. Rather than using the purchase and sale of only government bonds in the conduct of open market operations, in 2008 the Fed also began buying and selling a. stock options so it would be able to gain from the expected rebound in the stock market. b. real estate in the Washington D.C. area. c. corporate bonds, commercial paper, and mortgage-backed securities from commercial banks and other financial institutions. d. future contracts for goods like grains, metals, and crude oil, which could be expected to increase in price substantially if the inflation rate rose rapidly in the future.

4 Critical Thinking and Application 22. Briefly explain the three functions of money. 23. What advantages does a money economy have over a barter economy? 24. Why is there more than one definition of the money supply? What is the difference between them? 25. What are the advantages of a fractional reserve banking system compared to a system that requires 100 percent of deposits to be kept on reserve? 26. You deposit a $1,000 scholarship check in the bank. If the required reserve ratio is 10 percent, explain how the banking system will create new money and how much money can potentially be created. 27. Does the Federal Reserve operate like an ordinary commercial bank? What is the Fed's job? 28. Explain how the Fed would use its four tools to decrease and to increase the money supply. 29. How do changes in open market operations alter the monetary base, and how do changes in the monetary base translate to changes in the money supply? 30. What is the difference between the Treasury and the Federal Reserve? Is there any difference in the effect on the money supply between the sale of bonds by the Treasury and the sale of bonds by the Fed?

5 Macro Chapter 13 study guide questions Answer Section 1. C 2. A 3. A 4. D 5. C 6. C 7. B 8. A 9. B 10. A 11. B 12. D 13. C 14. D 15. A 16. B 17. D 18. C 19. A 20. C 21. C