Q&A Hero

Q: Suppose the required reserve ratio is 8% and that banks hold no excess reserves and the public does not change its currency holdings. If the Fed sells $5 million worth of securities, what happens to the amount of deposits in the banking system?

Q: ______ is said to occur when policymakers must increase inflation in response to an increase in the expected inflation rate.a. A liquidity trapb. An expectations trap.c. An adaptive expectations trapd. An inflation trap

Q: Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic? A) The Fed sets the required reserve ratio. B) The Fed is able to affect the level of reserves in the banking system. C) Banks loan out all of their excess reserves. D) The simple deposit multiplier is equal to 1 divided by the required reserve ratio.

Q: Briefly explain the process of multiple deposit creation.

Q: The Fed is said to tighten policy when ita. decreases both the money growth and the federal funds rate.b. decreases the money growth and increases the federal funds rate. c. increases both the money growth and the federal funds rate.d. increases the money growth and decreases the federal funds rate.

Q: If actual output is denoted yand potential output is denoted y*, the output gap isa. [(y − y*)/ y*] × 100.b. [(y − y*)/ y] × 100. c. [(y* − y)/ y*] × 100. d. [(y* − y)/ y] × 100.

Q: Suppose the required reserve ratio is 8% and banks do not hold excess reserves. Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.

Q: Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans? A) $8 million B) $92 million C) $100 million D) $1.25 billion

Q: When a central bank decreases money growth, the bank is said to____ monetary policy.a. tightenb. loosenc. destabilized. ease

Q: Suppose the Fed sells $500,000 worth of securities to First National Bank. Illustrate the immediate effect on the bank's balance sheet.

Q: A graph plotting the real value of a mortgage payment over time when the inflation rate is positive and the mortgage is a standard nominal-rate loan illustrates thea. present-value formula. b. securitization issue.c. real-interest rate conundrum. d. mortgage-tilt problem.

Q: Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine how much checking deposits would change. A) increase by $1 million B) increase by $10 million C) decrease by $1 million D) decrease by $10 million

Q: Why does the Taylor rule have such wide appeal?

Q: Which of the following is NOT a cost of anticipated inflation but arises only if inflation is unanticipated?a. Inflation interacts with the tax system to hurt savings and investment in physical capital. b. Inflation represents an implicit tax on holding money.c. Firms face menu costs of changing prices.d. Higher inflation leads to greater uncertainty about the future inflation rate.

Q: If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?A) 0.05B) 0.20C) 5D) 20

Q: Suppose the federal funds rate is 4.4 percent and you know that the Fed is following the Taylor rule. You don't know the Fed's inflation target, but the equilibrium real interest rate is 4 percent, the inflation rate is 3 percent, the weight on the GDP gap is 0.4, the weight on the inflation gap is 0.6 and nominal GDP is 2 percent points below its target. Calculate the Fed's inflation target from this information.

Q: In case of positive inflation rates,a. both borrowers and lenders of fund lose out.b. both borrowers and lenders of fund gain.c. lenders of funds gain, while borrowers lose out.d. borrowers of funds gain, while lenders lose out.

Q: If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)? A) rise by $1 million B) decline by $1 million C) rise by $8 million D) rise by $12.5 million

Q: Suppose (real) output is thought to be 2 percent above potential with an inflation rate of 3a. percent over the past year. The weights on the output gap and inflation gap are each 1/2. The inflation target is 1 percent. If you are sure that the equilibrium real federal funds rate is 3 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?b. If you are sure that the equilibrium real federal funds rate is 2 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?

Q: The cost that firms incur to change prices is referred to as a. menu costs.b. inflation tax.c. pseudo costs.d. transaction costs.

Q: Suppose a bank repays a $10 million discount loan that it had previously borrowed from the Fed. Illustrate how this affects the balance sheets of the Fed and the banking system. The Fed's assets decline by $10 million as discount loans decline and its liabilities decline by $10 million as reserves fall. The banking system's assets decline by $10 million due to a decline in reserves and liabilities decrease by $10 million due to a decline in discount loans.

Q: Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out? A) $8,000 B) $10,000 C) $40,000 D) $50,000

Q: Which of the following statements is true?a. Both expansionary and contractionary monetary policy has the drawback of increasing unemployment. b. Both expansionary and contractionary monetary policy has the drawback of increasing inflation.c. Expansionary monetary policy has the drawback of increasing unemployment, while contractionary monetary policy has the drawback of increasing inflation.d. Expansionary monetary policy has the drawback of increasing inflation, while contractionary monetary policy has the drawback of increasing unemployment.

Q: Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects the balance sheets of the Fed and the banking system.

Q: Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out? A) $2,000 B) $8,000 C) $10,000 D) $50,000

Q: The unemployment rate when the economy is producing output equal to its potential is known as a. the rate of disguised unemployment.b. the potential rate of unemployment. c. the natural rate of unemployment.d. equilibrium rate of unemployment.

Q: Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the Fed's balance sheet.

Q: The aggregate M1 consists of A) currency plus all deposits in financial institutions. B) currency plus all deposits in all institutions. C) currency plus checkable deposits in financial institutions. D) currency plus all checkable deposits.

Q: In the U.S., data on potential output come froma. estimates made by the Congressional Budget Office. b. data calculated by the Bureau of Trade.c. estimates generated by the National Bureau of Economic Research. d. forecasts from the United Nations Development Program.

Q: If the excess reserves held by banks increase, the money multiplier is likely to a. rise.b. fall.c. remain unchanged.d. rise at first, then decline later.

Q: Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet.

Q: What is the maximum amount a bank can lend? A) its total reserves B) its excess reserves C) its excess reserves divided by the required reserve ratio D) the value of its checkable deposits times the required reserve ratio

Q: The amount of output that would be produced by an economy if resources were being utilized at a high rate that is sustainable in the long run is referred to as thea. potential output. b. natural output.c. Walrasian output.d. partial-equilibrium output.

Q: An increase in interest ratesa. decreases the M2 money multiplier.b. decreases the ratio of excess reserves to transaction accounts held by banks c. increases the money supply for a given amount of monetary base.d. increases the ratio of excess reserves to transaction accounts held by banks

Q: Why did banks increase their holdings of excess reserves during the Financial Crisis of 2007-2009?

Q: Monetary policy can affect the level of output a. only in the short run.b. only in the long run.c. in both the short run and long run.d. in neither the short run nor the long run.

Q: Another name for the monetary base isa. commodity money.b. fiat money.c. high-powered money.d. bank reserves.

Q: What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?

Q: The longest economic expansion in U.S. history occurred froma. 1929 to 1939b. 1956 to 1966c. 1970 to 1980d. 1991 to 2001

Q: When conducting open market operations, at what price is it willing to buy or sell securities? A) at the price agreed upon by the Federal Open Market Committee B) at the price agreed upon by the Board of Governors C) at the price set by the Fed chair D) at whatever price is necessary to carry out its open market operations

Q: If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will a. increase by $1 billion.b. decline by $1 billion. c. decline by $9 billion. d. increase by $9 billion.

Q: In what year did sales of gold for investment exceed that for jewelry for the first time? A) 1933 B) 1971 C) 2001 D) 2009

Q: If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?a. $10 millionb. $100 millionc. $1 billiond. $6.889 billion

Q: Most of the increase in the monetary base between 2007 and 2012 was due to increases in: A) currency B) bank deposits C) excess reserves D) Treasury bills

Q: A $10 million open market purchase will increase the monetary base by A) $10 million. B) $10 million times the money multiplier. C) $10 million divided by the money multiplier. D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

Q: If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by a. −$3 million.b. $3 million. c. $10 million. d. $30 million.

Q: Between late 2007 and 2012, the Fed's balance sheet: A) remained about the same B) more than doubled C) more than tripled D) rose tenfold

Q: If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million A) if the public holds the proceeds as currency. B) if the public deposits the proceeds as checkable deposits. C) if the public deposits the proceeds with the Treasury in a monetary base account. D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

Q: M2 money multiplier equalsa. (nontransaction accounts + money market funds) ÷ monetary base b. (M1 + nontransaction accounts ­ money market funds) × reserves c. (M2 ­ money market funds) ÷ excess reservesd. (M1 + nontransaction accounts + money market funds) ÷ monetary base

Q: When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the: A) money supply B) size of the Fed's assets C) amount of bank reserves D) amount of foreign reserves

Q: Green bank has transaction accounts worth $200 million. If the required reserve ratio is 10%, Green bank holds_____as required reserves.a. $220 millionb. $180 millionc. $60 milliond. $20 million

Q: If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

Q: M1 money multiplier equalsa. (transaction accounts + currency) ÷ monetary base b. (transaction accounts ­ currency) ÷ monetary base c. (transaction accounts + currency) × monetary base d. (transaction accounts ­ currency) × monetary base

Q: Individual investors who always want to hold gold are known as: A) goldfinger B) golden boys C) gold bugs D) goldilocks

Q: Discuss the effectiveness of a monetary policy in an economy in which banks are indifferent between holding bonds and holding cash as reserves.

Q: If the Fed buys securities worth $10 million, then A) bank reserves will increase by $10 million. B) bank reserves will decrease by $10 million. C) currency in circulation will increase by $10 million. D) bank holdings of securities increase by $10 million.

Q: The money multiplier equalsa. the money supply divided by the monetary base.b. currency held by the non-bank public plus banks' reserves.c. currency held by the non-bank public plus transaction accounts. d. M2 divided by M1.

Q: The___ appoint one of the members of the Federal Reserve Board of Governors as chairman of the Board of Governors for a _____ ,___term.a. President of the United States; non-renewable; fourteen-yearb. Board of Directors; renewable; five-yearc. U.S. Senate; non-renewable; seven-yeard. President of the United States; renewable; four-year

Q: Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts. If a customer, who is a government securities dealer, sells $2 million in securities to the Feda. the bank's transaction accounts reduce to $98 million. b. the bank's securities reduce by $4 million.c. the bank's reserves increase to $12 million. d. the bank's loans reduce by $2 million.

Q: Open market operations generally involve A) the Fed making discount loans to depository institutions. B) the Fed buying and selling common stock in order to affect the liquidity of the stock market. C) the Fed buying and selling U.S. government securities. D) private investors buying and selling securities directly on exchanges, rather than through brokers.

Q: How long is the normal term in office for a Governor of the Federal Reserve Board?a. Five yearsb. Seven yearsc. Fourteen years d. Life

Q: Third Bank has reserves of $12.3 million and transaction accounts of $115 million. If required reserves are 10 percent of transactions accounts, Third Bank has excess reserves ofa. −$0.8 million. b. $0.c. $0.8 million d. $0.08 million

Q: What is the most direct method the Fed uses to change the monetary base? A) open market operations B) changing the required reserve ratio C) changing the federal funds rate D) changing the level of discount loans

Q: Publications of the Federal Reserve Bank such as the economicrevieware available a. to the public for free.b. only to the President of the United States.c. only to members of the Federal Reserve Bank.d. to all individuals willing to pay a fixed annual subscription charge.

Q: Generally, A) countries with the most independent central banks have the lowest inflation rates. B) countries with the least independent central banks have the lowest inflation rates. C) countries without central banks have the lowest inflation rates. D) the degree of independence of a country's central banks has little to do with its inflation rate.

Q: The interest rate the Fed charges on loans to depository institutions is known as A) the federal funds rate. B) the Fed loan rate. C) the discount rate. D) the interbank clearing rate.

Q: Which of the following is the most common goal for central banks of industrialized countries? A) high employment B) high economic growth C) low interest rates D) low inflation

Q: The Beigebook isa. a report on recent international economic conditions and forecasts for the next two years. b. a discussion of alternative policy choices and the implications of those choices.c. a report on local economic conditions.d. a report on Federal revenue and expenditure.

Q: When the Fed lends to depository institutions, the loans are called A) federal funds. B) discount loans. C) repurchase agreements. D) reverse repurchase agreements.

Q: Who sets the inflation target for the Bank of England? A) Prime Minister B) Chancellor of the Exchequor C) head of the monetary policy committee D) majority vote of the monetary policy committee

Q: Compiling information on basic economic variables such as the unemployment rate and inflation rate is referred to asamong Fed members. a. code­halo analyticsb. up­and­down economicsc. real­time data miningd. economic sequencing

Q: When the Fed extends loans to depository institutions A) it increases the level of reserves. B) it decreases the level of reserves. C) it reduces the total value of the assets on its balance sheet. D) it reduces the total value of the liabilities on its balance sheet.

Q: Of the nine directors of each Federal Reserve Bank, are elected by member banks. a. zerob. three c. sixd. nine

Q: The discount rate is thea. targeted inflation rate for an economy.b. ongoing taxation rate in an economy.c. interest rate that the Fed charges on the loans it makes.d. nominal interest rate charged by financial intermediaries when they advance loans.

Q: Which central bank gained the power to set interest rates independent of the government in the late 1990s? A) Bank of England B) Bank of Canada C) Bank of China D) Federal Reserve Board

Q: The Fed's portfolio of securities consists principally of A) municipal bonds. B) corporate bonds. C) U.S. Treasury obligations. D) obligations of foreign governments.

Q: Shares in the Federal Reserve Banks are owned by a. the federal government of the United States.b. banks that are members of the Federal Reserve System. c. the governments of the states in which they are located. d. private citizens who own stock in them.

Q: Which of the following statements is true?a. The annual income from securities far exceeds the annual expenditures of the Federal Reserve Bank. b. The Federal Reserve Bank's president is elected for a fourteen year renewable term.c. All banking services provided by the Federal Reserve Bank are free of charge.d. The Federal reserve Bank delegates its open market operations to smaller commercial banks.

Q: Apart from the United States, in countries where central bank board members serve fixed terms of office, A) none have terms as long as fourteen years. B) many serve for life or good behavior. C) all have terms longer than fourteen years. D) the head of the central bank rarely has a term longer than one year.

Q: Each Federal Reserve Bank is a. a corporation.b. a government owned enterprise. c. a publicly traded company.d. a government-sponsored enterprise.