Q&A Hero

Q: Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that A) the country's real interest rate would remain below the world level. B) the country would become a net lender abroad. C) the country would become a new borrower abroad. D) the amount of loanable funds supplied in the country would decline.

Q: A country's net foreign investment is equal to the amounta. the domestic country invests in other countries, minus what other countries invest in the domestic country. b. other countries invest in the domestic country, minus what the domestic country invests in other countries. c. of the current-account balance plus the capital-account balance.d. of portfolio investment made by the domestic country in other countries, minus the amount of portfolio investment other countries make in the domestic country.

Q: The main purpose of reserve requirements today is to: A. decrease the demand for reserves.B. make sure depositors can withdraw currency on demand.C. enable the FOMC to keep the market federal funds rate closer to the target reserve rate.D. keep banks sound.

Q: Since Germany is a large open economy, the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in A) a decline in the world real interest rate. B) a shift to the right in the German supply of loanable funds curve. C) an increase in the real interest rate in the United States. D) a shift to the left in the German demand for loanable funds curve.

Q: In broad real terms, the dollara. depreciated against other currencies in the second half of the 1990s and in the early 2000s.b. depreciated against other currencies in the second half of the 1990s and appreciated against those currencies in the early 2000s.c. appreciated against other currencies in the second half of the 1990s and in the early 2000s.d. appreciated against other currencies in the second half of the 1990s and depreciated against those currencies in the early 2000s.

Q: The use of lagged reserve accounting makes the demand for reserves: A. highly unpredictable.B. constant.C. more predictable.D. subject to daily changes by the Fed.

Q: In a large open economy, A) domestic lending and borrowing decisions have no impact on the world real interest rate. B) an increase in the domestic supply of loanable funds would lower the world real interest rate. C) the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending. D) an increase in the domestic demand for loanable funds would lower the world real interest rate.

Q: To minimize the cost of holding reserves for small banks, the: A. required reserve rate decreases as the amount of deposits increases.B. required reserve rate is constant.C. required reserve rate is not applied for transaction deposits less than $100 million.D. first few million of transactions deposits are exempt from reserve requirements.

Q: The reserve requirement is applied to two-week balances on: A. transactions deposits.B. savings deposits.C. both transactions deposits and savings deposits.D. savings deposits and one-week balances on transactions deposits.

Q: The equilibrium real interest rate in Belgium will be A) generally above the world real interest rate. B) generally below the world real interest rate. C) equal to the world real interest rate. D) determined by the equilibrium between desired domestic saving and desired domestic investment.

Q: The Fed is reluctant to change the required reserve rate because: A. changes in the rate have a small impact on the actual quantity of money.B. the money multiplier is not impacted by the required reserve rate.C. the time lag between changing the required reserve rate and changes in the money supply can be too long.D. small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits.

Q: A small open economy A) is unable to affect the world real interest rate by its borrowing and lending decisions. B) will always be a net borrower from abroad. C) will always be a net lender abroad. D) is almost never able to borrow abroad.

Q: Seasonal credit provided by the Fed is not as common as it used to be because: A. there are fewer banks in seasonal areas.B. other sources for long-term loans have developed for banks in seasonal areas.C. seasonal credit has been replaced by secondary credit.D. seasonal credit is being replaced by primary credit.

Q: In an open economy, desired domestic lending A) must equal desired domestic borrowing. B) must equal desired domestic borrowing plus the amount of international lending. C) is always greater than desired domestic borrowing. D) is always less than desired domestic borrowing.

Q: The interest rate the Fed charges for secondary credit is: A. above the primary discount rate.B. below the market federal funds rate.C. below the primary discount rate.D. equal to the primary discount rate.

Q: The world real interest rate is A) set annually by a special commission at the United Nations. B) set annually by a special commission at the International Monetary Fund. C) determined in the international capital market. D) determined daily on the New York Stock Exchange.

Q: An open economy is one that A) has a large government sector. B) lends and borrows in the international capital market. C) produces mainly agricultural goods. D) produces mainly manufactured goods.

Q: Secondary credit provided by the Fed is designed for: A. banks who qualify for a lower interest than what is available under primary credit.B. banks that are in trouble and cannot obtain a loan from anyone else.C. banks that want to borrow without putting up collateral.D. foreign banks.

Q: During a period of economic expansion, when expected profitability is high, A) the demand curve for bonds shifts to the left. B) the supply curve of bonds shifts to the right. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.

Q: One of the reasons primary credit exists is to: A. bail out banks which are in financial trouble.B. provide additional reserves when the open market staff's forecasts are off.C. provide banks with an available source for unsecured lending.D. provide banks with a low interest source for long-term capital.

Q: The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result A) the supply curve for bonds shifts to the right. B) the demand curve for loanable funds shifts to the left. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.

Q: The interest rate on primary credit extended by the Fed is: A. the average of the prime interest rate charged by the ten largest banks in the nation.B. below the target federal funds rate.C. equal to the target federal funds rate.D. above the target federal funds rate.

Q: Which of the following is the most likely explanation of Japan's very low market interest rates in the early 2000s? A) expected deflation B) an increasing budget deficit C) an increasing trade surplus D) an increase in corporate profits

Q: Primary credit extended by the Fed is: A. for banks needing long-term loans to work out financial problems.B. the highest interest rate loans offered by the Fed.C. short-term, usually overnight loans.D. loans offered at the prime interest rate for periods exceeding thirty days but less than one year.

Q: In 2008, the liquidity of mortgage-backed securities declined significantly. Make use of a graph of the bond market to show how this affected the price of mortgage-backed securities.

Q: The types of loans the Fed makes consist of each of the following, except: A. primary credit.B. conditional credit.C. seasonal credit.D. secondary credit.

Q: In November 2012, concern was raised about Spain's sovereign debt. Make use of a graph of the bond market to show how this would affect the price of Spanish bonds.

Q: For most of the Fed's history, the Fed: A. lent reserves at an interest rate below the target federal funds rate.B. found banks would borrow from the Fed far more often than they would borrow in the federal funds market.C. was very lenient in making discount loans.D. tied the discount rate to the rate on Treasury securities.

Q: The fact that, for most of its history, the Fed was reluctant to make discount loans actually: A. at times was a destabilizing force for financial markets.B. proved to be a very stabilizing force for financial markets.C. pushed the discount rate above the target federal funds rate.D. resulted in banks in very strong financial shape as being the only ones borrowing from the Fed.

Q: Assess the impact on the bond market of the rise in Internet trading of stocks.

Q: The Fed will make a discount loan to a bank during a crisis: A. no matter what condition the bank is in.B. only if the bank is sound financially and can provide collateral for the loan.C. but if the bank doesn't have collateral the interest rate is higher.D. only if the bank would fail without the loan.

Q: Which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway? A) increased demand for bonds B) increased supply of bonds C) lower bond prices D) higher interest rates

Q: In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate.B. The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective.C. Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves.D. The Fed now controls the quantity of credit extended as well as its price.

Q: If bond investors think they lack enough details to evaluate the likelihood of defaults on certain bonds, this will result in higher: A) expected return B) liquidity C) information costs D) expected inflation

Q: On a particular day, the actual federal funds rate can deviate from the target federal funds rate. This might be due to all of the following except: A. unexpected changes in the demand for reserves.B. the forecasts of the Fed's staff were in error.C. there may have been more float in the banking system than anticipated.D. daily changes in the target rate.

Q: As a result of low interest rates on CDs and the perceived riskiness of alternative investments following the financial crisis of 2007-2009, the bond market was affected in all of the following ways EXCEPT: A) higher demand for bonds B) higher real interest rates C) lower nominal interest rates D) higher price of bonds

Q: The Fed would use a reverse repo when they: A. want to temporarily increase the monetary base.B. forecast a permanent decrease in the demand for monetary base.C. forecast a permanent increase in the demand for monetary base.D. want to temporarily decrease the monetary base.

Q: Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the financial crisis? A) increased demand for U.S. government bonds B) the perceived riskiness of alternative investments such as stocks C) low interest rates on CDs and similar short-term assets D) increases in expected inflation

Q: The ECB's temporary operations typically involve the use of: A. discount loans.B. repurchase agreements.C. an outright purchase of U.S. Treasury Securities.D. an outright sale of U.S. Treasury Securities.

Q: An increase in the tax rate on dividends, other things equal, is likely to result in a(n): A) increased demand for bonds due to an increase in the expected return on bonds relative to stocks B) increased supply of bonds due to an increase in the expected return on bonds relative to stocks C) reduced demand for bonds due to a decrease in the expected return on bonds relative to stocks D) reduced demand for bonds due to an increase in the expected return on bonds relative to stocks

Q: Other things equal, an increase in the tax on dividends is likely to result in all of the following EXCEPT: A) higher expected return on bonds relative to stocks B) increased demand for bonds C) lower interest rates D) higher interest rates

Q: A reduction in expected inflation will result in all of the following EXCEPT: A) lower nominal interest rates B) lower real interest rates C) reduced demand for bonds D) increased supply of bonds

Q: When the Fed forecasts a sustained increase in the demand for the monetary base, the staff of the Fed is likely to meet this demand through: A. discount loans.B. repurchase agreements.C. an outright purchase of U.S. Treasury Securities.D. an outright sale of U.S. Treasury Securities.

Q: An increase in the federal funds rate should: A. cause mortgage rates to increase by less than the increase in the federal funds rate.B. have an inverse impact on mortgage rates.C. not impact mortgage rates since the federal funds rate is a very short-term rate.D. cause the mortgage rates to increase by more than the increase in the federal funds rate.

Q: Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S. government bonds. Which of the following is NOT a likely consequence? A) higher price of U.S. government bonds B) lower interest rate on U.S. government bonds C) increased demand for U.S. government bonds D) reduced supply of U.S. government bonds

Q: Discount lending ties into the Fed's function of: A. lender of last resort.B. open market operations.C. the government's bank.D. regulation of banking.

Q: The supply curve for bonds would be shifted to the left by A) a decrease in government borrowing. B) a decrease in the corporate tax on profits. C) an increase in tax subsidies for investment. D) an increase in expected inflation.

Q: Discount lending by the Fed: A. is the key component of monetary policy.B. is more important today than in years past.C. is not as important today as it was in the past.D. amounts to five billion dollars in volume during an average week.

Q: The supply curve for bonds would be shifted to the right by A) a decrease in expected profitability. B) a decrease in the corporate tax on profits. C) a decrease in tax subsidies for investment. D) a decrease in government borrowing.

Q: The daily reserve supply curve is: A. upward sloping.B. downward sloping.C. vertical until the federal funds rate equals the discount rate; at that point it becomes horizontal.D. horizontal until the federal funds rate equals the discount rate; at that point it becomes vertical.

Q: Which of the following statements is most correct? A. The market federal funds rate equals the target federal funds rate.B. Since 2008, the market federal funds rate has remained solidly within the target range announced by the Fed.C. Since 2008, the market federal funds rate has varied wildly, sometimes moving outside the target range announced by the Fed.D. There doesn't appear to be any relationship at all between the target and market federal fund rates.

Q: If households increase their saving at the same time that the government increases its deficit, A) the demand and supply curves for bonds will be unaffected. B) the demand curve for bonds will shift to the left. C) the supply curve for bonds will shift to the right. D) the equilibrium interest rate will definitely rise.

Q: One reason the target federal funds rate may not equal the actual federal funds rate is because: A. there is no way that the Fed could keep the actual rate at the target rate.B. the target rate changes with the demand for reserves.C. attaining the target rate involves forecasting reserve demand and forecasts are subject to error.D. none of the answers is correct; the target and the actual federal funds rates are always equal.

Q: If the government increases taxes while holding expenditures constant, A) the bond supply curve will shift to the left and the equilibrium interest rate will fall. B) the bond supply curve will shift to the right and the real interest rate will fall. C) government borrowing will be increased. D) the government's deficit will increase.

Q: If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: A. a decrease in the market federal funds rate.B. a market federal funds rate that will equal the target rate.C. an increase in the market federal funds rate.D. nothing; the Fed would act immediately and the market would not be affected.

Q: Studies by economists suggest that A) households do not increase their saving as the government's dissaving increases. B) households increase their saving, but not by the full amount of an increase in government dissaving. C) households also increase their dissaving when the government increases its dissaving. D) households also increase their saving when the government increases its saving.

Q: If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be: A. the market federal funds rate will decrease.B. the market federal funds rate will equal the target rate.C. the market federal funds rate will increase.D. nothing; the Fed would act immediately and the market would not be affected.

Q: If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall.

Q: If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: A. increase the supply of reserves.B. decrease the supply of reserves.C. do nothing; the Fed will let the market work.D. alter the demand for reserves.

Q: At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382

Q: If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.

Q: If the market federal funds rate were above the target rate, the response from the Fed would likely be to: A. purchase U.S. Treasury securities.B. sell U.S. Treasury securities.C. lower the required reserve rate.D. lower the discount rate.

Q: During most of the time in recent decades, the domestic government sector was A) a net borrower. B) a net lender. C) neither a borrower nor a lender. D) a major factor in keeping real interest rates low.

Q: If the market federal funds rate were below the target rate, the response from the Fed would likely be to: A. raise the required reserve rate.B. purchase U.S. Treasury securities.C. sell U.S. Treasury securities.D. raise the discount rate.

Q: $1 received n years from now has a value today of A) ($1 + i)/i. B) $1/(1 + i). C) ($1 + i/i. D) $1/(1 + i.

Q: The tool the Fed uses to keep the federal funds rate close to the target is: A. the required reserve rate.B. discount lending.C. open market operations.D. they can set the rate by law.

Q: If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $11,800 C) $11,910 D) $10,600

Q: One outcome that would result if the Fed paid interest on reserves would be: A. banks would hold less excess reserves.B. the federal government's deficit would be larger (or surplus smaller).C. banks would no longer hold excess reserves.D. the target federal funds rate would have to be fixed at a constant rate.

Q: If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $625 B) $392 C) $638 D) $550

Q: Federal funds loans are: A. secured loans between banks and the Fed.B. unsecured loans.C. collateralized loans between banks.D. guaranteed by the FDIC.

Q: Compounding refers to A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed payment loan. C) the process of earning interest on both the interest and the principal of an investment. D) the increased value of an investment that arises from the payment of periodic interest.

Q: If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except: A. making unsecured loans.B. in essence paying interest on excess reserves.C. eliminating a lot of valuable information coming from the market.D. following the directives issued by Congress.

Q: During the financial crisis of 2007-2009 it became difficult for the Fed to hit their target federal funds rate because: A. of the number of bank failures.B. of the Federal government stimulus package.C. of the loss of liquidity in the interbank lending market.D. of the instability in the stock market.

Q: The key to present value calculations is that they A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environment.

Q: Which of the following would be categorized as an unconventional monetary policy tool? A. Discount window lendingB. Targeted asset purchasesC. Federal funds rate targetD. Deposit rate

Q: The Fed could make the market federal funds rate equal the target rate by: A. mandating that all loans be transacted at the target rate.B. setting the discount rate below the federal funds rate.C. entering the federal funds market as a borrower or a lender.D. paying higher interest on reserves.

Q: Which of the following will lead to a higher interest rate on a loan? A) lower inflation B) lower opportunity cost C) increased perceived risk of default D) reduced likelihood of borrower not paying the loan

Q: The fact that there is a market for federal funds enables banks to: A. make fewer loans than they would otherwise.B. borrow more from the Fed.C. hold a lower level of excess reserves than they would otherwise hold.D. hold less in required reserves.

Q: Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low? A) price risk B) refinancing risk C) interest-rate risk D) present value risk

Q: The market for reserves derives from the fact that: A. reserves pay a relatively high return.B. desired reserves don't always equal actual reserves.C. the Fed refuses to lend to banks.D. banks do not want excess reserves.