Q&A Hero

Q: If the Fed desired to reduce the federal funds rate, A) it would conduct an open market sale, reducing reserve supply. B) it would conduct an open market purchase, increasing reserve supply. C) it would conduct an open market sale, increasing reserve demand. D) it would conduct an open market purchase, reducing reserve demand.

Q: Capital controls: A. can be controls on capital inflows.B. can only be controls on capital outflows.C. can be controls on capital inflows or outflows.D. must be controls on both capital inflows and outflows in order to be effective.

Q: Which of the following statements is true?a. The prices of debt securities fall during recessions.b. Interest rates on neither the short-term securities nor the long-term securities fall in recession.c. Interest rates on long-term securities fall more than the interest rates on short-term securities in recession. d. Interest rates on short-term securities fall more than the interest rates on long-term securities in recession.

Q: Most economists view capital controls: A. unfavorably.B. unfavorably, emphasizing their harmful effects on developing countries.C. favorably, since this is the main way for countries to exploit their comparative advantage.D. favorably, since having them makes capital markets more efficient.

Q: In order to increase its target for the federal funds rate, the Fed would normally A) conduct open market sales. B) conduct open market purchases. C) increase the discount rate. D) increase reserve requirements.

Q: Which of the following statements is true?a. A short-term bond and a long-term bond provides the same premium.b. Investors in short-term bonds earn higher premiums than investors in long-term bonds.c. A change in the interest rates of bonds affect the prices of long-term bonds more than the prices of short- term bonds.d. A change in the interest rates of bonds affect the prices of short-term bonds more than the prices of long- term bonds.

Q: Purchases of new houses are part of a. net exports.b. government spending. c. investment.d. consumption.

Q: In the federal funds market diagram, a decrease in the required reserve ratio A) shifts the demand curve for reserves to the left. B) increases the federal funds rate. C) results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks. D) shifts the supply curve for reserves to the right.

Q: The United States would be characterized as having: A. a controlled domestic interest rate, a closed capital market and a flexible exchange rate.B. a controlled domestic interest rate, an open capital market and a flexible exchange rate.C. no control over the domestic interest rate, an open capital market and a flexible exchange rate.D. a controlled domestic interest rate, an open capital market and a fixed exchange rate.

Q: The real interest rate is the nominal interest rate adjusted for expected or actual a. unemployment.b. production.c. income growth. d. inflation.

Q: Which of the following statements is incorrect? A. A country cannot be open to international capital flows, control its domestic interest rate and fix its exchange rate.B. A country can be open to international capital flows and control its own domestic interest rate but it can't fix its exchange rate.C. A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate.D. A country can be open to international capital flows and fix its exchange rate but could not also control its own domestic interest rate.

Q: In the federal funds market diagram, an open market sale by the Fed A) shifts the reserve supply curve to the right. B) shifts the reserve supply curve to the left. C) decreases the federal funds rate. D) increases the volume of federal funds traded.

Q: The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the a. expected real interest rate.b. realized real interest rate. c. after-tax real interest rate. d. nominal interest rate.

Q: Consider the following: an investor in the U.S. is pondering a one-year investment. She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if. The current exchange rate is $1.50/£. She considers the bonds to be of equal risk. If i = if, the expected returns are not equal. What do you know? A. The exchange rate is fixed between the U.S. and BritainB. The bonds initially sold for different pricesC. Arbitrage doesn't workD. The exchange rate must be flexible

Q: How can the Fed reduce the implicit tax on banks resulting from reserve requirements? A) lowering the discount rate B) paying interest on reserves C) reducing the federal funds rate D) increasing the federal funds rate

Q: How many times has the Fed has changed reserve requirements since 1993? A) never B) about once a year C) only once D) only twice

Q: A debt security sold by large corporations to raise short­term funds is known as a(n)a. commercial paper.b. treasury bill.c. debenture.d. bond.

Q: In the long run, a country's exchange rate is determined by: A. domestic monetary.B. purchasing power parity.C. the domestic inflation rate.D. supply and demand.

Q: Reserve requirements are changed A) more frequently than the discount rate is changed, but less frequently than open market operations are conducted. B) more frequently than the discount rate is changed and more frequently than open market operations are conducted. C) more frequently than open market operations are conducted, but less frequently than the discount rate is changed. D) less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Q: Let if be the interest rate being paid on a foreign bond, and let i be the interest rate being paid for a domestic bond; let P be the price of the domestic bond and let Pf be the price of the foreign bond. If exchanges rates are fixed and the bonds are equal in terms of risk: A. if = i.B. P = Pf times units of domestic currency/unit of foreign currency.C. the expected return from the foreign bond = the expected return from the domestic bond.D. all of the answers given are correct.

Q: The process of turning assets such as mortgages into bonds sold to investors is a. default.b. standard deviation. c. standardization.d. securitization.

Q: The size of the money multiplier depends upon all of the following EXCEPT A) the required reserve ratio. B) the currency-deposit ratio. C) excess reserves relative to deposits. D) the discount rate.

Q: Which of the following is a security in which a saver buys the security for a given time to maturity, earning interest at the specified rate?a. Commercial paper b. Debenturec. Government bondd. Certificates of deposit

Q: When arbitrage occurs across countries with a flexible exchange rate and when the bonds in each country are identical and there are no barriers to capital flows then the: A. interest rates on the bonds will be identical.B. expected return on the bonds will be identical.C. inflation rates in each country will be identical.D. prices of the bonds will be identical.

Q: If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equalsA) 1.14.B) 3.57.C) 4.35.D) 5

Q: When arbitrage occurs across countries with flexible exchange rates and when the bonds in each country are identical and there are no barriers to capital flows: A. the interest rates on the bonds will be identical.B. the prices of the bonds will be identical.C. the inflation rates in each country will be identical.D. none of the answers provided is correct.

Q: If the principal invested in a bank at an annual interest rate of 6% is $3,000, the interest that will accumulate on the principal after a year will equala. $180. b. $300. c. $500. d. $700.

Q: If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equalsA) 0.86.B) 0.14.C) 3.43.D) 4

Q: The amount of money that you would need to invest today to yield a given future amount is called the a. future value.b. present value.c. rate of discount. d. discount factor.

Q: If the bonds of two different countries are identical, their expected returns will: A. be equal if capital flows freely internationally.B. always be equal.C. be equal only if the exchange rate between the two countries is fixed.D. be equal only if the inflation rate is the same in each country.

Q: If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals A) $550 million. B) $1.54 billion. C) $1.9 billion D) $15 billion.

Q: The amount of money invested in a financial security or deposited into a financial intermediary is referred to as the a. principal.b. interest. c. yield.d. capital-gain.

Q: International capital mobility: A. contributes to the rigidity of exchange rates.B. contributes to the equalization of expected returns across countries.C. eliminates arbitrage opportunities.D. makes interest rates equal across countries.

Q: All of the following were reasons that the Fed increase the required reserve ration in 1936 EXCEPT: A) concerns over the possibility of future inflation B) to eliminate the high level of excess reserves C) fears that the economy was overheating D) concerns over a speculative bubble

Q: In the short run, a country's exchange rate is determined by: A. monetary policy.B. purchasing power parity.C. the domestic inflation rate.D. supply and demand.

Q: Costs of trading are referred to as_______costs. a. tradingb. menuc. shoe-leather d. transactions

Q: Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009? A) Excess reserves declined as the excess reserve ratio returned to near zero. B) Excess reserves rose to nearly one-third of checkable deposits. C) Excess reserves approached the same level as checkable deposits. D) Excess reserves exceeded checkable deposits.

Q: As a medium of exchange, money makes exchanges easier by reducing a. inflation.b. transactions costs.c. production costs of goods.d. legal costs in negotiating loan contracts.

Q: Purchasing power parity is a good theory of explaining exchange rate behavior: A. over very short periods.B. over periods lasting six to twelve months.C. over very long periods, such as decades.D. over both long and short periods.

Q: The money multiplier A) equals 1 over the required reserve ratio. B) is an expression that converts the monetary base to the money supply. C) is larger than the simple deposit multiplier. D) is completely controlled by the Fed.

Q: When people use money by trading it for goods and services, money is serving the role of a a. medium of exchange.b. unit of account. c. store of value.d. standard of deferred payment.

Q: Assuming the free flow of capital across borders, which of the following statements is most correct? A. A central bank can have both a fixed exchange rate and an independent inflation policy.B. A central bank cannot have both a fixed exchange rate and an independent inflation policy.C. The central banks of most industrialized countries focus on fixed exchange rates.D. While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation.

Q: When banks hold excess reserves, the size of the money multiplier A) is less than the simple deposit multiplier would suggest. B) is greater than the simple deposit multiplier would suggest. C) is equal to the size of the simple deposit multiplier. D) becomes infinite.

Q: Assuming the free flow of capital across borders, if country A wants to fix its exchange rate with country B, then: A. country A's inflation rate will have to match country B's.B. country A's monetary policy must be conducted so the inflation rate in country A matches the inflation rate in country B.C. country A's monetary policy will not be able to be used to address domestic issues.D. all of the answers given are correct.

Q: In the financial system, savers transfer funds to borrowers in exchange for a. cash.b. gold.c. financial securities. d. derivative securities.

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: Which of the following will be included in the financial system of a country?a. Labor Unions b. Banksc. Factor marketsd. Markets for raw materials

Q: Discuss what experience concerning required reserves occurred during the Great Depression that contributes to the decision today not to use required reserves as an active tool of monetary policy.

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: The financial system consists ofa. all the securities, intermediaries, and markets that exist to match savers and borrowers. b. all transactions occurring in the goods market during a financial year.c. all markets that exist to match the buyers and suppliers of various factors of production. d. all transactions involving the government.

Q: Imagine the inflation rate begins to rise rapidly, the FOMC meets and it is believed that the target interest rate needed to stem the inflation could easily exceed 20 percent. Many members of the committee believe the Fed cannot announce this high of a target for political reasons. Discuss what the FOMC could do in terms of targets and what change occurred in 2002 that is going to make their job a bit more difficult.

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: What are the advantages from the 2002 change in the Fed's lending policy?

Q: Which policymaking institution determines the money supply, sets the rules for how checks are cleared and how banks obtain new currency, and determines what activities banks may or may not engage in?a. Treasury Department.b. Commerce Department.c. Securities and Exchange Commission. d. Federal Reserve System.

Q: If the required reserve ratio is 10% and the Fed purchases $20 million worth of securities, what is the simple deposit multiplier and what happens to the amount of deposits in the banking system? Assume that banks do not hold excess reserves and the public does not change its currency holdings.

Q: Could the Fed enter the federal funds market to make sure the market and target rates are always equal, and if they could, why don't they?

Q: Which of the following is NOT a financial policymaker?a. Securities and Exchange Commission (SEC)b. Federal Deposit Insurance Corporation (FDIC) c. Consumer Financial Protection Bureau (CFPB) d. Federal Reserve System (the Fed)

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: How do targeted asset purchases alter the outlook for the economy and inflation?

Q: Economic policy affectsa. only the amount of money in the economy.b. only the lending policy of financial intermediaries.c. the entire financial system.d. how financial securities are traded and no other part of the financial system.

Q: Briefly explain the process of multiple deposit creation.

Q: The central bank of a country follows the Taylor rule to set its interest rate. If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,a. the central bank should raise the nominal interest rate by 1 percentage point.b. the central bank should lower the nominal interest rate by 1 percentage point.c. the central bank should raise the nominal interest rate by 0.5 percentage points.d. the central bank should lower the nominal interest rate by 0.5 percentage points.

Q: How does policy forward guidance influence the economy and inflation?

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: The Taylor rule implies that the nominal federal funds rate should be increased if there is a______output gap or a_____inflation gap. a. positive; positive b. positive; negative c. negative; positived. negative; negative

Q: What were the 3 unconventional policy approaches used by the Fed during the financial crisis of 2007-2009?

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: The Fed eases 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: What is your response to the following: "The Taylor rule shows a strong correlation between the target rate actually set by the FOMC and the one predicted by the rule. Since the Taylor rule would provide accountability, credibility, and transparency, the FOMC committee should be dissolved and replaced by a form of the Taylor rule."

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: When a central bank increases money growth, the bank is said to policy. a. restrictb. tightenc. destabilize d. ease

Q: Given the following Taylor rule:Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap);Explain what happens to the real interest rate and why it happens, each time inflation increases by 1 percent.

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: If monetary policy is not set by a rule, it is said to be set by a. randomization.b. discretion. c. credibility.d. destabilization.

Q: Given the following Taylor rule:Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap);Since the coefficients on the inflation and output gaps are equal, does this mean the central bank will respond to a one percent increase in inflation with the same change in the target rate as they would initiate from a one percent increase in the output gap? Explain.

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: The systematic setting of policy according to a formula is known as a. credibility.b. an expectations trap. c. discretionary policy.d. a rule for monetary policy.

Q: Given the following Taylor rule:Target federal funds rate = 2 + current inflation + 2x(inflation gap) + x(output gap);What do the coefficients on the inflation and output gaps (2x, x) reveal?

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 ideal inflation rate is also referred to as the a. steady state inflation rate.b. NAIRU.c. inflation target.d. minimal inflation rate.