W-15 Assignment Set 5, Macro
Multiple Choices
Identify the choice that best completes the statement or answers the question.
____ 1. A unit of account is
| a. |
a bank account. |
| b. |
a savings account. |
| c. |
a common measurement in which values are expressed. |
| d. |
the same as a medium of exchange. |
| e. |
none of the above |
____ 2. In a barter economy, people are _________ to specialize in the production of one good or service, compared to in a money economy.
| a. |
more likely |
| b. |
less likely |
| c. |
equally likely |
| d. |
almost always going |
____ 3. According to the text, The Wonderful Wizard of Oz is alleged to be a story about
| a. |
the California gold strikes of 1849. |
| b. |
the end of the gold standard in 1934. |
| c. |
the presidential election of 1896. |
| d. |
the financial panic of 1907. |
____ 4. According to the text, in the book version of The Wonderful Wizard of Oz, Dorothy’s slippers are
| a. |
gold. |
| b. |
silver. |
| c. |
ruby. |
| d. |
paper. |
____ 5. In the history of banking, warehouse receipts refer to receipts
| a. |
that goldsmiths once issued acknowledging that they held a customer’s gold. |
| b. |
for storing furniture in a warehouse. |
| c. |
goldsmiths issued to each other when they borrowed gold. |
| d. |
for storing food and other perishables in a warehouse. |
____ 6. A bank has $7 million in checkable deposits and $1.2 million in total reserves. If the required reserve ratio is 10 percent, then the bank has
| a. |
required reserves of $700,000. |
| b. |
excess reserves of $500,000. |
| c. |
excess reserves of $1,080,000. |
| d. |
required reserves of $120,000. |
| e. |
a and b |
____ 7. A medium of exchange is
| a. |
anything that is generally accepted in exchange for goods and services. |
| b. |
a common measurement in which relative values are expressed. |
| c. |
an item’s ability to hold value over time. |
| d. |
the exchange of goods and services for other goods and services. |
| e. |
both a and d |
____ 8. Bank A has checkable deposits of $10 million and total reserves of $1 million. The required reserve ratio is 9 percent. The bank has excess reserves of
| a. |
$910,000. |
| b. |
$91,000. |
| c. |
$100,000. |
| d. |
$10,000. |
| e. |
There is not enough information provided to answer this question. |
____ 9. Which set of prices would you expect to see (posted, quoted) in a barter economy?
| a. |
1 horse = 10 pieces of gold; 1 kettle = 1 piece of gold |
| b. |
1 horse = 10 kettles; 1 kettle = 1/10 horse |
| c. |
1 horse = $200; 1 kettle = $20 |
| d. |
1 horse = 10 kettles; 1 kettle = 10 apples; 1 apple = 1 orange |
| e. |
b and d |
____ 10. Banks in the United States operate under a fractional reserve system, which means they must maintain only a fraction of their deposits in the form of
| a. |
debt. |
| b. |
loans. |
| c. |
an insurance policy. |
| d. |
reserves. |
____ 11. Which of the following is not a component of M1?
| a. |
currency held outside banks |
| b. |
traveler’s checks |
| c. |
savings deposits |
| d. |
checkable deposits |
____ 12. When the federal government incurs a budget deficit, it will
| a. |
mint more coins and spend them. |
| b. |
create money out of thin air. |
| c. |
impose a special tax on all income earners. |
| d. |
borrow money from the Federal Reserve System by issuing securities. |
| e. |
borrow money from the public by issuing government securities. |
____ 13. If the Fed purchases government securities from a commercial bank, which of the following will happen?
| a. |
The Fed will increase the bank’s reserves on deposit at the Fed. |
| b. |
The Fed will decrease the bank’s reserves on deposit at the Fed. |
| c. |
The assets (government securities) of the Fed will decrease. |
| d. |
The assets (government securities) of the Fed will increase. |
| e. |
a and d |
____ 14. The word that best describes the relationship between the required reserve ratio and the money supply is
| a. |
direct. |
| b. |
constant. |
| c. |
inverse. |
| d. |
roundabout. |
____ 15. When one commercial bank borrows from another commercial bank, it pays the __________ rate.
| a. |
discount |
| b. |
bank interest |
| c. |
federal funds |
| d. |
prime |
| e. |
none of the above |
____ 16. Which of the following will decrease the money supply?
| a. |
an increase in the discount rate (relative to the federal funds rate) |
| b. |
an increase in the required reserve ratio |
| c. |
an open market purchase by the Fed |
| d. |
a and b |
| e. |
a, b, and c |
____ 17. When a bank obtains a loan from the Fed, it follows that the
| a. |
simple deposit multiplier rises. |
| b. |
bank (itself) can create more loans. |
| c. |
bank’s reserves decrease. |
| d. |
bank’s reserves remain unchanged. |
| e. |
none of the above |
____ 18. When the Fed increases the required reserve ratio, a bank’s
| a. |
excess reserves are unaffected. |
| b. |
excess reserves are increased. |
| c. |
excess reserves are decreased. |
| d. |
required reserves are decreased. |
| e. |
b and d |
____ 19. Which of the following Fed actions will increase the money supply?
| a. |
open market purchases of Treasury notes |
| b. |
an increase in the required reserve ratio |
| c. |
an increase in the discount rate |
| d. |
all of the above |
| e. |
none of the above |
____ 20. Federal Reserve Notes held by the Fed are considered part of the
| a. |
money supply. |
| b. |
bank reserves. |
| c. |
both of the above |
| d. |
none of the above |
____ 21. Assuming no cash leakages and no excess reserves held by banks, a required reserve ratio of 0 percent would mean that the simple deposit multiplier is
| a. |
0. |
| b. |
1. |
| c. |
10. |
| d. |
100. |
| e. |
infinity. |
____ 22. An open market __________ by the Fed increases the money supply; a(n) __________ in the required reserve ratio increases the money supply.
| a. |
sale; decrease |
| b. |
purchase; increase |
| c. |
sale; increase |
| d. |
purchase; decrease |
____ 23. A decrease in the required reserve ratio __________ the money supply; an open market purchase __________ the money supply.
| a. |
decreases; decreases |
| b. |
decreases; increases |
| c. |
increases; increases |
| d. |
increases; decreases |
____ 24. Every time the Fed buys or sells on the open market, the __________ changes.
| a. |
budget deficit |
| b. |
income tax rate |
| c. |
money supply |
| d. |
a and b |
| e. |
a, b, and c |
____ 25. If the federal funds rate falls below the discount rate, banks will decrease their borrowings from __________ and __________ their borrowings from __________. It follows that when one bank borrows from __________, reserves in the banking system __________.
| a. |
other banks; increase; the Fed; another bank; remain unchanged |
| b. |
the Fed; decrease; other banks; another bank; remain unchanged |
| c. |
other banks; increase; the U.S. Treasury; the Treasury; increase |
| d. |
the Fed; increase; other banks; another bank; remain unchanged |
| e. |
none of the above |
____ 26. The members of the Board of Governors of the Federal Reserve are
| a. |
elected by a vote of the Federal Reserve District Bank presidents. |
| b. |
appointed by the President of the United States with approval by the Senate. |
| c. |
appointed by the Congress with approval by the President of the United States. |
| d. |
elected by a general election of the citizens of the United States. |
____ 27. The simple deposit multiplier is
| a. |
the reciprocal of the required reserve ratio. |
| b. |
always 1. |
| c. |
the same as the required reserve ratio. |
| d. |
different from bank to bank even if the required reserve ratio is the same for all banks. |
____ 28. If reserves increase by $4 million and the required reserve ratio is 8%, what is the resulting change in checkable deposits (or the money supply), assuming that there are no cash leakages and that banks hold zero excess reserves?
| a. |
$3.2 million |
| b. |
$3.7 million |
| c. |
$5 million |
| d. |
$50 million |
____ 29. When a bank repays a _________________ loan, the Fed _____________________ the bank’s reserve account.
| a. |
overnight; subtracts the repayment from |
| b. |
overnight; adds the repayment to |
| c. |
discount; adds the repayment to |
| d. |
discount; subtracts the repayment from |
____ 30. In its current execution of monetary policy, the Fed does not usually have a specific _____________ target, but rather it tries to target a specific ________________.
| a. |
money supply; federal funds rate |
| b. |
federal funds rate; money supply |
| c. |
money supply; discount rate |
| d. |
required reserves ratio; discount rate |
____ 31. Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap. A Keynesian economist would most likely advocate
| a. |
expansionary monetary policy. |
| b. |
contractionary monetary policy. |
| c. |
expansionary fiscal policy. |
| d. |
contractionary fiscal policy. |
____ 32. Which of the following statements is false?
| a. |
Keynesians would not advocate an expansionary monetary policy to eliminate a recessionary gap if they believed that investment demand was interest-insensitive. |
| b. |
Keynesians would not advocate an expansionary monetary policy to eliminate a recessionary gap if they believed the money market was in the liquidity trap. |
| c. |
Keynesians would advocate an expansionary monetary policy to eliminate a recessionary gap if they believed investment spending was insensitive to changes in the interest rate. |
| d. |
Keynesians believe that money wages are inflexible in the downward direction. |
____ 33. Which of the following may block the Keynesian transmission mechanism?
| a. |
the loanable funds market |
| b. |
aggregate demand |
| c. |
interest-insensitive investment |
| d. |
the liquidity trap |
| e. |
c and d |
____ 34. Under conditions of a liquidity trap and interest-insensitive investment, Keynesians would be most likely to propose __________ policy to eliminate a recessionary gap.
| a. |
expansionary fiscal |
| b. |
contractionary fiscal |
| c. |
expansionary monetary |
| d. |
contractionary monetary |
____ 35. The quantity demanded of money is
| a. |
inversely related to the interest rate. |
| b. |
directly related to the interest rate. |
| c. |
inversely related to the general price level. |
| d. |
inversely related to GDP. |
| e. |
a, c, and d |
____ 36. Economic fine-tuning is the (usually frequent) use of
| a. |
monetary policy that is based on a predetermined steady growth rate in the money supply to counteract even small undesirable movements in economic activity. |
| b. |
only fiscal policy to counteract even small undesirable movements in economic activity. |
| c. |
monetary and fiscal policies to counteract even small undesirable movements in economic activity. |
| d. |
fiscal policy that both balances the budget and counteracts even small undesirable movements in economic activity. |
____ 37. According to the Keynesian transmission mechanism, if the Fed conducts an open market sale of government securities, it may cause which of the following in the investment goods market?
| a. |
a rightward shift in the investment demand curve |
| b. |
a leftward shift in the investment demand curve |
| c. |
a movement down and along a given investment demand curve |
| d. |
a movement up and along a given investment demand curve |
____ 38. The economy is in the horizontal portion of the AS curve, investment spending is interest insensitive and there is no liquidity trap. According to the Keynesian transmission mechanism, if the money supply increases the interest rate will __________, investment spending will __________, the AD curve will __________, and Real GDP will __________.
| a. |
fall; fall; left; fall |
| b. |
rise; drop; left; fall |
| c. |
fall; remain unchanged; not shift; not change |
| d. |
rise; remain unchanged; not shift; not change |
| e. |
none of the above |
____ 39. The economy is in a recessionary gap, wages are inflexible downward, and investment spending is insensitive to changes in the interest rate. In this situation, a Keynesian is likely to advocate the use of __________ policy.
| a. |
expansionary monetary |
| b. |
contractionary monetary |
| c. |
expansionary fiscal |
| d. |
contractionary fiscal |
Exhibit 15-3
____ 40. Refer to Exhibit 15-3. The economy is currently at point 4. The Fed increases the money supply and the economy ends up at point 8. Has monetary policy been effective at moderating the business cycle?
| a. |
Yes, since it eliminated the recessionary gap. |
| b. |
Yes, since it decreased the unemployment rate. |
| c. |
Yes, since it increased Real GDP. |
| d. |
No, since it has moved the economy from a recessionary gap to an inflationary gap. |
| e. |
a, b and c |
True/False
Indicate whether the statement is true or false.
____ 41. To an economist, the terms “money” and “wealth” are synonyms.
____ 42. Credit cards are a widely accepted form of money.
____ 43. Required reserves are a set percentage of total reserves that must be held in cash in a bank’s vault or in the bank’s reserve account at the Fed.
____ 44. In direct finance, funds are loaned and borrowed through a financial intermediary.
____ 45. The interest rate that the Fed charges when it lends reserves to banks is called the federal funds rate.
____ 46. The Fed is one of the largest departments within the U.S. Treasury.
____ 47. The president of the Federal Reserve District Bank of New York holds a permanent seat on the Federal Open Market Committee.
____ 48. Lowering the required reserve ratio raises the simple deposit multiplier.
____ 49. The price of old (or existing) bonds and interest rates have an inverse relationship.
____ 50. Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.
Essay
- List and describe the three functions of money.
- Describe the differences between M1 and M2.
- Summarize the history of how the Federal Reserve came to have twelve districts.
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