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Chapter 14 Monetary Policy and the Federal Reserve System 1) Which of the following are depository institutions? A) The Federal Reserve Banks of New York and Chicago B) The U

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Chapter 14 Monetary Policy and the Federal Reserve System

1) Which of the following are depository institutions?

A) The Federal Reserve Banks of New York and Chicago

B) The U.S. Treasury and the IRS

C) Banks and thrifts

D) Investment banks and finance companies

 

 

2) The monetary base is defined as

A) bank reserves plus currency held by the nonbank public.

B) bank reserves minus vault cash.

C) all deposits at the Fed.

D) deposits at the Fed plus vault cash.

 

 

3) High-powered money consists of

A) bank reserves plus currency held by the nonbank public.

B) bank reserves minus vault cash.

C) all deposits at the Fed.

D) deposits at the Fed plus vault cash.

 

 

4) Vault cash is equal to $2 million, deposits by depository institutions at the central bank are $1 million, the monetary base is $15 million, and bank deposits are $35 million. Currency held by the nonbank public is

A) $3 million.

B) $12 million.

C) $15 million.

D) $20 million.

 

 

5) Vault cash is equal to $2 million, deposits by depository institutions at the central bank are $1 million, the monetary base is $15 million, and bank deposits are $30 million. Bank reserves are equal to

A) $2 million.

B) $3 million.

C) $5 million.

D) $10 million.

 

 

6) Fractional reserve banking is the system that

A) allows banks not to insure their deposits.

B) allows banks not to join the Federal Reserve System.

C) limits banks' activities from crossing state lines.

D) allows banks to keep smaller reserves than their deposits.

 

 

7) Banks hold some deposits on reserve at the Fed because

A) the Fed requires every bank to hold at least $100 million on deposit at all times.

B) the Fed will insure those deposits, but will not insure regular bank deposits.

C) these are membership dues for being a member bank.

D) these deposits meet the reserve requirements of the Fed.

 

 

8) The currency-deposit ratio is determined by

A) banks.

B) the public.

C) the Federal Reserve.

D) Congress.

 

 

 

9) In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits, the money multiplier is

A) 1 - res.

B) 1 + res.

C) 1/res.

D) res2

 

 

10) Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action will increase the money supply by

A) $1 million.

B) $2 million.

C) $3 million.

D) $4 million.

 

 

11) Assume that the reserve-deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the money supply by $2,600,000. What is the currency-deposit ratio?

A) 0.2

B) 0.3

C) 0.4

D) 0.5

 

 

12) Assume that the reserve-deposit ratio is 0.4. The Federal Reserve carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the money supply by $1,750,000. What is the reserve-deposit ratio?

A) 0.2

B) 0.3

C) 0.4

D) 0.5

 

 

13) Assume that the currency-deposit ratio is 0.5. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action increased the money supply by $2 million. What is the reserve-deposit ratio?

A) 0.25

B) 0.35

C) 0.40

D) 0.50

 

 

14) Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2. What is the money multiplier?

A) 1.5

B) 2.0

C) 2.6

D) 5.0

 

 

15) Suppose there was a banking crisis. The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

A) decreased; decreased

B) decreased; increased

C) increased; decreased

D) increased; increased

 

 

16) Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations. It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements, which would in turn change the banks' reserve-deposit ratio.

A) decrease; lower

B) decrease; raise

C) increase; lower

D) increase; raise

 

 

17) The money supply is $10 million, currency held by the nonbank public is $2 million, and the reserve-deposit ratio is 0.2. Bank reserves are equal to

A) $1.6 million.

B) $2 million.

C) $4 million.

D) $8 million.

 

18) The money supply is $10 million, currency held by the nonbank public is $2 million, and the reserve-deposit ratio is 0.2. Bank deposits are equal to

A) $1.6 million.

B) $2 million.

C) $4 million.

D) $8 million.

 

 

19) The money supply is $6 million, currency held by the nonbank public is $2 million, and the reserve-deposit ratio is 0.1. The monetary base is equal to

A) $2 million.

B) $2.4 million.

C) $2.6 million.

D) $4 million.

 

 

20) Vault cash is equal to $8 million, deposits by depository institutions at the central bank are $2 million, the monetary base is $40 million, and bank deposits are $90 million. The money multiplier is equal to

A) 2.5.

B) 3.0.

C) 4.0.

D) 5.0.

 

 

 

21) Vault cash is equal to $8 million, deposits by depository institutions at the central bank are $2 million, the monetary base is $30 million, and bank deposits are $100 million. The money multiplier is equal to

A) 2.5.

B) 3.0.

C) 4.0.

D) 5.0.

 

 

22) Suppose that in Mysore, the reserve-deposit ratio is

                        res = 0.5 - 2 i,

where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function

                        L(Y, i) = 0.5Y - 10i,

where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. The money multiplier equals

A) 2.00.

B) 2.40.

C) 3.00.

D) 4.00.

 

 

23) Suppose that in Mysore, the reserve-deposit ratio is

                        res = 0.5 - 2i,

where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function

                        L(Y, i) = 0.5Y - 10i,

where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. The money supply equals

A) 200.

B) 240.

C) 300.

D) 400.

 

 

 

24) If the Fed decreases the monetary base by $100 million and the money multiplier is 4, M1 will

A) rise by $400 million.

B) fall by $400 million.

C) rise by $25 million.

D) fall by $25 million.

 

 

25) If the money multiplier is 10, the purchase of $1 billion of securities by the Fed on the open market causes a

A) $10 billion decrease in the money supply.

B) $1 billion decrease in the money supply.

C) $1 billion increase in the money supply.

D) $10 billion increase in the money supply.

 

26) If the money multiplier is 10, the sale of $1 billion of securities by the Fed on the open market causes a

A) $10 billion decrease in the money supply.

B) $1 billion decrease in the money supply.

C) $1 billion increase in the money supply.

D) $10 billion increase in the money supply.

 

 

27) A bank run is

A) a large-scale, panicky withdrawal of deposits from a bank.

B) the transfer of funds from one bank to another.

C) a situation when a bank borrows from the Fed's discount window.

D) a situation in which a bank borrows at the Federal funds rate.

 

 

 

28) Which of the following is the Federal Reserve most likely to use to change the nation's money supply?

A) Open-market operations

B) Reserve requirements

C) Discount lending

D) Credit controls

 

 

29) The Fed can reduce the money supply by reducing

A) the currency-deposit ratio.

B) the monetary base.

C) reserve requirements.

D) the discount rate.

 

 

 

14.2   Monetary Control in the United States

 

1) How many Federal Reserve Banks are there?

A) 7

B) 12

C) 15

D) 5,500 (approximately)

 

 

2) The Federal Reserve is

A) a Kentucky bourbon.

B) a wild game preserve.

C) an express mail service.

D) the central bank of the United States.

 

 

3) The leadership of the Federal Reserve System is provided by

A) the Board of Governors.

B) the Federal Advisory Committee.

C) the Federal Open Market Committee.

D) the directors of the twelve Federal Reserve banks.

 

 

4) The current chairman of the Board of Governors of the Federal Reserve System is

[NOTE: YOU MAY NEED TO UPDATE THIS QUESTION.]

A) Milton Friedman.

B) Alan Greenspan.

C) Ben Bernanke.

D) Paul Volcker.

 

 

5) Who determines the open-market operations of the Federal Reserve System?

A) Board of Governors

B) FDIC

C) FHLBB

D) FOMC

 

 

 

6) The Federal Open Market Committee consists of all the following people EXCEPT

A) the Board of Governors of the Federal Reserve System.

B) five presidents of Federal Reserve Banks, on a rotating basis.

C) the chairman of the President's Council of Economic Advisors.

D) the President of the Federal Reserve Bank of New York.

 

 

7) The largest liability of the Fed from those on this list is

A) U.S. Treasury securities.

B) mortgage-backed securities.

C) loans to depository institutions.

D) currency outstanding.

 

 

8) The largest asset of the Fed from those on this list is

A) U.S. Treasury securities.

B) mortgage-backed securities.

C) loans to depository institutions.

D) currency outstanding.

 

 

9) Which of the Fed's instruments is most frequently used?

A) Changing reserve requirements

B) Open-market operations

C) Changing the discount rate

D) Changing margin requirements for the stock market

 

 

 

10) Which of the following is not a policy instrument of the Fed?

A) Changing reserve requirements

B) Open-market operations

C) Changing the discount rate

D) Changing the federal government budget deficit

 

 

11) Since the 1930s, the Fed's most important tool for controlling the money supply has been

A) setting the discount rate.

B) setting reserve requirements.

C) moral suasion.

D) open-market operations.

 

 

12) Changes in reserve requirements directly and immediately affect

A) the monetary base.

B) banks' holdings of securities.

C) the Fed's holdings of foreign exchange.

D) the money multiplier.

 

 

13) The primary purpose of the discount window is to

A) influence the nation's money supply.

B) fulfill the bank's lender of last resort role.

C) control banks' excess reserves.

D) influence the amount of loans that banks provide to the public.

 

 

 

14) When U.S. banks borrow from one another, they must pay the

A) discount rate.

B) prime rate.

C) Fed funds rate.

D) Interbank Offer Rate.

 

 

15) The Federal funds market is a market for trading funds between

A) a bank and a multinational corporation.

B) a bank and the government.

C) a bank and another bank.

D) a bank and the Federal Reserve Bank.

 

 

16) If a bank borrows from a Federal Reserve Bank, the interest rate is called

A) the prime rate.

B) the discount rate.

C) the Fed funds rate.

D) the reserve availability rate.

 

 

17) Banks in good condition may take out a ________ from the Fed.

A) secondary credit discount rate

B) Fed funds loan

C) primary credit discount rate

D) class A loan

 

 

 

18) Which of the following best describes the relationship between the Fed funds rate and the discount rate, beginning in 2003?

A) The Fed funds rate is usually lower than the discount rate.

B) The two rates are equal.

C) The discount rate is usually lower than the Fed funds rate.

D) There is no relationship between the two rates.

 

 

19) The new monetary policy tool that the Fed began using in 2008 is

A) changing the interest rate paid on reserves.

B) imposing a surcharge on credit cards.

C) putting a tax on all financial transactions.

D) borrowing from China.

 

 

14.3   Setting Monetary Policy Targets

 

1) The Fed's tools are also known as

A) goals.

B) intermediate targets.

C) instruments.

D) derivatives.

 

 

 

2) Open-market operations, changes in reserve requirements, changes in the discount rate, and changes in the interest rate on reserves are known as

A) goals.

B) intermediate targets.

C) instruments.

D) derivatives.

 

 

 

3) Which of the following is an instrument of monetary policy?

A) The interest rate on 3-month Treasury bills

B) The mortgage interest rate

C) The discount rate

D) The budget deficit

 

 

4) Macroeconomic variables that the Fed cannot control directly but can influence fairly predictably, and which are related to the Fed's goals, are known as

A) instruments.

B) tools.

C) intermediate targets.

D) initial targets.

 

 

5) Intermediate targets are

A) identical to instruments.

B) macroeconomic variables that the Fed can influence that are related to the Fed's goals.

C) also known as the Fed's tools.

D) macroeconomic variables that never get revised.

 

 

6) Which of the following might the Fed rely on as an intermediate target?

A) The monetary base

B) The discount rate

C) M2

D) The exchange rate of the dollar

 

 

7) Which of the following variables is likely to serve as an intermediate target for monetary policy?

A) Money supply

B) Inflation rate

C) Open-market operations

D) Unemployment rate

 

 

8) In the Keynesian model, suppose the Fed sets a target for the money supply. If the IS curve shifts to the left, and the Fed wants to keep output unchanged, what should the Fed do?

A) Reduce taxes.

B) Reduce the money supply.

C) Increase taxes.

D) Increase the money supply.

 

 

9) In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts to the left, and the Fed wants to keep output unchanged,

A) taxes will increase.

B) the money supply will decline.

C) the real interest rate will decrease.

D) taxes will decrease.

 

 

10) In the Keynesian model, suppose the Fed wants to keep output unchanged. If the IS curve shifts to the left, and the Fed acts to keep output unchanged, then

A) taxes will increase.

B) the money supply will decline.

C) the real interest rate will decrease.

D) taxes will decrease.

 

 

11) In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts down and to the left, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, it will

A) shift the LR curve up.

B) not shift the LR curve.

C) shift the LR curve down.

D) shift the IS curve up and to the right.

 

 

12) In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts up and to the right, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, it will

A) shift the LR curve up.

B) not shift the LR curve.

C) shift the LR curve down.

D) shift the IS curve up and to the right.

 

 

14.4   Making Monetary Policy in Practice

 

1) In response to an unanticipated tightening of monetary policy, the Fed funds rate ________ at first, then ________ after 6 to 12 months.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; rises significantly

D) remains roughly unchanged; falls significantly

 

 

2) In response to an unanticipated easing of monetary policy, the Fed funds rate ________ at first, then ________ after 6 to 12 months.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; rises significantly

D) remains roughly unchanged; falls significantly

 

 

3) In response to an unanticipated easing of monetary policy, output ________ at first, then ________ after about 4 months.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; rises significantly

D) remains roughly unchanged; falls significantly

 

 

4) In response to an unanticipated tightening of monetary policy, output ________ at first, then ________ after about 4 months.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; rises significantly

D) remains roughly unchanged; falls significantly

 

 

 

5) In response to an unanticipated tightening of monetary policy, the price level ________ at first, then ________ after a year.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; begins to rise

D) remains roughly unchanged; begins to fall

 

 

6) In response to an unanticipated easing of monetary policy, the price level ________ at first, then ________ after a year.

A) rises; returns most of the way to its original value

B) falls; returns most of the way to its original value

C) remains roughly unchanged; begins to rise

D) remains roughly unchanged; begins to fall

 

 

7) Policymakers may be uncertain about the state of the economy because

A) initial releases of data may be less accurate than later data releases.

B) they don't know the predominant source of shocks to the economy.

C) they don't know how shocks affect people's expectations.

D) they are not aware of modern macroeconomic modeling techniques.

 

 

8) Policymakers may be uncertain about the structure of the economy because

A) initial releases of data may be less accurate than later data releases.

B) they don't know the predominant source of shocks to the economy.

C) they don't know how shocks affect people's expectations.

D) they are not aware of modern macroeconomic modeling techniques.

 

 

 

9) If the public is not sure about the central bank's motives, then

A) initial releases of data may be less accurate than later data releases.

B) the predominant source of shocks to the economy must be shocks to the LM curve.

C) central bankers should try to stabilize the inflation rate.

D) modern macroeconomic modeling techniques will fail.

 

 

10) Zero lower bound refers to the fact that

A) the government budget deficit must be zero in the long run.

B) the lowest possible level of the current account deficit is zero in the long run.

C) the inflation rate can never decline below zero.

D) nominal interest rates cannot fall below zero.

 

 

11) A liquidity trap occurs when

A) any additions to the monetary base are held as cash by people or reserves at banks.

B) the Fed increases the money supply, causing the expected inflation rate to rise more than the real interest rate declines, so that the nominal interest rate increases.

C) there are runs on banks that are solvent but illiquid.

D) the demand for loans increases in a country on the gold standard, so that the monetary supply is not able to increase and interest rates rise dramatically.

 

 

12) When the Fed signals how long it expects interest rates to remain at a low level, it is said to be engaging in

A) credit easing.

B) forward guidance.

C) quantitative easing.

D) a maturity extension program.

 

 

13) When the Fed alters the types of assets it owns, it is engaging in

A) credit easing.

B) forward guidance.

C) quantitative easing.

D) changing the discount rate.

 

 

14) When the Fed sells short-term bonds and buys long-term bonds, it is engaging in

A) changing the discount rate.

B) forward guidance.

C) quantitative easing.

D) a maturity extension program.

 

 

15) When the Fed increases the quantity of assets it owns, it is said to be engaging in

A) credit easing.

B) forward guidance.

C) quantitative easing.

D) a maturity extension program.

 

 

16) From 2007 to 2012, the amount of assets owned by the Fed approximately

A) doubled.

B) tripled.

C) quadrupled.

D) quintupled.

 

 

14.5   The Conduct of Monetary Policy: Rules Versus Discretion

 

1) Which of the following statements would Milton Friedman disagree with?

A) Monetary policy has few short-run effects on the real economy.

B) In the long run, changes in the money supply primarily affect the price level.

C) In practice, there is little scope for using monetary policy actively to smooth out business cycles.

D) The Federal Reserve cannot be relied on to effectively smooth out business cycles.

 

 

2) Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?

A) Information lags are short, enabling the central bank to respond quickly to changes in the economy.

B) There is little uncertainty over the effect of a change in the money supply on the economy.

C) There are long and variable lags between monetary policy actions and their economic results.

D) Wage and price adjustments are relatively slow, so changing the money supply will have a minimal impact on the real economy.

 

 

 

3) Milton Friedman would eliminate the destabilizing effect of the Federal Reserve's monetary policy by

A) eliminating the Federal Reserve.

B) removing the Federal Reserve's political independence.

C) requiring that the Federal Reserve choose a monetary aggregate and increase it at a fixed percentage rate each year.

D) eliminating the Federal Reserve's right to carry out open-market operations.

 

 

4) Monetarists suggest doing which of the following?

A) Maintain a steady growth rate of the money supply.

B) Use fiscal policy to combat unemployment in the short run.

C) Use monetary policy to combat unemployment in the long run.

D) Use fiscal policy to combat inflation in the long run.

 

 

5) Most Keynesians suggest that the Fed

A) use discretion in setting monetary policy.

B) use fiscal policy to combat unemployment in the short run.

C) follow a rule, such as keeping the money growth rate at 3%, regardless of the state of the economy.

D) use fiscal policy to combat inflation in the long run.

 

 

6) The basic Keynesian argument for discretionary monetary policy is that

A) monetary policy is the principal cause of business cycles.

B) monetary policy is much more effective than fiscal policy.

C) aggregate demand is unstable and monetary policy can help to stabilize it.

D) reducing unemployment is much more important than reducing inflation.

 

 

 

7) The Taylor rule relates

A) the nominal Fed funds rate to inflation over the past year and the deviation of output from full-employment output.

B) the growth rate of the monetary base to the growth rate of nominal GDP and the change in velocity over the past year.

C) the nominal Fed funds rate to the growth rate of nominal GDP and the change in velocity over the past year.

D) the growth rate of the monetary base to inflation over the past year and the deviation of output from full-employment output.

 

 

8) According to the Taylor rule, if inflation in the last year was 6% and output was 2% below its full-employment level, the nominal Fed funds rate should be

A) 3%.

B) 5%.

C) 7%.

D) 9%.

 

 

9) According to the Taylor rule, if the inflation rate in the last year was 2% and output was equal to its full-employment level, the nominal Fed funds rate should be

A) 3%.

B) 4%.

C) 5%.

D) 6%.

 

 

10) According to the Taylor rule, if output is above its full-employment level and inflation is less than 2%,

A) the Fed should raise the Fed funds rate above 4%.

B) the Fed should reduce the Fed funds rate below 4%.

C) the Fed should make the Fed funds rate exactly 4%.

D) what the Fed should do is ambiguous.

 

 

11) The degree to which the public believes the central bank's announcements about future policy is its

A) reputation.

B) transparency.

C) openness.

D) credibility.

 

 

12) The problem with the strategy of achieving credibility through reputation is that

A) reputations are rarely credible.

B) reputations lack any commitment.

C) serious costs may be incurred during the period in which reputation is established.

D) rules always have a lower cost than reputations in maintaining credibility.

 

 

13) The primary criticism by Keynesians of the credibility argument for rules is that

A) reputations are a less costly method of gaining credibility.

B) reputations are a less costly method of maintaining credibility.

C) the cost of losing flexibility over policy choices may exceed the cost of gaining credibility.

D) rules that reduce presidential and congressional influence over monetary policy could ultimately be harmful to the economy.

 

 

14) Monetarists argued that the Fed wasn't serious about adhering to a money-growth target because

A) it was unable to reduce inflation at all.

B) it tried to target three different monetary aggregates simultaneously.

C) the sacrifice ratio remained too high.

D) it gave too much weight to movements in exchange rates.

 

 

 

15) Many countries dropped their use of money-growth targets in the 1980s because

A) they were in severe recessions.

B) political opponents claimed money-growth targeting helped the rich at the expense of the poor.

C) money demand became unstable.

D) it was too difficult to coordinate monetary policy with fiscal policy.

 

 

16) When the central bank announces the inflation rate that it will achieve over the next one to four years, it is following a strategy known as

A) money targeting.

B) inflation targeting.

C) a currency board.

D) real business cycle targeting.

 

 

17) There is ________ relationship between inflation and central bank independence and ________ relationship between long-run rates of unemployment and central bank independence.

A) a negative; no

B) a negative; a negative

C) a positive; no

D) a positive; a negative