Final Exam Practice Problems Flashcards
Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks’ excess reserves?
A) The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease. B) The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase. C) A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment. D) A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment.
B) The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase
Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ____, which will ____ investment spending.
D) decrease; increase
Which of the following best describes the cause-and-effect chain of an expansionary monetary policy?
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
B) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP
If the Fed sells government securities to the general public in the open market, the
A) public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed. B) Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed. C) public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will increase their reserves at the Fed. D) Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed.
D) Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed
Assume that there is a 25% reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of
B) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks
6) When the reserve requirement is increased A) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves. B) the excess reserves of member banks are increased. C) the excess reserves of member banks are reduced. D) required reserves are changed into excess reserves.
C) The excess reserves of the member banks are reduced
7) The Federal Reserve can increase aggregate demand by A) reducing the discount rate. B) raising the reserve requirement. C) reducing the money supply. D) selling government securities in the open market.
A) reducing the discount rate
8) Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the A) federal funds rate. B) consumer price index. C) prime rate. D) discount rate.
A) Federal funds rate
If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?
A) Buy bonds in the open market. B) Recall Federal Reserve notes from circulation. C) Raise the discount rate. D) Raise the legal reserve requirement.
A) Buy bonds in the open market
13) When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce the A) discount rate. B) target federal funds rate. C) inflation rate. D) unemployment rate.
C) Inflation rate
From the mainstream perspective, instability in the economy is due to price
A) stickiness and shocks to either aggregate demand or aggregate supply. B) flexibility and government policies and regulation. C) stickiness and government policies and regulation. D) flexibility and shocks to either aggregate demand or aggregate supply.
A) Stickiness and shocks to either aggregate demand or aggregate supply
The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with A) monetarism. B) rational expectations theory. C) mainstream economics. D) real business cycle theory.
A) Monestarism
Real-business cycle theory suggests that changes in
A) monetary policy are the single most important cause of macroeconomic instability. B) the velocity of money are gradual and predictable and thus able to accommodate the long-run changes in nominal GDP C) investment spending will have a direct and significant effect on aggregate demand. D) technology and resources affect productivity, and thus the long-run growth of aggregate supply.
D) technology and resources affect productivity, and thus the long-run growth of aggregate supply
U.S. imports A) increase the domestic demand for foreign currencies. B) decrease the foreign supply of foreign currencies. C) increase the foreign demand for foreign currencies. D) increase the domestic supply of foreign currencies.
A) increase the domestic demand for foreign currencies
The U.S. demand for euros is A) downsloping because the dollar price of euros and the euro price of dollars are directly related. B) upsloping because a higher dollar price of euros makes European goods and services more attractive to Americans. C) downsloping because, at higher dollar prices for euros, Americans will want to buy more European goods and services. D) downsloping because, at lower dollar prices for euros, Americans will want to buy more European goods and services.
D) down-sloping because, at lower dollar prices for euros, Americans will want to buy more European goods and services
