final exam questions

Question 1

1. If the required reserve ratio is 20 percent, the simple deposit multiplier is

A. 2
B. 5
C. 10
D. 20

Answer 1

5

Question 2

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and
that the required reserve ratio is 20%.

Refer to Scenario 1. As a result of Kristy’s deposit, Bank A’s reserves immediately increase by

Answer 2

10,000

Question 3

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and
that the required reserve ratio is 20%.

Refer to Scenario 1. As a result of Kristy’s deposit, Bank A’s required reserves increase by

Answer 3

2,000

Question 4

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and
that the required reserve ratio is 20%.

Refer to Scenario 1. As a result of Kristy’s deposit, Bank A’s excess reserves increase by

Answer 4

8,000

Question 5

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and
that the required reserve ratio is 20%.

Refer to Scenario 1. As a result of Kristy’s deposit, Bank A can make a maximum loan of

Answer 5

8,000

Question 6

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and
that the required reserve ratio is 20%.

Refer to Scenario 1. As a result of Kristy’s deposit, checking account deposits in the banking system as a
whole (including the original deposit) could eventually increase up to a maximum of

Answer 6

50,000

Question 7

When you open a checking account at Bank of America, Bank of America

A. has more reserves and more excess reserves.
B. has more reserves, but excess reserves remain unchanged.
C. has more deposits and less in excess reserves.
D. has more deposits, but excess reserves remain unchanged

Answer 7

has more reserves and more excess reserves.

Question 8

Assets
Reserves $10,000 Loans $90,000
Liabilities
Deposits $100,000

If the required reserve ratio is lowered to 8 percent, how many additional funds can National City loan out?

A. $10,000
B. $8,000
C. $2,000
D. $0

Answer 8

2,000

Question 9

If the required reserve ratio is RR, the simple deposit multiplier is defined as

Answer 9

1/RR

Question 10

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks
respond appropriately to the change in the rate.

A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases

Answer 10

increases; increases

Question 11

If a bank receives a $1 million discount loan from the Federal Reserve, then the bank’s reserves will

A. not change.
B. increase by $1 million.
C. increase by less than $1 million.
D. increase by more than $1 million.

Answer 11

increased by $1 million

Question 12

An increase in interest rates

A. decreases investment spending on machinery, equipment and factories, but increases consumption
spending on durable goods and net exports.
B. decreases investment spending on machinery, equipment and factories, and consumption spending on
durable goods, but increases net exports.
C. decreases investment spending on machinery, equipment and factories, consumption spending on
durable goods, and net exports.
D. increases investment spending

Answer 12

decreases investment spending on machinery, equipment and factories, consumption spending on
durable goods, and net exports.

Question 13

Money market mutual funds sell shares to investors and use the money to buy

A. mortgage-backed securities.
B. foreign currency.
C. short-term securities.
D. overseas assets through foreign direct investment

Answer 13

short-term securities

Question 14

As was demonstrated in 2007, firms in the shadow banking system

A. were very vulnerable to bank runs.
B. were protected from financial ruin by federal deposit insurance.
C. were well insulated from bank runs.
D. were more insulated from the financial crisis than were commercial banks.

Answer 14

were very vulnerable to bank runs.

Question 15

In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by

A. allowing domestic banks to be taken over by foreign banks.
B. permitting banks to sell commercial bonds to the Federal Reserve Bank.
C. allowing banks to double any outstanding claims for federal deposit insurance reimbursements.
D. providing funds to banks in exchange for stock.

Answer 15

providing funds to banks in exchange for stock.

Question 16

In the United States, each bank panic in the late nineteenth and early twentieth centuries was
accompanied by

A. inflation.
B. deflation.
C. a depression.
D. a recession.

Answer 16

recession

Question 17

In 1913, Congress established the Federal Reserve system with the intention of putting an end to

A. high interest rates.
B. high unemployment rates.
C. inflation.
D. bank panics.

Answer 17

bank panics

Question 18

Prior to 2008, the primary tool the Federal Reserve used to increase the money supply was

A. printing more money.
B. lowering the required reserve ratio.
C. buying Treasury securities.
D. lowering the discount rate.

Answer 18

buying treasury securities

Question 19

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate
was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the
price level such as what occurred in Zimbabwe, the economy is said to experience

A. stagflation.
B. deflation.
C. inflation.
D. hyperinflation.

Answer 19

hyperinflation

Question 20

There is a strong link between changes in the money supply and inflation

A. in both the short run and the long run.
B. in neither the short run nor the long run.
C. in the short run, but not in the long run.
D. in the long run, but not in the short run.

Answer 20

in the long run, but not in the short run.

Question 21

The quantity theory of money predicts that, in the long run, inflation results from the

A. velocity of money growing at a faster rate than real GDP.
B. velocity of money growing at a lower rate than real GDP.
C. money supply growing at a lower rate than real GDP.
D. money supply growing at a faster rate than real GDP.

Answer 21

money supply growing at a faster rate than real GDP

Question 22

The velocity of money is defined as

A. the average number of times each dollar is used to purchase goods and services.
B. .
C. the total number of times each dollar is used to purchase goods and services.
D. P × Y.

Answer 22

the average number of times each dollar is used to purchase goods and services.

Question 23

The quantity theory of money implies that the price level will be stable (no inflation or deflation) when

the growth rate of the money supply equals
A. 0.
B. the growth rate of the price level.
C. the growth rate of the velocity of money.
D. the growth rate of real GDP.

Answer 23

the growth rate of real GDP

Question 24

Your roommate argues that he can think of no better situation than living in a deflationary economy, as
prices of goods and services would continuously fall. You disagree and argue that during a deflation,
people can be made worse off because

A. the purchasing power of people’s incomes would increase.
B. the purchasing power of the currency would decrease.
C. the value of the real interest rate will drop below the nominal interest rate.
D. borrowers will have to pay increasing amounts in real terms over time.

Answer 24

borrowers will have to pay increasing amounts in real terms over time.

Question 25

A barter economy is an economy where

A. goods and services are exchanged for money.
B. money is exchanged for goods and services.
C. goods and services are exchanged for other goods and services.
D. goods and services are exchanged for liabilities.

Answer 25

goods and services are exchanged for other goods and services.

Question 26

A major source of inefficiency in barter economies is that they require

A. a standard of deferred payment to make trade possible.
B. a double coincidence of wants in exchange.
C. more liquid stores of value than do monetary economies.
D. All of the above are correct.

Answer 26

a double coincidence of wants in exchange.

Question 27

Commodity money is a good

A. used as money that has no secondary use.
B. that is designated as money by law.
C. used as money that also has value independent of its use as money.
D. used as money that has no intrinsic value

Answer 27

used as money that also has value independent of its use as money.

Question 28

Cigarettes in prison would be an example of

A. fiat money
B. barter money
C. commodity money
D. interest-free money

Answer 28

commodity money

Question 29

Homebuilding construction firms did well during the mid-2000s but did not do so well in during and
immediately after the recession of 2007-2009. The reason for this is

A. the Fed kept low interest rates in the mid-2000s but raised interest rates in 2007 to help fight inflation.
B. the Fed kept low interest rates in the mid-2000s but by 2007 the housing bubble had burst.
C. the Fed raised interest rates in the mid-2000s but lowered rates in 2007 to revive the housing market.
D. the Fed raised interest rates in the mid-2000s and raised interest rates in 2007 to help fight inflation.

Answer 29

the Fed kept low interest rates in the mid-2000s but by 2007 the housing bubble had burst.

Question 30

If the probability of losing your job remains ________, a recession would be a good time to purchase a
home because the Fed usually ________ interest rates during this time.

A. low; lowers
B. low; raises
C. high; lowers
D. high; raises
E. low; does not change

Answer 30

low; lowers

Question 31

Monetary policy refers to the actions the

A. President and Congress take to manage the money supply and interest rates to pursue their economic
objectives.
B. Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic
policy objectives.
C. President and Congress take to manage government spending and taxes to pursue their economic
objectives.
D. Federal Reserve takes to manage government spending and taxes to pursue its economic objectives.

Answer 31

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic
policy objectives.

Question 32

Which of the following is true?

A. The money market model is a model that determines the short-term nominal rate of interest
B. The money market model is a model that determines taxes and government purchases
C. The loanable funds model is a model that determines the short-term real rate of interest
D. The loanable funds model is a model that determines the actions taken by the Fed

Answer 32

The money market model is a model that determines the short-term nominal rate of interest

Question 33

The Fed seeks to promote stability of financial markets because

A. they want to lift the self-esteem of workers.
B. Congress directed them to do so by the Employment Act of 1946.
C. resources are lost when there is not an efficient matching of savers and borrowers.
D. unstable markets result in increased efficiency.

Answer 33

resources are lost when there is not an efficient matching of savers and borrowers.

Question 34

Refer to Figure 1- a-b move up the line (note that it is considering a time of “scarce reserves” in which our money supply is
located on the downward sloping part of the money demand curve). In the figure above, the movement
from point A to point B in the money market would be caused by

A. an increase in the price level.
B. a decrease in real GDP.
C. an open market sale of Treasury securities by the Federal Reserve.
D. a decrease in the required reserve ratio by the Federal Reserve

Answer 34

an open market sale of Treasury securities by the Federal Reserve.

Question 35

What is the discount rate?

A. the rate at which banks can borrow from each other
B. the rate at which banks can borrow from the Federal Reserve
C. the rate at which homeowners can borrow from banks
D. the rate at which other countries can borrow from the United States

Answer 35

the rate at which banks can borrow from the Federal Reserve

Question 36

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

A. federal funds rate.
B. Treasury bill rate.
C. discount rate.
D. prime rate.

Answer 36

federal funds rate

Question 37

The monetary policy target the Federal Reserve focuses primarily on today is

A. the unemployment rate.
B. M1.
C. the inflation rate.
D. the interest rate.
E. M2.

Answer 37

the interest rate

Question 38

The interest rate that banks charge other banks for overnight loans is the

A. prime rate.
B. discount rate.
C. federal funds rate.
D. Treasury bill rate.

Answer 38

federal fund rate

Question 39

The federal funds rate is

A. the interest rate the Fed charges commercial banks.
B. the interest rate a bank charges its best customers.
C. the interest rate banks charge each other for overnight loans.
D. the interest rate on a Treasury Bill.

Answer 39

the interest rate banks charge each other for overnight loans.

Question 40

In the countries that have adopted inflation targeting, the inflation rate has typically

A. increased.
B. decreased.
C. decreased to zero.
D. not changed.

Answer 40

decreased

Question 41

A decrease in real GDP can

A. shift money demand to the right and decrease the interest rate.
B. shift money demand to the right and increase the interest rate.
C. shift money demand to the left and decrease the interest rate.
D. shift money demand to the left and increase the interest rate.

Answer 41

shift money demand to the left and decrease the interest rate.

Question 42

The money supply curve is vertical if

A. banks and the Fed jointly determine the money supply.
B. the Fed is able to completely determine the money supply.
C. banks and households determine the money supply.
D. households and the Fed jointly determine the money supply.

Answer 42

the Fed is able to completely determine the money supply.

Question 43

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

A. use open market operations to buy Treasury bills
B. use open market operations to sell Treasury bills
C. use discount policy to raise the discount rate
D. raise the reserve requirement

Answer 43

use open market operations to buy Treasury bills

Question 44

Contractionary monetary policy on the part of the Fed results in

A. an increase in the money supply, an increase in interest rates, and an increase in GDP.
B. a decrease in the money supply, an increase in interest rates, and a decrease in GDP.
C. an increase in the money supply, a decrease in interest rates, and an increase in GDP.
D. a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.

Answer 44

a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

Question 45

When the Fed uses contractionary policy,

A. the price level rises higher than it would if the Fed did not pursue policy.
B. the price level rises less than it would if the Fed did not pursue policy.
C. it does not change the price level.
D. it causes long term deflation.

Answer 45

the price level rises less than it would if the Fed did not pursue policy.

Question 46

Which of the following would most likely induce the Federal Reserve to conduct expansionary
monetary policy? A significant decrease in

A. oil prices.
B. business taxes.
C. income tax rates.
D. investment spending.

Answer 46

investment spending

Question 47

Refer to Figure 3- move point A to B which is equilibrium with LRAS and SRAS In the figure above suppose the economy is initially at point A. The movement of the
economy to point B as shown in the graph illustrates the effect of which of the following policy actions by
the Federal Reserve?

A. a decrease in income taxes
B. an increase in the required reserve ratio
C. a decrease in the interest rate
D. more regulations on banks

Answer 47

a decrease in the interest rate

Question 48

Inflation targeting is a framework for carrying out monetary policy whereby

A. the central bank adopts a rigid target for inflation and ignores declines in output.
B. the central bank commits to achieving a publicly announced level of inflation.
C. the central bank commits to achieving a target level of inflation which is never announced publicly.
D. the central bank commits to a monetary growth rule.

Answer 48

the central bank commits to achieving a publicly announced level of inflation.

Question 49

Why are some of the older (pre-2008) tools of the Fed no longer considered effective?

A. Because the Fed now requires banks to keep 50% of deposits in reserves.
B. Because inflation was briefly negative during the 2008 financial crisis.
C. Quantitative Easing increased the money supply by a large amount which reduced the ability of open
market operations to influence interest rates
D. The Fed was scrapped in 2008 for a new version.

Answer 49

Quantitative Easing increased the money supply by a large amount which reduced the ability of open
market operations to influence interest rates

Question 50

Which of the following is true today regarding Fed monetary policy?

A. The Fed effectively administers interest rates directly through two new tools, interest on reserves and
repurchase agreements.
B. The Fed is focused on interest rates, but is not concerned about inflation.
C. The Fed has to get permission from the President to change interest rates.
D. We are currently in a time of very scarce reserves.

Answer 50

The Fed effectively administers interest rates directly through two new tools, interest on reserves and
repurchase agreements.

Question 51

A financial asset is considered a security if

A. the owner of the security receives dividends and realizes a capital gain when the asset is sold.
B. it can be sold in a secondary market.
C. its value increases after it is sold in a primary market.
D. its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.

Answer 51

it can be sold in a secondary market.

Question 52

Which of the following explains why mortgages weren’t considered securities prior to 1970?

A. The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An
amendment to the Act was approved in 1970 that allowed mortgages to be considered securities.
B. Until 1970, the average annual increase in housing prices did not allow the buying and selling of
mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage
values since 1970.
C. Congress passed a law in 1970 stipulating that mortgages could be classified as securities.
D. Prior to 1970, mortgages were rarely resold in the secondary market

Answer 52

Prior to 1970, mortgages were rarely resold in the secondary market

Question 53

The smaller the fraction of an investment financed by borrowing,

A. the greater the potential return and potential loss on that investment.
B. the smaller the potential return and potential loss on that investment.
C. the greater the potential return and the smaller the potential loss on that investment.
D. the smaller the potential return and the greater the potential loss on that investment.

Answer 53

the smaller the potential return and potential loss on that investment.

Question 54

Which of the following would be classified as fiscal policy?

A. The federal government passes tax cuts to encourage firms to reduce air pollution.
B. The Federal Reserve cuts interest rates to stimulate the economy.
C. A state government cuts taxes to help the economy of the state.
D. The federal government cuts taxes to stimulate the economy.
E. States increase taxes to fund education.

Answer 54

The federal government cuts taxes to stimulate the economy

Question 55

Refer to Figure 4 (question 55). In the dynamic model of AD-AS in the figure above, if the economy is at point A in
year 1 and is expected to go to point B in year 2, Congress and the president would most likely

A. decrease government spending.
B. increase government spending.
C. increase oil prices.
D. increase taxes.
E. lower interest rates

Answer 55

increase government spending

Question 56

Refer to Figure 4 (question 55). In the dynamic model of AD-AS shown, if the economy is at point A in year 1 and is
expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B

A. the unemployment rate is very low.
B. firms are operating below capacity.
C. the economy is above full employment.
D. income and profits are rising.
E. there is pressure on wages and prices to rise.

Answer 56

firms are operating below capacity.

Question 57

The multiplier effect refers to the series of

A. autonomous increases in consumption spending that result from an initial increase in induced
expenditures.
B. induced increases in consumption spending that result from an initial increase in autonomous
expenditures.
C. autonomous increases in investment spending that result from an initial increase in induced
expenditures.
D. induced increases in investment spending that result from an initial increase in autonomous
expenditures.

Answer 57

induced increases in consumption spending that result from an initial increase in autonomous
expenditures.