MC questions Flashcards
A ________ in market interest rates relative to the discount rate will cause discount borrowing to_______.
rise; increase
A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank’s excess reserves will be
$9,000.
A simple deposit multiplier equal to one implies a required reserve ratio equal to
100 percent
An increase in the nonborrowed monetary base, everything else held constant, will cause
the money supply to rise
Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an decrease in the currency-deposit ratio to 30% causes the M1 money multiplier to ________, everything else held constant.
increase from 2.8 to 3.25
Both ________ and ________ are Federal Reserve assets.
securities; loans to financial institutions
During the 2007-2009 financial crisis the currency ratio
decreased slightly.
Everything else held constant, a decrease in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.
increase; increase
Excess reserves are equal to
vault cash plus deposits with Federal Reserve banks minus required reserves.
High-powered money minus currency in circulation equals
reserves
if a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of
$21,000.
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply
does not change.
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
2.8.
In the model of the money supply process, the bank’s role in influencing the money supply process is represented by
both the excess reserve and the market interest rate.
In the model of the money supply process, the depositor’s role in influencing the money supply is represented by
the currency holdings.
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by
$100 times the reciprocal of the required reserve ratio.
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.
ten
The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the monetary base (MB) is
MB = MBn - BR.
When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation.
increase; more
A decrease in ________ increases the money supply since it causes the ________ to rise.
reserve requirements; money multiplier
At its inception, the Federal Reserve was intended to be
a lender-of-last-resort.
Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate
when the funds rate is below the interest rate paid on excess reserves.
Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate
has no effect on the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%
has no effect on the federal funds rate.
Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.
above, falls
From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to
a huge increase in the monetary base.
If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
increase; defensive; inject
If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.
sales; increase
If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.
defensive; sale
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.
increases; rise
Open market purchases ________ reserves and the monetary base thereby ________ the money supply.
raise; raising
The most important advantage of discount policy is that the Fed can use it to
perform its role as lender of last resort.
The opportunity cost of holding excess reserves is the federal funds rate
minus the interest rate paid on excess reserves.
There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.
dynamic; defensive
Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?
the Fed’s liquidity provision
Everything else held constant, an autonomous monetary policy easing ________ aggregate ________.
increases; demand
A decrease in the availability of raw materials that increases the price level is called a ________ shock.
negative supply
A theory of aggregate economic fluctuations called real business cycle theory holds that
aggregate supply shocks do affect the natural rate of output.
According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of
increasing aggregate output, lowering unemployment, and lowering inflation.
Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation.
an increase; demand
Everything else held constant, a decrease in the cost of production ________ aggregate ________.
increases; supply
In the long-run equilibrium
output equals potential output.
If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.
rises; leftward
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)
an increase; an increase
Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate and ________ in the inflation in the long run
no change; no change
According to Keynes’s theory of liquidity preference, velocity increases when
interest rates increase.
According to the quantity theory of money demand
interest rates have no effect on the demand for money.
Empirical evidence shows that the quantity theory of money is a good theory of inflation
in the long run, but not in the short run.
Financing government spending by selling bonds to the public, which pays for the bonds with currency,
has no net effect on the monetary base.
If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is $5 trillion, an increase in the money supply to $2 trillion
increases the price level to 2.
If nominal GDP is $10 trillion, and velocity is 10, the money supply is
$1 trillion.
If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.
increase; increase
In Irving Fisher’s quantity theory of money, velocity was determined by
the institutions in an economy that affect individuals’ transactions.
In the liquidity trap, monetary policy
has no impact on interest rates.
Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of
income.
Keynes’s model of the demand for money suggests that velocity is ________ related to ________.
negatively; interest rates
The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply
is an ineffective way to conduct monetary policy.
