MC questions

Question 1

A ________ in market interest rates relative to the discount rate will cause discount borrowing to_______.

Answer 1

rise; increase

Question 2

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

Answer 2

$9,000.

Question 3

A simple deposit multiplier equal to one implies a required reserve ratio equal to

Answer 3

100 percent

Question 4

An increase in the nonborrowed monetary base, everything else held constant, will cause

Answer 4

the money supply to rise

Question 5

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.

Answer 5

increase from 2.8 to 3.25

Question 6

Both ________ and ________ are Federal Reserve assets.

Answer 6

securities; loans to financial institutions

Question 7

During the 2007-2009 financial crisis the currency ratio

Answer 7

decreased slightly.

Question 8

Everything else held constant, a decrease in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.

Answer 8

increase; increase

Question 9

Excess reserves are equal to

Answer 9

vault cash plus deposits with Federal Reserve banks minus required reserves.

Question 10

High-powered money minus currency in circulation equals

Answer 10

reserves

Question 11

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

Answer 11

$21,000.

Question 12

If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply

Answer 12

does not change.

Question 13

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

Answer 13

2.8.

Question 13

In the model of the money supply process, the bank’s role in influencing the money supply process is represented by

Answer 13

both the excess reserve and the market interest rate.

Question 14

In the model of the money supply process, the depositor’s role in influencing the money supply is represented by

Answer 14

the currency holdings.

Question 15

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

Answer 15

$100 times the reciprocal of the required reserve ratio.

Question 16

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.

Answer 16

ten

Question 17

The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the monetary base (MB) is

Answer 17

MB = MBn - BR.

Question 18

When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation.

Answer 18

increase; more

Question 19

A decrease in ________ increases the money supply since it causes the ________ to rise.

Answer 19

reserve requirements; money multiplier

Question 20

At its inception, the Federal Reserve was intended to be

Answer 20

a lender-of-last-resort.

Question 21

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate

Answer 21

when the funds rate is below the interest rate paid on excess reserves.

Question 22

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

Answer 22

has no effect on the federal funds rate.

Question 23

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%

Answer 23

has no effect on the federal funds rate.

Question 24

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 ________.

Answer 24

above, falls

Question 25

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

Answer 25

a huge increase in the monetary base.

Question 26

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.

Answer 26

increase; defensive; inject

Question 27

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.

Answer 27

sales; increase

Question 28

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.

Answer 28

defensive; sale

Question 29

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.

Answer 29

increases; rise

Question 30

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

Answer 30

raise; raising

Question 31

The most important advantage of discount policy is that the Fed can use it to

Answer 31

perform its role as lender of last resort.

Question 32

The opportunity cost of holding excess reserves is the federal funds rate

Answer 32

minus the interest rate paid on excess reserves.

Question 33

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.

Answer 33

dynamic; defensive

Question 34

Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?

Answer 34

the Fed's liquidity provision

Question 35

Everything else held constant, an autonomous monetary policy easing ________ aggregate ________.

Answer 35

increases; demand

Question 36

A decrease in the availability of raw materials that increases the price level is called a ________ shock.

Answer 36

negative supply

Question 37

A theory of aggregate economic fluctuations called real business cycle theory holds that

Answer 37

aggregate supply shocks do affect the natural rate of output.

Question 38

According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of

Answer 38

increasing aggregate output, lowering unemployment, and lowering inflation.

Question 39

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.

Answer 39

an increase; demand

Question 40

Everything else held constant, a decrease in the cost of production ________ aggregate ________.

Answer 40

increases; supply

Question 41

In the long-run equilibrium

Answer 41

output equals potential output.

Question 42

If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.

Answer 42

rises; leftward

Question 43

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.)

Answer 43

an increase; an increase

Question 44

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

Answer 44

no change; no change

Question 45

According to Keynes's theory of liquidity preference, velocity increases when

Answer 45

interest rates increase.

Question 46

According to the quantity theory of money demand

Answer 46

interest rates have no effect on the demand for money.

Question 47

Empirical evidence shows that the quantity theory of money is a good theory of inflation

Answer 47

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

Question 48

Financing government spending by selling bonds to the public, which pays for the bonds with currency,

Answer 48

has no net effect on the monetary base.

Question 49

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

Answer 49

increases the price level to 2.

Question 50

If nominal GDP is $10 trillion, and velocity is 10, the money supply is

Answer 50

$1 trillion.

Question 51

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.

Answer 51

increase; increase

Question 52

In Irving Fisher's quantity theory of money, velocity was determined by

Answer 52

the institutions in an economy that affect individuals' transactions.

Question 53

In the liquidity trap, monetary policy

Answer 53

has no impact on interest rates.

Question 54

Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of

Answer 54

income.

Question 55

Keynes's model of the demand for money suggests that velocity is ________ related to ________.

Answer 55

negatively; interest rates

Question 56

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

Answer 56

is an ineffective way to conduct monetary policy.