Problems and Short Answer Questions CH11

Question 1

Suppose the Federal Reserve purchases a U.S government bond from you for $10,000. What is the name of the Fed’s action?

Answer 1

Open-market operations

Question 2

What is barter and why does it limit trade?

Answer 2

Barter is trading goods and services directly for other goods and services. It requires a double coincidence of wants

Question 3

What are the two main jobs of the Federal reserve?

Answer 3

1. regulate banks to ensure the health of the banking system and 2. control the quantity of money in the economy

Question 4

What are the monetary policy tools of the Fed?

Answer 4

Open market operations, the fed lending to the banks, reserve requirements and the Fed paying interest on bank reserves.

Question 5

If the Fed buys $1,000 of government bonds from you and you hold all of the payment as currency at home, by how much does the money supply rise?

Answer 5

$1,000

Question 6

What must the Fed do with open-market operations and the money supple if it wishes to reduce the federal funds rate?

Answer 6

It must buy bonds, wich injects reserves into the banking system and increases the money supply.

Question 7

True or False? Commodity money has value independent of its use as money.

Answer 7

true

Question 8

True or False? The M1 money supply is composed of currency, demand deposits, travelers checks, and other checkable deposits.

Answer 8

true

Question 9

True or False?When you are willing to go to sleep tonight with $100 in your wallet and you have complete confidence that you can spend it tomorrow and receive the same ammout of goods as you would have received had you spent it today, money has demonstrated its function as a medium of exchange.

Answer 9

false, money has demonstyrated its function as a store of value

Question 10

True or False? The federal reserve is the central bank of the United States and is run by the seven members of the Board of Governors?

Answer 10

true

Question 11

True or False? The Federal Open Market committee (FOMC) meets about every six weeks and discusses the condition of the economy and votes on changes in monetary policy.

Answer 11

true

Question 12

True or False?If there is 100% reserve banking system, the money supply is unaffected by the proportion of the dollars that the public chooses to hold as currency versus deposits.

Answer 12

true

Question 13

True or False?If the fed desires to contract the money supple is could to any of the following: sell government bonds, increase the discount rate, increase the reserve requirement, and increase the rate paid on reserves.

Answer 13

true

Question 14

True or False? An increase in the reserve requirement increases the money multiplier and increases the money supply.

Answer 14

False, and increase in the reserve requirement decreases the money multiplier, which decreases the money supply.

Question 15

If banks choose to hold excess reserves, lending decreases and the money supply decreases

Answer 15

true

Question 16

The Board of Govenors of the Federal Reserve System consists of

Answer 16

seven members appointed by the president

Question 17

To insulate the Federal Reserve from political pressure

Answer 17

The board of govenors are appointed to 14 year terms.

Question 18

When the Fed sells government bonds, the money supply

Answer 18

decreases

Question 19

Required reserves of banks are a fixed percentage of their

Answer 19

deposits

Question 20

Reducing the reserve requirement will likely

Answer 20

increase the money supply

Question 21

A decrease in the reserve requirement causes the money multiplier to

Answer 21

rise

Question 22

The discount rate is

Answer 22

the interest rate the Fed charges on loans to banks.

Question 23

Think of a policy combination that would consistently work to increase the money supply…

Answer 23

buy government bonds, decrease reserve requirements, decrease the discount rate.

Question 24

True or False? Assets minus Liabilities equals owners equity or capital.

Answer 24

True

Question 25

The Fed’s tools of monetary control are

Answer 25

1. open-market operations 2. lending to banks 3. reserve requirements 4. paying interest on reserves

Question 26

If banks increase their holdings of excess reserves…

Answer 26

The money multiplier and the money supply decrease.

Question 27

If the Fed doesn’t want the money supply to rise when it purchases new furniture, what might it do to offset the purchase?

Answer 27

The Fed could sell government bonds of equal value to offset other purchases.