Untitled Flashcards Set

10. The tool of monetary policy that involves the Fed's buying and selling of government bonds is:*

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A. moral suasion.

B. reserve requirements.

C. the discount rate.

D. open-market operations.

E. setting government transfer payments.

____ 6. A _____ is when people rush to a bank to withdraw all of their deposits because they feel that the bank could fail.*

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A. depression

B. real estate bubble

C. bank run

D. stock market crash

E. hyperinflation

____ 28. When the demand for money is greater than the supply of money:*

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A. people offering to sell nonmonetary financial assets will find they must increase the interest rate on these assets pay in order to sell them.

B. interest rates will fall.

C. the opportunity cost of holding money will fall.

D. more people will hold money.

E. savings rates will fall as interest rates rise.

____ 16. The three main monetary policy tools are:*

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A. interest rates, taxes, and transfers.

B. currency, near-moneys, and the reserve ratio.

C. deposit insurance, discount rate, and the money multiplier.

D. open-market operations, the discount rate, and the money multiplier.

E. reserve requirements, the discount rate, and open-market operations.

____ 19. If the Federal Reserve wants to increase the monetary base, the Fed might:*

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A. engage in an open market purchase of Treasury bills.

B. increase the discount rate.

C. increase the reserve ratio.

D. decrease personal income taxes.

E. increase the federal funds rate.

____ 18. When the Fed decreases bank's reserves through an open-market operation:*

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A. deposits increase, currency in circulation increases, and the monetary base remains the same.

B. the monetary base decreases, the money multiplier decreases, and the money supply increases.

C. loans increase, the federal funds rate rises, and the discount rate rises.

D. the monetary base decreases, loans decrease, and the money supply decreases.

E. the monetary base decreases, loans decrease, and the money multiplier decreases.

____ 9. The major tools of monetary policy available to the Federal Reserve System include:*

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A. reserve requirements, margin regulations, and moral suasion.

B. reserve requirements, open-market operations, and the discount rate.

C. open-market operations, margin regulations, and moral suasion.

D. the discount rate, margin regulations, and moral suasion.

E. tax collections, open-market operations and the discount rate.

____ 4. The Federal Reserve system was created largely as a response to*

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A. the economic fallout from World War I.

B. a devastating financial panic that caused the stock market to collapse and prompted a long recession.

C. the long-term unemployment of the Great Depression.

D. the hyperinflation that emerged after the Civil War.

E. growing national debt that followed World War II.

____ 17. To decrease the money supply, the central bank could:*

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A. lower the discount rate.

B. make open-market sales.

C. increase the discount rate.

D. lower the federal funds rate spread.

E. increase the 30-year mortgage rate.

____ 35. Crowding out results in a(n):*

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A. decrease in private investment spending resulting from government deficit spending.

B. increase in physical capital accumulation which leads to higher economic growth.

C. increase in private investment spending resulting from a government surplus.

D. increase in consumption spending as a result of higher investment spending.

E. decrease in private investment spending due to a positive foreign capital inflow.

____ 22. If the Federal Reserve wants to increase the money supply, it will:*

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A. sell U.S. Treasury bills.

B. cut taxes across the board.

C. lower the reserve requirement.

D. increase the discount rate.

E. increase the federal funds rate.

____ 29. A business will want to borrow to undertake an investment project when the rate of return on that project is:*

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A. less than the interest rate.

B. greater than the interest rate.

C. greater than the exchange rate.

D. equal to the inflation rate.

E. less than the inflation rate.

____ 33. In the loanable funds market, savers:*

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A. demand funds.

B. supply funds.

C. represent borrowers of funds.

D. pay the equilibrium interest rate.

E. enjoy an inverse relationship between the quantity of funds saved and the interest rate.

____ 24. When the Federal Reserve is conducting an open market operation, it is*

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A. raising or lowering personal income taxes.

B. raising or lowering the discount rate.

C. buying or selling corporate stock.

D. buying or selling Treasury securities.

E. raising or lowering the reserve requirement.

____ 8. All of the following are responsibilities of the Fed EXCEPT:*

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A. control the monetary base.

B. set the reserve requirement.

C. oversee and regulate the banking system.

D. set the discount rate.

E. mint bills and coins.

____ 30. All other things unchanged, a general decrease in the amount of government borrowing will typically:*

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A. have no effect on the demand for loanable funds.

B. increase interest rates.

C. shift the loanable funds demand curve to the left.

D. raise the level of demand for loanable funds.

E. reduce the supply of loanable funds.

____ 21. The federal funds rate is the interest rate at which:*

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A. banks borrow funds directly from the Federal Reserve.

B. banks borrow excess reserves from other banks.

C. influential companies borrow from banks.

D. households' savings are invested in the Federal Reserve.

E. the government borrows funds from the Federal Reserve.

____ 34. Businesses will undertake projects if the rate of return is:*

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A. positive.

B. greater than the rate of inflation.

C. greater than 1.

D. less than the cost of borrowing for the project.

E. greater than or equal to the interest rate levied on the loan.

____ 12. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:*

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A. other member banks and borrow at the federal funds rate.

B. Federal Reserve and borrow at the discount rate.

C. open market and borrow money there.

D. Congress to borrow funds.

E. Federal Reserve and borrow at the prime rate.

____ 32. The Fisher Effect states that:*

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A. the nominal rate of interest is unaffected by the change in expected inflation.

B. the nominal rate of interest is unaffected by the change in unexpected inflation.

C. the expected real rate of interest is unaffected by the change in expected inflation.

D. the expected real rate of interest increases by one percentage point for each percentage point change in expected inflation.

E. the nominal rate of interest increases by one percentage point for each one percentage point decrease in expected inflation.

____ 7. When a financial institution finances investments by borrowing money it is said to be using  *

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A. leverage.

B. a balance sheet effect.

C. a bubble.

D. subprime lending.

E. securitization.

____ 11. Which of the following is a tool used by the Fed in the conduct of monetary policy?*

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A. Changes in the prime rate.

B. Issuing new government bonds and retiring old ones.

C. Buying and selling corporate bonds.

D. Buying and selling federal government bonds.

E. Raising and lowering import tariffs.

____ 27. Now that fast food places such as McDonald's are accepting credit card payments:*

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A. the demand for money has increased.

B. the supply of money has decreased.

C. the demand for money has not been affected.

D. the supply of money has increased.

E. the demand for money has decreased.

____ 14. The Fed's main assets are:*

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A. currency in circulation and bank reserves.

B. the facilities of the twelve district banks.

C. corporate stocks and bonds.

D. U.S. Treasury bills.

E. checking deposits.

____ 13. The discount rate is the interest rate the Fed charges on loans to:*

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A. consumers.

B. the federal government.

C. state governments.

D. banks.

E. corporations.

____ 3. The Federal Reserve System was created in:*

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A. 1913.

B. 1971.

C. 1857.

D. 1873.

E. 2001.

____ 2. The Federal Reserve System is the _______ for the United States.*

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A. government entity that collects taxes.

B. government-owned bank

C. U.S. Treasury Bank

D. largest private banking corporation in the world.

E. central bank

____ 20. When banks borrow and lend reserves from each other, they are participating in the ______ market.*

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A. subprime mortgage

B. long-term capital

C. money

D. federal funds

E. foreign exchange

____ 31. Crowding out is a phenomenon:*

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A. where an increase in government's budget surplus decreases the overall investment spending.

B. where overproduction in the goods market leads to a sharp drop in the aggregate price level.

C. where an increase in government spending causes an equal decrease in consumption spending.

D. where an increase in imports causes the overall domestic production to fall.

E. where an increase in government's budget deficit causes the overall investment spending to fall.

____ 25.  When the central bank wants to expand the monetary base, the most commonly used method is to*

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A. buy government bonds from commercial banks.

B. decrease the reserve requirement.

C. buy shares of stock from commercial banks.

D. decrease the discount rate.

E. decrease the federal funds rate.

____ 26. The opportunity cost of holding money is:*

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A. zero.

B. the interest rate on using one's credit card.

C. the difference between interest rates on monetary assets and on nonmonetary assets.

D. the discount rate.

E. the federal funds rate.

____ 5. In the Federal Reserve system, there are ____ districts.*

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A. 50

B. 10

C. 7

D. 18

E. 12

____ 1. In the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the:*

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A. Treasury Department.

B. Commerce Department.

C. U.S. Senate Banking Committee.

D. Federal Reserve.

E. President’s Council of Economic Advisors.

____ 23. When a bank borrows from the Federal Reserve, it pays the:*

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A. required reserve ratio.

B. discount rate.

C. federal funds rate.

D. prime rate.

E. mortgage rate.

____ 15. The Fed's main liabilities are:*

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A. currency and bank reserves.

B. the facilities of the twelve district banks.

C. corporate stocks and bonds.

D. U.S. Treasury bills.

E. loans to member banks.