Group Exercise G Chapter 14

    Chapter 141) The monetary base is equal toA) all currency in circulation plus all deposits in financial institutions.B) all currency in circulation plus checkable deposits in financial institutions.C) all currency in circulation plus reserves held by banks.D) checkable deposits in depository institutions plus reserves held by banks.2) Which of the following is a liability of the Fed?A) U.S. government securitiesB) currency in circulationC) discount loans to banksD) checkable deposits in commercial banks3) As of October 2012, the value of currency in circulation was aboutA) $1.1 billion.B) $11 billion.C) $1.1 trillion.D) $11 trillion.4) Normally Fed’s portfolio of securities consists principally ofA) municipal bonds.B) corporate bonds.C) U.S. Treasury obligations.D) obligations of foreign governments.5) What is the most direct method the Fed uses to change the monetary base?A) open market operationsB) changing the required reserve ratioC) changing the federal funds rateD) changing the level of discount loans6) If the Fed purchases securities worth $10 million from a commercial bank, the bankingsystem’s balance sheet will showA) an increase in securities held of $10 million and an increase in bank reserves of $10 million.B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.7) Although open market operations and discount loans both change the monetary base, the FedhasA) greater control over open market operations than over discount loans.B) greater control over discount loans than over open market operations.C) very little control over either discount loans or open market operations.D) complete control over both discount loans and open market operations.8) On the books of the Fed the difference between borrowed reserves and discount loans is equaltoA) excess reserves.B) required reserves.C) currency in circulation.D) zero; they are the same thing.9) Most of the increase in the monetary base between 2007 and 2012 was due to increases in:A) currencyB) bank depositsC) excess reservesD) Treasury bills10) Suppose that the banking system currency has no excess reserves and that a bank receives adeposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, whatis the maximum amount that the BANKING SYSTEM can lend out?A) $8,000B) $10,000C) $40,000D) $50,00011) If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, byhow much will deposits increase (assuming no change in excess reserves or the public’s currencyholdings)?A) rise by $1 millionB) decline by $1 millionC) rise by $8 millionD) rise by $12.5 million12) Which of the following assumptions made in deriving the simple deposit multiplier isunrealistic?A) The Fed sets the required reserve ratio.B) The Fed is able to affect the level of reserves in the banking system.C) Banks loan out all of their excess reserves.D) The simple deposit multiplier is equal to 1 divided by the required reserve ratio.13) Which of the following accurately describes the relationship between excess reserves andcheckable deposits following the financial crisis of 2007-2009?A) Excess reserves declined as the excess reserve ratio returned to near zero.B) Excess reserves rose to nearly one-third of checkable deposits.C) Excess reserves approached the same level as checkable deposits.D) Excess reserves exceeded checkable deposits.14) If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400million, and the required reserve ratio is 10%, then the monetary base equalsA) $550 million.B) $1.54 billion.C) $1.9 billionD) $15 billion.15) If currency outstanding equals $500 million, checkable deposits equal $2 billion, reservesequal $200 million, and the required reserve ratio is 0.10, the money multiplier equalsA) 1.14.B) 3.57.C) 4.35.D) 5.16) Why didn’t the surge in the monetary base between 2008-2012 lead to a similar surge in themoney supply?A) The currency-deposit ratio rose significantly, resulting in a much smaller money multiplier.B) The excess reserve-deposit ratio rose significantly, resulting in a much smaller moneymultiplier.C) The Fed increase the required reserve ratio, resulting in a much smaller money multiplier.D) Nonborrowed reserves declined, offsetting the increase in the monetary base.17) Suppose the required reserve ratio is 10%, excess-to-deposit ratio is 10%, and the currencyto-deposit ratio is 20%. If the Fed buys $50 million worth of securities, what will happen to themoney supply?RRR=10%ER/D=10%C/D=20%m=[(C/D)+1]/[(C/D)+rrD+(ER/D)](.2+1)/(.2+.1+.1)=3M=m x B3 x $50 million=$150 millionThe money supply will increase by $150 million, due to the money multiplier being 3 and the$50 million increase in the Monetary Base.Chapter 151) Inflation is an economic problem because itA) leads inevitably to unemployment.B) makes prices less useful as signals for resource allocation.C) leads to recession.D) results in rapid increases in the money supply.2) Most economists believe that a zero rate of unemploymentA) is obtainable with the correct monetary policy.B) would result in a better functioning economy.C) is inconsistent with a well-functioning economy.D) is obtainable only if the inflation rate is also zero.3) John Smith leaves his job in New York to go to California in hopes of finding a better one. IfJohn Smith is unemployed while searching for a job in California, economists would considerhim to beA) frictionally unemployed.B) structurally unemployed.C) cyclically unemployed.D) naturally unemployed.4) When Ben Bernanke referred to the exit strategy of the Fed, he was referring to:A) his plans to retire as chair of the FedB) when the Fed would stop implementing monetary policyC) the process by which the Fed would shrink its balance sheetD) increasing the federal funds rate back to where it was prior to the financial crisis5) Reserve requirements are changedA) more frequently than the discount rate is changed, but less frequently than open marketoperations are conducted.B) more frequently than the discount rate is changed and more frequently than open marketoperations are conducted.C) more frequently than open market operations are conducted, but less frequently than thediscount rate is changed.D) less frequently than open market operations are conducted and less frequently than thediscount rate is changed.6) In the federal funds market diagram, an open market sale by the FedA) shifts the reserve supply curve to the right.B) shifts the reserve supply curve to the left.C) decreases the federal funds rate.D) increases the volume of federal funds traded.7) In order to meet the target of higher federal funds rate, the Fed would normallyA) conduct open market sales.B) conduct open market purchases.C) increase the discount rate.D) increase reserve requirements.8) Expansionary monetary policy consists of all of the following EXCEPTA) open market sales.B) lower interest rates.C) increased monetary base.D) increased money supply.9) Under which circumstance is the Fed most likely to carry out a defensive open marketoperation?A) to prevent an increase in inflationB) if a snowstorm results in a delay in check clearing, resulting in an increase in the FederalReserve floatC) to defend the value of the U.S. dollar on the foreign exchange marketD) to prevent the negative impact of a demand shock10) The policy directive from the FOMC is carried out byA) the presidents of the district banks.B) the presidents of commercial banks that are members of the Federal Reserve System.C) the account manager at the Federal Reserve Bank of New York.D) private dealers in the bond market.11) How does the Open Market Trading Desk conduct its operations?A) directly with private securities dealers on the floor of the New York Stock ExchangeB) directly with private securities dealers on the floor of the Federal Reserve Bank of New YorkC) over-the-counter electronically with private securities dealersD) by sending its buy and sell orders to the U.S. Treasury for execution12) A Federal Reserve repurchase agreement involvesA) an agreement by a bank to repay a discount loan on a specific day.B) an agreement by a dealer to buy back securities she has sold to the Fed.C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount ofTreasury securities.D) an agreement by a commercial bank to make a loan to another bank in the federal fundsmarket.13) Dynamic open market operationsA) are aimed at achieving changes in monetary policy.B) are used much more frequently than defensive open market transactions.C) are used to offset disturbances to the monetary base.D) make it easy to deduce the Fed’s intentions for monetary policy.14) Open market operationsA) lack flexibility because only very small purchases or sales may be carried out in any givenmonth.B) lack flexibility because open market purchases cannot easily be offset by subsequent openmarket sales.C) are more flexible than other policy tools.D) may be carried out only on the third Friday of each month.15) Discount loans available to health banks which can be used for any purpose are calledA) primary credit.B) secondary credit.C) seasonal credit.D) repo loans.16) Which of the following statements is correct?A) The discount rate is generally above the federal funds rate.B) The discount rate is generally below the federal funds rate.C) The discount rate is generally equal to the federal funds rate.D) There is no general pattern to the relation between the discount rate and the federal funds rate.17) What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worthof long-term securities while selling $400 billion worth of short-term securities?A) Operation Go LongB) Operation TwistC) QE2D) QE318) In the market for reserves, if the federal funds rate is between the discount rate and theinterest rate paid on excess reserves, an increase in the reserve requirement ________ thedemand for reserves, ________ the federal funds rate, everything else held constant.A) decreases; loweringB) increases; loweringC) increases; raisingD) decreases; raising19) Suppose there is an increase in demand of reserves in the federal funds market. If the FederalReserve wishes to keep the effective federal funds rate close to the target level, then theappropriate action for the Federal Reserve to take is a ________ open market ________,everything else held constant.A) defensive; saleB) defensive; purchaseC) dynamic; saleD) dynamic; purchase20) Everything else held constant, in the market for reserves, when the federal funds rate equalsthe discount rate, lowering the discount rateA) increases the federal funds rate.B) lowers the federal funds rate.

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