Test questions – Flashcards

if you deposit $100 of cash into a checking account at a bank, this action by itself a. has an undetermined effect on the money supply; it may rise or it may fall. b. decreases the money supply. c. does not change the money supply. d. increases the money supply.

Which of the following is a primary action of modern banks? a. They expand the money supply by printing currency when they need it. b. They hold only a fraction of their assets in the form of required reserves relative to their deposits. c. They decrease the supply of money when they extend additional loans. d. They are required to hold 90% of their deposits as excess reserves.

The legal requirement that commercial banks hold required reserves equal to some fraction of their deposits a. limits the ability of the Treasury to expand the national debt. b. prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their deposit c. limits the ability of banks to expand the money supply by extending additional loans. d. prevents the Fed from controlling the money supply since commercial banks can always offset the actions of the Fed.

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for a. a sharp contraction in the money supply, which is likely to increase the length and severity of the recession. b. a reduction in the ability of banks to extend additional loans. c. a gradual increase in the money supply, following the trend of the previous decade. d. a rapid increase in the money supply, potentially leading to inflation.

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy? a. An increase in prices proportional to the increase in the money supply. b. A decrease in real output. c. An increase in real output. d. An improvement in technology, which will stimulate growth in the long run.

If the Federal Reserve increases its bond purchases, the short-run effects will be a. an increase in the money supply and lower real interest rates. b. a decrease in the money supply and higher real interest rates. c. a decrease in the money supply and lower real interest rates. d. an increase in the money supply and higher real interest rates.

An unanticipated shift to a more expansionary monetary policy by the Fed will a. reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand. b. reduce real interest rates, leading to an appreciation of the dollar and an expansion in net exports and aggregate demand. c. increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand. d. increase real interest rates, leading to higher asset prices that will stimulate aggregate demand.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because a. lower interest rates will tend to decrease asset prices (for example, stock prices), which decreases wealth and, thereby, decreases current consumption. b. real interest rates will fall, stimulating business investment and consumer purchases. c. the dollar will appreciate on the foreign exchange market, leading to a decrease in net exports. d. the general level of prices will fall, which will increase the disposable income of households.

An unexpected increase in the supply of money will a. reduce the real rate of interest and, thereby, trigger an increase in current spending by households and businesses. b. reduce aggregate demand and real output in the short run. c. increase only the general level of prices in the short run.

A decrease in the money supply will have which of the following effects? Answers: a. It will reduce the interest rate, causing an increase in investment and a decrease in GDP. b. It will reduce the interest rate, causing a decrease in investment and an increase in GDP. c. It will reduce the interest rate, causing a decrease in investment and a decrease in GDP. d. It will raise the interest rate, causing an increase in investment and an increase in GDP. e. It will raise the interest rate, causing a decrease in investment and a decrease in GDP.

When the Fed buys bonds and injects additional reserves into the banking system, this action will a. place downward pressure on short-term interest rates. b. cause many decision makers to expect that the future rate of inflation will fall. c. place upward pressure on both short-term and long-term interest rates. d. place upward pressure on short-term interest rates and downward pressure on long-term interest rates.

A shift to a more expansionary monetary policy will a. Stimulate output and employment almost immediately. b. Stimulate output and employment, but only after a time lag that is generally long and variable. c. increase the long-term growth rate of the economy. d. reduce the future rate of inflation.

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy? a. A higher price level. b. A lower price level. c. A higher level of real output. d. Both a higher price level and a higher level of real output. e. A lower level of real output.

An analysis of countries experiencing rapid inflation indicates that inflation is generally a. the result of restrictive macroeconomic policy, which pushes up interest rates. b. caused by rapid growth in the money supply. c. the result of bad weather conditions that reduce the supply of agriculture products. d. caused by strong labor unions that push wages up rapidly.

If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate a. through its policy of open market operations. b. by altering the size of the federal budget deficit or surplus. c. by having the U.S. Treasury fix this interest rate. d. by imposing legal restrictions that prohibit exchanges at interest rates other than the ones designated by the Fed.

An increase in the discount rate impacts the money supply because it a. makes it more attractive for commercial banks to borrow from the Federal Reserve b. reduces the incentive of commercial banks to borrow from the Federal Reserve. c. decreases the interest yield on new issues of U.S. securities. d. increases the Federal Reserve's earnings and, thereby, expands the money supply.

The main purpose of the Fed is to a. serve as the bankers' bank for member banks. b. print Federal Reserve Notes. c. regulate interest rates. d. maintain the proper functioning of our money system. e. regulate financial institutions.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. sell U.S. securities on the open market. b. raise the discount rate. c. buy U.S. securities on the open market.

When the Fed sells Treasury Bonds on the open market, it will tend to a. decrease the money supply and raise interest rates. b. increase the money supply and raise interest rates. c. decrease the money supply and lower interest rates. d. increase the money supply and lower interest rates.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. b. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. c. increase the interest rate paid on excess reserves encouraging banks to extend more loans. d. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

Which of the following indicates the primary mechanism by which the money supply expands? a. The Fed purchases additional bonds, which increases the reserves available to the banking system. b. The U.S. Treasury prints additional currency. c. The U.S. government purchases additional gold. d. The public decides to hold more currency rather than checking deposits.

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments? a. Loans and investments generally earn more interest income for the banks than excess reserves. b. Banks fear the Fed will remove the excess reserves. c. Banks are legally required to expand loans when the Fed creates excess reserves. d. Maintaining reserves in excess of demand deposits is against the law.

Suppose people gain more confidence in the banking system so they hold relatively less currency and deposit more into checking accounts. What will happen to bank reserves and the money supply? a. Bank reserves will decrease and the money supply will eventually increase. b. Bank reserves will increase and the money supply will eventually increase. c. Bank reserves will decrease and the money supply will eventually decrease. d. Bank reserves will increase and the money supply will eventually decrease.

Which of the following will cause the U.S. money supply to expand? a. A commercial bank uses excess reserves to extend a loan to a customer. b. A commercial bank purchases U.S. securities from the Fed as an investment. c. An increase in reserve requirements. d. An increase in the discount rate.

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply? a. The number of commercial bank charters issued by the Fed b. The dollar value of the bonds issued by the U.S. Treasury c. The reserve requirements mandated by the Fed d. The federal funds interest rate that commercial banks pay (and receive) for short-term loanable funds