Deck 14: Monetary Policy and the Federal Reserve System

Question 1

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?

A)1)5
B)2)0
C)2)6
D)5)0

Answer 1

2)6

Question 2

Fractional reserve banking is the system that

A)allows banks not to insure their deposits.
B)allows banks not to join the Federal Reserve System.
C)limits banks' activities from crossing state lines.
D)allows banks to keep smaller reserves than their deposits.

Answer 2

allows banks to keep smaller reserves than their deposits.

Question 3

High-powered money consists of

A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Answer 3

bank reserves plus currency held by the nonbank public.

Question 4

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to

A)$2 million.
B)$3 million.
C)$5 million.
D)$10 million.

Question 5

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank deposits are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 6

The currency-deposit ratio is determined by

A)banks.
B)the public.
C)the Federal Reserve.
D)Congress.

Question 7

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

A)decreased; decreased
B)decreased; increased
C)increased; decreased
D)increased; increased

Question 8

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by

A)$1 million.
B)$2 million.
C)$3 million.
D)$4 million.

Question 9

Assume that the reserve-deposit ratio is 0.4.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?

A)0)2
B)0)3
C)0)4
D)0)5

Question 10

Which of the following are depository institutions?

A)The Federal Reserve Banks of New York and Chicago
B)The U.S. Treasury and the IRS
C)Banks and thrifts
D)Investment banks and finance companies

Question 11

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is

A)1 - res.
B)1 + res.
C)1/res.
D)res²

Question 12

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is

A)$3 million.
B)$12 million.
C)$15 million.
D)$20 million.

Question 13

Banks hold some deposits on reserve at the Fed because

A)the Fed requires every bank to hold at least $100 million on deposit at all times.
B)the Fed will insure those deposits, but will not insure regular bank deposits.
C)these are membership dues for being a member bank.
D)these deposits meet the reserve requirements of the Fed.

Question 14

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.

A)decrease; lower
B)decrease; raise
C)increase; lower
D)increase; raise

Question 15

The monetary base is defined as

A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Question 16

The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to

A)$2 million.
B)$2.4 million.
C)$2.6 million.
D)$4 million.

Question 17

Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?

A)0)25
B)0)35
C)0)40
D)0)50

Question 18

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 19

Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?

A)0)2
B)0)3
C)0)4
D)0)5

Question 20

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to

A)2)5.
B)3)0.
C)4)0.
D)5)0.

Question 21

The current chair of the Board of Governors of the Federal Reserve System is

A)Janet Yellen.
B)Alan Greenspan.
C)Ben Bernanke.
D)Paul Volcker.

Question 22

How many Federal Reserve Banks are there?

A)7
B)12
C)15
D)5500 (approximately)

Question 23

Suppose the following statistics are available for the economy:
CU = $60 billion
RES = $100 billion
DEP = $1000 billion
(a)Calculate the size of the monetary base,the money supply,the reserve-deposit ratio,the currency-deposit ratio,and the money multiplier.
(b)Suppose the currency-deposit ratio rises to .10,while the reserve-deposit ratio and monetary base remain unchanged.Calculate the money multiplier,the money supply,and the new values of cu,res,and DEP.

Question 24

Suppose the reserve-deposit ratio is
res = 0.5 - 2 i,
where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10 i,
where Y is real output.Currently the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume the price level P is equal to 1.
(a)Calculate the money multiplier.
(b)Calculate the reserve-deposit ratio.
(c)Calculate the money supply.
(d)Calculate the value of output Y that clears the asset market.

Question 25

The Federal Reserve is

A)a Kentucky bourbon.
B)a wild game preserve.
C)an express mail service.
D)the central bank of the United States.

Question 26

If the money multiplier is 10,the sale of $1 billion of securities by the Fed on the open market causes a

A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Question 27

Suppose that bank reserves (res)are a function of the nominal interest rate (i):
res = 0.3 - 3i.
The money multiplier is (cu + 1)/(cu + res),where cu is the currency-deposit ratio.Initially,suppose the real interest rate (r)equals 0.03,the expected inflation rate (p^e)equals 0.03,and the currency-deposit ratio equals:
cu = 0.4 - (10 × p^e).
The real money demand function is L(Y,i)= 0.8Y - 1500i,where Y is the level of output.The monetary base equals 100.The price level equals 1.0 initially and will not change in the short run,but will adjust in the long run.
(a)Calculate the currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output.Assume that this level of output equals full-employment output,so you are assuming that the economy is in general equilibrium with the price level equal to 1.0.Show your work.
(b)Suppose financial innovation causes the reserve-deposit ratio to decline to res = 0.2 - 3i.Calculate the new currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output in the short run,assuming a Keynesian model with the price level fixed in the short run.Show your work.
(c)Calculate the equilibrium price level in the long run.Show your work.

Question 28

If the Fed decreases the monetary base by $100 million and the money multiplier is 4,M1 will

A)rise by $400 million.
B)fall by $400 million.
C)rise by $25 million.
D)fall by $25 million.

Question 29

Who determines the open-market operations of the Federal Reserve System?

A)Board of Governors
B)FDIC
C)FHLBB
D)FOMC

Question 30

Which of the following is the Federal Reserve most likely to use to change the nation's money supply?

A)Open-market operations
B)Reserve requirements
C)Discount lending
D)Credit controls

Question 31

The Fed can reduce the money supply by reducing

A)the currency-deposit ratio.
B)the monetary base.
C)reserve requirements.
D)the discount rate.

Question 32

The leadership of the Federal Reserve System is provided by

A)the Board of Governors.
B)the Federal Advisory Committee.
C)the Federal Open Market Committee.
D)the directors of the twelve Federal Reserve banks.

Question 33

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2 i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money multiplier equals

A)2)00.
B)2)40.
C)3)00.
D)4)00.

Question 34

A bank run is

A)a large-scale, panicky withdrawal of deposits from a bank.
B)the transfer of funds from one bank to another.
C)a situation when a bank borrows from the Fed's discount window.
D)a situation in which a bank borrows at the Federal funds rate.

Question 35

The money supply is $12.5 million,currency held by the nonbank public is $2.5 million,and the reserve-deposit ratio is 0.25.
(a)What is the quantity of bank deposits?
(b)What is the quantity of bank reserves?
(c)What is the quantity of the monetary base?
(d)What is the money multiplier (give a number)?

Question 36

If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a

A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Question 37

Last year,the currency-deposit ratio was 0.2 and the reserve-deposit ratio was 0.2.Over the past year,the public changed its currency-deposit ratio,to which the Fed responded by reducing the reserve-deposit ratio to 0.15,to keep the money supply from changing and keeping the same monetary base.Calculate the new currency-deposit ratio.Show your work.

Question 38

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money supply equals

A)200.
B)240.
C)300.
D)400.

Question 39

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $30 million,and bank deposits are $100 million.The money multiplier is equal to

A)2)5.
B)3)0.
C)4)0.
D)5)0.

Question 40

Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?

Question 41

Open-market operations,changes in reserve requirements,changes in the discount rate,and changes in the interest rate on reserves are known as

A)goals.
B)intermediate targets.
C)instruments.
D)derivatives.

Question 42

The largest liability of the Fed from those on this list is

A)U)S. Treasury securities.
B)mortgage-backed securities.
C)loans to depository institutions.
D)currency outstanding.

Question 43

Describe,in general terms,the strategy of monetary policy,explaining how monetary-policy tools are used to achieve the goals of monetary policy.What intermediate stages are important in going from tools to goals? What are the links between the different stages? How does the Federal Reserve use this strategy today?

Question 44

When U.S.banks borrow from one another,they must pay the

A)discount rate.
B)prime rate.
C)Fed funds rate.
D)Interbank Offer Rate.

Question 45

Suppose the Fed has just learned that some foreign economies are headed for recession,which will reduce U.S.exports.This is an economic shock that shifts the IS curve down.What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases?
(a)You use the classical (RBC)model.
(b)You use the Keynesian (efficiency wage)model.
(c)You use the extended classical model with misperceptions.
In each case,show the IS-LM-FE diagram associated with your answer.

Question 46

The new monetary policy tool that the Fed began using in 2008 is

A)changing the interest rate paid on reserves.
B)imposing a surcharge on credit cards.
C)putting a tax on all financial transactions.
D)borrowing from China.

Question 47

Since the 1930s,the Fed's most important tool for controlling the money supply has been

A)setting the discount rate.
B)setting reserve requirements.
C)moral suasion.
D)open-market operations.

Question 48

Which of the following is not a policy instrument of the Fed?

A)Changing reserve requirements
B)Open-market operations
C)Changing the discount rate
D)Changing the federal government budget deficit

Question 49

The Federal funds market is a market for trading funds between

A)a bank and a multinational corporation.
B)a bank and the government.
C)a bank and another bank.
D)a bank and the Federal Reserve Bank.

Question 50

Intermediate targets are

A)identical to instruments.
B)macroeconomic variables that the Fed can influence that are related to the Fed's goals.
C)also known as the Fed's tools.
D)macroeconomic variables that never get revised.

Question 51

Which of the following is an instrument of monetary policy?

A)The interest rate on three-month Treasury bills
B)The mortgage interest rate
C)The discount rate
D)The budget deficit

Question 52

Describe the difference between a primary credit discount rate and the secondary credit discount rate,including who can borrow at which rate and how such lending is managed by the Fed.

Question 53

Macroeconomic variables that the Fed cannot control directly but can influence fairly predictably,and which are related to the Fed's goals,are known as

A)instruments.
B)tools.
C)intermediate targets.
D)initial targets.

Question 54

The largest asset of the Fed from those on this list is

A)U)S. Treasury securities.
B)mortgage-backed securities.
C)loans to depository institutions.
D)currency outstanding.

Question 55

Changes in reserve requirements directly and immediately affect

A)the monetary base.
B)banks' holdings of securities.
C)the Fed's holdings of foreign exchange.
D)the money multiplier.

Question 56

If a bank borrows from a Federal Reserve Bank,the interest rate is called

A)the prime rate.
B)the discount rate.
C)the Fed funds rate.
D)the reserve availability rate.

Question 57

The Federal Open Market Committee consists of all the following people except

A)the Board of Governors of the Federal Reserve System.
B)five presidents of Federal Reserve Banks, on a rotating basis.
C)the chairman of the President's Council of Economic Advisors.
D)the President of the Federal Reserve Bank of New York.

Question 58

The Fed's tools are also known as

A)goals.
B)intermediate targets.
C)instruments.
D)derivatives.

Question 59

Which of the Fed's instruments is most frequently used?

A)Changing reserve requirements
B)Open-market operations
C)Changing the discount rate
D)Changing margin requirements for the stock market

Question 60

The primary purpose of the discount window is to

A)influence the nation's money supply.
B)fulfill the bank's lender of last resort role.
C)control banks' excess reserves.
D)influence the amount of loans that banks provide to the public.

Question 61

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts down and to the left,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,what should the Fed do? Use the LR curve to formulate your answer.

Question 62

Policymakers may be uncertain about the structure of the economy because

A)initial releases of data may be less accurate than later data releases.
B)they don't know the predominant source of shocks to the economy.
C)they don't know how shocks affect people's expectations.
D)they are not aware of modern macroeconomic modeling techniques.

Question 63

Which of the following might the Fed rely on as an intermediate target?

A)The monetary base
B)The discount rate
C)M2
D)The exchange rate of the dollar

Question 64

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts to the left,and the Fed wants to keep output unchanged

A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.

Question 65

Suppose the Fed cares only about keeping the economy close to full-employment output.The Fed can target the real money supply (thus keeping the LM curve fixed)or it can target the real interest rate,changing the money supply and shifting the LM curve however is necessary to prevent a change in the real interest rate.
(a)Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why.Illustrate with a diagram.
(b)Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why.Illustrate with a diagram.

Question 66

In response to an unanticipated easing of monetary policy,the price level ________ at first,then ________ after a year.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; begins to rise
D)remains roughly unchanged; begins to fall

Question 67

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts up and to the right,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,it will

A)shift the LR curve up.
B)not shift the LR curve.
C)shift the LR curve down.
D)shift the IS curve up and to the right.

Question 68

In the Keynesian model,suppose the Fed sets a target for the money supply.If the IS curve shifts to the left,and the Fed wants to keep output unchanged,what should the Fed do?

A)Reduce taxes.
B)Reduce the money supply.
C)Increase taxes.
D)Increase the money supply.

Question 69

Which of the following variables is likely to serve as an intermediate target for monetary policy?

A)Money supply
B)Inflation rate
C)Open-market operations
D)Unemployment rate

Question 70

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts down and to the left,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,it will

A)shift the LR curve up.
B)not shift the LR curve.
C)shift the LR curve down.
D)shift the IS curve up and to the right.

Question 71

Policymakers may be uncertain about the state of the economy because

A)initial releases of data may be less accurate than later data releases.
B)they don't know the predominant source of shocks to the economy.
C)they don't know how shocks affect people's expectations.
D)they are not aware of modern macroeconomic modeling techniques.

Question 72

In the Keynesian model,suppose the Fed wants to keep output unchanged.If the IS curve shifts to the left,and the Fed acts to keep output unchanged,then

A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.

Question 73

In response to an unanticipated easing of monetary policy,the Fed funds rate ________ at first,then ________ after 6 to 12 months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 74

In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts up and to the right,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,what should the Fed do? Use the LR curve to formulate your answer.

Question 75

In response to an unanticipated tightening of monetary policy,the price level ________ at first,then ________ after a year.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; begins to rise
D)remains roughly unchanged; begins to fall

Question 76

In response to an unanticipated easing of monetary policy,output ________ at first,then ________ after about four months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 77

In response to an unanticipated tightening of monetary policy,the Fed funds rate ________ at first,then ________ after 6 to 12 months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 78

In response to an unanticipated tightening of monetary policy,output ________ at first,then ________ after about four months.

A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; rises significantly
D)remains roughly unchanged; falls significantly

Question 79

Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.

Question 80

Use the LR curve to show what happens to output,the real interest rate,and the price level in the short run and in the long run if the government provides a tax credit to people who buy a new home,which leads to an increase in new housing investment.