Part 1:
1) The monetary base is equal to
A) 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 securities
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks
3) As of October 2012, the value of currency in circulation was about
A) $1.1 billion.
B) $11 billion.
C) $1.1 trillion.
D) $11 trillion.
4) Normally Fed's portfolio of securities consists principally of
A) 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 operations
B) changing the required reserve ratio
C) changing the federal funds rate
D) changing the level of discount loans
6) If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show
A) 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 Fed has
A) 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 equal to
A) 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) currency
B) bank deposits
C) excess reserves
D) Treasury bills
10) Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?
A) $8,000
B) $10,000
C) $40,000
D) $50,000
11) If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?
A) rise by $1 million
B) decline by $1 million
C) rise by $8 million
D) rise by $12.5 million
12) Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?
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 and checkable 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 $400 million, and the required reserve ratio is 10%, then the monetary base equals
A) $550 million.
B) $1.54 billion.
C) $1.9 billion
D) $15 billion.
15) If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals
A) 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 the money 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 money multiplier.
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 currency-to-deposit ratio is 20%. If the Fed buys $50 million worth of securities, what will happen to the money supply?
RRR=10%
ER/D=10%
C/D=20%
m=[(C/D)+1]/[(C/D)+rrD+(ER/D)]è(.2+1)/(.2+.1+.1)=3
M=m x Bè3 x $50 million=$150 million
The money supply will increase by $150 million, due to the money multiplier being 3 and the $50 million increase in the Monetary Base.
Part 2:
1) Inflation is an economic problem because it
A) 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 unemployment
A) 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. If John Smith is unemployed while searching for a job in California, economists would consider him to be
A) 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 Fed
B) when the Fed would stop implementing monetary policy
C) the process by which the Fed would shrink its balance sheet
D) increasing the federal funds rate back to where it was prior to the financial crisis
5) Reserve requirements are changed
A) more frequently than the discount rate is changed, but less frequently than open market operations are conducted.
B) more frequently than the discount rate is changed and more frequently than open market operations are conducted.
C) more frequently than open market operations are conducted, but less frequently than the discount rate is changed.
D) less frequently than open market operations are conducted and less frequently than the discount rate is changed.
6) In the federal funds market diagram, an open market sale by the Fed
A) 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 normally
A) 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 EXCEPT
A) 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 market operation?
A) to prevent an increase in inflation
B) if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float
C) to defend the value of the U.S. dollar on the foreign exchange market
D) to prevent the negative impact of a demand shock
10) The policy directive from the FOMC is carried out by
A) 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 Exchange
B) directly with private securities dealers on the floor of the Federal Reserve Bank of New York
C) over-the-counter electronically with private securities dealers
D) by sending its buy and sell orders to the U.S. Treasury for execution
12) A Federal Reserve repurchase agreement involves
A) 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 of Treasury securities.
D) an agreement by a commercial bank to make a loan to another bank in the federal funds market.
13) Dynamic open market operations
A) 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 operations
A) lack flexibility because only very small purchases or sales may be carried out in any given month.
B) lack flexibility because open market purchases cannot easily be offset by subsequent open market 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 called
A) 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 worth of long-term securities while selling $400 billion worth of short-term securities?
A) Operation Go Long
B) Operation Twist
C) QE2
D) QE3
18) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
A) decreases; lowering
B) increases; lowering
C) increases; raising
D) decreases; raising
19) Suppose there is an increase in demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the effective federal funds rate close to the target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
20) Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.