Assignment:
Multiple Choice:
1) When new reserves that are available to the banking system increase, then
a) initially deposits increase more than the increase in reserves, but eventually deposits leak out of the system and it returns to equilibrium
b) credit increases by a multiple of the increase in reserves as deposits are loaned out, those loans are spent, and the expenditure is redeposited into the system
c) if the reserve ratio is 100%, then deposits will increase by twice the amount of the new reserves.
d) all of the above
2) Which of the following was not provided for in the Federal Reserve Act
a) the Fed would be the fiscal agent of the government
b) the Fed has the power to set reserve requirements for member banks
c) the Fed has the power to lend to member banks
d) the Fed generates revenue from holding government securities
3) M2 differs from M1 in that
a) M2 is never smaller than M1
b) M2 is not subject to the influences of multiple deposit creation
c) M1 is a broader measure of the public's holdings of liquid assets
d) none of the above
4) If the interest rate on reserves is 2%, the discount rate is 5%, and the fed funds rate is in equilibrium at 4%, then if the Fed wants to lower the funds rate, it will
a) Purchase government securities
b) Sell government securities
c) Not be able to do so because the funds rate is in the corridor
d) Change the lower bound of the funds rate
5) If the Fed purchases a government security, then
a) Multiple deposit creation will occur unless banks sharply increase their excess reserves
b) Multiple credit creation will not occur unless banks sharply increase their excess reserves
c) The monetary base will not increase if banks sharply increase their excess reserves
d) Multiple deposit and credit creation will take place regardless of bank's holding of excess reserves
6) The creation of the Fed was motivated by the need to address bank panics. To address bank panics, the Fed was given the power to
a) buy and sell government securities and lend at the discount window
b) issue currency and lend at the discount window
c) lend at the discount rate and to insure deposits
d) issue currency and to act as the fiscal agent for the federal government
7) If the Fed wants to reduce inflationary pressure, it can
a) sell government securities or decrease the federal funds rate
b) purchase mortgage backed securities or increase the reserve ratio
c) sell mortgage backed securities or increase interest rate on reserves
d) purchase government securities or increase the discount rate
8) In a fractional reserve banking system
a) new deposits are typically larger than withdrawals so loans made by banks can be redeposited into other banks
b) welfare is generally increased, and multiple credit creation takes place because most loans are redeposited within the banking system
c) welfare is generally increased, but bank panics can only be eliminated with the help of a central bank
d) new deposits about equal withdrawals, and short term loans are financed by longer term borrowing
9) When the Fed was created, the principal way in which it conducted monetary policy was to
a) lend to banks who suffered liquidity problems
b) buy and sell government securities
c) regulate state banks
d) set reserve requirements high enough to avoid bank runs
10) During the financial crisis of 2008-09, the Fed did all of the following except
a) extended its role by buying large quantities of mortgage backed securities
b) increased the reserve ratio and so the excess reserves that banks hold fell
c) began to buy longer term to maturity government securities
d) tried to influence expectations with regard to inflation and future short term interest rates.
11) If you are told that the federal funds rate and the supply of reserves have both increased, then which of the following could have happened?
a) an increase in the purchase of mortgage backed securities and an increase in the required reserve ratio
b) a decrease in the interest rate paid on reserves and the Fed sold government securities
c) a decrease in the purchase of government securities and a decrease in the required reserve ratio
d) all of the above may simultaneously raise the federal funds rate and the supply of reserves
12) M2
a) Includes all of the elements of M1 except vault cash
b) Includes Small time deposits, savings deposits, and treasury bills
c) is a broader measure of the public's holdings of liquid assets than is the monetary base
d) none of the above
13) Long and uncertain lags
a) Lead households to increase their savings
b) May make stabilizing monetary policy be destabilizing
c) Was one of the motives for forward guidance
d) Made the financial crisis worse than it otherwise would be
14) Quantitative easing refers to
a) An attempt by the Fed to reduce uncertainty by buying mortgaged back securities
b) The policy of the Fed to hit the zero lower bound
c) The purchase of the Fed of longer term to maturity government securities
d) An attempt by the Fed to make the yield curve a bit steeper
Definitions
1) What is the discount rate?
2) Write out the deposit multiplier? Be sure to define all of the terms.
3) What is the M1 multiplier?
4) What is the monetary base?