Macro Problem Set 3 Fall 2017

Transcription

1 Macro Problem Set 3 Fall 2017 Directions: Choose the single best answer for each question. Answers should be turned in on the Scantron form at the beginning of class. True=A/False=B 15 points 1) Savings deposits are not subject to the reserve requirement. 2) When the Fed conducts contractionary monetary policy, this will decrease both the money supply and interest rates. 3) When a borrower fails to pay a loan back, this loan becomes a liability of the bank. 4) Contractionary monetary policy should lead to falling bond prices. 5) When a consumer withdraws funds from their checking account in cash, M2 doesn t change. 6) A contractionary monetary policy should increase the value of the dollar relative to other currencies. 7) The asset demand for money is vertical. 8) If the Fed sells bonds to banks, we would expect to see reserves fall. 9) The oversimplified money multiplier increases when the Fed lowers the reserve requirement. 10) Borrowing from the Fed increases a bank s net worth. 11) The reserves that a commercial bank holds at the Fed are a liability of the Federal Reserve. 12) Inflation is likely to shift the asset demand curve for money outward. 13) A bank whose liabilities are greater than its net worth will likely be taken over by the FDIC. 14) When the Discount Rate is raised, this tends to push up the Fed Funds Rate as well. 15) The Federal Reserve closely coordinates monetary policy with Congress.

2 Multiple Choice Select the best answer 30 points 16) Which of the following is a true statement? a) Excess Reserves = Actual Reserves Required Reserves b) Excess Reserves = Deposits Required Reserves c) Excess Reserves = Deposits Loans d) Excess Reserves = Loans Required Reserves 17) If the Fed buys U.S. Treasury securities, this action a) decreases reserves, causes banks to reduce lending, and decreases the money supply. b) decreases reserves, causes banks to increase lending, and increases the money supply. c) increases reserves, encourages banks to make more loans, and increases the money supply. d) increases reserves, causes banks to reduce their loans, and increases the money supply. 18) The transaction demand for money is most closely related to money functioning as a a) standard of deferred payment. b) unit of account. c) medium of exchange. d) store of value. 19) Other things being equal, we would expect a large decrease in the supply of money to: a) decrease the value of the dollar against other currencies. b) lower interest rates. c) increase the purchasing power of the dollar. d) cause inflation. 20) Commodity monies are problematic due to a) their opportunity cost. b) Gresham s Law. c) an inability to control their supply. d) all of the above. 21) Government securities held by commercial banks are a) counted as part of the banks reserves. b) a liability of the commercial bank. c) counted as part of M1. d) an asset of the bank.

3 22) If the stock market were providing really strong rates of returns to investors, we might expect to see a) the asset demand for money shift left. b) the transactions demand for money shift left. c) the transaction demand for money shift to the right. d) the money supply curve to shift to the right. 23) Which of the following statements is correct? Other things being equal a) a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged. b) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. c) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. d) inflation will shift the transactions demand curve for money to the right, but leave the total money demand curve unchanged. 24) If the Fed were to sell bonds to commercial banks, we would expect to see a) the dollar rise in value relative to other currencies. b) interest rates rise. c) net exports fall. d) bond prices to fall. e) all of the above. 25) If the quantity of money supplied exceeds the quantity demanded a) the money supply curve will shift to the left. b) the money demand curve will shift to the right. c) the interest rate will rise. d) the interest rate will fall. 26) If there is a decrease in nominal GDP, we would expect a) the demand for money to decrease. b) the interest rate to increase. c) bond prices to fall. d) all of the above to occur. 27) If banks become concerned about economic conditions and become less willing to lend to consumers and business, which of the following is least likely to occur? a) The Fed Funds Rate rise. b) Reserves rise c) Bank holdings of government securities rise d) Interest rates rise

4 28) Banks create money when they a) add to their reserves in the Federal Reserve Bank. b) accept deposits of cash. c) sell government bonds. d) exchange demand deposits for the IOU's of businesses and individuals. 29) Suppose the ABC bank has excess reserves of $4,000 and outstanding demand deposits of $80,000. If the reserve requirement is 20 percent, what is the size of the bank's actual reserves? a) $16,000 b) $20,000 c) $24,000 d) $84,000 30) If a bank has liabilities which exceed its net worth a) it will not be able to meet the legal reserve ratio. b) it is considered to be insolvent. c) it most likely is a heavy borrower from its district Federal Reserve Bank. d) none of the above are necessarily true. 31) Which of the following will not decrease the quantity of reserves a bank is holding? a) A borrower defaults on a loan. b) A customer writes a check. c) The bank makes a loan to a new borrower. d) The bank buys government securities from the Fed. 32) Which one of the following is presently a major deterrent to bank panics in the United States? a) the discount window b) deposit insurance c) the fractional reserve system d) the gold standard

5 The following balance sheet is for the ABC National Bank. Assume the required reserve ratio is 10 percent. Assets Liabilities and net worth Reserves... $28,000 Demand deposits... $110,000 Loans... $160,000 Savings deposits... $60,000 I Net Worth... $18,000 33) Refer to the above information. The largest new loan this bank could make is a) $5,000. b) $11,000. c) $17,000. d) $18,000. e) $23, ) The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of a) its actual reserves. b) its excess reserves. c) the required reserve ratio. d) the MPS. 35) Overnight loans from one commercial bank to another for reserve purposes entail an interest rate called a) the prime rate. b) the federal funds rate. c) the discount rate. d) LIBOR. 36) The Fed could decrease the Fed Funds Rate by a) selling Treasury securities. b) buying Treasury securities. c) raising the reserve requirement. d) raising the Discount rate.

6 37) Which of the following best describes the Keynesian view of the cause and effect chain of an easy money policy? a) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. b) An increase in the money supply will lower the interest rate, increase investment spending, and increase GDP. c) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. d) A decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP. 38) Suppose the Fed conducts a contractionary monetary policy. Which of the following would be unlikely to happen? a) an increase in the value of the dollar with respect to other currencies b) an increase in investment c) an increase in interest rates d) a decrease in net exports 39) The Federal Reserve System regulates the money supply primarily by: a) controlling the production of coins at the United States mint. b) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. c) altering the reserves of commercial banks, largely through sales and purchases of government bonds. d) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. 40) If the Fed buys $80 million worth of government bonds directly from commercial banks and the reserve requirement is 25%, which of the following would you not expect to see? a) a full $320 million dollar increase in the money supply b) banks holding on to some of their new excess reserves c) individuals failing to redeposit some of portion of the loans they receive. d) a drop in the fed funds rate 41) If the Federal Reserve authorities were attempting to reduce demand-pull inflationary pressures, appropriate policies would be to a) buy government securities, lower reserve requirements, and lower the discount rate. b) buy government securities, raise reserve requirements, and raise the discount rate. c) sell government securities, raise reserve requirements, and lower the discount rate. d) sell government securities, raise reserve requirements, and raise the discount rate.

7 42) Think about the money market. (Drawing a graph of it may help.) Suppose that Real GDP decreases. The Fed could stabilize interest rates by a) lowering the reserve requirement. b) lowering the discount rate. c) buying government securities. d) selling government securities. 43) In the long run, an increase in the money supply will: a) reduce the interest rates and shift AD out. b) reduce the interest rate and the price level. c) increase interest rates and reduce the price level. d) increase the interest rate and shift AD out. 44) The statement A Dell laptop costs $2,500. illustrates which function of money? a) medium of exchange b) unit of account c) store of value d) standard of deferred payment 45) One fundamental policy dilemma facing the monetary authorities is that a) banks and thrift institutions which are not members of the Federal Reserve System are immune to monetary policy. c) reserve requirements and the discount rate cannot be changed simultaneously. c) interest rates and the money supply cannot be stabilized simultaneously. d) the discount rate and open market operations cannot be used simultaneously.