Banks can also borrow reserves from the Fed at the (Click to select) at the. References

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1 1. Award: points If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves? Banks can also borrow reserves from the Fed at the at the. Learning Objective: Discuss the tools of conventional monetary policy. 2. Award: points If you invest $150 in a stock, borrowing 90 percent of the $150 at 10 percent interest, and the stock price rises by 10 percent, what is the return on your investment? Instructions: Enter your response as a whole number. percent Worksheet Difficulty: 03 Hard Learning Objective: Explain the role of leverage and herding in financial bubbles and how central bank policy can contribute to a financial bubble. Page 1 of 14

2 3. Award: points What is an inverted yield curve? An inverted yield curve is when long-terms bonds Worksheet Difficulty: 01 Easy Learning Objective: Discuss the complex nature of monetary policy and the importance of central bank credibility. 4. Award: points What are three reasons why the Glass-Steagall Act became less and less effective? Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box. Regulations covered fewer financial instruments as new financial instruments were developed. There was no political pressure to reduce regulations. There was political pressure to reduce regulations. Financial markets were becoming global, and U.S. regulations controlled only U.S. financial institutions. Regulations covered more financial instruments as new financial instruments were developed. Financial markets were becoming more localized, which U.S. regulations could effectively control. Page 2 of 14

3 Worksheet Difficulty: 01 Easy Learning Objective: Explain why regulating the financial sector and preventing financial crises is so difficult. 5. Award: points What is meant by the Federal funds rate? The Federal funds rate is the interest rate. Worksheet Difficulty: 01 Easy Learning Objective: Discuss the tools of conventional monetary policy. 6. Award: points For each of the following, state whether it is considered money in the United States. Explain why or why not. a. A check you write against deposits you have at Bank USA: Money: represents a store of value Not money: has no real value Money: can be used as a medium of exchange Not money: not accepted for purchase b. Brazilian reals. Money: represents a store of value Money: can be used as a medium of exchange Not money: has no real value Not money: not accepted for purchase Page 3 of 14

4 c. The available credit you have on your MasterCard. Not money: has no real value Money: can be used as a medium of exchange Money: represents a store of value Not money: creates debt upon purchase d. Reserves held by banks at the Federal Reserve Bank. Not money: has no real value Money: represents a store of value Not money: not accepted for purchase Money: can be used as a medium of exchange e. Federal Reserve notes in your wallet. Not money: has no real value Not money: not accepted for purchase Money: represents a store of value Money: can be used as a medium of exchange f. Gold bullion. Money: can be used as a medium of exchange Not money: has no real value Not money: not accepted for purchase Money: represents a store of value g. Grocery store coupons. Not money: not accepted for purchase Not money: has no real value Money: represents a store of value Money: can be used as a medium of exchange Learning Objective: Discuss the functions and measures of money. 7. Award: points Page 4 of 14

5 What are examples of tools, operating targets, and ultimate targets? Open market operations: Discount rate: Reserve requirement: Fed funds rate: Stable prices: Sustainable growth: Acceptable employment: Moderate long-term interest rates: Learning Objective: Discuss the complex nature of monetary policy and the importance of central bank credibility. 8. Award: points Say that investment increases by $20 for each interest rate drop of 1 percent. Say also that the expenditures multiplier is 3. If the money multiplier is 4, and each 5-unit change in the money supply changes the interest rate by 1 percent, what open market policy would you recommend to increase income by $240? Instructions: Enter your response as a whole number. Open market so that the monetary base by $. Page 5 of 14

6 Worksheet Difficulty: 03 Hard Learning Objective: Discuss the tools of conventional monetary policy. 9. Award: points Why is the Fed's role as lender of last resort an important function of the Fed? When households cannot obtain credit from banks, they can get credit directly from the Fed. Thus, the Fed's role as a lender of last resort helps households when no one else will. As a lender of last resort, the Fed lends to the Federal government whenever it has a budget deficit. Thus, the Fed acts as the central bank, lending to the government when there is no other option. The Fed lends to other nations that face a financial crisis. Thus, the Fed acts as a lender of last resort lending to banks and financial institutions of other nations when no one else will. When there is a shortage of short-term credit, the Fed steps in as a lender of last resort lending to banks and other financial institutions. Learning Objective: Explain why financial crises are dangerous and why most economists see a role for the central bank as a lender of last resort. 10. Award: points If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer. People will the amount of money they hold, and bonds, if they expect interest rates to rise in the future because the price of those bonds will be Page 6 of 14

7 . Learning Objective: Explain the role of interest rates in an economy. 11. Award: points Categorize the following as components of M 1, M 2, both, or neither. a. State and local government bonds. b. Checking accounts. c. Money market deposit accounts. d. Currency. e. Stocks. f. Corporate bonds. Learning Objective: Discuss the functions and measures of money. 12. Award: points Page 7 of 14

8 Say that investment increases by $20 for each interest rate drop of 1 percent. Say also that the expenditures multiplier is 3. If the money multiplier is 4, and each 5-unit change in the money supply changes the interest rate by 1 percent, what open market policy would you recommend to increase income by $240? Instructions: Enter your response as a whole number. Open market so that the monetary base by $. Worksheet Difficulty: 03 Hard Learning Objective: Discuss the tools of conventional monetary policy. 13. Award: points Why are there few regional Fed banks in the western part of the United States? When the Fed was established, farming was a predominant industry. When the Fed was established, there were fewer banks in the West. The Fed is based in Washington, D.C., so regional banks need to be close to Washington, D.C. States in the western part of the United States have little interest in the financial system. Worksheet Difficulty: 01 Easy Learning Objective: Discuss how monetary policy works in practice. 14. Award: points Page 8 of 14

9 The table below gives the Fed funds rate target at the end of each year shown. Year Federal Funds Target Rate Year % Year Year Year Using these figures, describe how the monetary policy directions changed from Year 1 through Year 4. Year 2: Year 3: Year 4: Learning Objective: Discuss the complex nature of monetary policy and the importance of central bank credibility. 15. Award: points How does a monetary regime differ from a policy? A is a predetermined statement about what will be followed in various situations. It ties the hands of policy makers. A is a one-time action that does not imply the course of future actions. Learning Objective: Discuss the complex nature of monetary policy and the importance of central bank credibility. Page 9 of 14

10 16. Award: points Assuming individuals hold no currency, calculate the simple money multiplier for each of the following reserve ratios: Instructions: Enter your responses rounded to two decimal places. 5 percent: 10 percent: 20 percent: 25 percent: 50 percent: 75 percent: 100 percent: Worksheet Difficulty: 03 Hard Learning Objective: Define banks and explain how they create money. 17. Award: points While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves: Instructions: Enter your responses as whole numbers. Page 10 of 14

11 a. How much money can the bank initially lend out? $ b. After this initial transaction, by how much is the money in the economy changed? $ c. What s the money multiplier? d. How much money will eventually be created by the banking system from Jon s $100? $ Worksheet Difficulty: 03 Hard Learning Objective: Define banks and explain how they create money. 18. Award: points How would a precommitment policy address problems in the economy? Precommitment policy reverses unconventional policy and returns to conventional monetary policy. Precommitment policy is a commitment to continue a policy for a prolonged period of time, thereby reducing uncertainty. Precommitment policy does not commit the Fed to continue a policy for a prolonged period of time, thereby increasing uncertainty. Precommitment policy is a commitment to continue a policy for a short period of time, thereby increasing uncertainty. What is the risk of such a policy? Precommitments do not tie the hands of the Fed, it has the ability to reverse its stance on the Fed funds rate should the economy do better or worse. Precommitments make it easier for the Fed to reverse its stance on the Fed funds rate should the economy do better or worse. It requires selling long-term bonds and asset holdings, slowing the economy in precisely the opposite way in which the policies are now speeding it up. Page 11 of 14

12 Precommitments tie the hands of the Fed, which may not allow the Fed to reverse its stance on the Fed funds rate should the economy do better or worse or if inflation emerges. Learning Objective: Discuss monetary policy in the post financial crisis period. 19. Award: points Explain the different effects that quantitative easing and operation twist were expected to have on the yield curve. Quantitative easing pushes the upper end of the yield curve down directly, thereby holding down the interest rate for investors and stimulating asset markets and the economy. Operation twist places downward pressure on the long-term rate and upward pressure on the short-term rate. Quantitative easing shifts up the upper end of the yield curve directly, thereby holding up the interest rate for investors and depressing asset markets and the economy. Operation twist places upward pressure on long-term and short-term rates. Quantitative easing pushes the lower end of the yield curve down directly, thereby holding up the interest rate for investors and stimulating asset markets and the economy. Operation twist places upward pressure on the long-term rate and downward pressure on the short-term rate. Quantitative easing pushes the upper end of the yield curve up directly, thereby not changing the interest rate for investors and not stimulating asset markets and the economy. Operation twist places no pressure on the long-term rate and upward pressure on the short-term rate. Learning Objective: Discuss monetary policy in the post financial crisis period. Page 12 of 14

13 20. Award: points If financial institutions don t produce any tangible real assets, why are they considered a vital part of the U.S. economy? The financial sector is the largest consumer of tangible real assets. The financial sector is the largest sector in the economy. The financial sector transfers saving into investment and makes the real economy more efficient. The financial sector certifies all transactions, which is essential for a monetary system. Learning Objective: Explain why the financial sector is so important to macroeconomic debates. 21. Award: points What are two roles of the financial sector? The financial sector facilitates taxes, acting as a lubricant to the fiscal side of the economy. Its second role is to transfer taxes, outflows from the spending stream, back into income. The financial sector facilitates trade, acting as a lubricant to the economy. Its second role is to transfer saving, outflows from the spending stream, back into spending. The financial sector facilitates the supply of money, acting as an agent of the Fed. Its second role is to transfer money, outflows from the monetary stream, back into banks. The financial sector facilitates production, acting as a lubricant to the economy. Its second role is to transfer investment, outflows from the saving stream, back into saving. Worksheet Difficulty: 01 Easy Learning Objective: Explain why the financial sector is so important to macroeconomic debates. Page 13 of 14

14 22. Award: points What distinguishes credit easing from quantitative easing? What problem was each designed to address? Credit easing is the sale of long-term government bonds and securities from private financial corporations for the purpose of changing the mix of securities held by the Fed toward less liquid and less risky assets. the purchase of short-term government bonds and securities from private financial corporations for the purpose of changing the mix of securities held by the Fed toward more liquid and less risky assets. the purchase of long-term government bonds and securities from private financial corporations for the purpose of changing the mix of securities held by the Fed toward less liquid and more risky assets. the sale of short-term government bonds and securities from private financial corporations for the purpose of changing the mix of securities held by the Fed toward more liquid and more risky assets. Quantitative easing is a policy of decreasing the money supply by selling financial assets from banks and other financial institutions with already existing money. decreasing the money supply by buying financial assets from banks and other financial institutions with newly created money. increasing the money supply by buying financial assets from banks and other financial institutions with newly created money. increasing the money supply by selling financial assets from banks and other financial institutions with newly created money. Learning Objective: Discuss monetary policy in the post financial crisis period. Page 14 of 14