1. The ___________________ is the institution designed to control the quantity of money
in the economy and also to oversee the:
A. FOMC; passing of tax and spending bills.
B. Central Bank; safety and stability of the banking system.
C. FFIEC; day-to-day democratic control of policy.
D. FDIC; responsibility for deposit insurance.
answer
B. Central Bank; safety and stability of the banking system.
question
2. Which of the following is a traditional tool used by the Fed during recessions?
A. quantitative easing
B. higher interest rates
C. open market operations
D. coins and paper currency
answer
C. open market operations
question
3. Which of the following terms is used to describe the proportion of deposits that banks
are legally required to deposit with the central bank?
A. discount requirements
B. deposit requirements
C. reserve requirements
D. monetary requirements
answer
C. reserve requirements
question
4. What term is used to describe the interest rate charged by the central bank when it
makes loans to commercial banks?
A. discount rate
B. reserve requirement
C. Fed rate
D. open market rate
answer
A. discount rate
question
5. Which of the following is considered to be a relatively weak tool of monetary policy?
A. quantitative easing
B. altering the discount rate
C. reserve requirements
D. reducing the money supply
answer
B. altering the discount rate
question
6. A central bank that desires to reduce the quantity of money in the economy can:
A. raise the reserve requirement.
B. buy bonds in open market operations.
C. lower the discount rate.
D. engage in quantitative easing.
answer
A. raise the reserve requirement.
question
7. The quantitative easing policies adopted by the Federal Reserve are usually thought of
as:
A. short term loans to fill out reserves.
B. temporary emergency measures.
C. traditional monetary policies.
D. a relatively weak tool.
answer
B. temporary emergency measures.
question
8. The central bank requires Southern to hold 10% of deposits as reserves. Southern
Bank's policy prohibits it from holding excess reserves. If the central bank sells $25
million in bonds to Southern Bank which of the following will result?
A. the money supply in the economy decreases
B. Southern's net worth increases by $25 million
C. decrease in Southern's bond assets by $25 million
D. increase in Southern's loan assets of $25 million
answer
A. the money supply in the economy decreases
question
9. Atlantic Bank is required to hold 10% of deposits as reserves. If the central bank
increases the discount rate, how would Atlantic Bank respond?
A. by noting a decrease in net worth
B. by increasing its reserves
C. its balance sheet will be unchanged
D. it can make more loans with increased loan assets
answer
B. by increasing its reserves
question
10. The Central Bank has raised its reserve requirements from 10% to 12%. If Southern
Bank finds that it is not holding enough in reserves to meet the higher requirements, then
it will likely:
A. keep track of whether money is flowing in or out of the bank.
B. buy bonds to increase the size of its reserve assets.
C. reduce the quantity of money and loans on the balance sheet.
D. borrow for the short term from the central bank.
answer
D. borrow for the short term from the central bank.
question
11. When the central bank decides it will sell bonds using open market operations:
A. interest rates decrease.
B. the money supply increases.
C. the money supply decreases.
D. the money supply is unaffected.
answer
C. the money supply decreases.
question
12. Which of the following events would cause interest rates to increase?
A. lower tax rates
B. a higher discount rate
C. lower reserve requirements
D. an open market operation to buy bonds
answer
B. a higher discount rate
question
13. When the Federal Reserve announces that it is implementing a new interest rate
policy, the ____________________ will be affected?
A. real interest rate
B. consumer lending rate
C. nominal interest rate
D. federal funds rate
answer
D. federal funds rate
question
14. If a Central Bank decides it needs to decrease both the aggregate demand and the
money supply, then it will:
A. follow expansionary monetary policy.
B. follow loose monetary policy.
C. follow tight monetary policy.
D. follow quantitative easing policy.
answer
C. follow tight monetary policy.
question
15. When a Central Bank takes action to decrease the money supply and increase the
interest rate, it is following:
A. a loose monetary policy.
B. a contractionary monetary policy.
C. a expansionary monetary policy.
D. a quantitative easing policy.
answer
B. a contractionary monetary policy.
question
16. When a Central Bank makes a decision that will cause an increase in both the money
supply and aggregate demand, it is:
A. following a loose monetary policy.
B. following a tight monetary policy.
C. following a contractionary monetary policy.
D. reversing quantitative easing.
answer
A. following a loose monetary policy.
question
17. _____________ will often cause monetary policy to be considered counterproductive
because it makes it hard for the central bank to know when the policy will take effect?
A. Altering the discount rate
B. Reserve requirements
C. Long and variable time lags
D. Quantitative easing
answer
C. Long and variable time lags
question
18. What is the name given to the macroeconomic equation MV = PQ?
A. basic velocity of money equation
B. basic quantity equation of output
C. basic quantity equation of money
D. basic velocity of price equation
answer
C. basic quantity equation of money
question
19. If GDP is 3600 and the money supply is 300, what is the velocity?
A. 18
B. 8
C. 4.57
D. 12
answer
D. 12
question
20. In good economic times, a surge in lending exaggerates the episode of economic
growth. Which of the following adaptations of monetary policy can moderate these
exaggerated effects?
A. price stability to reinforce effect of deposit insurance
B. monitoring asset prices and leverage
C. quantitative easing when banks are under stress
D. inflation-targeting lender of last resort policies
answer
B. monitoring asset prices and leverage
question
21. If you were to survey central bankers from around the world and ask them what they
believe the primary task of monetary policy should be, what would the most popular
answer likely be?
A. leverage cycle
B. bank runs
C. fighting inflation
D. bank supervision
answer
C. fighting inflation
question
22. If nominal GDP is 2700 and the money supply is 900, what is velocity?
A. 25
B. 13.5
C. 3
D. .33
answer
C. 3
question
23. If GDP is 2400 and the money supply is 600, then what is the velocity?
A. 18.3
B. 4
C. 4.57
D. 12
answer
B. 4
question
24. If the economy is at equilibrium as shown in the diagram above, then an expansionary
monetary policy will:
A. have no effect on both unemployment and inflation.
B. reduce unemployment, but increase inflation.
C. reduce both unemployment and inflation.
D. reduce unemployment, but have little effect on inflation.
*SEE GRAPH
answer
D. reduce unemployment, but have little effect on inflation.
question
25. Contrast the actions a central bank would take to increase the quantity of money in
the economy with the actions it would take to produce the opposite effect.
answer
25. Answer: A central bank that wants to increase the quantity of money in the economy
can buy bonds in an open market operation, reduce the reserve requirement, lower the
discount rate, or engage in quantitative easing. Conversely, a central bank that wants to
reduce the quantity of money in the economy can sell bonds in an open market operation,
raise the reserve requirement, raise the discount rate, or reverse its past practices of
quantitative easing.
question
26. Contrast the actions a central bank should take when an economy is in recession with
production substantially below potential GDP and those needed when an economy is
producing in overdrive above potential GDP.
answer
26. Answer: If the economy is in a recession, with production substantially below
potential GDP, then the central bank should raise the supply of money and credit, first by
reducing interest rates, and then by considering the use of "quantitative easing" and direct
loans. If the economy is producing in overdrive above potential GDP, experiencing high
inflation, then the central bank should raise interest rates by holding down growth of the
money supply
question
27. Define and contrast contractionary monetary policy and expansionary monetary
policy and their respective economic outcomes. Explain what happens if the effects of
either of these policies goes too far.
answer
27. Answer: A monetary policy which reduces the amount of money and loans in the
economy is a contractionary monetary policy or a "tight" monetary policy. A monetary
policy that expands the quantity of money and loans is known as an expansionary
monetary policy or a "loose" monetary policy. Tight or contractionary monetary policy
that leads to higher interest rates and a reduced quantity of loanable funds will reduce two
components of aggregate demand. Conversely, loose or expansionary monetary policy
that leads to lower interest rates and a higher quantity of loanable funds will tend to
increase business investment and consumer borrowing for big-ticket items. If loose
monetary policy seeking to end a recession goes too far, it may push aggregate demand
so far to the right that it triggers inflation. If tight monetary policy seeking to reduce
inflation goes too far, it may push aggregate demand so far to the left that a recession
begins.
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