1) Even if the Fed could completely control the money supply, monetary policy would
have critics because
A) the Fed is asked to achieve many goals, some of which are incompatible with others
B) the Fed’s goals do not include high employment, making labor unions a critic of the
Fed
C) the Fed’s primary goal is exchange rate stability, causing it to ignore domestic
economic conditions
D) it is required to keep Treasury security prices high
2) If wealth increases, the demand for stocks ________ and that of long-term bonds
________, everything else held constant
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
3) The monetary base consists of
A) currency in circulation and Federal Reserve notes
B) currency in circulation and the US Treasury’s monetary liabilities
C) currency in circulation and reserves
D) reserves and Federal Reserve Notes
4) Higher government deficits ________ the supply of bonds and shift the supply curve
to the ________, everything else held constant
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
5) A difference between inventory investment and fixed investment is that
A) fixed investment is never unplanned
B) fixed investment is never planned
C) inventory investment is never unplanned
D) unplanned inventory investment is always zero
6) Although the FDIC was created to prevent bank failures, its existence encourages
banks to
A) take too much risk
B) hold too much capital
C) open too many branches
D) buy too much stock
7) The relationship between borrowed reserves, the nonborrowed monetary base, and
the monetary base is
A) MB = MBn – BR
B) BR = MBn – MB
C) BR = MB – MBn
D) MB = BR – MBn
8) The Federal Reserve ________ pay interest on reserves held on deposit The
European System of Central Banks ________ pay interest on reserves held on deposit
A) does; does
B) does; does not
C) does not; does
D) does not; does not
9) Adjustable rate mortgages
A) protect households against higher mortgage payments when interest rates rise
B) keep financial institutions’ earnings high even when interest rates are falling
C) benefit homeowners when interest rates are falling
D) generally have higher initial interest rates than on conventional fixed-rate mortgages
10) Evidence from business cycle fluctuations in the United States indicates that
A) a negative relationship between money growth and general economic activity exists
B) recessions are usually preceded by declines in bond prices
C) recessions are usually preceded by dollar depreciation
D) recessions are usually preceded by a decline in the growth rate of money
11) In the figure above, a factor that could cause the supply of bonds to shift to the right
is:
A) a decrease in government budget deficits
B) a decrease in expected inflation
C) a recession
D) a business cycle expansion
12) Budgets deficits can be a concern because they might
A) ultimately lead to higher inflation
B) lead to lower interest rates
C) lead to a slower rate of money growth
D) lead to higher bond prices
13) If the quantity of money demanded is not affected by changes in the interest rate,
the LM curve is ________ and fiscal policy will be ________
A) horizontal; very effective
B) horizontal; ineffective
C) vertical; ineffective
D) vertical; very effective
14) The current international financial system is a managed float exchange rate system
because
A) exchange rates fluctuate in response to, but are not determined solely by, market
forces
B) some countries keep their currencies pegged to the dollar, which is not allowed to
fluctuate
C) all countries allow their exchange rates to fluctuate in response to market forces
D) all countries peg their currencies to the dollar which is allowed to fluctuate in
response to market forces
15) If a foreign bank operates a subsidiary bank in the US, the subsidiary bank is
A) subject to the same regulations as a US owned bank
B) only subject to the regulations of the country in which the foreign bank is chartered
C) restricted to making loans to only foreign citizens in the US
D) restricted to accepting deposits from foreign citizens living in the US
16) As the costs associated with deposit outflows ________, the banks willingness to
hold excess reserves will ________
A) decrease; increase
B) increase; decrease
C) increase; increase
D) decrease; not be affected
17) Everything else held constant, in the market for reserves, when the federal funds
rate is 3%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate
B) raises the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect on the federal funds rate
18) The more interest-sensitive is money demand, the
A) more effective is fiscal policy relative to monetary policy
B) more effective is monetary policy relative to fiscal policy
C) steeper is the IS curve
D) steeper is the LM curve
19) The theory of PPP suggests that if one country’s price level falls relative to
another’s, its currency should
A) depreciate
B) appreciate
C) float
D) do none of the above