If a member of the nonbank public sells a government bond to the Federal Reserve in
exchange for currency, the monetary base will ________, but ________.
A) remain unchanged; reserves will fall
B) remain unchanged; reserves will rise
C) rise; currency in circulation will remain unchanged
D) rise; reserves will remain unchanged
Answer:
If reserves in the banking system increase by $100, then checkable deposits will
increase by $500 in the simple model of deposit creation when the required reserve
ratio is
A) 0.01
B) 0.1
C) 0.05
D) 0.2
Answer:
If the interest rate on a bond is below the equilibrium interest rate, there is an excess
________ of bonds and the bond price will ________.
A) demand; rise
B) demand; fall
C) supply; rise
D) supply; fall
Answer:
The Phillips curve indicates that when the labor market is ________, production costs
will ________ and aggregate supply decreases.
A) easy; rise
B) easy; fall
C) tight; fall
D) tight; rise
Answer:
When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
Answer:
In the market for money, an interest rate below equilibrium results in an excess
________ money and the interest rate will ________.
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
Answer:
The Bretton Woods system broke down in the early 1970s for all but one of the
following reasons:
A) deficit countries losing international reserves were not willing to devalue their
currencies.
B) surplus countries were not willing to revalue their currencies upwards.
C) surplus countries were not willing to pursue more expansionary policies.
D) the United States had been pursuing an inflationary monetary policy to reduce
domestic unemployment.
Answer:
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from
a bank that previously had no excess reserves, deposits in the banking system can
potentially increase by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
Answer:
The theory that monetary policy conducted on a discretionary, day-by-day basis leads to
poor long-run outcomes is referred to as the
A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.
Answer:
Which of the following is not a requirement in selecting a policy instrument?
A) Measurability
B) Controllability
C) Flexibility
D) Predictability
Answer:
To claim that a lottery winner who is to receive $1 million per year for twenty years has
won $20 million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
Answer:
The central bank which is generally regarded as the most independent in the world
because its charter cannot be changed by legislation is the
A) Bank of England.
B) Bank of Canada.
C) European Central Bank.
D) Bank of Japan.
Answer:
Financial intermediaries develop ________ in things such as computer technology
which allows them to lower transactions costs.
A) expertise
B) diversification
C) regulations
D) equity
Answer:
If a market participant believes that a stock price is irrationally high, they may try to
borrow stock from brokers to sell in the market and then make a profit by buying the
stock back again after the stock falls in price. This practice is called
A) short selling.
B) double dealing.
C) undermining.
D) long marketing.
Answer:
Under a gold standard in which one dollar could be turned in to the U.S. Treasury and
exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for
1/100th of an ounce of gold, an exchange rate of ________ marks to the dollar would
stimulate a flow of gold from the United States to Germany.
A) 7
B) 6
C) 5
D) 4
Answer:
In the model of the money supply process, the Federal Reserve’s role in influencing the
money supply is represented by
A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, and borrowed reserves.
C) only borrowed reserves.
D) only nonborrowed reserves.
Answer:
An increase in ________ leads to an equal ________ in the monetary base in the short
run.
A) float; decrease
B) float; increase
C) discount loans; decrease
D) Treasury deposits at the Fed; increase
Answer:
Everything else held constant, when the federal funds rate is ________ the interest rate
paid on reserves, the quantity of reserves demanded rises when the federal funds rate
________.
A) above, rises
B) above, falls
C) below, rises
D) below, falls
Answer:
Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
Answer:
If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk
at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
Answer:
Holding all else constant, when a bank receives the funds for a deposited check,
A) cash items in the process of collection fall by the amount of the check.
B) bank assets increase by the amount of the check.
C) bank liabilities decrease by the amount of the check.
D) bank reserves increase by the amount of required reserves.
Answer:
Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, one million dollars in required reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars on deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
Answer:
The price of a barrel of oil doubled between 2007 and the middle of To make matters
worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the
following is an appropriate description of the mechanism that would have ensued?
A) The increase in the price of oil would have immediately shifted the AS curve to the
right.
B) The financial crisis would have led to a sharp contraction in spending shifting the
AD curve to the right.
C) Shifts in both the AD and the AS curve would have ensued in the short-run but as
long as neither shock had an impact on potential output, ultimately unemployment will
have been unaffected in the long run.
D) All of the above.
E) None of the above.
Answer:
If gold becomes acceptable as a medium of exchange, the demand for gold will
________ and the demand for bonds will ________, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Answer:
If the Fed adopts a policy of pegging the interest rate, a ________ in government
spending forces the Fed to increase the money supply to prevent interest rates from
________.
A) fall; increasing
B) fall; decreasing
C) rise; decreasing
D) rise; increasing
Answer:
The theory of PPP suggests that if one country’s price level falls relative to another’s, its
currency should
A) depreciate in the long run.
B) appreciate in the long run.
C) appreciate in the short run.
D) depreciate in the short run.
Answer:
Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one
million dollars in required reserves. Given this information, we can say First National
Bank has ________ million dollars in excess reserves.
A) three
B) nine
C) ten
D) eleven
Answer:
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and
it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without
altering its balance sheet is
A) $30,000.
B) $25,000.
C) $20,000.
D) $10,000.
Answer:
The account that shows international transactions involving currently produced goods
and services is called the
A) trade balance.
B) current account.
C) balance of payments.
D) capital account.
Answer:
Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic
for lunch is a good idea. Last night the weather forecast included a 100% chance of rain
by midday but Barbara did not watch the local news program. Is Barbara’s prediction of
good weather at lunch time rational? Why or why not?
Answer:
Demand-pull inflation can result when
A) policymakers set an unemployment target that is too high.
B) a persistent budget deficit is financed by selling bonds to the public.
C) a persistent budget deficit is financed by selling bonds to the central bank.
D) workers get numerous wage increases.
Answer: