ECON 1BB3 Study Guide - Final Guide: Stagflation, Hyperinflation

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19 Sep 2015

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ECON 1BB3 Full Course Notes

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Increase in price: raises money demand & increases the interest rate which lowers investment: open market operations: change the quantity of reserves in the banking system, foreign exchange market operations: boc buying/selling foreign currencies in the market, money supply: not affected by charges in interest rates (vertical line, increase: decrease in bank rates (cid:224) less expensive to borrow (cid:224) increases the banks reserves, decrease: increase in bank rates (cid:224) more expensive to borrow (cid:224) decreases the banks reserve, money demand: people hold money that offer higher rate of return because money can buy goods and services, interest rate: when holding cash on self instead of buying bonds, lose out on interest, increase: raises the cost of holding money (cid:224) reduces the quantity demanded, decreases: reduces the cost of holding money (cid:224) increases the quantity demanded, wealth effect: lower price level adds value to money, which increases consumer spending.

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QUESTION 46

When the Fed buys a U.S. bond in the open market

		its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
		its action expands total reserves and the money supply.
		its action contracts total reserves and the money supply.
		total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

		reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

		the reserve ratio.
		one minus the reserve ratio
		the inverse of the required reserve ratio.
		the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

		the growth in the money supply when income increases.
		the growth in real national income when the money supply increases.
		the maximum potential change in the money supply due to a change in income.
		the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

		increases the money multiplier.
		will cause banks to make more loans.
		has an expansionary effect on the money supply.
		has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

		banks against lawsuits.
		the deposits held in member banks.
		the deposits held in the Fed.
		the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

		in difficult times people want currency instead of demand deposits.
		the FDIC is inefficient.
		banks do not keep enough reserves to cover all their depository liabilities.
		bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

		make riskier loans than they otherwise would.
		reject some loans that probably would be profitable.
		maintain excess reserves that are too great.
		be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

		discourages banks from engaging in excessive risk taking.
		was established after the Panic of 1907.
		only insures deposits in money-center banks.
		increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

		Money is government issued and it is redeemable for gold or silver.
		Money is part of every barter transaction and it is divisible.
		Money is accepted as a medium of exchange and it is the common unit of account used to express prices.
		Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

		asset demand.
		precautionary demand.
		aggregate demand.
		transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

		the transaction demand for money.
		the spending demand for money.
		the asset demand for money.
		the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

		decreases.
		increases.
		decreases initially and then increases to the original position.
		does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

		increases, and the money demand curve shifts to the right.
		remains constant, and the money demand curve remains the same.
		decreases, and the money demand curve shifts to the left.
		increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

		it fulfills no precautionary role.
		it fulfills no transactions role.
		it earns no interest income.
		its real value always increases.

blacktrout920

Q30. The higher the reserve requirement,
a. the more the money supply can expand
b. the more interest the bank will earn on its reserve account
c. the less the money supply can expand
d. both the more the money supply can expand and the more interest the bank will earn on its reserve account

Q31. If depositors withdraw their funds and create a shortage of reserves, bankers
a. have no alternative but to call in outstanding loans
b. can borrow reserves from the Fed
c. must close their operations until their reserves increase
d. must sell bank stock to replenish reserves

Q32. If a bank has excess reserves,
a. its reserves are greater than its liabilities
b. it can make a loan if it wishes
c. it cannot make a loan if it wishes
d. it must borrow from the Fed

Q33. Which of the following is most influenced by changes in the discount rate?
a. the interest rate paid on savings
b. the commercial loan rate
c. the installment loan rate
d. the mortgage loan rate

Q34. The Federal Reserve System is built around
a. four regional banks
b. six regional banks
c. twelve district banks
d. one bank with several branches

Q35. The interest rate at which banks borrow excess reserves from each other is known as the
a. prime rate
b. federal funds rate
c. discount rate
d. T-bill rate

Q36. If the U. S. government increases spending, the U. S. Treasury
a. has the legal right to issue currency to pay for the spending
b. does not have the legal right to issue currency to pay for the spending
c. usually pays for the spending by selling bonds directly to the Fed
d. seldom pays for the spending by selling bonds to the public

Q37. Forces within the economy that naturally tend to counteract recessions and inflation are known as
a. discretionary stabilizers
b. automatic stabilizers
c. demand-management policies
d. fiscal dividends

orchidraven755

If the Fed lowers the federal funds rate using an open market sale, what will be the effect on other interest rates? The exchange rate? Money and bank loans? Long-term real interest rate? Expenditure plans? Aggregate demand?

What limits the Fed's ability to steer the economy to avoid both recession and inflation?

Why is there a difference between the short-run and long-run effects from an increase in the quantity of money?

Why must the Fed decide to target either the interest rate or the monetary base? Why can't the Fed determine acceptable values for both and then use open market operations to hit both targets?

What are the benefits of using rules to conduct monetary policy?

ECON 1BB3 Study Guide - Final Guide: Stagflation, Hyperinflation

ECON 1BB3 Full Course Notes

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