ECN 506 Chapter 11: Chapter 11-Money an Banking

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4 Aug 2016

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Chapter 11: the money supply and interest rates. A central bank, such as the bank of canada, operates as an arm of the federal government. It carries out the monetary policy, acting as a lender of last resort to the commercial banks. It holds deposits of the governments and of chartered banks, and engages in issuing of currency or money. The bank of canada"s most important function is to formulate and implement monetary policy that promotes a stable and healthy economy. See next slide for the mechanism of changing money supply. How does the fed(bank of canada) control the money supply: the money supply, m, is the sum of currency in circulation, c, and checking deposits, d: M = c + d: the fed issues currency, banks and their customers create checking deposits, the fed creates the monetary base. The monetary base: the monetary base (b) is the sum of currency in circulation and bank reserves (b = c +

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1. The Federal Funds Rate is set by the Federal Reserve on the first business day of each month by faxing the rate to the member banks of each Federal Reserve District.

A. True

B. False

2. The Federal Reserve is a single Central bank located on Wall Street in New York City.

A. True

B. False

3. Which of the following is NOT true about the Federal Reserve System?

A. Terms of service of the members of the Board of Governors are longer than the number of years that a two-term President of the United States would serve.

B. The Federal Reserve System is the nation's central bank and is comprised of 12 Federal Reserve Banks that serve as bankers' banks.

C. Some of the main functions of the Federal Reserve System include the authority to control the money supply, to issue currency, to set reserve requirements, and to hold reserves.

D. While Congress controls the actions of the Federal Reserve, the President has the authority to appoint and remove private banks from the Federal Reserve System.

4. Which of the following is NOT true about restrictive monetary policy?

A. A restrictive monetary policy seeks to raise the federal funds rate.

B. A restrictive monetary policy seeks to expand the money supply.

C. A restrictive monetary policy seeks to raise the Federal Funds Rate by selling government bonds or raising the reserve requirement ratio or increasing the discount rate.

D. A restrictive monetary policy is used when the government is concerned about suddenly increasing inflation.

5. Which of the following statements is NOT true about contractionary fiscal policy?

A. Contractionary fiscal policy consists of reductions in government spending or increases in taxes.

B. Contractionary fiscal policy can include both reductions in government spending or increases in taxes.

C. Contractionary fiscal policy seeks to shift the Aggregate Demand curve to the right.

D. Contractionary fiscal policy is used when the government seeks to reduce suddenly surging inflation.

6. The Federal Reserve creates money by printing the amount of desired new money and distributing it via armored trucks and high-security railways to Federal Reserve District Banks.

A. True

B. False

7. If the Fed feared a looming recession was just around the corner, which of the following actions would it "NOT" consider?

A. The Fed would raise the discount rate.

B. In order to influence prevailing commercial interest rates to fall, the Fed would buy large amounts of government securities.

C. In order to expand the money supply (which influences prevailing commercial interest rates to fall), the Fed would either buy large volumes of government bonds, lower the reserve requirement or cut the discount rate.

D. The Fed would seek to expand the money supply because, in so doing, the federal funds rate would fall and that would stimulate commercial interest rates to fall.

8. Which of the following statements is NOT true about the ability of the Federal Reserve System to expand the money supply?

A. The Federal Reserve System uses the fractional nature of the banking system to create money in order to expand the money supply.

B. The money multiplier defines the relationship between new excess reserves throughout the banking system and the creation of money by banks in the system. It is calculated by dividing the number 1 by the Required Reserve Ratio. [1/rr].

C. If the required reserve ratio is 20%, then $80 billion in new excess reserves will create $400 billion in bank system lending throughout the entire banking system.

D. If the reserve requirement is 100%, then the banks can generate 100% in new excess reserves.

9. Which of the following is NOT true about the tools of monetary policy?

A. The Fed can alter the money supply through open market operations, changes in the reserve ratio or adjustments to the discount rate.

B. Lowering the reserve ratio would expand the money supply.

C. Raising the discount rate would restrict the money supply.

D. Adjusting the reserve requirement is the most important day-to-day method for controlling the nation's money supply.

10. If the Federal Reserve wishes to hold off a feared recession, it will sell large volumes of government bonds.

A. True

B. False

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6. Other things beingâ equal, the M1 money supply varies in the same direction as the magnitude of

A.âk, theâ currency/DDO ratio

B.rrâ , the average required reserve ratio

C.âre, theâ banksâ desired excess reserves ratio

D.none of the above

7. Suppose that discounts and advancesâ (Fed loans of reserves toâ banks) increaseâ $200 million, Treasury deposits at the Fed increaseâ $500 million, and the Fed buysâ $700 million of Treasury bills from dealers. The net effect of these 3 transactions is to

A.increase bank reserves byâ $1,000 million

B.increase bank reserves byâ $1,400 million

C.increase bank reserves byâ $400 billion

D.leave bank reserves unchanged

8. Other things being equalâ (assuming the Fed takes noâ action), a sharp increase in interest rates caused by market forces in a strong economic recovery is likely to

A.increaseâ k, the currencyâ ratio, thus reducing the money supply

B.reduce the monetaryâ base, thus increasing the money supply

C.reduce reâ , the desired excess reserveâ ratio, thus increasing the money supply

D.do none of the above

9. The Federal Reserve is able to control most accurately in the short run

A.âB, the monetary base

B.âk, the currency ratio

C.reâ , theâ bankâs desired excess reserve ratio

D.M1, the U.S. money supply

10. The Federal Reserve implementedâ âoperation twistâ inâ 2011-2012 by

A.simultaneously buyingâ long-term and sellingâ short-term Treasury securities

B.heavy purchases of bothâ long-term andâ short-term Treasury securities

C.lowering the federal funds rate target and buyingâ long-term bonds

D.purchasingâ short-term securities and buyingâ mortgage-backed bonds

11. Duringâ 2008-2014, Fed Chairman Ben Bernanke drew a lot of criticism for

A.maintainingâ short-term interest rates at extremely low levels for an extended period

B.bailing out large banks that would otherwise have failed

C.conducting the quantitative easing policy for about six years

D.all of the above

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

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ECN 506 Chapter 11: Chapter 11-Money an Banking

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