Chapters 12-14

12-1

Macroeconomics

Instructor: Jen Dinsmore Hanson

Homework Assignment

Chapter 12

Multiple Choice Questions

1. If we passed a constitutional amendment requiring a balanced budget every year, this

would probably

A. make our recessions into depressions.

B. prevent recessions.

C. create inflations.

D. raise interest rates.

2. If full employment GDP is $1 trillion greater than equilibrium GDP, and there is a

recessionary gap of $400 billion, the multiplier is

A. 1.

B. 2.5.

C. 4.

D. 5.

E. This is impossible to find with the information given.

3. The national debt passed the $2 trillion mark in

A. 1980.

B. 1982.

C. 1984.

D. 1986.

E. 1988.

4. Most economists would agree that the national debt should be reduced

A. during both periods of recession and prosperity.

B. just during periods of recession.

C. just during periods of prosperity.

D. never.

5. We have an inflationary gap when

A. equilibrium GDP is greater than full employment GDP.

B. full employment GDP is greater than equilibrium GDP.

C. equilibrium GDP is equal to full employment GDP.

D. None of the choices are correct.

6. Which statement is true?

A. On occasion we have inflationary gaps and recessionary gaps at the same time.

B. When we are at equilibrium GDP, we are generally at full employment.

C. Fiscal policy and the automatic stabilizers are identical terms.

D. None of the statements are true.

12-2

7. Which statement is false?

A. Foreigners are holding an increasing percentage of the national debt.

B. The national debt rises substantially during wartime.

C. Over the next 50 years we will have to pay off most of the national debt.

D. None of the statements are false.

8. Which statement is true?

A. The public debt is greater than our GDP.

B. The public debt has doubled over the past four years.

C. Over 50 percent of the outstanding public debt is owed by foreigners.

D. None of the statements are true.

9. In the 1930s, John Maynard Keynes said that our main economic problem was

A. weak aggregate demand.

B. too much government spending.

C. big budget deficits.

D. high interest rates.

E. that taxes were too low.

10. Which statement is true?

A. When there is a recessionary gap, we are spending too much and taxes should be raised.

B. When there is a recessionary gap we are spending too little and taxes should be raised.

C. When there is a recessionary gap, we are spending too much and taxes should be lowered.

D. When there is a recessionary gap we are spending too little and taxes should be lowered.

11. The national debt is ____ of the United States government and ___ of the people who hold

it.

A. an asset; an asset

B. a liability; a liability

C. an asset; a liability

D. a liability; an asset

12. Fiscal policy includes each of the following except

A. the money supply.

B. taxes.

C. government spending.

D. the automatic stabilizers.

13. Between fiscal years 2008 and 2010, our federal budget deficit as a percent of GDP

A. rose substantially.

B. rose slightly.

C. fell slightly.

D. fell substantially.

14. Two ways to lower the deficit are to

A. raise taxes and raise government spending.

B. lower taxes and lower government spending.

C. raise taxes and lower government spending.

D. lower taxes and raise government spending.

12-3

15. In the mid-1990s, the federal budget deficit

A. fell substantially.

B. fell slightly.

C. stayed about the same.

D. rose slightly.

E. rose substantially.

16. Large budget deficits tend to

A. raise interest rates.

B. lower interest rates.

C. have no effect on interest rates.

17. Interest rates in the United States would have been higher in recent years had it not been

for

A. the federal budget deficits.

B. the large federal budget surpluses.

C. the outflow of funds to foreigners.

D. the inflow of funds from foreigners.

18. Even if the economy has considerable excess capacity, new government spending that

creates new jobs involves opportunity costs because

A. goods other than those purchased by government could have been produced and consumed.

B. unemployed workers are unwilling to surrender leisure time to take paid jobs.

C. excess capacity implies that the capital stock exceeds equilibrium.

D. government employment is inefficient relative to jobs in the private sector.

E. expansionary monetary policy stimulates employment without growth of national debt.

19. Which of the following would require reducing government expenditures and increasing

tax rates during a recession?

A. An annually balanced budget policy

B. A countercyclical fiscal policy

C. A cyclically balanced budget policy

D. A policy employing built-in stability

20. Expansionary fiscal policy involves

A. a decrease in government spending and/or an increase in taxes.

B. only an increase in taxes.

C. an increase in government spending and/or a decrease in taxes.

D. only a decrease in government spending.

21. In the 20
th

century, our federal budget deficits were, on average, largest in the

A. 1960s.

B. 1970s.

C. 1980s.

D. 1990s.

12-4

22. An illustration of the term “automatic stabilizer” is provided by

A. The tendency of tax collections to rise as the economy moves into a recession.

B. The tendency of tax collections to fall as the economy moves into a recession.

C. Increases in tax rates as the economy moves into a recession.

D. Decreases in tax rates as the economy moves into a recession.

E. Public works designed to get the economy out of a depression.

23. Statement I: The federal budget deficit is the same thing as the national debt.

Statement II: The national debt will continue to rise even if the federal budget deficit is

lowered.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

24. The multiplier effect occurs because

A. as saving levels increase, a greater pool of loanable funds is available for investment

spending by businesses.

B. increases in income cause a chain reaction of spending by many businesses and

individuals.

C. increases in income cause tax revenues to increase, thereby stimulating increases in

government spending levels.

D. businesses copy the spending decisions of their competitors.

E. households tend to spend any increase in income.

25. Statement I: The national debt passed the $1 trillion mark in 1981.

Statement II: The national debt exceeded $12 trillion in 2010.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

26. Statement I: To lower a recessionary gap we would raise the C + I + G + Xn line.

Statement II: The best way to eliminate a recessionary gap is to balance the federal budget.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

27. The public debt is the sum of all of the previous

A. expenditures of the federal government.

B. budget deficits of the federal government.

C. budget deficits less the budget surpluses of the federal government.

D. budget surpluses less the budget deficits of the federal government.

12-5

28. Because automatic stabilizers exist in the United States economy

A. during a recession, transfer payments automatically rise and tax revenue drops; during a

period of economic recovery, transfer payments fall and tax revenue rises.

B. real wages automatically adjust to keep the labor force fully employed at all stages of the

business cycle.

C. monetary policy is designed to automatically respond to changes in money demand.

D. during a recession, the government’s budget deficit automatically becomes smaller.

E. All of the choices/statements are true.

29. The reason the multiplier is greater than 1 is that

A. income is re-spent.

B. workers are capable of increasing their production when they have to.

C. the marginal propensity to save is 1.

D. none of the choices are correct.

30. John Maynard Keynes believed that

A. the market forces would soon cure the Great Depression.

B. the federal government should balance its budget every year.

C. we could spend our way out of the Great Depression.

D. we should scrap the capitalist system and have the government take over the ownership of

the means of production.

31. How large will the total change in income be from a change in investment of $15 if the

marginal propensity to consume is .8?

A. $12

B. $20

C. $25

D. $75

E. $200

32. The paradox of thrift refers to the idea that

A. people who save are usually those who cannot afford it.

B. as people become more thrifty, incomes may fall.

C. the thrift industry (banks and savings and loans) wants some people to save so that others

may borrow.

D. saving is necessary for economic development.

E. equilibrium requires aggregate supply and total expenditures to be equal.

33. When government expenditures in a given year are less than tax receipts, there exists

A. a budget deficit.

B. public revenue.

C. full-employment taxation.

D. a budget surplus.

34. During the 1980s,

A. both the national debt and the deficit increased.

B. neither the national debt nor the deficit increased.

C. the national debt increased while the deficit decreased.

D. the national debt decreased while the deficit increased.

E. the national debt was the same thing as the deficit and it increased.

12-6

35. During recessions, who would tend to call for more government spending?

A. Liberals

B. Conservatives

C. Both liberals and conservatives

D. Neither liberals nor conservatives

36. If the MPC is .75, the multiplier is

A. .25.

B. .75.

C. 1.

D. 4.

E. 7.5.

37. If the MPC is .75, then a $50 billion increase in investment would result in an increase in

GDP of

A. $50 billion.

B. $75 billion.

C. $150 billion.

D. $200 billion.

E. $375 billion.

38. If the MPC is .8 and government spending falls by $20 billion, GDP will fall by

A. $16 billion.

B. $20 billion.

C. $80 billion.

D. $100 billion.

E. $160 billion.

39. If the MPC were .75, what change in government spending (in billions of dollars) would

be required to cause the equilibrium level of GDP to fall by 100?

A. A decrease of 25.

B. A decrease of 50.

C. A decrease of 75.

D. A decrease of 100.

E. A decrease of 125.

40. According to the “paradox of thrift,” an increase in the

A. average propensity to save results in an increase in national output.

B. average propensity to save results in a decrease in unemployment.

C. saving function (upward shift) can result in a decrease in both national output and total

saving.

D. consumption function (upward shift) results in a decrease in national income.

E. desire of the public to save causes national income and wealth to grow rapidly.

41. Contractionary fiscal policy could be carried out by

A. an increase in government spending and/or a decrease in taxes.

B. an increase in transfer payments.

C. a decrease in government spending and/or an increase in taxes.

D. All of the choices are correct.

12-7

42. Stabilization policies can best be described as policies that

A. attempt to eliminate recession and/or inflation in the

economy.

B. use changes in government spending to promote an equitable income distribution.

C. use changes in the money supply to lower income tax rates.

D. eliminate poverty through the adoption of work incentives.

43. The Budget Act of 1990

A. did not change the top marginal tax rate.

B. lowered the top marginal tax rate.

C. raised the top marginal tax rate.

44. Statement I: Rapid economic growth would tend to raise the federal budget deficit.

Statement II: The 1990-91 recession raised the budget deficit over the level it would have

otherwise been.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

45. Statement I: In the 1930s, the federal government built a few automatic stabilizers into the

economy.

Statement II: Automatic stabilizers protect the economy from the extremes of the business

cycle.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

46. A list of automatic stabilizers in the United States economy would NOT include

A. income taxes.

B. unemployment compensation.

C. agricultural support payments.

D. defense spending.

47. Suppose that we reduce the federal budget deficit (in billions of dollars) in year 1 from

300 to 150 and in year 2 from 150 to 50. During these two years the national debt will

A. fall by 200.

B. fall by 50.

C. rise by 50.

D. rise by 150.

E. rise by 200.

48. If the multiplier is 5, the MPC is

A. .1.

B. .2.

C. .5.

D. .8.

E. 1.0.

12-8

49. As the economy expands, tax revenues _____ and transfer payments ____.

A. fall; rise

B. fall; fall

C. rise; fall

D. rise; rise

50. Nondiscretionary fiscal policy

A. multiplies declines in aggregate demand.

B. multiplies inflationary growth of aggregate demand.

C. does not require any changes in legislation.

D. includes government expenditures, taxes and monetary policy.

E. is an executive power of the United States President.

Short Answer Questions

1.) Given the following (in $ billions): tax receipts = 800, government borrowing = 150, and

government spending = 950, how much is the deficit?

2.) Suppose that government spending fell by $20 billion with a multiplier of 7. What

happened to GDP?

3.) If GDP were $4 trillion, I rose by $30 billion, and, the multiplier was 5, find the new level

of GDP.

4.) If the MPC is .8, how much is the multiplier?

13-1

Macroeconomics

Instructor: Jen Dinsmore Hanson

Homework Assignment

Chapter 13

Multiple Choice Questions

1. Which of the following is money?

A. A credit card

B. A check

C. A share of corporate stock

D. None of the choices are money.

2. Back in the Middle Ages, the only safe place to put your money was

A. in Treasury bills.

B. in goldsmiths’ safes.

C. in real estate.

D. in commodity futures.

3. Statement I: The savings and loan debacle has cost the U.S. taxpayers hundreds of billions

of dollars.

Statement II: One of the main causes of the savings and loan debacle was federal deregulation

of that industry.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

4. Statement I: In the 1980s, many savings and loan associations made very risky real estate

loans that were not repaid.

Statement II: Risky investments in junk bonds played a role in the decline and fall of the

savings and loan industry.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

5. Bank deposit creation is limited by

A. reserve requirements.

B. the interest rate.

C. whether a bank is nationally or state chartered.

D. whether a bank is in a large city or rural area.

6. The _____ demand for money is most sensitive to interest rate changes.

A. transactions

B. precautionary

C. speculative

13-2

7. Suppose a goldsmith (banker) had a certain number of gold coins in his safe and he kept

writing more and more goldsmiths’ receipts for people who came to him to borrow money.

What would be happening to his reserve ratio?

A. It would be rising.

B. It would be falling.

C. It would stay the same.

D. There is not enough information to answer this question.

8. People tend to hold more money as

A. the price level rises and interest rates rise.

B. the price level falls and interest rates fall.

C. the price level rises and interest rates fall.

D. the price level falls and interest rates rise.

9. The transaction motive for holding money

A. varies inversely with income.

B. varies directly with the number of times one is paid annually.

C. are used to make expected expenditures.

D. are held for the same reasons that precautionary cash balances are held.

E. are held to cover unpredictable expenditures.

10. Statement I: As the level of income rises, people tend to hold more money.

Statement II: People tend to hold less money as credit availability increases.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

11. Most (75%) of the financial transactions are through the use of

A. electronic fund transfers.

B. credit cards.

C. checks.

D. cash.

12. Coins in the hands of the public are

A. included in M1, but not in M2.

B. included in both M1 and in M2.

C. included in M2, but not in M1.

D. excluded from M1 and M2 because people can exchange them for Federal Reserve notes.

13. Which is NOT considered money?

A. Checking account balances

B. Traveler’s checks issued by non-banks

C. Credit cards

D. Currency

13-3

14. The opportunity cost of holding money

A. is zero because money is not an economic resource.

B. varies inversely with the interest rate.

C. varies directly with the interest rate.

D. varies inversely with the level of national income.

15. Statement I: One job of money is as a store of value.

Statement II: Money may perform as a standard of value or as a medium of exchange, but not

both at the same time.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

16. Which statement is true?

A. Money may perform as a standard of value or as a store of value, but not both at the same

time.

B. The main job of money is a medium of exchange.

C. Money may perform as a standard of value or as a standard of deferred payment, but not

both at the same time.

D. Money performs extremely well as a standard of deferred payment in the long run.

17. Paper money in the United States is issued by the

A. United States Mint.

B. Federal Reserve Banks.

C. United States Treasury.

D. Federal Open Market Committee.

E. United States Government Printing Office.

18. Even though credit cards are used by many people in making purchases, they are not

included in the M1. A major reason is that

A. credit cards are a way of going into debt, whereas the components of M1 represent assets.

B. credit cards had not yet been invented when money was defined.

C. some credit cards are issued by stores (such as Sears), whereas all money is issued by

banks.

D. credit cards are much less liquid than M1.

E. credit cards don’t affect consumer expenditures, whereas M1 does.

19. The term “double coincidence of wants”

A. means that people are trying to purchase the same thing.

B. is a situation where runaway prices are the result of printing too much money.

C. describes a barter situation where individuals agree to trade commodities in amounts

satisfactory to both parties.

D. means that people with the same commodities agree to trade among themselves.

13-4

20. Large denomination time deposits are included in

A. M2 only.

B. M3 only.

C. M2 and M3.

D. M1 and M2.

E. M1, M2, and M3.

21. Which is the most accurate statement?

A. The FDIC will not let any bank fail.

B. The FDIC insures all bank deposits up to $10,000.

C. The FDIC was created in the 1930s to prevent bank failures.

D. The FDIC insures all bank deposits up to $40,000.

22. Money serves which of the following functions?

A. A medium of exchange.

B. A standard of value.

C. A store of value.

D. All of the choices are true of money’s function.

23. The major consideration of whether something can serve as money is that it must be

A. redeemable in precious metals such as gold or silver.

B. printed by each nation’s government or banking authority.

C. freely available to all who want it.

D. exchangeable for other types of money.

E. acceptable as a means of payment.

24. The main purpose of federal deposit insurance is to

A. permit the Federal Reserve to control the money supply.

B. prevent borrowers who are likely to default on their loans from getting loans in the first

place.

C. prevent bank panics.

D. put savings and loan associations on an equal competitive footing with commercial banks.

25. When money is held as an asset, it is serving as

A. a standard of value.

B. a standard of deferred payment.

C. a medium of exchange.

D. a store of value.

26. It is costly to hold money because

A. deflation may reduce its purchasing power.

B. in doing so one sacrifices interest income.

C. bond prices are highly variable.

D. the velocity of money may decline.

27. An increase in the rate of interest would increase

A. the opportunity cost of holding money.

B. the transactions demand for money.

C. the asset demand for money.

D. the price of bonds.

13-5

28. Money allows dissimilar goods and services to be valued according to a single common

denominator-a nation’s basic monetary unit, such as the dollar. Which of the following

represents this function?

A. Medium of exchange

B. Store of value

C. Standard of value

D. Standard of deferred payment

29. Our money supply

A. does not grow from year to year.

B. grows by about three percent from year to year.

C. grows by about six percent from year to year.

D. grows by varying amounts from year to year.

30. The precautionary motive for holding money is

A. the desire to hold silver instead of gold.

B. the desire to hold money to undertake unexpected transactions.

C. the desire to hold gold instead of interest-bearing assets.

D. the desire to hold money to complete purchases of goods and services.

31. Statement I: The whole idea of the FDIC is to avert bank panics by assuring the public

that the federal government stands behind the banking system.

Statement II: The FDIC is backed by the Congress, the Treasury, and the Federal Reserve.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

32. The opportunity cost of holding cash in your wallet

A. tends to increase as interest rates decrease.

B. is the foregone interest that could have been earned on other assets.

C. is zero.

D. None of the choices are correct.

33. Higher interest rates ____ the ____ cost of holding currency and therefore reduce the

quantity of currency demanded.

A. decrease; opportunity

B. increase; transaction

C. decrease; transaction

D. increase; opportunity

34. When inflation occurs

A. money gains in value.

B. money loses value.

C. the value of money is unaffected.

D. the value of demand deposits falls but the value of currency is unaffected.

E. inflation has nothing to do with money.

13-6

35. A goldsmith with 100 gold coins in his safe and 400 goldsmith’s receipts in circulation has

a reserve ratio of

A. 400%.

B. 100%.

C. 50%.

D. 25%.

E. 20%.

36. The largest United States bank in 2010 was

A. BankAmerica.

B. Citigroup.

C. J.P. Morgan Chase.

D. Security Pacific.

37. Checkable deposits are classified as money because

A. they can be readily used in the making of purchases and payment of debts.

B. banks hold currency equal to the value of their outstanding deposits.

C. they are ultimately the obligations of the Treasury.

D. they earn interest income for the depositor.

38. Another name for the money of checking accounts is

A. certificates of deposit.

B. time deposits.

C. demand deposits.

D. bank notes.

E. near money.

39. In the fractional reserve banking system

A. only a fraction of bank assets at any one time may be used to create money.

B. only a fraction of a bank’s liabilities must be held as reserves to meet withdrawals at any

one time.

C. a bank receives only a fraction of the reserve it needs at any given time.

D. All of the choices are correct.

40. Statement I: Welfare banks are check-cashing outlets.

Statement II: To cash a check at a check-cashing outlet, you usually have to pay a fee of one

to three percent of the value of the check.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

41. Statement I: Banks require a minimum balance of checking accounts because it cost them

money to process each check.

Statement II: The American Bankers Association has successfully beaten back attempts to

pass legislation requiring banks to provide free check-cashing services to the poor.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

13-7

42. Money is NOT

A. a medium of exchange.

B. a standard of value.

C. a store of value.

D. the exclusive means of holding wealth.

43. The first bankers were

A. goldsmiths.

B. printers.

C. storekeepers.

D. innkeepers.

E. blacksmiths.

44. People tend to hold more money as the rate of inflation ___ and as the level of income

___.

A. rises; rises

B. falls; falls

C. rises; falls

D. falls; rises

45. Barter transactions

A. involve directly exchanging goods for other goods.

B. can occur without the “double coincidence of wants.”

C. are less costly than transactions involving money.

D. involve the use of money as a medium of exchange.

46. Banks create money when they

A. add to their reserves in the Federal Reserve Bank.

B. accept deposits of cash.

C. sell government bonds.

D. exchange demand deposits for loans to businesses and individuals.

47. Which of these is NOT money in the United States?

A. M1

B. Currency

C. Credit cards

D. None of the choices/statements are true (i.e., each is money).

48. The most responsive to interest rate changes is the _______ demand for money.

A. transactions
B. precautionary

C. speculative

49. Statement I: Processing a teller transaction costs more than double what an ATM

transaction costs.

Statement II: In 2009 there were about 425,000 ATMs in the U.S.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

13-8

50. Mr. Krapotkin hopes to use the family savings to invest in the stock market after prices

fall next week. This is an example of

A. speculative demand for holding money.

B. the precautionary motive for holding money.

C. the commodity demand for money.

D. the transaction demand for money.

Short Answer Questions

M1 = 1,000

Small denomination time deposits = 1,500

Savings deposit = 1,800

Money market mutual funds = 300

Large denomination time deposits = 800

1. How much is M2?

2. How much is M3?

14-1

Macroeconomics

Instructor:

Jen Dinsmore Hanson

Homework Assignment

Chapter 14

Multiple Choice Questions

1. When there is a great deal of inflation the Fed will

A. sell securities on the open market.

B. buy securities on the open market.

C. both sell and buy securities on the open market.

D. not sell nor buy securities on the open market.

2. Which statement is false?

A. The main job of the Fed is to control the rate of monetary growth.

B. The Fed is more effective at fighting inflation than recession.

C. Open market operations are carried out for the Fed by private government bond dealers.

D. None of the statements are false.

3. If you wrote a check for $37.55 to pay your phone bill and sent it to Verizon,

A. your bank’s deposits will go down by $37.55 and its reserves would go up by $37.55.

B. your bank’s deposits would go up by $37.55 and its reserves would go down by $37.55.

C. your bank’s deposits would go down by $37.55 and its reserves would go down by $37.55.

D. your bank’s deposits would go up by $37.55 and its reserves would go up by $37.55.

4. Which statement is true?

A. The Federal Reserve buys nearly all its United States government securities directly from the

Treasury.

B. Open market operations are the buying and selling of United States government securities in the open market

by the Federal Reserve.

C. The least important policy tool used by the Federal Reserve to control the money supply is open market

operations.

D. None of the choices/statements are true.

5. Which statement is true?

A. The chairman of the Federal Reserve Board is appointed to that position for one 14-year term.

B. The chairman may be fired at any time by the President.

C. Most presidents get to appoint all the members of the Federal Reserve Board.

D. None of the statements are true.

6. Which statement is true?

A. The Federal Open Market Committee has very little power.

B. The Federal Reserve rarely raises or lowers the discount

rate.

C. Our money supply grows at a rate of between three and four percent a year.

D. The Federal Reserve rarely changes the reserve requirements.

14-2

7. Which statement is true?

A. Open market operations are carried out by the President and Congress.

B. The rate of growth of our money supply is set by law.

C. The most powerful policy weapon of the Federal Reserve is raising and lowering the discount rate.

D. The President’s appointment of the chairman of the Federal Reserve must be approved by Congress.

8. Which statement is true?

A. We have had a central bank since 1789.

B. We have never had a central bank.

C. Our central bank was formed in 1913.

D. We did not have a central bank prior to the Federal Reserve.

9. Statement I: The president basically makes monetary policy.

Statement II: The Board of Governors of the Fed serves at the president’s pleasure and can be summarily

dismissed.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

10. Required reserves are

A. equal to total reserves minus excess reserves.

B. equal to total reserves minus

checkable deposits.

C. always less than total reserves.

D. determined by multiplying the level of checkable deposits times the discount rate.

E. always equal to outstanding loans times the reserve requirement ratio.

11. The Federal Open Market Committee has _____ members.

A. 7

B. 10

C. 12

D. 14

E. 17

12. Which of the following statements best describes the twelve Federal Reserve Banks?

A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and

orderly market for United States Treasury securities.

B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks

in commercial banking in order to make it a reasonably profitable industry.

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money

supply and interest rates in promoting the general economic welfare.

D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their

owners.

E. They are publicly owned and publicly controlled central banks whose basic goal is to provide income for the

Treasury.

14-3

13. The Depository Institutions Deregulation and Monetary Control Act of 1980 accomplished which one of the

following reforms?

A. Established a uniform set of reserve requirements for all depository institutions.

B. Established maximum and minimum interest rates which depository institutions were permitted to pay on

checkable deposits.

C. Shifted to the United States Treasury the responsibility for setting the discount rate.

D. Provided presidential veto power over setting reserve requirements.

14. The Federal Reserve System was NOT

A. established with the 1913 passage of the Federal Reserve Act.

B. the first attempt to have a United States central bank.

C. intended to act as a “lender of last resort.”

D. designed to lend money to inherently sound banks so that they can survive financial panics.

15. The Federal Open Market Committee is made up of all of the following, except

A. the board of governors.

B. the chairman of the board of governors.

C. the president of the United States.

D. the president of the Federal Reserve Bank of New York.

E. the presidents of four Federal Reserve Banks other than the New York Bank.

16. The reserve requirement ratio is equal to

A. required reserves divided by excess reserves.

B. legal required reserves times the deposit multiplier.

C. total checkable deposits times the deposit multiplier.

D. total checkable deposits times the excess reserve ratio.

E. legal required reserves divided by total checkable deposits.

17. When the Fed buys United States bonds,

A. excess reserves in commercial banks are increased immediately.

B. the banking system will decrease the number of loans that are made.

C. total bank reserves are decreased.

D. the value of the money multiplier slowly declines to a new stationary level.

E. the money supply will eventually decline as banks are forced to call loans due to meet reserve requirements.

18. Which of the following was a result of the Depository Institutions Deregulation and Monetary Control Act

of 1980 (DIDMCA)?

A. All checkable deposits, whether at commercial banks, savings banks, savings and loan associations, or credit

unions will have the same reserve requirements.

B. The Fed has the power to change the reserve requirement on checkable deposits at commercial banks but not

credit unions.

C. The Fed has the power to set the reserve requirement on checkable deposits at credit unions, but once set, the

reserve requirement cannot be changed for two years.

D. Commercial and savings banks are regulated by the Fed, but credit unions and state banks are not subject to

regulations, but must pay dues to the Fed.

E. Credit unions and state banks must abide by Fed reserve requirements, but are denied access to borrowing at

the discount window.

14-4

19. Monetary policy consists of

A. actions taken by both the legislative and executive branches of government to control the nation’s money

supply.

B. actions taken by Congress to control the nation’s money supply.

C. actions taken by the Federal Reserve System to control the nation’s money supply.

D. actions taken by the executive branch of government to control the nation’s money supply.

20. Which statement is true?

A. The Federal Reserve has an excellent record as a “lender of last resort.”

B. There is little debate about whether or not the Federal Reserve Board should be independent.

C. The power of the Federal Reserve is centered largely in its Board of Governors.

D. The stockholders in the Federal Reserve receive large profits.

21. The most powerful (but seldom used) tool at the Federal Reserve’s disposal is

A. the ability to set reserve requirements.

B. the discount rate.

C. open market operations.

D. margin requirements on stock purchases.

22. Bank panics were the result of

A. banks holding 100% of their deposits on reserve.

B. depositors attempting to withdraw more deposits than the banks held in reserve.

C. banks hoarding greenbacks during the Civil War.

D. the United States going off the gold standard in 1933.

E. money circulating too slowly.

23. The discount rate refers to

A. the penalty paid by risky bank borrowers; that is, the amount of interest they pay in excess of the prime rate.

B. the rate at which banks write off bad loans.

C. the rate at which assets lose their real value as a result of inflation.

D. the rate at which money loses its value as a result of inflation.

E. the rate of interest that the Fed charges on loans to commercial banks and thrift institutions.

24. Which of the following will increase commercial bank reserves?

A. The purchase of government bonds in the open market by the Federal Reserve Banks

B. An increase in the reserve ratio

C. An increase in the discount rate

D. The sale of government bonds in the open market by the Federal Reserve Banks

25. The Federal Reserve System controls the money supply primarily through

A. open market operations.

B. accounting operations.

C. reserve requirement changes.

D. jawboning.

E. changing the discount rate.

14-5

26. Statement I: An expansionary monetary policy tends to raise our net exports.

Statement II: Higher interest rates in the United States tend to raise the United States dollar relative to foreign

currencies.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

27. When the Fed issues currency

A. this increases our money supply only if it replaces old, worn-out currency.

B. this increases our money supply only if it is used to accommodate the

public’s desire to hold more currency.

C. this increases our money supply either if it replaces old, worn currency, or if it is used to accommodate the

public’s desire to hold more currency.

D. this does not increase our money supply.

28. When the Federal Reserve sells U.S. government securities on the open market, this tends to ____ banks

reserves and ______ the money supply.

A. raise; raise

B. lower; lower

C. raise; lower

D. lower; raise

29. If the monetary authorities want to lower the size of the monetary multiplier, they should

A. lower the legal reserve ratio.

B. raise the legal reserve ratio.

C. take actions to increase bank reserves.

D. take none of these actions.

30. The most powerful individual in the Federal Reserve System is the

A. senior member of the Federal Open Market Committee.

B. Superintendent of the Board of Governors.

C. Chairman of the Federal Reserve Board.

D. New York District Bank President.

31. If Suntrust Banks have demand deposits of $10 billion, actual reserves of $2 billion, and the reserve

requirement is 18%, the bank’s excess reserves are

A. $180 million.

B. $200 million.

C. $360 million.

D. $400 million.

E. $1 billion.

32. If the current equilibrium output level is above the full-employment output level, the Fed should consider

A. selling government securities, raising the discount rate, and raising the required reserve ratio.

B. selling government securities, lowering the discount rate, and raising the required reserve ratio.

C. buying government securities, lowering the discount rate, and raising the required reserve ratio.

D. buying government securities, raising the discount rate, and raising the required reserve ratio.

E. selling government securities, raising the discount rate, and lowering the required reserve ratio.

14-6

33. The federal funds rate is the interest rate for

A. reserves that banks borrow from the Fed.

B. the preferred customers of the banks.

C. reserves borrowed by one bank from another bank.

D. banks belonging to the Federal Reserve System.

34. Statement I: If a bank has negative excess reserves, its required reserves are greater than its actual reserves.

Statement II: Ideally banks prefer to keep zero excess reserves.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

35. Suppose the required reserve ratio is 10% and a commercial bank has $2 million in checkable deposits

appearing on the liability side of its balance sheet. How much vault cash does the bank have?

A. $2 million

B. $20,000

C. $200,000

D. Vault cash cannot be determined by the information given.

36. During a depression, the best strategy of the Federal Reserve is to

A. sell government bonds, to make low-risk, sound assets available for commercial banks to buy.

B. sell government bonds, in order to reduce the size of the government’s deficits.

C. sell government bonds, in order to increase aggregate demand.

D. buy government securities.

37. If the Fed sells government bonds on the open market, which of the following will NOT occur?

A. The money supply will contract.

B. The market rate of interest on corporate bonds will increase.

C. The market rate of interest on government bonds will increase.

D. The interest rate will fall.

38. A major factor contributing to the recession of 1981-1982 was

A. an increase in interest rates.

B. an increase in exports.

C. the multiplier effect.

D. an increase in unemployment.

39. An individual bank can create deposits to the extent of its

A. excess reserves.

B. required reserves.

C. total reserves.

D. deposits.

E. net worth.

40. The independence of the Fed

A. allows it to run a monetary policy different from that which elected officials might demand.

B. means that the Fed frequently pursues policies quite different from what the President asks for.

C. is widely agreed to be best for the nation’s welfare.

D. is not real, since Congress must approve its policy.

14-7

41. The Federal Reserve CANNOT do which one of the following?

A. Change the tax rate on profits

B. Change the discount rate

C. Change the required reserve ratio

D. Change margin requirements

E. Buy securities on the open market

42. The Federal Reserve System

A. has regional Federal Reserve Banks that make most of the decisions.

B. makes decisions subject to the approval of the President.

C. makes its major policy decisions in its Open Market Committee.

D. makes decisions subject to the approval of Congress.

43. If the Fed buys $30 million in government securities, paying for them with new deposit balances at the Fed,

the money supply will end up

A. decreasing by $30 million.

B. decreasing by much more than $30 million.

C. increasing by $30 million.

D. increasing by much more than $30 million.

44. Statement I: The interest rate charged by the Fed on loans to depositary institutions is called the short-term

rate.

Statement II: Changes in the reserve requirements are the most frequently used forms of monetary policy

available to the Fed.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.

45. Assume that a bank has $2 million in reserves and checkable deposits of $10 million and the required

reserve ratio on checkable deposits is 20%. The maximum amount of new loans this bank can make is

A. $500,000.

B. $1 million.

C. $200,000.

D. zero.

E. $700,000.

46. Which of the following cities in NOT the location of a Federal Reserve Bank?

A. Salt Lake City

B. Kansas City

C. St. Louis

D. San Francisco

E. Boston

47. Which of the following policy actions by the Fed is likely to cause the money supply to decrease?

A. An open market purchase

B. A decrease in required reserve ratios

C. A decrease in the discount rate

D. An open market sale

14-8

48. Statement I: Banks try to carry large excess reserves.

Statement II: Actual reserves minus excess reserves = required reserves.

A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.

D. Both statements are false.

49. Which of the following policy action by the Fed is likely to cause the money supply to increase?

A. An open market sale.

B. An increase in required reserve ratios.

C. An increase in the discount rate.

D. An open market purchase.

50. During a recession, banks are likely to

A. experience a deficit.

B. decrease deposits.

C. hold excess reserves.

D. Banks are likely to do all of these choices.