Chapter 14 Macro

The use of money and credit controls to achieve macroeconomic goals is

Monetary policy.

Monetary policy involves the use of money and credit controls to

Shift the aggregate demand curve.

The primary method for controlling the money supply in the United States is to limit the

Volume of loans the banking system can make.

The government uses ______________ to regulate the amount of money banks lend

monetary policy

All of the following would be true for the banking system if there was no government regulation except

The banking system would be regulated by consumers.

The creation of a Federal Reserve System was recommended by

The National Monetary Commission.

The Federal Reserve System was created by

The Federal Reserve Act in 1913.

Which of the following serves as the central banker for private banks in the United States?

The 12 Federal Reserve banks.

The Federal Reserve holds deposits from

Banks.

Regional Fed banks

Clear checks between private banks.

Which of the following services is performed by the regional Federal Reserve banks?

Holding bank reserves.

Which of the following services is performed by the regional Federal Reserve banks?

Providing currency to private banks.

Suppose Brian receives a check for $100 from a bank in Atlanta. He deposits the check in his account at a Dallas bank. The Dallas bank will most likely collect the $100 directly from the

Dallas regional Federal Reserve Bank.

Regional Fed banks are responsible for all of the following except

Cashing checks for large nonfinancial corporations.

Monetary policy is set by the

Board of Governors.

The Board of Governors consists of

7 members, appointed for 14-year terms.

Members of the Board of Governors are

Appointed by the president and confirmed by the Senate.

Which of the following is not true for members of the Federal Reserve Board of Governors?

They usually serve two or three terms.

Which of the following provides evidence that the Federal Reserve System is politically insulated?

The Fed governors are appointed for 14-year terms and cannot be reappointed.

Members of the Federal Reserve Board of Governors are appointed for one 14-year term so that they

Make their decisions based on economic, rather than political, considerations.

The Federal Open Market Committee includes

All 7 governors and 5 of the regional Reserve bank presidents.

The current chairman of the Federal Reserve is

Janet Yellen.

Which of the following is responsible for the Fed’s daily activity in financial markets?

The FOMC.

The Federal Open Market Committee meets

Every four or five weeks.

The Federal Open Market Committee is responsible for

The Fed’s daily activity in financial markets.

Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?

The Federal Open Market Committee.

The money supply (M1) includes currency held by the public plus

Transactions accounts plus travelers checks.

Currency held by the public plus balances in transactions accounts plus travelers checks is the definition of

M1.

The M2 money supply is defined as

M1 plus balances in most savings accounts and money market mutual funds.

The money supply (M2) includes M1 plus balances in

Saving accounts and money market mutual funds.

All of the following are tools available to the Fed for controlling the money supply except

Taxes.

The minimum amount of reserves a bank is required to hold is

Required reserves.

The Fed can use all of the following except ____________ to change the lending capacity of the banking system.

the excess reserve requirement

_____________ can be altered to change the lending capacity of the banking system.

The reserve requirement

Excess reserves are

Bank reserves in excess of required reserves.

Which of the following represents the money multiplier?

1 ÷ (required reserve ratio).

Which of the following represents the lending capacity of an individual (nonmonopoly) bank?

Total reserves – required reserves.

Which of the following represents the lending capacity of an entire banking system?

(Total reserves – required reserves) ×money multiplier. D. 1 ÷ (required reserve ratio).

Assume the reserve requirement is 10 percent, demand deposits are $200 million, and total reserves are $18 million. If the reserve requirement is increased to 14 percent, the banking system will have

A deficiency of reserves equal to $10 million.

Assume the reserve requirement is 25 percent, demand deposits are $500 million, and total reserves are $32 million. If the reserve requirement is decreased to 20 percent, the banking system will experience

A deficiency of required reserves equal to $68 million.

Suppose the banks in the Federal Reserve System have $100 billion in transactions accounts, the required reserve ratio is 0.10, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.15, the deficiency of reserves would be

$5 billion.

Suppose the banks in the Federal Reserve System have $200 billion in transactions accounts, the required reserve ratio is 0.15, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.10, the amount of excess reserves would be

. Positive $10 billion.

Suppose all of the banks in the Federal Reserve System have $500 billion in transactions accounts, the required reserve ratio is 0.30, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.25, the total lending capacity of the system is increased by

$100 billion.

A change in the reserve requirement causes a change in all of the following except

Pretax income.

Changing the reserve requirement is

A powerful tool that can cause abrupt changes in the money supply.

The federal funds rate is the interest rate charged when

One bank lends reserves to another bank.

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

Federal funds market.

If excess reserves are too large, a bank is likely to

Buy government securities.

If banks do not have enough reserves to satisfy the reserve requirement, they can

Sell securities.

If a bank does not have enough reserves to satisfy the reserve requirement, it is likely to do any of the following except

Buy securities.

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

Discount rate.

Discounting refers to the Fed’s practice of

Lending reserves directly to private banks.

Which of the following is true about an increase in the discount rate?

. It signals the Federal Reserve’s desire to restrain money growth.

When the Fed raises the discount rate, all of the following result except

It expands the lending capacity of the banking system.

A reduction in the discount rate

Signals the Federal Reserve’s desire for additional credit expansion.

When a bank borrows money from the Federal Reserve,

Reserves increase for the bank.

By raising and lowering the discount rate, the Fed changes the

Incentive for banks to borrow reserves.

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

Open market operations.

The Fed is most likely to pursue

Use of open market operations as the primary mechanism to change reserves.

Which of the following is the tool used most frequently by the Fed?

. Open market operations.

The choice of how and where to hold idle funds is

A portfolio decision.

Through open market operations, the Fed is able to influence

Portfolio decisions.

When the Fed wishes to increase the reserves of the member banks, it

Buys securities.

When the Fed buys bonds from the public, it

Increases the flow of reserves to the banking system.

A bond is a

Promise to repay borrowed funds.

Janette buys a bond in the amount of $500 with a promised interest rate of 15 percent. If the market interest rate decreases to 5 percent, Janette can sell her bond for up to

$1,500.

Anil buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate increases to 27 percent, Anil can sell his bond for up to

$1,259.26.

Shoffner buys a bond in the amount of $1,000 with a promised interest rate of 18 percent. If the market interest rate decreases to 3 percent, Shoffner can sell his bond for up to

$6,000.

The rate of return on a bond is the

Yield.

Which of the following equals the current yield on a bond?

Annual interest payment ÷ current market price of the bond.

If the annual interest rate printed on the face of a bond is 12 percent, the face value of the bond is $1,000, and the current market price of the bond is $1,200, what is the current yield on the bond?

10.0 percent.

If the annual interest rate printed on the face of a bond is 7 percent, the face value of the bond is $1,000, and the current market price of the bond is $250, what is the current yield on the bond?

28 percent.

If the annual interest rate printed on the face of a bond is 25 percent, the face value of the bond is $1,000, and the current market price of the bond is $700, what is the current yield on the bond?

35.7 percent.

If the annual interest rate printed on the face of a bond is 16 percent, the face value of the bond is $1,000, and the current market price of the bond is $200, what is the current yield on the bond?

80.0 percent.

The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is known as

Open market operations.

Open market operations involve the Fed

Buying or selling government bonds.

If the Fed wants to sell more government bonds than people are willing to buy, then the Fed

Decrease the price it asks for the bonds.

If market interest rates rise, the selling price of existing bonds in the market will, ceteris paribus,

Fall.

If market interest rates fall, the selling price of existing bonds in the market will, ceteris

Rise.

The Fed can decrease the federal funds rate by

Buying government bonds, which causes market interest rates to fall.

The Fed can increase the federal funds rate by

Selling government bonds, which causes market interest rates to rise.

If the Federal Reserve buys government bonds from the public

Banks will be able to make additional loans. If the Fed wishes to increase the money supply, it could; Lower the discount rate.

In order to increase the money supply, the Fed can

Lower the reserve requirement, decrease the discount rate, or buy bonds.

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system. If the Open Market Committee buys $50 million of securities from the commercial banking system, the total lending capacity for the system

Increases by $500 million.

Suppose the Federal Reserve System has a required reserve ratio of 0.20 and there are no excess reserves in the system. If the Open Market Committee buys $20 million of securities from the commercial banking system, the total lending capacity of the system

Increases by $100 million.

If the Fed buys $25 billion of U.S. bonds in the open market and the reserve requirement is 20 percent, M1 will eventually

. Increase by $125 billion.

If the Fed buys $32 billion of U.S. bonds in the open market and the reserve requirement is 10 percent, M1 will eventually

Increase by $320 billion.

If the Fed buys $20 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually

Increase by $400 billion.

A growing economy needs a

Steadily increasing supply of money to finance market exchanges.

If the Fed wishes to reduce the money supply, it can do all of the following except

Buy shares of common stock in a large bank.

In order to decrease the money supply, the Fed can

Raise the reserve requirement, increase the discount rate, or sell bonds.

Suppose the Federal Reserve System has a required reserve ratio of 0.20. If the Open Market Committee sells $10 billion of securities to the commercial banking system, then before the money multiplier takes effect, initially excess reserves

Decrease by $10 billion.

Which of the following is not required to satisfy Fed minimum reserve requirements?

Pawn shops.

Which of the following does not reduce the Fed’s control of the money supply?

Lobbying by consumer watchdog groups.