Macroeconomics Final Exam

The Transactions approach to measuring money (M1) includes all of the following except
A: Currency
B: certificates of deposit
C: Travler’s checks
D: checking accounts

D: Checking accounts

All of the following are included in M1 except
A: checking account balances
B: coin and currency
C: money market mutual fund shares
D: travler’s checks

A: checking account balances

Which of the following is NOT a function of the Fed?
A: providing a system of check collection and clearing for depository institutions
B: regulating the money supply in the economy
C: offering checking accounts to the US public
D: Acting as goverment’s fiscal agent

C: offering checking accounts to the US public

The reserve requirement for commercial banks
A: is set by the president of the united states
B: is actually less than that required to prevent a run on bank deposits.
C: is set by the US congress
D: has a direct effect on how much money can be created from a new deposit

D: has a direct effect on how much money can be created from a new deposit

Legal reserve consists of
A: deposits at federal banks only
B: savings and checking accounts only
C: vault cash only
D: deposits at district federal reserve banks plus vault cash

D: deposits at district federal reserve banks plus vault cash

According to the text, the required federal reserve ratio above the first possibly the 50 million in deposits at the US depository institution is
A: 20 percent
B: 10 percent
C: equal to the discount rate
D: 5 percent

B: 10 percent

A decrease in the required reserve ratio will
A: cause the money supply to increase
B: decrease the money multiplier
C: cause the money supply to decrease
D: not affect the money supply

A: cause the money supply to increase

The reason that the commercial banking system can generate a multiple expansion or contraction of the money supply is that
A: Banks are required to hold only a fraction of their deposit liabilities as reserves
B: Banks generally have surplus funds on deposit with other banks
C: Banks hold reserves equal to their net worth
D: most banks maintain a relatively large stock of excess reserves

A: Banks are required to hold only a fraction of their deposit liabilities as reserves

Which of the following would reduce the money multiplier?
A: the purchase of bonds by the fed
B: a flow of currency into the banking systems
C: increases in the required reserve ratio
D: lowering the required reserve ratio

C: increases in the required reserve ratio

The federal deposit insurance corporation insures
A: the deposits held in member banks
B: banks against lawsuits
C: the federal funds market
D: the deposits held in the Fed

A: the deposits held in member banks

Leaders generally want barrowers to agree to invest prudently yet once a loan is made barrowers may use the funds in a highly risky fashion. This leads to the problem of
A: deposit insurance
B: critical mass
C: investor selection
D: moral hazard

D: moral hazard

The fed would be pursuing an expansionary monetary policy if it were
A: lowering the required reserve ratio
B: raising the discount rate relation to the federal funds rate.
C: lowering bond prices
D: selling bonds

A: lowering the required reserve ratio

The velocity of money
A: is according to the equation of exchange, equal to M/Y
B: indicates the number of times per year a dollar is spent on final goods and services
C: is according to the equation of exchange, equal to P/M
D: indicates the speed with which the U.S. Treasury can make new coins

B: indicates the number of times per year a dollar is spent on final goods and services

The Central Bank of the United States is called
A: The Congressional Bank
B: Chase Manhattan Bank
C: The federal reserve system
D: First national bank of New York

C: The federal reserve system

Which of the following is true about the federal reserve system
1: It was established in the early 1980s
2: It Serves as the central bank of the United States

B: 2 only

The part of the federal reserve system that determines monetary policy actions is the
A: Federal Open Market Committee
B: Comptroller’s Office
C: Federal Deposit Insurance Corperation (FDIC)
D: Direct Bank Board

A: Federal Open Market Committee

Who appoints the Federal Reserve System’s Board of Goverment
A: The President of the United States
B: The Secratary of the Treasuary
C: The American Banking Association
D: The Speaker of the House

A: The President of the United States

Which of the following is not a function of the federal reserve system
A: the fed acts as a fiscal agent for the united states department of the treasury
B: the fed supplies the economy with fudicary currency
C: the fed holds reserves of depository institutions
D: the fed determines goverment spending and taxation policies.

D: the fed determines goverment spending and taxation policies.

Which of the following is NOT a function of the fed?
A: regulating the money supply
B: supervising member banks
C: lending funds to credit-worthy private firms
D: holding reserves for depository institutions

C: lending funds to credit-worthy private firms

Economists have found a loose relationship between money supply growth and the inflation rate, generally speaking, how are these two variables related
A: inversely
B: conversely
C: negatively
D: directly

D: directly

The federal deposit insurance coporation insures
A: banks against lawsuits
B: the federal funds market
C: the deposits held in the fed
D: the deposits held in member banks

D: the deposits held in member banks

The FDIC was created because
A: the fed kept the required ratio too low
B: banks failed to create money the fed wanted them to
C: there were so many bank failures in the 1930s
D: people worried about bank failures after world war 1, even though very few banks actually failed

C: there were so many bank failures in the 1930s

Which of the following has been a problem faced by the FDIC in its provision of federal deposit insurance?
A: moral hazard arising from the tendency for the highest risk banks to be those most interested in obtaining deposit insurance in the first place
B: adverse selection from the tendency for banks to take on more risk after they recieve deposit insurannce
C: a relatively low number of bank failures each year which has reduced the need for deposit insurance
D: moral hazard arising from the tendency for banks to take on more risk after they recieve deposit insurance

D: moral hazard arising from the tendency for banks to take on more risk after they recieve deposit insurance

Bank runs are a possibility because
A: in difficult times people want currency instead of demand deposits
B: the FDIC is inefficient
C: bankers are often poor business people
D: banks do not keep enough reserve to cver all their deopsitory lilabilities

D: banks do not keep enough reserve to cver all their deopsitory lilabilities

If the FDIC eliminated its insurance program for deposits, then
A: the banking system would probably fail
B: banks would probably hold fewer reserves
C: individual depositors would have more incentive to ascertain the soundness and solvency of the bank
D: moral hazard would be increased

C: individual depositors would have more incentive to ascertain the soundness and solvency of the bank

Deposit insurance shields depositors from the adverse effects of risky decisions and thereby
A: encourges moral hazard on the part of the depositors
B: encourages riskier behavior on the part of managers of depository institutions.
C: generates a more efficient banking system
D: encourages depositiors to monitor the managers of the depository institutions more closely.

B: encourages riskier behavior on the part of managers of depository institutions.

To close a recessionary gap the Fed would?
A: increase the money supply
B: increase intrest rate
C: sell bonds
D: decrease the money supply

A: increase the money supply

In the long run, a decrease in the money supply will
A: increase the price level
B: decrease real Gross Domestic Product (GDP)
C: decrases the price level
D: increase real Gross Domestic Product (GDP)

C: decrases the price level

Which of the following best represents the equation of exchange?
A: m<b>v = p</b>y
B: m<b>y</b>v = p
C: m<b>y = p</b>v
D: m<b>p = v</b>y

A: mv = py

According to the quantity theory of money, the price level decreases om equal proportion to?
A: a decrease in nominal intrest rate
B: an increase in the real intrest rate
C: an increase in the income velocity of money
D: a decrease in the money supply

D: a decrease in the money supply

According to the quantity theory of money, an excess quantity of money supplied will lead too
A: a higher price level
B: a reduction in spending and higher intrest rates
C: a reduced level of real gross domestic product (GDP)
D: a higher level of employment

A: a higher price level

Active policymaking refers to
A: relying on policies that act as automatic stabilizers
B: nondiscretionary policymaking
C: policymaking that is carried out in response to a rule
D: actions taken by policymakers in response to or in anticipation of some change in the overall economy

D: actions taken by policymakers in response to or in anticipation of some change in the overall economy

Active policymaking would include all the following except
A: increased goverment spending by congress
B: tax increase
C: unemployment insurance benifits
D: intrest rate changes by the fed

C: unemployment insurance benifits

Which of the following would be an example of passive policymaking?
A: Marginal rate tax cuts intended to increase real gross domestic product (GDP)
B: Establishing a system of automatic tax stabilizers
C: Goverment spending decreases intended to decrease real Gross Domestic Product
D: None of the Above

B: Establishing a system of automatic tax stabilizers

With discretionary policymaking fiscal and monetary policies are usually
A: set according to pre-establishing standards that do not take into account any changes in the economy
B: undertaken in response to or anticipation of some change in the overall economy
C: immune to any political overtones
D: immune to any lag times that might counter their effectiveness.

B: undertaken in response to or anticipation of some change in the overall economy

If a policymaker is convinced that time lags frequently negate the impact of short-run stablization efforts, it is likely she would favor ______ policymaking
A: discretionary
B: Active
C: agressive
D: nondiscretionary

D: nondiscretionary

Money

any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts.

Medium of exchange

Any item that sellers will accept as payment

Barter

The direct exchange of goods and services for other goods and services without the use of money

Unit of accounting

A measure by which prices are expressed; the common denominator of the price system a central property of money

Store of value

the ability to hold value overtime; a necessary properity of money

Standard of deferred payment

a property of an item that makes it desirable for use as a means of settling debts maturing in the future; an essential property of money

Liquidity

The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs. Money is the most liquid asset.

Transactions Deposits

Checkable and debitable account balances in commercial banks and other types of financial institutions, such as credit unions and savings banks. Any accounts in financial institutions from which you can easily transmit debit-card and check payments without many restrictions.

Fiduciary Monetary System

a system in which money is issued by the government and its value is based uniquely on the public’s faith that the currency represents command over goods and services

Money Supply

the amount of money in circulation

Transaction Approach

A method of measuring the money supply by looking at money as a medium of exchange.

Liquidity Approach

a method of measuring the money supply by looking at money as a tempory store of value

M1

The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.

Depository Institutions

financial institutions that accept deposits from savers and lend funds from those deposits out at interest

Thrift Institutions

financial institutions that receive most of their funds from the savings of the public; they include savings banks, savings and loan associations, and credit unions

Traveler’s Checks

financial instruments obtained from a bank or a non-banking organization and signed during purchase that can be used as cash upon a second signature by the purchaser

M2

a more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances.

Financial Intermediation

the process by which financial institutions accept savigns from businesses, households, and governments and lend the savings to other businesses, households, and governments

Financial Intermediaries

institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers

Asymmetric information

Information possessed by one party in a financial transaction but not by the other party

Adverse Selection

The tendency of risks with higher probability of loss to purchase and maintain insurance more often than the risks who present lower probability.

Moral hazard

the possibility that a borrower might engage in riskier behavior after a loan has been obtained

Liabilities

The amounts a corporation owes to various creditors

Assets

money and other valuables belonging to an individual or business

The Fed

The Federal Reserve System. The central bank of the united states

Functions of the Federal Reserve System

1) issuing new currency 2) providing check-clearing services 3) holding depository institutions’ reserve accounts 4) making discount loans to banks 5) collecting data on business conditions within their district 6) researching topics related to monetary policy

Lender of Last Resort

the federal reserve’s role as an institution that is willing and able to lend to a temporarily illiquid bank that is otherwise in good financial condition to prevent the bank’s illiquid position from leading to a general loss of confidence in that bank or in others

Functional reserve banking

A system in which depository institutions hold reserves that are less than the ammount of total deposits

Reserves

deposits that banks have received but have not loaned out

Reserve Ratio

the fraction of deposits that banks hold as reserves

Balance Sheets

The financial statement that reports a company’s assets, liabilities, and owner’s equity as of a specific date.

Open Market Operations

the purchase and sale of U.S. government bonds by the fed

Money Multiplier

a number that, when multiplied by a change in reserves in the banking system, yields the resulting change in the money supply

Potential money multiplier

the reciprocal of the required reserve ratio, assuming no leakages into currency and no excess reserves. It is equal to 1 divided by the required reserve ratio.

Bank run

the concerted action of depositors who try to withdraw their money from a bank because the think it will fail

Federal Deposit Insurance Corperation

Federal guarantee of bank deposits in the event of bankruptcy. It guaranteed that up to five thousand dollars would be returned to the owner if the bank went under, so people started splitting their money up into several different banks (instead of putting all of their money in one).

Money Balances

synonymous with money, money stock, money holdings

transaction demand

holding money as a medium of exchange to make payments.

precautionary demand

holding money to meet unplanned expenditures and emergencies

Asset Demand

holding money as a store of value instead of other assets such as certificates of deposit, corporate bonds, and stocks

Equation of Exchange

the formula indicating that the number of monetary units (Ms) times the number of times each unit is spent on final goods and services (V) is identical to the price level (P) times real GDP (Y)

Income velocity of money

the number of times a dollar bill enters someone’s income in a given period of time.

Quantity theory of money and prices

the hypothesis that changes in the money supply lead to equiproportional changes in the price level

Federal Funds Market

a private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them (usually lent for overnight use)

Federal Funds Rate

interest rate banks charge each other for loans

Discount Rate

the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System

FOMC Directive

a document that summarizes the Federal Open Market Committee’s general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth

Trading Desk

an office at the federal reserve bank of new york charged with implementing monetary policy strategies developed by the federal open market committee

Neutral federal funds rate

a value of the interest rate on interbank loans at which the growth rate of real GDP tends neither to rise nor to fall relative to the rate of growth of potential, long-run, real GDP, given the expected rate of inflation

taylor rule

a rule developed by John Taylor that links the fed’s target for the federal funds rate to economic variables

Active (Discretionary) Policymaking

all actions on the part of the fiscal and monetary policymakers that are undertaken in response to some change in the overall economy

Passive (nondiscretionary) policymaking

policymaking that is carried out in response to a rule. it is therefore not in response to an actual or potential change in overall economic activity.

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

phillips curve

a curve that shows the short-run trade-off between inflation and unemployment

Nonaccelerating Inflation rate of unemployment

the unemployment rate at which the inflation rate has no tendency to increase or decrease

Rational expectations hypothesis

A theory stating that people combine the effects of past policy changes on important economic variables with their own judgment about the future effect of current and future policy changes.

Policy Irrelevance proposition

the conclusion that policy actions have no real effects in the short run if the policy actions are anticipated and none in the long run even if the policy actions are unanticipated

Stagflation

a situation when the economy is slowing but prices are going up anyhow

Small Menu costs

costs that deter firms form changin prices in response to demand changes–for example, the costs of renegotiating contracts or printing new list prices

New keynesian inflation dynamics

In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand-initial sluggish adjustment of the price level in response to increased aggregate demand followed by higher inflation later.

Economic freedom

the freedom to own property, to make profit, and to make choices about what to produce

Dead Capital

Any capital resource that lacks clear title of ownership.

Portfolio Investment

occurs if the level of equity ownership is less than 10% ownership.

Foreign Direct Investment

The acquisition by residents of one country of control over a new or existing business in another country.

World Bank

A multinational agency that specializes in making loans to about 100 percent developing nations in an effort to provide their long term development of growth

Quota Subscription

A nation’s account with the International Monetary Fund, denominated in special drawing rights.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer

Infant industry argument

The contention that tariffs should be imposed to protect from import competition an industry that is trying to get started. Presumably, after the industry becomes technologically efficient, the tariff can be lifted.

Dumping

selling goods abroad at a price below that charged in the domestic market

Quota system

governmental regulation which allows a limited number of immigrants per year

Voluntary restraint agreement

an official agreement with another country that voluntarily restricts the quantity of its exports to the United States

Voluntary Import Expansion

an official agreement with another country to import more US goods

General Agreement on Tariffs and Trade

a 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions

World Trade Organization

the sucessor organization to thre GATT that handles trade disputes among its member nations

Regional Trade Bloc

A group of nations that grants members special trade privileges.

Trade Diversion

occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

Rules of Origin

Regulations that nations in regional trade blocs establish to delineate product categories eligible for trading preferences.