econ final exam study guide
Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserverequirement is 10 percent.All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$60
Checkable Deposits
$600
Securities
140
Stock Shares
260
Loans
260
Property
400
Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy.Assuming that the money multiplier is operating to full effect, to accomplish the desiredincrease, the Fed could
sell $20 billion of U.S. securities to the banks.
buy $20 billion of U.S. securities from the banks.
sell $40 billionof U.S. securities to the banks.
D. buy $40 billion of U.S. securities from the banks.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserverequirement is 10 percent.All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$60
Checkable Deposits
$600
Securities
140
Stock Shares
260
Loans
260
Property
400
Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation. Assuming that the money multiplier is operating to full effect, to accomplish the desired reduction, the Fed could
sell $20 billion of U.S. securities to the banks.
buy $20 billion of U.S. securities from the banks.
C. sell $40 billionof U.S. securities to the banks.
D. buy $40 billion of U.S. securities from the banks.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
If the Fed were to reduce the legal reserve ratio, we would expect
A. lower interest rates, an expanded GDP, and ahigher rate of inflation.
lower interest rates, an expandedGDP, and a lower rate of inflation.
higher interest rates, a contracted GDP, and a higher rate of inflation.
higher interest rates, a contractedGDP, and a lower rate of inflation.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
An increase in the legal reserve ratio
A. increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B. decreases the money supply by decreasing excess reservesand decreasing the monetarymultiplier.
increases the money supply by decreasing excess reserves and decreasing the monetarymultiplier.
decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
When the reserve requirement is increased,
required reserves are changedinto excess reserves.
the excess reserves of memberbanks are increased.
a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D. the excess reserves of member banks are reduced.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Assume that the commercial banking system has checkabledeposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent.If the reserve requirement is nowraised to 30 percent,the banking system then has
A. excess reserves of $2 billion.
B. neither an excess nor a deficiency of reserves.
a deficiency of reserves of $.5 billion.
excess reserves of only $.5 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
When the required reserve ratio is increased, the excess reserves of member banks are
reduced, but the multiple by which the commercial banking system can lend is unaffected.
reduced and the multiple by which the commercial banking system can lend is increased.
increased and the multiple by which the commercial banking system can lend is increased.
D. reduced and the multiple by which the commercial banking system can lend is reduced.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
When the required reserve ratio is decreased, the excess reserves of member banks are
reduced, but the multiple by which the commercial banking system can lend is unaffected.
reduced and the multiple by which the commercial banking system can lend is increased.
C. increased and the multiple by which the commercial banking system can lend is increased.
D. increased and the multiple by which the commercial banking system can lend is reduced.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
A decrease in the reserve ratio increasesthe
A. amount of actual reserves in the banking system.
B. amount of excess reserves in the banking system.
number of government securities held by the FederalReserve Banks.
ratio of coins to paper currency in the economy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the monetarypolicy tools can alter both the level ofexcess reserves and the money multiplier?
A. open-market operations
B. the reserve ratio
the discount rate
the federal funds rate
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Answer the questionon the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
The commercial banking system has excess reserves of
A. zero.
$2 billion.
$5 billion.
$10 billion.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the questionon the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
The monetary multiplier for the commercial banking system is
A. 5. B. 10. C. 15. D. 20.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the questionon the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
If the Fed increased the reserve requirement from 20 percentto 25 percent,a deficiency of reservesin the commercial banking system of would occur and the monetary multiplier would fall to .
$50 billion; 5
$10 billion;4
C. $50 billion; 4
D. $10 billion; 8
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the questionon the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
If the Fed reduced the reserve requirement from 20 percentto 16 percent,excess reserves in the commercial banking system would increaseby
and the monetary multiplier would rise to .
A. $10 billion; 5
B. $40 billion;6.25
$10 billion;10
$40 billion; 12.5
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the question on the basis of the given consolidated balance sheet of the commercialbanking system. Assume that the reserverequirement is 20 percent.All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interestrates and stimulate the economy.To accomplish this, it could lower the reserve requirement from 20 percentto
A. 10 percent.
12 percent.
14 percent.
15 percent.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
Answer the questionon the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.
Assets
Liabilities & Net Worth
Reserves
$200
Checkable Deposits
$1,000
Securities
300
Stock Shares
400
Loans
500
Property
400
Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation. To accomplish this, it could increase the reserve requirement from 20 percentto
A. 22 percent.
B. 25 percent.
30 percent.
33 percent.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Type: Table
The discount rate is the interest
A. rate at which the central bankslend to the U.S. Treasury.
B. rate at which the Federal Reserve Banks lend to commercialbanks.
yield on long-term government bonds.
rate at which commercial banks lend to the public.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
A commercial bank can add to its actual reserves by
lending money to bank customers.
buying government securities from the public.
buying government securities from a Federal Reserve Bank.
D. borrowing from a Federal ReserveBank.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
The interest rate at which the Federal ReserveBanks lend to commercial banks is called the
prime rate.
short-term rate.
C. discount rate.
D. federal funds rate.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
The discount rate is the rate of interestat which
A. Federal Reserve Banks lend to commercial banks.
savings and loan associations lend to some builders.
Federal ReserveBanks lend to large corporations.
commercial banks lend to large corporations.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal ReserveBank. The interest rate on the loan is called the
prime rate.
federal funds rate.
Treasury bill rate.
D. discount rate.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
When the Fed lends money to a commercial bank, the bank
A. increases its reserves and enhances its ability to extend credit to bank customers.
decreases its reserves and reducesits ability to extend credit to bank customers.
pays the federal funds interestrate on the loan.
pays the prime interest rate on the loan.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billionfrom Federal ReserveBanks. Also assume that the reserveratio is 10 percent.If the Fed lowers the discount rate from 4.0 percentto 3.5 percent, bank
reserves will
increase by $1 billion and the money supply willincrease by $5 billion.
decline by $1 billionand the money supply will decline by $10 billion.
C. increase by $1 billion and the money supply will increase by $10 billion.
D. increase by $10 billion and the money supply willincrease by $100 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Suppose that, for every 1-percentage-point decline of the discountrate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 20 percent.If the Fed increases the discount rate from 4.0 percent to 4.25 percent,
bank reserves will
A. increase by $0.5 billion and the money supply will increase by $2.5 billion.
B. decline by $0.5 billion and the money supply will decline by $2.5 billion.
increase by $0.75 billion and the money supply will increase by $3.75 billion.
increase by $1 billion and the money supply willincrease by $5 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the followingtools of monetarypolicy is considered the most important on a day-to-day basis?
the discount rate
the reserve ratio
C. open-marketoperations
D. paying interest on excess reserves
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the followingtools of monetarypolicy is flexible and able to affectbank reserves quicklyand by relatively specific amounts?
the discount rate
the reserve ratio
C. open-marketoperations
D. the federal fundsrate
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the followingtools of monetarypolicy has not been used since 1992?
A. paying interest on excess reserves
B. the reserve ratio
open-market operations
the federal funds rate
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the followingmonetary policy tools was introducedin 2008?
the discount rate
the federal funds rate
open-market operations
D. paying interest on excess reserves held at the Fed
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
If the Fed wants to discourage commercial bank lending, it will
A. increase the interest paid on excess reserves held at the Fed.
decrease the interest paid on excess reserves held at the Fed.
buy government securities from commercial banks.
lower the federalfunds rate target.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Interest paid on excess reserves held at the Fed
A. is available to the general public, but not to commercial banks.
B. incentivizesfinancial institutions to hold more reserves and reduce risky lending.
is determined by the federal funds rate.
totaled over $1 trillion in 2012.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Beginning in 2008, the Fed was allowed to
lend directly to consumers.
alter tax rates.
C. pay interest on excess reserves deposited at Fed banks.
D. require commercial banks to loan a certain percentage of their excess reserves.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to
use those excess reserves to increase its lending.
not change its lending activity, as excess reserves are not eligibleto receive interestpaid on reserve accounts.
move a portion of those excess reserves into its required reserve account.
D. hold more of those excess reserves in its reserve accountat the Fed, reducingthe amount it is willing to lend.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
Which of the followingactions by the Fed most likelyincrease commercial bank lending?
raising the reserveratio
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
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 16-03 List and explainthe goals and tools of monetarypolicy.
Test Bank: I Topic: Tools of MonetaryPolicy
The interest rate that banks charge one another on overnight loansiscalled the
discount rate.
prime lending rate.
overnight lending rate.
D. federal funds rate.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-04 Describethe federal funds rate and how the Fed directly influences it.
Test Bank: I Topic: Targeting the FederalFunds Rate
The federal funds rate is the interest rate that charge(s) .
A. banks; other banks
the Fed; commercial banks
banks; their best corporate customers
banks; on federal student loans
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-04 Describethe federal funds rate and how the Fed directly influences it.
Test Bank: I Topic: Targeting the FederalFunds Rate
Which of the following statements is true?
The Federal Reservesets the federal funds rate.
The Federal Reserve sets the target for the federalfunds rate, and then uses the reserve ratio to push banks toward that target.
C. The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations.
D. The Federal Reserve will set a higher target for the federal funds rate if pursuingan expansionary monetarypolicy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-04 Describethe federal funds rate and how the Fed directly influences it.
Test Bank: I Topic: Targeting the FederalFunds Rate
The Fed directly sets
the prime interest rate but not thefederal funds rate.
both the federal funds rate and the prime interest rate.
C. neither the federal funds rate nor the prime interest rate.
D. the discount rate and the prime interest rate.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-04 Describethe federal funds rate and how the Fed directly influences it.
Test Bank: I Topic: Targeting the FederalFunds Rate
A federal funds rate reduction that is caused by monetarypolicy will
increase the prime interest rate.
decrease the size of the monetarymultiplier.
increase the Fed's discountrate.
D. decrease the prime interest rate.