Test 3 Chapter 13 2) Why has the Federal Reserve chairman often been called the second most important

person in the nation? A) Because the Fed chairman has veto power over all federal spending. B) Because the Fed is in control of monetary policy. C) Because the Fed chairman draws the second highest salary of any official of the federal government. D) Because the Fed has regulatory power over all financial markets. Answer: B 6) The movement to set up a central bank in the United States was spurred by the financial panic that occurred in A) 1816. B) 1907. C) 1929. D) 1987. Answer: B 11) Which of the following is NOT considered one of the four principal groups in the Federal Reserve System? A) Federal Reserve banks B) Federal Deposit Insurance Corporation C) Board of Governors D) Federal Open Market Committee Answer: B 18) Which best describes the Federal Reserve district banks? A) They are private ventures. B) They are government ventures. C) Some are private while others are government. D) They are private-government joint ventures. Answer: D 28) Under the Federal Reserve Act, which banks must be members of the Federal Reserve System? A) all commercial banks B) national banks C) state banks D) all banks with capital in excess of $100 million Answer: B

42) The president of which Federal Reserve bank is always a voting member of the Federal Open Market Committee? A) Philadelphia B) Boston C) Chicago D) New York Answer: D 43) To conduct open market operations, the FOMC issues a directive to A) the trading desk at the Federal Reserve Bank of New York. B) the Board of Governors in Washington, D.C. C) the presidents of the district banks. D) the chairman of the New York Stock Exchange. Answer: A 3) Which of the following statements is correct? A) The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve. B) The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. C) The Fed is fully insulated from external pressures because it has a constitutional mandate. D) The Fed is only partially insulated from external pressures. Answer: D 4) The Fed does not have to go through the normal congressional appropriations process because A) its expenses are very small. B) it was given enough funds at the time of its founding to provide for its expenses indefinitely. C) it is self financing. D) it is not part of the legislative branch of the federal government. Answer: C Chapter 14 The Federal Reserve's Balance Sheet and the Money Supply Process 1) The monetary base is equal to A) all currency in circulation plus all deposits in financial institutions. B) all currency in circulation plus checkable deposits in financial institutions. C) all currency in circulation plus reserves held by banks. D) checkable deposits in depository institutions plus reserves held by banks. Answer: C

4) Which of the following is a liability of the Fed? A) reserves B) U.S. government securities C) discount loans to banks D) checkable deposits in commercial banks Answer: A 8) In July 2010, the largest liability of the Fed was A) currency in circulation. B) reserves. C) discount loans to banks. D) vault cash. Answer: B 19) What is the most direct method the Fed uses to change the monetary base? A) open market operations B) changing the required reserve ratio C) changing the federal funds rate D) changing the level of discount loans Answer: A 21) If the Fed buys securities worth $10 million, then A) bank reserves will increase by $10 million. B) bank reserves will decrease by $10 million. C) currency in circulation will increase by $10 million. D) bank holdings of securities increase by $10 million. Answer: A 22) If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million. Answer: C

31) Although open market operations and discount loans both change the monetary base, the Fed has A) greater control over open market operations than over discount loans. B) greater control over discount loans than over open market operations. C) very little control over either discount loans or open market operations. D) complete control over both discount loans and open market operations. Answer: A 35) Which of the following expressions is correct? A) B = Bnon + BR B) BR = Bnon + B C) Bnon = B + BR D) Bnon = -BR - B Answer: A 3) The aggregate M1 consists of A) currency plus all deposits in financial institutions. B) currency plus all deposits in all institutions. C) currency plus checkable deposits in financial institutions. D) currency plus all checkable deposits. Answer: C 5) The money supply process focuses on the monetary base rather than on bank reserves because A) bank reserves have little connection to the money supply. B) the Fed has better control of the monetary base than it has on bank reserves. C) bank reserves are difficult to measure. D) banks are not required to report the level of their reserves, which makes it difficult for the Fed to use them to control the money supply. Answer: B Chapter 15 Monetary Policy 2) Which of the following is considered to be a goal of monetary policy? A) a low federal budget deficit B) fair wages C) price stability D) an end to poverty Answer: C

3) Inflation is an economic problem because it A) leads inevitably to unemployment. B) makes prices less useful as signals for resource allocation. C) leads to recession. D) results in rapid increases in the money supply. Answer: B 8) John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) naturally unemployed. Answer: A 13) High employment spurs economic growth because high employment A) usually reduces inflation. B) discourages foreign imports. C) often leads to a high birth rate. D) often leads to high rates of investment. Answer: D 14) When financial markets and institutions are not efficient in matching savers and borrowers, A) interest rates fall, which discourages saving even further. B) interest rates fall, which discourages investment even further. C) resources are lost. D) investment rises. Answer: C 16) The Fed was created A) after financial panics in the late 1800s and early 1900s. B) after the stock market crash of 1929. C) to help finance government expenditures during World War II. D) to help channel funds to the residential mortgage market. Answer: A 17) Interest rate fluctuations A) are usually not considered to be of much importance and are largely ignored by the Fed. B) have the paradoxical effect of increasing the rate of economic growth. C) make it difficult for households and firms to plan for the future. D) have largely been eliminated by the Fed during the past two decades. Answer: C

19) The Fed's goal of interest rate stability A) was formally abandoned in 1998. B) is motivated by political pressure as well as by a desire for a stable saving and investment environment. C) is undermined by actions the Fed takes to further its goal of stability in financial markets and institutions. D) is undermined by actions the Fed takes to further its goal of price stability. Answer: B 5) In the federal funds market diagram, an open market sale by the Fed A) shifts the reserve supply curve to the right. B) shifts the reserve supply curve to the left. C) decreases the federal funds rate. D) increases the volume of federal funds traded. Answer: B 7) In order to increase its target for the federal funds rate, the Fed would normally A) conduct open market sales. B) conduct open market purchases. C) increase the discount rate. D) increase reserve requirements. Answer: A 8) If the Fed desired to reduce the federal funds rate, A) it would conduct an open market sale, reducing reserve supply. B) it would conduct an open market purchase, increasing reserve supply. C) it would conduct an open market sale, increasing reserve demand. D) it would conduct an open market purchase, reducing reserve demand. Answer: B 9) As a result of an open market purchase, bank reserves A) rise and interest rates fall. B) fall and interest rates rise. C) and interest rates both rise. D) and interest rates both fall. Answer: A 2) An open market purchase A) increases the monetary base. B) decreases the monetary base. C) increases the federal funds rate. D) is another name for a discount loan. Answer: A

4) When did the Fed first begin to use open market operations as a policy tool? A) The 1920s B) The 1930s C) The 1960s D) The 1980s Answer: A 6) Congress established the FOMC because A) a group was needed to set reserve requirements for member banks. B) of a lack of coordination among district banks in carrying out open market operations. C) Congress was attempting to expand its influence within the Federal Reserve System. D) a group was needed to coordinate the setting of discount rates by the district banks. Answer: B 10) Which of the following statements is correct? A) Open market purchases are expansionary and open market sales are contractionary. B) Open market purchases are contractionary and open market sales are expansionary. C) Both open market purchases and open market sales are expansionary. D) Both open market purchases and open market sales are contractionary. Answer: A 17) If the account manager does not use a Federal Reserve repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use A) an outright purchase or sale. B) a limited-duration purchase or sale. C) an indirect purchase or sale. D) a reverse duration purchase or sale. Answer: A 26) Which of the following statements is correct? A) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed. B) The volume of open market operations is determined jointly by the actions of banks and the Fed. C) The volume of open market operations is determined jointly by the actions of the public and the Fed. D) The volume of open market operations is determined solely by the Fed. Answer: D 39) The Fed tends not to use discount policy as its principal tool in influencing the money supply since A) discount loans do not affect the money supply. B) it does not have as much control over discount loans as it has on open market operations. C) it is prohibited from doing so by an act of Congress. D) it prefers to use reserve requirements. Answer: B

9) Which of the following is an intermediate target? A) M2 B) reserves C) unemployment rate D) inflation rate Answer: A 10) Which of the following is an operating target? A) M1 B) M2 C) nonborrowed reserves D) the inflation rate Answer: C Chapter 16 2) Deliberate actions by a central bank to influence the exchange rate are known as A) current account actions. B) foreign-exchange market interventions. C) dollar-value operations. D) foreign-commerce maneuvers. Answer: B 5) If the Fed wants to increase the value of the dollar, it will A) sell foreign securities and buy dollars in international currency markets. B) buy foreign securities and sell dollars in international currency markets. C) buy foreign securities and also buy dollars in international currency markets. D) sell foreign securities and also sell dollars in international currency markets. Answer: A 6) If the Fed wants to reduce the value of the dollar, it will A) sell foreign assets and buy dollars. B) sell dollars and buy foreign assets. C) buy foreign assets and also buy dollars. D) sell foreign assets and also sell dollars. Answer: B 8) When a central bank buys foreign assets, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected. Answer: A

11) When the Fed sells foreign assets and buy domestic assets at the same time, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected. Answer: C 14) An unsterilized foreign-exchange intervention occurs A) whenever a central bank purchases or sells domestic currency. B) whenever a central bank purchases or sells foreign currency. C) whenever a central bank allows the monetary base to respond to the sale or purchase of domestic currency. D) whenever a central bank fails to reduce its holdings of gold by the amount of a foreign-exchange purchase. Answer: C 18) If the Fed sterilizes the purchase of foreign assets, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected. Answer: C 2) Why may a central bank intervene in the foreign exchange market when its currency is depreciating? A) concerns about the country's exports becoming less competitive B) concerns about inflation C) concerns about deflation D) to sterilize the effects on the domestic economy Answer: B 3) Why may a central bank intervene in the foreign exchange market when its currency is appreciating? A) concerns about the country's exports becoming less competitive B) concerns about inflation C) concerns about imports becoming less competitive D) to sterilize the effects on the domestic economy Answer: A 5) A central bank may be reluctant to see its currency appreciate because A) rising prices of imports will contribute to inflation. B) falling prices of exports will contribute to inflation. C) the country's goods may become uncompetitive in world markets. D) the country's monetary base will increase. Answer: C

7) If a central bank wishes to lower the foreign-exchange value of its currency, it will A) buy domestic currency and sell foreign assets. B) sell domestic currency and buy foreign assets. C) attempt to raise domestic interest rates. D) attempt to lower the domestic price level relative to foreign price levels. Answer: B 1) Which of the following is true of the U.S. balance of payments? A) It includes as receipts all inflows of funds from foreigners to the United States. B) It includes as receipts only inflows of funds used to purchase U.S. produced goods and services. C) It includes as receipts inflows of funds used to purchase U.S. goods or services or to acquire U.S. assets but not funds received as unilateral transfers. D) It includes as receipts inflows of funds used to purchase U.S. goods or services and funds received as unilateral transfers but not inflows of funds used to acquire U.S. assets. Answer: A 11) Historically, the leading official reserve asset was A) gold. B) the U.S. dollar. C) the British pound. D) the German mark. Answer: A Chapter 17 2) Which of the following expressions is correct? A) AE = C + I + G - NX. B) AE = C + I + G + NX. C) AE = C + I + (G - T) + NX. D) AE = C + I + (G - T) - NX. Answer: B 5) A rise in the real interest rate will cause which of the components of aggregate demand to decline? A) Only C B) Only C and I C) Only C, I, and NX D) C, I, G, and NX Answer: C 8) An increase in the price level reduces net exports because A) it leads indirectly to a higher exchange rate. B) it leads indirectly to a lower exchange rate. C) it leads indirectly to a lower real interest rate. D) it leads directly to higher real money balances. Answer: A

9) A shift of the AD curve A) to the right is considered expansionary, and a shift to the left is considered contractionary. B) to the left is considered expansionary, and a shift to the right is considered contractionary. C) to the right or to the left is considered contractionary. D) to the right or to the left is considered expansionary. Answer: A 3) Most economists believe that the short-run aggregate supply curve A) slopes down. B) slopes up. C) is a vertical line. D) is a horizontal line. Answer: B 4) Most economists believe that the aggregate supply curve is A) upward-sloping in the short run, but vertical in the long run. B) upward-sloping in the long run, but vertical in the short run. C) upward-sloping in both the short run and in the long run. D) vertical in both the short run and in the long run. Answer: A 2) When output exceeds its full-employment level, A) the short-run aggregate supply function shifts up. B) wages fall. C) the short-run aggregate supply function shifts down. D) aggregate supply exceeds aggregate demand. Answer: A 8) Economists generally agree that in the long run changes in aggregate demand affect A) aggregate output but not the price level. B) the price level but not aggregate output. C) both the price level and aggregate output. D) neither the price level nor aggregate output. Answer: B 9) In the aggregate demand-aggregate supply model, if the Federal Reserve decides to decrease the nominal money supply, A) current output will fall, but the price level will rise. B) current output will rise, but the price level will fall. C) current output and the price level will both rise. D) current output and the price level will both fall. Answer: D

Chapter 18 Monetary Theory II: The IS-MP Model

3) The IS curve depicts the relationship between A) aggregate output and the real interest rate. B) investment demand and the real interest rate. C) investment demand and the level of current output. D) national saving and the level of current output. Answer: A 15) An increase in the real interest rate causes A) the IS curve to shift to the right. B) the IS curve to shift to the left. C) a movement up the IS curve. D) a movement down the IS curve. Answer: C 4) In the IS-MP model, when the Fed increases the real interest rate A) the MP curve shifts up resulting in a decline in the output gap. B) the MP curve shifts up resulting in an increase in the output gap. C) the MP curve shifts down resulting in a decline in the output gap. D) the MP curve shifts down resulting in an increase in the output gap. Answer: A 5) When the Fed reduces the real interest rate, which of the following does NOT increase? A) consumption B) investment C) government purchases D) net exports Answer: C 3) In a closed economy, the goods market is in equilibrium when A) Y = S + I + G. B) C + S = I + G. C) C + I = S + G. D) Y = C + I + G. Answer: D