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The Fed Buys Bonds. Increase or Decrease Money Supply

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The Fed Buys Bonds. Increase or Decrease Money Supply document sample

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									MULTIPLE-CHOICE QUESTIONS, CHP. 12
INTRODUCTION

1.   The central bank of the United States is known as the
     a. Internal Revenue Service.
+    b. Federal Reserve System.
     c. Federal Deposit Insurance Corporation.
     d. Department of Commerce.
2.           s
     The Fed’ principal objective is to
     a. make profits to pay into the U.S. Treasury.
     b. collect tax revenues.
     c. supervise the business decisions of banks.
+    d. manage the money supply and interest rates.
3.   The current chair of the Federal Reserve System is
     a. George W.Bush.
     b. Hillary Clinton.
+    c. Alan Greenspan.
     d. Trent Lott.
     e. Paul O’  Neill.
4.   The immediate impetus for the establishment of the Federal Reserve System came from
     a. severe outbreaks of inflation in the early 1900s.
+    b. four severe banking panics between 1873 and 1907.
     c. the discovery of gold in Alaska.
     d. the desire to copy the founding of the Bank of England.
5.   Technically, the Federal Reserve district banks are corporations whose stockholders are the
     a. state governments in each district.
     b. citizens of the United States.
     c. Departments of Treasury and Commerce.
+    d. member banks.
6.   In reality, commercial banks are ____________ of the district Federal Reserve Banks.
     a. managers
     b. regulators
+    c. customers
     d. competitors
7.   The actual control of the Federal Reserve System resides in the
     a. Congress of the United States.
     b. member banks.
     c. Senate Banking Committee.
+    d. Board of Governors.
8.   Members of the Board of Governors of the Fed are
     a. elected to two-year terms by the Electoral College.
     b. appointed by the president for four-year terms and confirmed by the Congress.
+    c. appointed by the president for 14-year terms and confirmed by the Senate.
     d. appointed by the president for 14-year terms and confirmed by the Supreme Court.
9.    The Federal Open Market Committee consists of
      a. the president and the Board of Governors.
      b. Congresspeople, Senators, and the Board of Governors.
      c. the Secretary of the Treasury and the Board of Governors.
+     d. the Board of Governors and five district bank presidents.
10.   In practice, money supply and short-term interest rates are determined by the
      a. Treasury and Commerce departments.
+     b. Federal Open Market Committee.
      c. Board of Governors.
      d. House and Senate.
11.   The Fed is institutionally independent. A major advantage of this is that monetary policy
      a. is subject to regular congressional scrutiny.
      b. will often offset fiscal policy.
+     c. is not controlled by politicians.
      d. is usually coordinated with fiscal policy.

IMPLEMENTING MONETARY POLICY: OPEN MARKET OPERATIONS

12.   Open market operations generally involve the purchase and sales of
+     a. government securities.
      b. stocks and bonds.
      c. coins and currency.
      d. Federal Reserve notes.
13.   The Fed relies on open market operations, which work
      a. with the Treasury in creating money to finance bonds.
      b. through major stock exchanges to influence bond prices.
      c. directly through the nonbank public to change their assets.
+     d. through the banking system by affecting their reserves.
14.   If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
+     a. It will give the bank new reserves.
      b. It will write the bank a check.
                                           s
      c. It will transfer cash to the bank’ vault.
      d. It will take reserves from another bank.
15.   If the Fed sells a T-bill to a commercial bank, how will this effect the money supply?
      a. It will increase the money supply.
      b. It will increase bank reserves.
+     c. It will decrease the money supply.
      d. It will have no effect on the money supply.
16.   When the Fed wants to expand the money supply through open market operation, it
      a. sells government securities to the Treasury.
      b. sells government securities to member banks.
+     c. buys government securities from member banks.
      d. buys government securities from the Treasury.
17.   If the Federal Open Market Committee decides to expand the money supply, then it will
      a. raise the discount rate to member banks.
+     b. issue directions to purchase government securities, thus putting more reserves in
            member banks.
      c. issue directions to sell government securities, thus taking reserves from member banks.
      d. order new Federal Reserve notes delivered to member banks.
18.   When the Fed purchases government securities from a commercial bank, the bank
      a. loses its ability to make loans.
      b. automatically becomes poorer.
      c. loses equity in the Fed.
+     d. receives reserves that can be loaned out.
19.   The Fed conducts an open market purchase of Treasury bills of $10 million. If the required
      reserve ratio is .10, what change in the money supply can be expected using the
      oversimplified money multiplier?
+     a. $100 million
      b. $10 million
      c. 0
      d. –$10 million
      e. –$100 million
20.   The Fed conducts an open market sale of Treasury bills of $5 million. If the required
      reserve ratio is .20, what change in the money supply can be expected using the
      oversimplified money multiplier?
      a. $25 million
      b. $5 million
      c. 0
      d. –$5 million
+     e. –$25 million
21.   If the FOMC orders the sale of T-bills in the open market, then bank reserves are
      a. decreased, but the money supply will remain unchanged.
+     b. decreased, and a multiple contraction of the money supply will occur.
      c. increased, but the money supply will remain unchanged.
      d. increased, and a multiple expansion of the money supply will occur.
22.              s
      If the Fed’ open market operations expand the money supply, one can expect
      a. a decrease in excess reserves.
+     b. bond prices to rise.
      c. interest rates to rise.
      d. open market sales of T-bills.
23.   An open market purchase of T-bonds by the Fed causes the money supply to
      a. fall and bond prices to fall.
      b. rise and bond prices to fall.
+     c. rise and bond prices to rise.
      d. fall and bond prices to rise.
OTHER METHODS OF MONETARY CONTROL

26.   If the Fed wants to reduce banks’reserves, it can
      a. buy securities in the open market.
      b. lower the reserve ratio.
      c. lower the federal funds rate.
+     d. raise the discount rate.
27.   In its original role as “lender of last resort” the Fed was supposed to
      a. lend money to people in regions without banks.
      b. lend money to developing nations.
+     c. keep the money supply from drying up during financial panics.
      d. provide mortgage lending to returning soldiers.
28.   The discount rate is the rate that the
      a. Treasury pays on savings bonds.
+     b. Fed charges member banks.
      c. Fed charges on government securities.
      d. Fed charges the Treasury for sales of securities.
29.   If the Fed lends to member banks, what happens to reserves and the money supply?
      a. Reserves increase and the money supply decreases.
+     b. Both increase.
      c. Reserves decrease and the money supply increases.
      d. Both decrease.
30.   If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what
      would happen to the money supply?
+     a. It would decrease.
      b. It would increase.
      c. It would remain unchanged.
      d. It depends on the value of interest rates.
31.   Assume that the banking system has $200 billion in reserves. There are no excess reserves
      in the system. If the reserve requirement is decreased from 10 percent to 8 percent, what
      will happen to the level of excess reserves in the system?
      a. There will be a deficiency of $40 billion in reserves.
      b. There will be a deficiency of $20 billion in reserves.
      c. There will be $20 billion in excess reserves.
+     d. There will be $40 billion in excess reserves.
32.   If the Fed reduces the required reserve ratio,
+     a. excess reserves will increase.
      b. excess reserves will decrease.
      c. total reserves will increase.
      d. total reserves will decrease.

SUPPLY-DEMAND ANALYSIS OF THE MONEY MARKET

33.   The quantity of money supplied increases as interest rates rise because
      a. the Treasury borrows more at higher interest rates.
                          t
      b. consumers don’ want to borrow as much so more money is left in banks.
      c. as interest rates rise, banks fear losses so they decrease lending.
+     d. banks find it profitable to expand loans at higher interest rates.
34.   The money supply schedule has a positive slope because
      a. the Fed lowers the discount rate as interest rates rise.
      b. the Fed makes more money available at higher interest rates.
+     c. as interest rates rise, banks will find loans more profitable.
      d. as interest rates rise, people will demand more loans.

35.   If the price level rises, what will happen to the demand for money?
 +    a. It will shift outward.
      b. It will shift inward.
      c. It will remain unchanged.
      d. It depends on what happens to interest rates.
36.   If interest rates increase, what will happen to the demand for money?
      a. It will shift outward.
      b. It will shift inward.
+     c. Nothing, the economy will move to a new quantity demanded.
      d. It depends on what happens to prices.
37.   Money demanded varies
      a. inversely with both prices and output.
      b. inversely with prices and directly with output.
      c. directly with prices and inversely with output.
+     d. directly with both prices and output.
38.   Which of the following will increase interest rates in the short run?
      a. an decrease in reserve requirements
+     b. open market sales by the Fed
      c. a decrease in real GDP
      d. an decrease in the price level
39.   Which of the following will cause movement along the money demand schedule?
      a. a change in the price level
      b. a change in real GDP
      c. a change in tax rates
+     d. a change in interest rates
40    The interest rate
+     a. is the opportunity cost of holding money.
      b. is the opportunity cost of earning income.
      c. is the reciprocal of the price level.
      d. increases as bond prices increase.
Figure 12-2




41.   In Figure 12-2, which panel shows the effect on the interest rate of inflation?
      a. 1
      b. 2
      c. 3
+     d. 4
42.   In Figure 12-2, which panel shows the effect on the interest rate of an increase in the
      discount rate?
      a. 1
      b. 2
+     c. 3
      d. 4
43.   In Figure 12-2, which panel shows the effect on the interest rate of an open market sale by
      the Fed?
      a. 1
      b. 2
+     c. 3
      d. 4
44. The Fed were to increase the money supply at the same time the government was increasing
     taxes, we could expect
     a. an increase in interest rates and real GDP.
     b. a decrease in interest rates and real GDP.
+    c. a decrease in interest rates but the effect on real GDP is indeterminant.
     d. an increase in interest rates but the effect on real GDP is indeterminant.
45.   The correct chain of causation illustrating the effects of monetary policy is
      a. money, interest rates, C + I + G + (X – IM), I.
+     b. money, interest rates, I, C + I + G + (X – IM).
      c. C + I + G + (X – IM), I, interest rates, money.
      d. I, C + I + G + (X – IM), money, interest rates.

								
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