Chapter 1 :

1.

Interest rates are important because:

Your Answer: high interest rates encourage individuals to save more.

Correct Answer: All the above are correct

2.

Looking at interest rates over time, generally,

Your Answer: short term interest rates usually rise when long term interest rates rise.

3.

Over time, generally, the value of stocks has:

Your Answer: Increased smoothly.

Correct Answer: Fluctuated substantially

4.

Before periods of recession,

Your Answer: money supply growth rates sometimes rise and sometimes fall.
Correct Answer: money supply growth rates always fall.

5.

Which of the following captures the historic relationship between money and
the overall price level?

Your Answer: Prices increase but the money supply has remained constant over time.
Correct Answer: Both tend to increase together over time.

6.

Countries with low inflation tend to have:

Your Answer: high money growth

Correct Answer: low money growth
7.

Well performing financial markets

Your Answer: Promote economic efficiency

8.

The relationship between real and nominal GDP is that:

Your Answer: Real GDP is evaluated with current prices and nominal GDP uses base
year prices.
Correct Answer: Real GDP is evaluated with base year prices and nominal GDP use
current year prices.

9.

The GDP deflator is calculated as:

Your Answer: Real GDP – Nominal GDP

Correct Answer: Nominal GDP/Real GDP

10.

The Foreign Exchange Market

Your Answer: Is where U.S. goods are exchanged for foreign currency.
Correct Answer: Allows one currency to be converted into another.

11.

The stock market is:

Your Answer: the market where the cost of borrowing is determined.

Correct Answer: the most widely followed financial market in the United States.

12.

As financial intermediaries, banks:

Your Answer: have few interactions with the average person.

Correct Answer: make loans and accept deposits.

13.
 Which of the following is true of a nation's central bank?

Your Answer: It has many interactions with the nation's citizens and businesses.
Correct Answer: It is responsible for conducting the nation's monetary policy.

14.

Exchange rates are important to American consumers because

Your Answer: Americans import more goods when foreign currencies rise in relation
to the dollar.
Correct Answer: Americans can afford to buy more foreign goods if the dollar is
stronger.

15.

U. S. Government Budget deficits

Your Answer: May result in lower interest rates

Correct Answer: Occur when government spending exceeds tax revenues.

Chapter 2 :

1.

The essential role of financial markets is:

Your Answer: Provide a method of borrowing.

Correct Answer: Provide a method of channeling funds between borrowers and savers.

2.

With direct finance,

Your Answer: individuals deposit savings directly in banks.

Correct Answer: individuals (or firms) borrow directly from the savers.

3.

Concerning time to maturity,

Your Answer: "short term" is 30 days or less.

Correct Answer: "long term" is over 10 years.
4.

Moral hazard refers to

Your Answer: Occurs after the transaction

Correct Answer: Is all of the above

5.

Eurodollars are:

Your Answer: Bank deposits held outside the U.S. but denominated in dollars.

6.

The difference between equities and debt securities is

Your Answer: Equities are short term and debt securities are long term.
Correct Answer: Equities represent ownership in a corporation and debt represents a
contractual liability of the corporation.

7.

Transaction costs:

Your Answer: Are increased with financial intermediaries.

Correct Answer: Are the time and money spent carrying out financial transactions.

8.

Which of the following is not a depository financial institution?

Your Answer: Savings and Loan

Correct Answer: Life Insurance Company

9.

Which of the following is NOT a function of the Securities and Exchange

Commission?

Your Answer: Distributing seats on the New York Stock Exchange.

10.

How does the government insure the soundness of financial institutions?

 Your Answer: By forcing banks to have at least one CEO of a Fortune 500 company
on their Boards of Directors.
Correct Answer: By subjecting institutions to stringent financial reporting requirements.

11.

A corporation working with an investment bank to issue new shares of stock

is engaged in a ________ market, ________ market transaction.

Your Answer: secondary, money

Correct Answer: primary, capital

12.

Financial intermediaries (banks, for instance) provide small lender-savers all

of the following advantages except:

Your Answer: lower transaction costs.

Correct Answer: a higher return.

13.

The financial intermediary that obtains funds largely through premium

payments and uses those funds to purchase corporate bonds and mortgages is:

Your Answer: mutual funds.

Correct Answer: life insurance companies.

14.

Asymmetric information refers to the fact:

Your Answer: That buyers typically have more information than sellers.
Correct Answer: There is not enough information to make accurate decisions

15.

Repurchase agreements are

Your Answer: Loans of deposits at the Federal Reserve

Correct Answer: Short term loans with Treasury bills as collateral.

Chapter 3 :
1.

Fiat money is:

Your Answer: coins

Correct Answer: not convertible into precious metals.

2.

Which of these is not a function of money in an economy?

Your Answer: Store of value

Correct Answer: Source of income

3.

Which of the following is not part of M1?

Your Answer: checking accounts

Correct Answer: savings accounts

4.

If Mary deposits $100 of her currency in her checking account, then:

Your Answer: M2 will increase by $100.

Correct Answer: M1 and M2 will not change.

5.

If Mary moves $100 from her savings account to her checking account, then:

Your Answer: M2 will not change.

6.

Which of the following is not part of M2?

Your Answer: Institutional money market mutual funds

7.

Inefficiencies that are created when using checks as money include:

Your Answer: Checks can transfer funds slowly and require paper shuffling.

8.

The liquidity of an asset is:

Your Answer: the amount of an asset sold at discount or premium.

Correct Answer: the relative ease with which an asset can be converted into a medium of
exchange.

9.

For a commodity to function effectively as money, it must

Your Answer: Be indestructible.

Correct Answer: Be widely accepted.

10.

Money supply data is generated by:

Your Answer: The Department of Commerce

Correct Answer: The Federal Reserve System (the Fed)

11.

Which of the following correctly shows the evolution of the payments

system?

Your Answer: Commodity money, checks, fiat money, electronic money.

Correct Answer: Commodity money, fiat money, checks, electronic money.

12.

Which of the following is true regarding money's store of value function?

Your Answer: money is the only store of value available.

Correct Answer: money is the most liquid store of value available.

13.

Which of the following is not a disadvantage of electronic money?

Your Answer: People are concerned about the privacy and security of e-money
 transactions.
Correct Answer: E-money transactions cost more than paper check transactions.

14.

Wealth is

Your Answer: A flow of earnings per unit of time

Correct Answer: The total collection of pieces of property that serve to store value

15.

The Fed's measurements of monetary aggregates

Your Answer: Does not depend on the definition of money.

Correct Answer: Are more reliable in the long run than the short run.

Chapter 4 :

1.

You receive a check for $100 two years from today. The discounted present
value of this $100 is:

Your Answer: $100*(1+i)

Correct Answer: $100/(1+i)2

2.

Why do current prices on previously issued bonds offered for resale change
when the market interest rate changes?

Your Answer: Because the marketplace does not provide enough information to price
bonds accurately.
Correct Answer: Because no buyer of bonds today will accept a lower yield to maturity
than the market rate, and no buyer will be able to get a higher yield.

3.

If a bond sells at a premium, where price exceeds face value, then we would
expect to see:

Your Answer: market interest rates below the coupon rate.

4.

As bond prices increase:

Your Answer: yields to maturity do not change.

Correct Answer: yields to maturity decrease.

5.

For a $1000 one year discount bond with a price of $975, the yield to
maturity is

Your Answer: ($1000 – $975)/($1000)

Correct Answer: ($1000 – $975)/$975

6.

For a coupon bond, the current yield is calculated as:

Your Answer: Coupon Payment/Price

7.

If the interest rate rises one basis point, then it has gone from 4% to

Your Answer: 5%.

Correct Answer: 4.01%.

8.

The return on a bond is

Your Answer: coupon rate – rate of capital gain.

Correct Answer: current yield + rate of capital gain.

9.

Interest rate risk is:

Your Answer: the risk the government or firm will not make interest payments.
Correct Answer: the risk associated with change in return with changes in interest rates.

10.
 The real interest rate is:

Your Answer: the nominal interest rate/the CPI.

Correct Answer: the nominal rate minus the expected inflation rate.

11.

For a coupon bond, the yield to maturity is the:

Your Answer: difference between the bond's price and its face value.
Correct Answer: interest rate that equates the bond's present value with its price.

12.

When interest rates fluctuate, which bonds will experience the least price
volatility?

Your Answer: 20-year bonds

Correct Answer: 1-year bonds

13.

Which of the following provides the greatest incentive to borrow?

Your Answer: A high nominal interest rate

Correct Answer: A low real interest rate

14.

Why is the Rate of Return often the most relevant measure of a bond's
benefit to the buyer?

Your Answer: Because the Rate of Return uses the difference between the face value
and the purchase price to compute a capital gain on the bond.
Correct Answer: Because the Rate of Return recognizes that many bond buyers do not
plan to hold to maturity, but will sell the bond before maturity.

15.

The price structure for discount bonds

Your Answer: Means that for discount bonds with the same face value, the one with
the longer term will sell for a higher price.
Correct Answer: Means that for discount bonds with the same face value, the one with
 the shorter term will sell for a higher price.

Chapter 5 :

1.

Other things remaining equal, which of the following will increase the
demand (shift the demand curve to the right) for bond J?

Your Answer: An increase in the interest rate on bond K.

Correct Answer: An increase in the level of wealth in the economy.

2.

The theory of asset demand tells us that

Your Answer: Risky assets have higher liquidity.

Correct Answer: The demand for an asset will increase if the expected return on an asset
rises.

3.

At a bond price above the equilibrium,

Your Answer: there is an excess demand and the price will tend to fall.
Correct Answer: there is an excess supply and the price will tend to fall.

4.

Which of the following will cause a movement along the demand curve for
bond J?

Your Answer: An increase in the price of bond K.

Correct Answer: An increase in the price of bond J.

5.

Suppose the price of bond J rises. This will:

Your Answer: increase the demand for bond K and increase the interest rate on bond
K.
Correct Answer: increase the demand for bond K and decrease the interest rate on bond
K.
6.

Which of the following will increase the supply of bonds (shift the supply
curve to the right)?

Your Answer: A decrease in the expected inflation rate.

Correct Answer: A business cycle expansion.

7.

An increase in the expected inflation rate will:

Your Answer: increase the demand for bonds, decrease the supply of bonds and
increase the interest rate.
Correct Answer: decrease the demand for bonds, increase the supply of bonds and
increase the interest rate.

8.

Because Keynes assumed that money and bonds are the only two assets
available, it must be true that

Your Answer: Md + Ms = Bd - Bs
Correct Answer: Md + Bd = Ms + Bs

9.

At interest rates below the equilibrium rate of interest

Your Answer: there is an excess demand for money and the interest rate will rise.

10.

Using money demand and money supply:

Your Answer: an increase in income will increase money demand and increase the
interest rate.

11.

In the Liquidity Preference framework, the price-level effect differs from the
expected inflation effect in that:

Your Answer: The price level effect remains and the expected inflation effect reverses
12.

In Liquidity Preference, why does the demand curve for money slope
downward?

Your Answer: Because people are more willing to hold money when interest rates are
low.

13.

According to the ________ effect, an increase in the money supply lowers

the interest rate.

Your Answer: price-level

Correct Answer: liquidity

14.

Why does the supply curve for bonds slope upward?

Your Answer: Because as the price falls, firms are more willing to supply bonds.
Correct Answer: Because as the interest rate falls, firms are more willing to borrow
money.

15.

Increasing government deficits causes

Your Answer: The supply curve for bonds to shift left because corporations will
borrow less due to decreased profitability when the government is in
debt
Correct Answer: The supply curve for bonds to shift right because the U.S. Treasury will
issue bonds to pay for the deficit

Chapter 6 :

1.

Generally, which bond has the highest interest rate?

Your Answer: Municipal Bonds

Correct Answer: Corporate Baa Bonds

2.
 Default risk is:

Your Answer: the chance the issuing firm will be sold to another firm.
Correct Answer: the chance the issuer will be unable to make interest payments or repay
principal.

3.

Suppose that there are two bonds, A and B. Suppose also the default risk on
bond A increases. As a result of this we would expect to see:

Your Answer: the demand for A to decrease and the demand for B to increase.

4.

The risk premium on a bond is:

Your Answer: the difference in interest rate between that bond and a US Treasury bond.

5.

An increase in the level of risk for bond A will:

Your Answer: increase the risk premium on bond A and increase the risk premium on
bond B.
Correct Answer: increase the risk premium on bond A and reduce the risk premium on
bond B.

6.

Municipal bonds generally have lower interest rates than U.S. Government
bonds because:

Your Answer: they have less risk.

Correct Answer: they are exempt from Federal taxes.

7.

Yield curves show:

Your Answer: the relationship between risk and bond interest rates (yields).
Correct Answer: the relationship between time to maturity and bond interest rates
(yields).

8.
 The liquidity premium theory explains an inverted yield curve by

Your Answer: Assuming that the liquidity premium is always positive

Correct Answer: Assuming that short-term rates are expected to fall to a great degree in
the future

9.

The liquidity premium theory suggests that yield curves should usually be:

Your Answer: up-sloping.

10.

The liquidity premium theory is based upon the idea that, other things
remaining equal,

Your Answer: investors are indifferent between short-term and long-term bonds.
Correct Answer: investors prefer short-term bonds.

11.

The shape of the yield curve is usually:

Your Answer: downward sloping.

Correct Answer: upward sloping.

12.

The expectations theory of the term structure assumes:

Your Answer: markets for different maturity bonds are completely separate.
Correct Answer: buyers of bonds consider bonds of different maturities to be perfect
substitutes.

13.

What will the yield curve look like if future short-term interest rates are
expected to rise sharply?

Your Answer: It will be horizontal.

Correct Answer: It will steeply slope upward.

14.
 Reduced liquidity of a bond causes the interest rate on that bond

Your Answer: To be lower because it is more widely traded

Correct Answer: To be higher because it is less widely traded.

15.

The Segmented Markets theory of term structure suggests that

Your Answer: Investors have no preference for short-term bonds over long-term
bonds, or vice versa.
Correct Answer: Investors have strong preferences for bonds of a particular maturity.

Chapter 14 ;
Chapter 14: Determinants of the Money Supply, Multiple Choice Quiz"
Kepada: dee2k_corr@yahoo.com, nugroho_addy@yahoo.com, noventius@yahoo.com
Tanggal: Minggu, 15 Maret, 2009, 12:29 AM

---------- Forwarded message ----------

From: <lita.aster@gmail.com>
Date: Sun, Mar 15, 2009 at 10:44 AM
Subject: Answers to "The Economics of Money, Banking and Financial Markets, Eighth
Edition, 8/e" for "Student Resources, Chapter 14: Determinants of the Money Supply,
Multiple Choice Quiz"
To: lita.aster@gmail.com

Student Name: asterlita eswarien

Student Email: lita.aster@gmail.com

Site Title: The Economics of Money, Banking and Financial Markets, Eighth Edition
Book's Title: The Economics of Money, Banking and Financial Markets, Eighth Edition
Book's Author: Mishkin
Location on Site: Student Resources > Chapter 14: Determinants of the Money Supply >
Multiple Choice Quiz

100% Correct of 15 items:

15 correct: 100%
0 incorrect: 0%
Submitted on March 14, 2009 at 11:42 PM (EDT)

-------------------------------------------------------------------
Question 1

The money multiplier shows:

Correct: the change in the money supply from a $1.00 change in the monetary base.

-------------------------------------------------------------------
Question 2

Required reserves are calculated as:

Correct: rDD

-------------------------------------------------------------------
Question 3

The money multiplier is:

Correct: (1 + (C/D))/(rD + (ER/D) + (C/D))

-------------------------------------------------------------------
Question 4

Suppose that C/D = .6, rD=10%, and ER/D=10%. If the monetary base increases by
$100, when the banking system returns to equilibrium,
Correct: The money supply will increase $200

-------------------------------------------------------------------
Question 5

Suppose that C/D = .6, rD=15%, and ER/D=5%. If the monetary base falls by $100,
when the banking system returns to equilibrium,

Correct: the money supply will decrease by $200.

-------------------------------------------------------------------
Question 6

Which of the following will increase the money multiplier?

Correct: a decrease in (C/D).

-------------------------------------------------------------------
Question 7

An increase in expected deposit outflows will:

Correct: increase (ER/D).

-------------------------------------------------------------------
Question 8

The non-borrowed monetary base is calculated as:

Correct: MB – Discount Loans

-------------------------------------------------------------------
Question 9

The money supply increases with:

Correct: an increase in the non-borrowed monetary base.

-------------------------------------------------------------------
Question 10

Historically, the primary determinant of the money supply is:

Correct: changes in the non-borrowed monetary base.

-------------------------------------------------------------------
Question 11

An increase in the market interest rate causes the excess reserves ratio {ER/D} to
________ and the money supply to ________.

Correct: decrease; increase

-------------------------------------------------------------------
Question 12

During the Great Depression the money supply ________ because the currency ratio
{C/D} ________ and the excess reserves ratio {ER/D} ________.

Correct: fell; rose; rose

-------------------------------------------------------------------
Question 13

If the Federal Reserve purchases securities, and the buyers convert the proceeds of the
sale into currency

Correct: The money supply and the monetary base increase by the amount of the sale.

-------------------------------------------------------------------
Question 14

Why does an increase in the excess reserves ratio cause the money supply to fall?

Correct: Because as banks hold more excess reserves, they make fewer loans.

-------------------------------------------------------------------
Question 15

If the Fed increases the volume of discount loans

Correct: The monetary base rises.

Chapter 15 :
Location on Site: Student Resources > Chapter 15: Tools of Monetary Policy > Multiple
Choice Quiz

100% Correct of 15 items:

15 correct: 100%
0 incorrect: 0%

Submitted on March 15, 2009 at 9:57 AM (EDT)

-------------------------------------------------------------------
Question 1

The federal funds rate:

Correct: Is the interest rate banks charge each other when making overnight loans of
reserves.

-------------------------------------------------------------------
Question 2

An open market purchase of securities by the Federal Reserve system will:

Correct: increase the supply of Federal funds.

-------------------------------------------------------------------
Question 3

An increase in the discount rate can:

Correct: reduce the supply of Federal funds and increase the Federal funds rate.

-------------------------------------------------------------------
Question 4

An increase in the reserve requirement ratio will:

Correct: increase the demand for Federal funds and increase the Federal funds rate.

-------------------------------------------------------------------
Question 5

Sometimes the Fed purchases a security and the seller agrees to buy the security back.
This is called a:

Correct: Repurchase agreement

-------------------------------------------------------------------
Question 6

Which of the following is not an advantage of open market operations compared to other
methods of changing the money supply?

Correct: Open market operations do not need the approval of Congress.

-------------------------------------------------------------------
Question 7

The demand for reserves has a negative slope because:

Correct: A higher Federal Funds rate increases the cost of excess reserves so that banks
wish to hold smaller amounts of reserves.

-------------------------------------------------------------------
Question 8
The shape of the supply curve for reserves

Correct: Depends on the relationship between the Federal Funds rate and the discount
rate.

-------------------------------------------------------------------
Question 9

When the Fed sells government securities on the open market,

Correct: The Federal Funds rate rises.

-------------------------------------------------------------------
Question 10

If the Fed eliminated reserve requirements,

Correct: banks would still keep reserves because of the need for vault cash.

-------------------------------------------------------------------
Question 11

The objective of a defensive open market operation is to:

Correct: prevent a change in the monetary base.

-------------------------------------------------------------------
Question 12

One difference between the European Central Bank and the Federal Reserve System is
that:

Correct: The ECB pays interest on reserves

-------------------------------------------------------------------
Question 13

An advantage of using reserve requirement changes to control the money supply is:

Correct: they affect all banks equally.

-------------------------------------------------------------------
Question 14

The channel system for conducting monetary policy

Correct: Is used to keep the overnight interest rate between limits

-------------------------------------------------------------------
Question 15

The primary role of discount lending is now

Correct: To allow the Fed to act as the lender of last resort to troubled banks. Location on
Site: Student Resources > Chapter 15: Tools of Monetary Policy > Multiple Choice Quiz

100% Correct of 15 items:

15 correct: 100%
0 incorrect: 0%
Submitted on March 15, 2009 at 9:57 AM (EDT)

-------------------------------------------------------------------
Question 1

The federal funds rate:

Correct: Is the interest rate banks charge each other when making overnight loans of
reserves.

-------------------------------------------------------------------
Question 2

An open market purchase of securities by the Federal Reserve system will:

Correct: increase the supply of Federal funds.

-------------------------------------------------------------------
Question 3

An increase in the discount rate can:

Correct: reduce the supply of Federal funds and increase the Federal funds rate.

-------------------------------------------------------------------
Question 4

An increase in the reserve requirement ratio will:

Correct: increase the demand for Federal funds and increase the Federal funds rate.

-------------------------------------------------------------------
Question 5

Sometimes the Fed purchases a security and the seller agrees to buy the security back.
This is called a:

Correct: Repurchase agreement

-------------------------------------------------------------------
Question 6

Which of the following is not an advantage of open market operations compared to other
methods of changing the money supply?

Correct: Open market operations do not need the approval of Congress.

-------------------------------------------------------------------
Question 7

The demand for reserves has a negative slope because:

Correct: A higher Federal Funds rate increases the cost of excess reserves so that banks
wish to hold smaller amounts of reserves.

-------------------------------------------------------------------
Question 8

The shape of the supply curve for reserves

Correct: Depends on the relationship between the Federal Funds rate and the discount
rate.

-------------------------------------------------------------------
Question 9

When the Fed sells government securities on the open market,

Correct: The Federal Funds rate rises.

-------------------------------------------------------------------
Question 10

If the Fed eliminated reserve requirements,

Correct: banks would still keep reserves because of the need for vault cash.

-------------------------------------------------------------------
Question 11

The objective of a defensive open market operation is to:

Correct: prevent a change in the monetary base.

-------------------------------------------------------------------
Question 12

One difference between the European Central Bank and the Federal Reserve System is
that:
Correct: The ECB pays interest on reserves

-------------------------------------------------------------------
Question 13

An advantage of using reserve requirement changes to control the money supply is:

Correct: they affect all banks equally.

-------------------------------------------------------------------
Question 14

The channel system for conducting monetary policy

Correct: Is used to keep the overnight interest rate between limits

-------------------------------------------------------------------
Question 15

The primary role of discount lending is now

Correct: To allow the Fed to act as the lender of last resort to troubled banks.

Chapter 12 :
Chapter 12: Structure of Central Banks and the Federal Reserve System > Multiple
Choice Quiz

100% Correct of 15 items:

15 correct: 100%
0 incorrect: 0%

Submitted on March 15, 2009 at 9:26 AM (EDT)

-------------------------------------------------------------------
Question 1

The Federal Reserve System was created in:

Correct: 1913

-------------------------------------------------------------------
Question 2

The United States is divided into ____ Federal Reserve Districts.

Correct: 12

-------------------------------------------------------------------
Question 3

Members of the Board of Governors are:

Correct: appointed by the President and confirmed by the Senate.

-------------------------------------------------------------------
Question 4

Which of the following is not a function of the District Federal Reserve Banks?
Correct: Make loans to businesses in the district.

-------------------------------------------------------------------
Question 5

The Federal Open Market Committee (FOMC) is made up of:

Correct: the members of the Board of Governors and five of the District bank Presidents.

-------------------------------------------------------------------
Question 6

Member banks of the Federal Reserve System include:

Correct: All nationally chartered banks

-------------------------------------------------------------------
Question 7

Currently, _____ percent of banks are required to keep reserve deposits at the Federal
Reserve System.

Correct: 100%

-------------------------------------------------------------------
Question 8

The Discount Rate is set by:

Correct: the members of the Board of Governors and all of the District bank Directors.

-------------------------------------------------------------------
Question 9

The Political Business Cycle refers to:

Correct: Expansionary policies designed to lower unemployment and interest rates before
an election.

-------------------------------------------------------------------
Question 10

Many observers of central banks feel that countries with more independent central banks
tend to have:

Correct: Lower inflation.

-------------------------------------------------------------------
Question 11

Which of the following was not an obstacle to the creation of the Federal Reserve
System?

Correct: The successes of contemporary banking arrangements in avoiding bank panics.

-------------------------------------------------------------------
Question 12

An argument in favor of Fed independence is that Fed policymakers are ________ than
are politicians.

Correct: better able to focus on long-run objectives

-------------------------------------------------------------------
Question 13

The theory of bureaucratic behavior holds that government agencies strive to:

Correct: maximize their power and prestige.

-------------------------------------------------------------------
Question 14

The Board of Governors

Correct: Sets margin requirements for purchases of securities.

-------------------------------------------------------------------
Question 15

The main reason the Federal Reserve System is able to be independent is:

Correct: It is not subject to appropriations from Congress.

Chapter 13 :

Chapter 13: Multiple Deposit Creation and the Money Supply Process > Multiple Choice
Quiz
100% Correct of 15 items:
15 correct: 100%
0 incorrect: 0%

Submitted on March 15, 2009 at 9:38 AM (EDT)

-------------------------------------------------------------------
Question 1

The largest source of Federal Reserve System income is:

Correct: Interest and capital gains on government securities.

-------------------------------------------------------------------
Question 2

When the Fed sells governments securities to a private firm or individual who pays for
them with a check,

Correct: Currency in circulation decreases.

-------------------------------------------------------------------
Question 3

The monetary base (or high-powered money) is equal to:

Correct: reserves + currency in circulation.

-------------------------------------------------------------------
Question 4
An open market purchase of securities by the Fed from banks will:

Correct: increase bank reserves.

-------------------------------------------------------------------
Question 5

An open market purchase of securities by the Fed from the public will:

Correct: always increase the monetary base.

-------------------------------------------------------------------
Question 6

If a bank borrows from the Fed at the discount window, then:

Correct: bank reserves increase.

-------------------------------------------------------------------
Question 7

Bank A faces a 15% reserve requirement ratio. If this bank gains $100 of deposits and
$100 of new reserves, then this bank has:

Correct: $15 of new required reserves.

-------------------------------------------------------------------
Question 8
As banks make new loans, they will:

Correct: lose reserves.

-------------------------------------------------------------------
Question 9

If banks have a 20% reserve requirement ratio, then for the banking system an addition of
$100 of new reserves will create:

Correct: $500 of new deposits.

-------------------------------------------------------------------
Question 10

The deposit expansion multiplier is:

Correct: 1/rDR

-------------------------------------------------------------------
Question 11

Which of the following is not a player in the money supply process?

Correct: Congressional banking committees

-------------------------------------------------------------------
Question 12
On the Federal Reserve System's balance sheet, float is:

Correct: cash items in process of collection minus deferred-availability cash items.

-------------------------------------------------------------------
Question 13

Which of the following is an assumption of the simple model of multiple deposit

creation?

Correct: Depositors hold no currency.

-------------------------------------------------------------------
Question 14

If bank depositors begin to withdraw more currency from banks,

Correct: The monetary base is unchanged.

-------------------------------------------------------------------
Question 15

The maximum amount a bank can lend is

Correct: The amount of its excess reserves.

Chapter 16 :
Chapter 16: What Should Central Banks Do? Monetary Policy Goals, Strategy, and
Tactics > Multiple Choice Quiz
100% Correct of 15 items:
15 correct: 100%
0 incorrect: 0%

Submitted on March 15, 2009 at 9:44 AM (EDT)

-------------------------------------------------------------------
Question 1

A disadvantage of inflation targeting includes

Correct: Delayed signaling

-------------------------------------------------------------------
Question 2

The natural rate of unemployment is:

Correct: the rate where demand for labor equals the supply of labor

-------------------------------------------------------------------
Question 3

Price stability is important because:

Correct: inflation creates uncertainty in the economy.

-------------------------------------------------------------------
Question 4
Which of the following is not a goal of monetary policy?

Correct: High levels of imports from other countries.

-------------------------------------------------------------------
Question 5

Which of the following is not an intermediate Fed target?

Correct: Low unemployment.

-------------------------------------------------------------------
Question 6

Which of the following is not a Federal Reserve operating instrument?

Correct: Monetary aggregate M2

-------------------------------------------------------------------
Question 7

If the Fed chooses a money supply intermediate target, and if the demand for money
increases, then:

Correct: interest rates will increase.

-------------------------------------------------------------------
Question 8
If the Fed chooses an interest rate intermediate target, and if the demand for money
increases, then:

Correct: the money supply will increase.

-------------------------------------------------------------------
Question 9

Currently, the Fed's operating target is:

Correct: the Federal funds rate.

-------------------------------------------------------------------
Question 10

According to the Taylor rule, the target Federal funds rate will increase when:

Correct: inflation increases.

-------------------------------------------------------------------
Question 11

Which of the following is not a criterion for choosing a target variable for monetary
policy?

Correct: The target must be transparent

-------------------------------------------------------------------
Question 12
The dual mandate of the Fed charges it to with the two equal objectives of:

Correct: Price stability and low unemployment

-------------------------------------------------------------------
Question 13

The Phillips curve theory predicts an increase in inflation if output is ________ potential
and the rate of unemployment is ________ the natural rate of unemployment.

Correct: above; below

-------------------------------------------------------------------
Question 14

The most serious disadvantage of the Federal Reserve's 'just do it' monetary strategy is
that

Correct: It relies heavily on individuals in charge of the Fed

-------------------------------------------------------------------
Question 15

Monetary targeting has been largely abandoned because:

Correct: The relationship between the monetary aggregates and overall economic activity
is weak