MACRO 2301 TEST III HCCS
Download, print out, complete on the test, and hand in on the first day after the holiday.
1. The current Chairman of the Federal Reserve Board of Governors is:
a. Milton Friedman
b. John Maynard Keynes
c. Ben Bernanke
d. Alan Greenspan
2. Ceteris paribus, A rise in the money supply and an decrease in U.S. interest rates would have which of
the following effects:
a. A lower nominal U.S. Gross Domestic Product
b. A strengthening of the value of the U.S. dollar
c. A weakening of the value of the U.S. dollar
d. No effect on either GDP or the Dollar
3. The Money Supply decreases from $3 Trillion to $2.5 Trillion. Which of the following could have
caused this change?
a. The FED purchased bonds from the public
b. Consumers who were holding money in deposit accounts within the banking system withdrew
that money
c. The FED decreased the discount rate
d. Commercial banks decided to hold less excess reserves
4. An expansionary monetary policy in the U.S. will tend to: (ceteris paribus)
a. Appreciate the value of the U.S. dollar
b. Depreciate the value of the U.S. dollar
c. Have no effect on exchange rates
5. Which of these describes the functions of Money? It is a:
a. Unit of account
b. Medium of Exchange
c. Store of Value
d. All of the above are functions of money
6. Which of the following are included in M1?
Yes, it’s M1; No, it’s not M1.
Savings account balances _______
Demand deposits ________
Currency ________
Money Market Mutual Funds (< $100 k) _____
Money Market Deposit Accounts (< $100K) _______
Travelers checks __________
7. True or False. The term liquidity refers to the ease with which an asset can be converted to cash
without sustaining an appreciable loss. Assets with higher liquidity are more readily convertible
into cash than assets with lower liquidity.
8. True or False. The Federal Reserve System (FED) is the central bank of the U.S.
9. True or False. The policies of the FED are under the direct supervision and control of the U.S.
Congress.
10. List 3 traits of “good money”
A.
B.
C.
11 -- 13. Ceteris Paribus, indicate whether the particular policy below is Expansionary or Contractionary:
a. The Congress raises taxes on individuals ______
b. The FED sells bonds on the open market _______
c. U.S. Banks increase their excess reserves _______
d. The FED raises the Reserve Requirement ______
e. The MPS changes from 10% to 20% __________
f. Net U.S. exports increase _____________
14. True or False. The U.S. Constitution established the Federal Reserve System, and the system has
functioned continuously as the central bank of the U.S. since 1789.
15 -- 17. If the FED wanted to Increase the Money supply it would.
Circle your choice within each of the following three.
(Raise or lower) the Reserve Requirement
(Buy or Sell) Bonds on the Open Market
(Raise or Lower) the Discount Rate
18. If the FED lowers the reserve requirement from 20% to 10%, the
a. Money multiplier increases
b. Money multiplier decreases
c. Money multiplier remains the same
d. Amount of excess reserves the bank has decreases
19. To cure an excessively inflationary economy, the FED would most likely
a. Encourage banks to provide loans by lowering the discount rate
b. Restrict bank lending by lowering the discount rate
c. Restrict bank lending by raising the discount rate
d. Restrict bank lending by lowering the federal funds rate
20. The Keynesian cause-and-effect sequence often referred to as a transmission mechanism (assuming no
“disconnects”) predicts that an increase in the money supply will cause interest rates to
a. fall, boosting investment, increasing aggregate demand, and increasing GDP
b. fall, boosting investment, increasing aggregate demand, and lowering GDP
c. fall, cutting investment, lowering aggregate demand, and decreasing GDP
d. rise, boosting investment, lowering aggregate demand, and increasing GDP.
21. The FED’s most effective and frequently used tool to change the economy’s
money supply is
a. Open market operations
b. The discount rate
c. The legal reserve requirement
d. The power to tax
22. The FED’s policies to lower inflation include
a. Raising the legal reserve requirement, raising the discount rate, and buying government bonds
on the open market
b. Raising the legal reserve requirement, cutting the discount rate, and selling government bonds
on the open market
c. Lowering the legal reserve requirement, cutting the discount rate, and buying government
bonds on the open market.
d. Raising the legal reserve requirement, raising the discount rate, and selling government bonds
on the open market
23. The primary “demand side” policy to fight inflation is to:
a. Bring Aggregate Expenditure down to a level where inflationary pressure is reduced
b.
c.
d.
Make sure that retail stores such as The Gap do not get out of control
Increase Aggregate Expenditure in order to stimulate GDP
Stimulate an increase in investment
24. The primary “supply side” policy to fight inflation is to:
a. Reduce Aggregate expenditure
b. Stimulate output through such policies as investment tax credits, accelerated depreciation; or
reduced capital gains tax
c. Increase net exports to secure more foreign trade earnings
d. Increase government spending to purchase more goods and services
25. Theoretically, to eliminate a recession, the FED could use ________ monetary policy, and to eliminate
inflation, the FED could use ___________ monetary policy.
a. contractionary; expansionary
b. expansionary; contractionary
c. expansionary; expansionary
d. contractionary; contractionary
26. If there is a recession and the FED wants to raise the money supply in order to encourage banks to
make more loans , the FED can:
a. Raise the legal reserve requirement
b. Sell bonds on the open market
c. Cut taxes and increase spending
d. Lower the discount rate
27. A decrease in the money supply (Ceteris Paribus and assuming no disconnects)
a. Raises the interest rate, causing an increase in investment and an increase in GDP
b. Lowers the interest rate, causing an increase in investment and an increase in GDP
c. Raises the interest rate, causing a decrease in investment and an decrease in GDP
d. Lowers the interest rate, causing a decrease in investment and a decrease in GDP
28 & 29. Label the components in the Monetary equation MV = PQ
M ______________________
V ______________________
P _______________________
Q ______________________
30. Demand deposits are:
a. Coins and currency
b. the same as time deposits
c. included in M2 but not in M1
d. Funds in checking accounts
31. The interest rate which banks pay the FED for funds they borrow from the FED is called the
__________, and the interest rate banks pay each other when they borrow among themselves is
called the ___________:
a. Federal funds rate; discount rate
b. Discount rate; Federal Funds rate
c. Reserved rate; federal funds rate
d. Investment rate, prime rate 25.
32. The money market multiplier is a “potential” multiplier because:
a. Without willful borrowers, banks might not be able to lend out all of their excess reserves
and the full effect is not realized, hence “potential.”
b. Banks are prohibited from lending out all of their excess reserves
c. Banks can only lend out an amount equal to their required reserves.
d.
The legal reserve requirement is never precisely set by the FED
33. The federal funds market is the market in which
a. Banks lend and borrow from each other for short periods of time
b. The national government sells certificates in order to finance the national debt
c. Open market operations occur
d. Member banks can borrow from the FED
34. What do Keynesians mean when they say: “You can’t push on a string.”?
a. An increase in the supply of goods does not really create its own demand.
b. If the government wants to get something done, the best approach is not to force the issue, but to
offer incentives.
c. If the government reduces taxes in an effort to increase consumption expenditures, it probably will
not work.
d. An increase in the money supply will not always stimulate the economy as predicted because of
such effects as liquidity traps and global movements of money.
35. Open market operations are
a. Used on a quarterly basis to balance out the deficit spending of the national government
b. Rarely used by the FED since they are a monetary tool of last resort
c. Used about once a year to make adjustments between the actual money supply and the desired
money supply
d. The most frequently used and the most effective tool the FED has to control the money supply
36. According to liquidity preference theory, when the interest rate increases, people rethink the
opportunity cost related to liquidity. Which might we expect if interest rates increase?
a. The FED would automatically increase the money supply (M 1)
b. People would not desire to change their money holdings (M 1)
c. People would want to hold more money as M 1
d. People would desire to hold less money as M 1
37. _____________ is the economist associated with the following argument: the FED should
determine monetary policy by Rule rather than by Discretion, and he offers a quasiautomatic procedure based on inflation and GDP fluctuations.
a. Ben Bernanke
b. Alan Greenspan
c. Paul Volker
d. John Taylor
38. __________ was a leading monetarist of the University of Chicago’s “Chicago School” who
advocated adding a fixed amount (e.g. 3%) to the money supply annually rather than
varying the money supply to achieve a targeted federal funds rate.
a. Ben Bernanke
b. Milton Friedman
c. John Taylor
d. Alan Greenspan
39. True or False. In general, to be effective, Fiscal Policy has a longer implementation time lag than
Monetary Policy.
40. If the U.S. Treasury sells bonds to the U.S. public in order to finance deficit spending, it may
__________ the price of bonds and __________ the interest rates on the bonds.
a. Drive down; drive down
b. Drive down; drive up
c. Drive up; drive down
d. Drive up; drive up
41. Consider a Keynesian transmission mechanism as we have discussed in class. If the economy has
excess production capacity and unemployment, an expansionary monetary and/or fiscal policy
will __________.
a. Lower output and cause inflation
b. Raise output without causing inflation
c. Raise output but these changes will cause substantial inflation
d. Have no effect on output or the price level
42. As the interest rates fall, the opportunity cost of holding cash is altered so that people (ceteris paribus):
a. Prefer to hold more cash
b. Prefer to hold less cash
c. Would tend to shift funds from their checking accounts into savings accounts
d. Convert M1 to M2
43. Select the appropriate answer that will make the following a coherent, logical statement.
“If the FED ___________ the money supply, there will be a __________ of money and the
equilibrium interest rate will __________.”
a. Decreases; surplus; rise
b. Increases; surplus; rise
c. Decreases; shortage; rise
d. Increases; shortage; fall
44. If the current NOMINAL interest rate is 5% and inflation is 2%, then the REAL interest rate is:
a. 3%
b. 7%
c. 2.5% d. 10%
45.—46. The United States is divided into ____ Federal Reserve districts; Federal Reserve Governors
serve _____ year terms; the Chairman of the FED serves a _________ year term as Chairman.
47. If the money multiplier is 4, the FED’s required reserve ratio is:
a. 4%
b. 20%
c. 25%
d. 40%
48. True or False. The amount of money banks can loan out is determined by the federal funds rate which
is set by the FED
49. The voting members of the FED’s Open Market Committee are:
a. All of the members of the Board of Governors and all of the Presidents of the 12 Federal
Reserve Banks
b. All of the members of the Board of Governors and five of the Presidents of the 12 Federal
Reserve Banks
c. All of the Presidents of the 12 Federal Reserve Banks and 3 of the Governors
d. Only the members of the Board of Governors
50. Assume that all commercial banks collectively have deposits totaling $800 million. Further assume
that they are fully loaned out. (i.e. they have loaned all of their excess reserves). Now assume
the FED reduces the Required Reserve. The money supply will:
a. Decrease
b. Increase
c. Remain unchanged since there are no additional deposits
d. Remain unchanged because the required reserve ratio does not affect the money supply.
51.—52. Currently the Discount rate is ___________ and the Federal Funds Rate is targeted at
____________
53. Bond Prices and the interest rates
a. Move inversely
b. Move Directly
c. Move Independently
d. Are Static
ENJOY THANKSGIVING. I WILL COLLECT THE TEST ON THE FIRST CLASS DAY AFTER THE
HOLIDAY.