Q&A Hero

Q: In addition to paying interest on reserves starting in October 2008, the Fed also provideda. lending against a variety of collateral, such as commercial paper and mortgage-backed securities. b. advice on how to conduct contemporaneous reserve accounting.c. the power for banks to print and distribute their own currency.d. staff people to help banks make real-estate decisions regarding the locations of their branch offices.

Q: A decrease in the real interest rate in the U.S. will cause net exports to: A. increase because exports will remain constant but imports will decrease.B. decrease because exports will decrease and imports will increase.C. decrease because exports will increase but imports will increase.D. increase because exports will increase and imports will decrease.

Q: When the Fed began paying interest on reserves, reserve balances a. increased dramatically.b. decreased dramatically. c. decreased only slightly. d. increased only slightly.

Q: Increases in the real interest rate in the U.S. will cause net exports to: A. decrease, because the dollar depreciates.B. increase, because the dollar depreciates.C. decrease, because the dollar appreciates.D. increase, because the dollar appreciates.

Q: Before October 2008, banks earned interest on reserve balances that they held at the Federal Reserve at a rate ofa. 0.00%.b. 0.05%. c. 0.60%.d. 1.00%.

Q: Which of the following statements is most correct? A. When the real interest rate increases the reward for saving decreases.B. When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases.C. When the real interest rate decreases the cost of current consumption increases.D. When the real interest rate increases the level of saving always decreases.

Q: Which of the following is a way in which banks can equalize the time to maturity of their assets and liabilities?a. Securitizationb. Quantitative easingc. Privatizationd. Credit easing

Q: Consumption can be sensitive to changes in the real interest rate because: A. higher interest rates can increase the cost of durable goods like automobiles.B. higher interest rates will result in less saving.C. lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods.D. lower interest rates increase savings.

Q: Securitization is the process by which a bank sells a loan (which it made previously) toa. investors.b. the government.c. other banks.d. depositors.

Q: Which component of aggregate expenditures is the least sensitive to changes in the real interest rate? A. InvestmentB. ConsumptionC. Net exportsD. Government purchases

Q: If a bank has assets with the same time to maturity as its liabilities, thena. the interest rate on assets changes faster than the interest rate on liabilities. b. the interest rate on liabilities changes faster than the interest rate on assets. c. changes in interest rates will not affect the bank's overall portfolio.d. changes in interest rates puts the bank at a high risk of default.

Q: Why is it necessary to understand fluctuations in investment if we want to understand the fluctuations in the business cycle?

Q: Credit risk means the same thing as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: What distinguishes the short-run real interest rate from the long-run real interest rate?

Q: The risk that market interest rates may change, affecting the value of a bank's assets and liabilities, is known as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: Why would central bankers have to pay attention to forecasts regarding consumer sentiment and expectations of business owners and managers?

Q: A bank can reduce the impact of a default risk by a. having assets with the same time to maturity.b. making risky loans at low interest rates. c. making safe loans at high interest rates. d. diversifying its portfolio.

Q: Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

Q: The possibility that a bank's loan customers might not repay their loans is known as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: If changes in the nominal federal funds rate result in equal changes to the expected rate of inflation, how effective would it be for the FOMC to target the nominal federal funds rate?

Q: Suppose a bank earned $173 million in interest on its assets of $2,153 million, it paid out $81 million in interest on its liabilities (excluding capital) of $2,007 million, and it paid its workers $71 million in total compensation. The bank's return on equity is approximatelya. 12 percent. b. 14 percent. c. 16 percent. d. 18 percent.

Q: Temporary changes in inflation lead to adjustments in the price level. What causes permanent increases in inflation and why?

Q: Suppose a bank earned $173 million in interest on its assets of $2,153 million, it paid out $81 million in interest on its liabilities (excluding capital) of $2,007 million, and it paid its workers $71 million in total compensation. The bank's spread is approximatelya. 2 percent. b. 3 percent. c. 4 percent. d. 5 percent.

Q: In the face of constant velocity, explain what happens to aggregate demand if the growth rate of money is less than the rate of inflation.

Q: Suppose a bank earned $12 million in interest on its assets of $157 million, it paid out $8 million in interest on its liabilities (excluding capital) of $172 million, and it paid its workers $3 million in total compensation. The bank's profit equalsa. $12 million. b. $8 million. c. $3 million. d. $1 million.

Q: Use the equation of exchange to show how the level of money in the economy impacts the level of aggregate demand.

Q: A bank borrows funds from its depositors by paying them 2% interest on the funds. It lends those funds to borrowers by charging an interest of 5% on the loans. The bank's spread isa. 2 percent.b. 3 percent. c. 4 percent. d. 5 percent.

Q: Use the equation of exchange to show that in the long run, inflation must equal money growth less the growth of potential output.

Q: Which of the following statements is true of banks?a. Small banks do not face the same competitive pressure as large banks do. b. Location of banks does not determine the level of competition among them. c. Bank spreads are large for large banks.d. Returns on equity are large for small banks.

Q: What would you expect to happen to the price level (inflation) from a prolonged expansionary gap and why?

Q: Which size category of banks generally has the smallest spread?a. The 10 smallest banks b. The 100 smallest banks c. Medium-sized banksd. Large banks

Q: What are the determinants of the potential output for an economy?

Q: Which size category of banks generally has the largest spread?a. Small banksb. Medium-sized banksc. The 100 largest banks d. The 10 largest banks

Q: Irving Fisher derived the quantity theory of money from the equation of exchange. What two assumptions did he make to derive the theory and what is the basic assertion of the theory?

Q: Which of the following is true of bank spread?a. The more vigorous the competition among banks, the smaller will be spread between the interest rates on loans and deposits.b. The larger the banks that are competing with each other, the larger will be spread between the interest rates on loans and deposits.c. The spread between the interest rates on loans and deposits will be much narrower in banks in rural areas than the banks in big cities.d. The lower the number of banks in a city, the smaller will be the spread between the banks' interest rates on loans and deposits.

Q: Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.

Q: A bank's spread equalsa. the bank's average profit per dollar of assets. b. the bank's return on equity.c. the average interest rate on all the bank's investments minus the inflation rate.d. the average interest rate on the bank's assets minus the average interest rate on its liabilities.

Q: If the price of money is determined by supply and demand, what impact should a decrease in the supply of money (given steady money demand) have on the price of money and the rate of inflation?

Q: A bank is said to have________ when its average costs decline when it offers a wider variety of products.a. economies of scope.b. economies of scale.c. cost diminution.d. decreasing returns to scale.

Q: The CPI is a commonly used and closely watched measure of inflation. However, it has limitations. What are they?

Q: A bank is said to have when its average costs decline as its volume of sales increases. a. economies of scope.b. economies of scale. c. cost diminution.d. decreasing returns to scale.

Q: If the Fed wanted to target price stability, meaning zero inflation, why should it set a target rate of inflation of around one percent?

Q: In which of the following ways can a bank increase its reserves?a. Give out more loans b. Sell securitiesc. Reduce interest rate on time depositsd. Increase service charges for safety vault facility

Q: The equation of exchange which is MV = PY is an identity, which means it is true by definition. If you think carefully, what variable in the equation by the way it is defined really makes the equation of exchange an identity?

Q: The discount rate is the interest rate on a. loans of reserves between banks.b. discount loans from the Federal Reserve. c. discount bonds.d. federal agency securities.

Q: If velocity of money is constant; real growth in the output of the economy is +2.5%; and inflation is 2.0%; what is the growth rate of money?

Q: The interest rate in the market for loans of reserves between banks is the a. three-month Treasury bill rate.b. reserve ratio. c. discount rate.d. federal funds rate.

Q: When the former Soviet Union collapsed in 1990, most of the countries that made up the union experienced extremely high rate of inflation? What was the source of the high inflation and why did it happen?

Q: The is a place where banks can request loans from the Federal Reserve. a. money marketb. domestic trading desk c. Treasuryd. discount window

Q: Why does the Fed have to be concerned with money growth even though their main focus seems to be on interest rates?

Q: The federal funds rate is the interest rate in the market for a. mortgage loans.b. loans of reserves between banks. c. loans of government securities.d. federal agency securities.

Q: All other factors equal, as nominal interest rates increase, checking account balances should: A. increase.B. decrease.C. remain constant.D. be converted to cash.

Q: All other factors equal, if the costs of converting bonds and other financial securities to a means of payment decrease: A. the transactions demand for money should increase.B. the transactions demand for money should decrease.C. it shouldn't impact the transactions demand for money.D. nominal interest rates should decrease.

Q: The market in which banks with excess reserves lend them to banks that desire additional reserves is known as the________ market.a. capital reservesb. excess reservesc. federal fundsd. excess funds

Q: If the nominal interest rate decreases: A. the cost of holding money decreases.B. the cost of holding money increases.C. the velocity of money should increase.D. the cost of holding money increases and the velocity of money should decrease.

Q: Under which of the following options does the Fed offer reserves to banks through a competitive auction process?a. Term deposit facility b. Discount lendingc. Quantitative easing d. Safety vault facility

Q: In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period: A. the velocity of money should have been stable.B. money demand as well as velocity should have also been shifting and volatile.C. it should have been easy for the Fed to predict the velocity of money.D. the Fed was actually targeting the short-term interest rate.

Q: Suppose a bank's excess reserves are equal to $100 million. The bank is required to hold $50 million as reserves. The bank currently holds as reserves.a. $50 million b. $100 million c. $150 million d. $200 million

Q: During the period of October 1979 to October 1982; the FOMC's primary operating target resulted in: A. the most stable period for the federal funds rate in history.B. reserves being highly volatile.C. the federal funds rate experiencing high volatility.D. the federal funds rate dropping to 2 percent (an all-time low to that date) and not rising above 3 percent.

Q: Suppose a bank has $200 million as transaction deposits, and holds $25 million as reserves. If the reserve requirement is uniformly 10% on any positive amount, the bank's excess reserves equalsa. $25 million. b. $10 million. c. $5 million. d. $1 million.

Q: For a three-year period from October 1979 to October 1982; the FOMC: A. primarily targeted reserves.B. primarily targeted the real federal funds interest rate.C. primarily targeted M2.D. gave up targeting reserves entirely.

Q: A bank's excess reserves equal itsa. vault cash plus deposits at the Federal Reserve. b. total reserves minus required reserves.c. reserve requirement times transactions deposits. d. vault cash plus required reserves.

Q: One cost that potentially could result from central banks targeting money growth is: A. high inflation.B. a slowdown in financial innovation.C. volatile interest rates.D. decreased independence.

Q: The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8 million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposits totaling $83 million has required reserves equal toa. $2.49 million. b. $4.56 million. c. $6.54 million. d. $8.30 million.

Q: Which of the following statements is true? A. While the Fed emphasizes money growth more than the ECB, both central banks have chosen interest rates as their operating target.B. While the Fed emphasizes money growth less than the ECB, both central banks have chosen interest rates as their operating target.C. Because the Fed emphasizes money growth less than the ECB, the Fed uses interest rates as their operating target while the ECB looks at growth in money aggregates.D. Both the Fed and the ECB use growth in money aggregates as their operating target.

Q: The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8 million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposits totaling $7 million has required reserves equal toa. $0.00 million. b. $0.21 million. c. $0.70 million. d. $1.17 million.

Q: Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is equivalent to U.S. M2): A. is unstable in the euro similar to the instability that exists in the U.S.B. is much more stable in the U.S. than in the euro area.C. has increased in the euro area since 1980.D. is more stable in the euro area than in the U.S.

Q: A bank with transaction deposits totaling $45 million had reserves equal to $0.98 million. The reserve requirement for this bank is percent. (Hint: use the cutoff amounts as per the reserve requirements for the year 2013)a. 10b. 8c. 3d. 2

Q: Between 1970 and 2000, if the Fed had tried to hit the money growth targets: A. the economy would have likely experienced very high inflation.B. the federal funds rate would have changed often and by large amounts.C. the interest rates would have likely been more stable.D. the economy would have likely experienced very high inflation but the interest rates would have likely been more stable.

Q: A bank has currency and coins equal to $20 million in its vaults. It has securities worth $10 million, has borrowings equal to $5 million, and has given out loans equal to $2 million. It also has deposits with the Federal Reserve equal to $4 million. The total reserves of the bank equalsa. $12 million.b. $22 million.c. $24 million.d. $36 million.

Q: Between 1970 and 2000, the Fed: A. published their targets for money growth and often hit these targets.B. never published targets or actual amounts for money growth.C. published targets for money growth and rarely hit them.D. published actual money growth but not targets.

Q: Sarah, a customer of a bank, transfers $10,000 from her checking account to her money-market deposit account.Which of the following changes will be reflected in Sarah's bank's balance sheet?a. Reserves decrease by $10,000.b. Transactions deposits increase by $10,000.c. Nontransactions deposits decrease by $10,000. d. Borrowings increase by $10,000.

Q: The Lucas critique focuses specifically on: A. the relationship between Fed policy and the money supply.B. the role that economic policymaking has on people's economic behavior.C. the inability to measure economic performance accurately.D. the moving away from fixed exchange rates to flexible exchange rates.

Q: Paul, a customer of a bank, writes a check for $50,000 to a customer of another bank. Which of the following changes will be reflected in Paul's bank's balance sheet?a. Reserves decrease by $50,000.b. Transactions deposits increase by $50,000.c. Nontransactions deposits increase by $50,000.d. Borrowings increase by $50,000.

Q: A major contributing factor to the instability of money demand over the past 25 years is the: A. introduction of financial instruments that pay higher returns than money but can be used as a means of payment.B. Fed has changed the way the money aggregates are defined.C. failure of many savings and loans.D. introduction of credit cards.

Q: A bank's reserves equal its a. government securities.b. transactions deposits.c. vault cash plus deposits at the Federal Reserve. d. cash assets plus government securities.

Q: The relationship between the velocity of money and interest rates is: A. positive but not stable.B. negative but not stable.C. positive and stable.D. negative and stable.

Q: Which of the following is recorded under the liabilities side of a bank's balance sheet?a. Transaction deposits b. Securitiesc. Reserves d. Loans

Q: To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying: A. the supply of money is not stable.B. the money market is always in disequilibrium.C. money demand is stable.D. money demand is not stable.

Q: Which of the following is recorded under the asset side of a bank's balance sheet?a. Transaction deposits b. Equity capitalc. Borrowings d. Reserves