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Exploring Macroeconomics 5th Edition Robert L. Sexton - Solutions
24. When interest rates are lower, the opportunity cost of holding monetary assets is higher. True or False.
23. If the Fed wanted to increase the money supply, it would buy bonds, lower reserve requirements, or lower the discount rate. True or False.
22. Setting the discount rate above the Fed funds target tends to discourage borrowing from the Fed’s discount window. True or False.
21. The Fed funds rate target tends to affect interest rates throughout the economy. True or False.
20. Currently, the Fed sets the discount rate below the federal funds target. True or False.
19. The discount rate’s main significance is that changes in the rate signal the Fed’s intentions with respect to monetary policy. True or False.
18. The discount rate is a relatively unimportant monetary policy tool, mainly because member banks do not rely heavily on the Fed for borrowed funds. True or False.
17. If the Fed raises the discount rate, the money supply will tend to increase. True or False.
16. Changes in required reserve ratios are such a potent monetary policy tool that they are frequently used. True or False.
15. Generally, in a growing economy, where the real value of goods and services is increasing over time, an increase in the supply of money is needed to maintain stable prices. True or False.
14. The Fed selling government bonds will tend to cause a multiple expansion of bank deposits. True or False.
13. With a 10 percent required reserve ratio, a $1,000 bond purchase by the Fed directly creates $1,000 in money in the form of bank deposits, and indirectly permits up to $9,000 in additional money to be created through the multiple expansion in bank deposits. True or False.
12. With a 10 percent required reserve ratio, a $10,000 cash deposit in a bank would result in an increase in the bank’s excess reserves of $1,000. True or False.
11. If the Fed buys bonds in an open market operation, and the seller deposits the payment in her bank account, the money supply will increase and lead to an increase in the bank’s reserves. True or False.
10. Open market purchases or sales of bonds by the Fed have an ultimate impact on the money supply that is several times the amount of the purchase or sale. True or False.
9. The Fed controls the supply of money, even though privately owned commercial banks actually create and destroy money by making loans. True or False.
8. The Federal Open Market Committee makes most of the key decisions influencing the direction and size of changes in the money supply. True or False.
7. No member of the Federal Reserve Board will face reappointment by the president who initially made the appointment. True or False.
6. Historically, the Fed has had limited independence from the executive and legislative branches of government. True or False.
5. Banks are not all required to belong to the Fed; but there is currently virtually no difference in the requirements for member and nonmember banks. True or False.
4. The 12 member banks of the Federal Reserve System act largely in unison on major monetary policy issues. True or False.
3. The central bank implements monetary and fiscal policy for the government. True or False.
2. The central bank typically serves as the major bank for the central government. True or False.
1. A central bank has only one function—controlling the supply of money in a country. True or False.
56. When increased government purchases or expansionary monetary policy does give the economy a boost, _____________ knows precisely how long it will take to do so.
55. Policymakers must adopt the _____________ policies in the _____________ amounts at the _____________ time for such “stabilization” to do more good than harm.
54. Some people believe that monetary policy should be more directly controlled by the president and Congress, so that all macroeconomic policy will be determined _____________ directly by the political process, which will ____________ policy coordination.
53. Decision making with respect to fiscal policy is made by _____________ and _____________, while monetarypolicy decision making is in the hands of ____________.
52. The Fed can control deposit expansion at _____________ banks, but it has no control over global and nonbank institutions that also ___________.
51. Ordinarily, banks want to convert excess reserves into interest-earning _____________, but in a deep recession or a depression, banks might be hesitant to make enough loans to put all those reserves to work.
50. In the process of calling in loans to obtain necessary banking reserves, banks _____________ the supply of money.
49. According to the Federal Reserve Bank of San Francisco, the major effects of a change in policy on growth in the overall production of goods and services usually are felt within _____________ months to _____________ years, and the effects on inflation tend to involve even longer lags, perhaps
48. The lag problem inherent in adopting fiscal policy changes is much _____________ acute for monetary policy.
46. Higher rates of anticipated inflation would tend to _____________ velocity.
45. An increase in the interest rates will cause people to hold _____________ money, which, in turn, means that the velocity of money _____________.
44. Velocity is _____________ stable when measured using the M1 definition and over shorter periods of time.
42. Expanding the money supply, other things being equal, will have a similar impact on aggregate demand as _____________ government spending or _____________ taxes.
41. If M increases and V remains constant, then P must _____________, Q must _____________, or P and Q must each _____________.
39. The quantity equation of money can be presented as:_____________ _____________.
37. Countercyclical monetary policy would _____________ the supply of money to combat a potential inflationary boom.
36. The real interest rate is equal to _____________ minus _____________.
35. A contractionary policy can be thought of as a(n)___________ in the money supply or a(n) __________ in the interest rate.
34. The _____________ is the interest rate the Fed targets.
33. When the economy grows, the Fed would have to _____________ the money supply to keep interest rates from rising.
32. If the demand for money increases, but the Fed doesn’t allow the money supply to increase, interest rates will ___________, and aggregate demand will ____________.
31. When the Fed sells bonds, it _____________ the price of bonds, _____________ interest rates, and _____________ aggregate demand in the short run.
30. An increase in the money supply will lead to _____________ interest rates and a(n) _____________ in aggregate demand.
29. Rising national income will shift the demand for money to the _____________, leading to a new _____________ equilibrium nominal interest rate.
28. Money market equilibrium occurs at that ____________ interest rate where the quantity of money demanded equals the quantity of money supplied.
26. If the price level falls, buyers will need _____________ money to purchase their goods and services.
25. The quantity of money demanded varies _____________ with the rate of interest.
23. An increase in the money supply would tend to _____________ nominal GDP.
22. The Fed can do three things if it wants to reduce the money supply: _____________ government bonds, _____________ reserve requirements, or _____________ the discount rate.
21. In recent years, the Federal Reserve has _____________ its focus on the federal funds rate as the primary indicator of its stance on monetary policy.
20. The current extent of discount lending is ____________.
19. When banks have short-term needs for cash to meet reserve requirements, they are more likely to take a short-term (often overnight) loan from other banks in the _____________ market than to borrow reserves directly from the Fed.
18. If the Fed wants to expand the money supply, it will _____________ the discount rate.
17. If the Fed raises the discount rate, it makes it _____________ costly for banks to borrow funds from it to meet their reserve requirements, which will result in __________ new loans being made and __________ money created.
16. Banks having trouble meeting their reserve requirement can borrow reserves directly from the Fed at an interest rate called the _____________ rate.
15. Small reserve requirement changes have a _____________ impact on the potential supply of money.
14. An increase in the required reserve ratio would result in a _____________ in the money supply.
13. If the Fed _____________ reserve requirements, other things being equal, it will create excess reserves in the banking system.
12. When the Fed sells a bond, the reserves of the bank where the bond buyer keeps his bank account will _____________.
11. If the reserve requirement is 10 percent, a total of up to _____________ in new money is potentially created by the purchase of $100,000 of government bonds by the Fed.
10. The most a bank can lend out at a given time is equal to its _____________.
9. When the Fed buys government bonds in an open market operation, it _____________ the money supply.
8. Open market operations involve the purchase or sale of _____________ by _____________.
7. _____________ are by far the most important device used by the Fed to influence the money supply.
6. The Fed has three major methods that it can use to control the supply of money: It can engage in _____________ operations, change _____________ requirements, or change its _____________ rate.
5. Perhaps the most important function of the Federal Reserve is its ability to regulate the _____________.
4. The _____________ consists of the seven members of the Board of Governors, the president of the New York Federal Reserve Bank, and four other presidents of Federal Reserve banks, who serve on the committee on a rotating basis.
3. The Federal Reserve was created in 1913 because the U.S. banking system had little _____________ and no _____________ direction.
2. Effective control of major monetary policy decisions rests with the _____________ and the _____________ of the Federal Reserve System.
1. In most countries, the job of manipulating the supply of money belongs to the _____________.
16. Answer questions a and b.a. If a bank had reserves of $30,000 and demand deposits of $200,000 (and no other deposits), how much could it lend out if it faced a required reserve ratio of 10 percent? _____________ 15 percent? _____________ 20 percent? _____________b. If the bank then received a
15. Calculate the magnitude of the money multiplier if banks were to hold 100 percent of deposits in reserve. Would banks be able to create money in such a case? Explain.
14. If the required reserve ratio is 10 percent, calculate the potential change in demand deposits under the following circumstances:a. You take $5,000 from under your mattress and deposit it in your bank.b. You withdraw $50 from the bank and leave it in your wallet for emergencies.c. You write a
13. Assume there was a new $100,000 deposit into a checking account at a bank.a. What would be the resulting excess reserves created by that deposit if banks faced a reserve requirement of 10 percent? _____________ 20 percent? _____________ 25 percent? _____________ 50 percent? _____________b. How
12. What would the money multiplier be if the required reserve ratio were 5 percent? _____________ 10 percent? _____________ 20 percent? _____________ 25 percent? _____________ 50 percent? _____________
11. If the Fed paid interest on bank reserves at the Fed, would banks still want to avoid holding excess reserves?
10. Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts, other things equal?
9. What would each of the following changes do to M1 and M2?
8. Why would the increasing liquidity of savings accounts make some monetary economists track the size of M1 plus savings account balances (called MZM) over time?
7. Why have ATMs and online banking made savings accounts more liquid than they used to be?
6. Why do you think asking whether money is an asset or a liability is a trick question in economics?
5. Indicate whether each of the following belongs on the asset or liability side of a bank’s balance sheet:a. loansb. holdings of government securitiesc. demand depositsd. vault cashe. deposits at the Fedf. bank buildings g. certificates of deposit
4. Which one of each of the following pairs of assets is most liquid?a. Microsoft stock or a traveler’s checkb. a 30-year bond or a six-month Treasury billc. a certificate of deposit or a demand depositd. a savings account or 10 acres of real estate
3. An alternative version of Gresham’s Law is that “Bad money drives out good money.” Why is it true that, in choosing between different currencies to transact in, good money drives out bad money?
2. Why do people who live in countries experiencing rapid inflation often prefer to hold American dollars rather than their own country’s currency? Explain.
1. Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.
18. If the required reserve ratio were increased, thena. the money supply would tend to decrease, but the outstanding loans of banks would tend to increase.b. both the money supply and the outstanding loans of banks would tend to decrease.c. the money supply would tend to increase, but the
17. A reserve requirement of 20 percent means a money multiplier ofa. 1.25.b. 2.c. 5.d. 20.
16. If many people were to suddenly deposit into their checking accounts large sums of cash previously kept in their wallets, and no offsetting actions were taken by the Fed, the result would bea. a reduction in the U.S. money supply.b. a decrease in M1 but an increase in M2.c. an increase in
15. If a banking transaction created new excess reserves in the banking system, the result would tend to bea. an increase in the amount of loans made by banks and an increase in the supply of money.b. an increase in the amount of loans made by banks and a decrease in the supply of money.c. a
14. Which of the following will lead to an increase in the money supply?a. You pay back a $10,000 loan that you owe to your bank.b. Your bank gives you a $10,000 loan by adding $10,000 to your checking account.c. You pay $10,000 in cash for a new motorcycle.d. You bury $10,000 in cash in your
13. Required reserves of a bank are a specific percentage of theira. loans.b. cash on hand.c. total assets.d. deposits.
12. Under fractional reserve banking, when a bank lends to a customer,a. bank credit decreases.b. reserves drain away from the system.c. the bank is protected from a run.d. borrowers receive a newly created demand deposit; that is, money is created.e. bank profitability is decreased.
11. Liquidity is defined asa. the cash value of fiat money.b. the value of fiat money when used to buy a good or service.c. the speed at which money is spent.d. the ease with which money can be divided to make payments.e. the ease with which an asset can be converted into cash.
10. An increase in demand deposits combined with an equal decrease in currency in circulation woulda. have no direct effect on M1 or M2.b. increase both M1 and M2.c. increase M1 and decrease M2.d. decrease M1 and increase M2.
9. Without money to serve as a medium of exchange,a. gains from trade would be severely limited.b. our standard of living would probably be reduced.c. the transaction costs of exchange would increase.d. All of the above are true.
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