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Name: ____________Nicole D. _______________________ECO 121 (Macroeconomics) Test 4, Fall 2012Questions 1 to 40: Do all 40 questions (Two and one-half points each)1. Which of the following is the basic economic policy function of the Federal Reserve Banks? A) the supervision of commercial banks B) holding the deposits or reserves of commercial banks C) acting as fiscal agents for the Federal government D) regulating the supply of money 2. When banks bundled mortgage loans and sold the resulting mortgage-backed securities:A. they insulated the banking system from any risk associated with mortgage defaults.B. they greatly reduced the overall risk of mortgage defaults.C. buyers of these securities assumed all of the risk of mortgage defaults.D. they reduced their direct exposure to mortgage default risk, but were still exposed through loans to investors in mortgage-backed securities.3. In the financial industry, “securitization” refers to:A. increasing insurance protection on bank deposits.B. requiring greater down payments on home purchases to reduce mortgage default risk.C. bundling groups of loans, bonds, mortgages, and other financial debts into new securities.D. increasing collateral requirements on loans.4. Collateralized default swaps:A. helped reduce the losses from the mortgage default crisis.B. involve exchanging high-risk mortgages for low-risk mortgage-backed securities.C. are loans to investors in mortgage-backed securities.D. insured holders of loan-backed securities in case they underlying loans were not repaid.5. Banks create money when they:A) loan money. B) add to their reserves in the Federal Reserve. C) accept deposits of cash. D) sell government bonds. 6. The amount that a commercial bank can lend at any given time is determined by its: A) outstanding checkable deposits. B) excess reserves. C) required reserves. D) outstanding loans. 7. The value of the monetary multiplier is: A) 1/Required Reserve Ratio. B) 1/MPS. C) 1/Excess Reserves. D) 1/MPC. 8. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $50,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of: D) $300,000.9. The ABC Bank of Bermuda has outstanding checkable deposits of $300,000 and a reserve ratio of 10%. If it has excess reserves of $45,000, what is the size of the bank’s actual reserves?D) $275,000 10. When the interest rate falls, the:A. Asset demand for money decreases C. Total amount of money demanded decreasesB. Transactions demand for money increases D. Total amount of money demanded increases11. When the Federal Reserve uses open-market operations to raise the Federal funds rate several times over a year, it is pursuing:A) An expansionary money policy C) A restrictive money policyB) A prime interest rate policy D) A Taylor rule policyECO 121 (Macroeconomics) Test 4(112912)12. Which of the following will increase commercial bank reserves? A) the purchase of government bonds in the open market by the Federal Reserve Banks B) the sale of government bonds in the open market by the Federal Reserve Banks C) an increase in the reserve ratio D) an increase in the discount rate 13. Answer the next question on the basis of the following information for a bond having no expiration date: bond price = $1000; bond fixed annual interest payment = $100; the annual interest rate when bond was issued = 10 percent. If the price of this bond rises to $1100, the interest rate will: D) rise to 12 percent. 14. Upon which of the following industries is a tight money policy likely to be most effective? A) residential construction B) furniture C) clothing D) food processing 15. Monetary policy is expected to have its greatest impact on: D) G.16. Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply: A) expands and commercial bank reserves decrease. B) expands and commercial bank reserves increase. C) contracts and commercial bank reserves increase. D) contracts and commercial bank reserves decrease. 17. Which of the following statements is true?A) The Federal Reserve sets the Federal funds rate.B) The Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push banks toward that target.C) The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.D) The Federal Reserve will set a higher target for the Federal funds rate if pursuing an expansionary monetary policy.18. If the amount of money supplied exceeds the amount demanded, the: A) demand-for-money curve will shift to the left. B) money supply curve will shift to the right.C) interest rate will rise.D) interest rate will fall. 19. If the Fed wants to raise the Federal funds rate, it should:A) decrease the discount rate.B) decrease the reserve ratio.C) buy government securities.D) sell government securities.20. Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks’ excess reserves?A. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employmentB. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employmentC. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decreaseD. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increaseECO 121 (Macroeconomics) Test 4(112912)21. Which of the following best describes what occurs when monetary authorities sell government securities?A. There is a decrease in the size of commercial banks’ excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDPB. There is a decrease in the size of commercial banks’ excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDPC. There is a decrease in the size of commercial banks’ excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDPD. There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP22. Generally, the prime interest rate:A) moves in the opposite direction as the Federal funds rate.B) remains constant over long periods of time.C) is highly inflexible downward.D) moves in the same direction as the Federal funds rate.23. Assume the economy is operating at less than full employment. An easy money policy will cause interest rates to ________, which will ___________ investment spending. A) increase; decreaseB) decrease; decreaseC) decrease; increaseD) increase; increase24. One of the strengths of monetary policy relative to fiscal policy is that monetary policy: A) entails a larger spending income multiplier effect on real GDP. B) can be implemented more quickly. C) is subject to closer political scrutiny. D) does not produce a net export effect. 25. Monetary policy is thought to be: A) only effective in moving the economy out of a depression. B) equally effective in moving the economy out of a depression as in controlling demand-pull inflation. C) more effective in controlling demand-pull inflation than in moving the economy out of a depression. D) more effective in moving the economy out of a depression than in controlling demand-pull inflation. ECO 121 (Macroeconomics) Test 4 (112912)For questions 26, 27 and 28, refer to the graphs below in which the numbers in parentheses near the AD1, AD2, and AD3labels indicate the level of investment spending associated with each curve. All figures are in billions. 26. If the money supply is MS0 and the goal of the monetary authorities is full-employment output Qf, they should:A. increase the money supply from $80 to $100.B. increase the money supply from $100 to $120.C. maintain the money supply at $100.D. decrease the money supply from $100 to $80.27. If aggregate demand is AD1 and the monetary authorities desire to increase it to AD2, they should:A. increase the interest rate from 3 percent to 6 percent.B. increase the money supply from $80 to $100.C. decrease the money supply from $120 to $100.D. decrease the interest rate from 9 percent to 3 percent.28. Which of the following would shift the money supply curve from MS3 to MS1?A. a decrease in the discount rateB. purchases of U.S. securities by the Fed in the open marketC. sales of U.S. securities by the Fed in the open marketD. a decrease in the reserve ratio29. If there is full employment, and a decline in aggregate demand occurs: A) Keynesian analysis would predict a decline in real output and employment. B) Keynesian analysis would predict a decline in prices and wages. C) Classical analysis would predict a decline in real output and employment. D) RET analysis would predict declines in both real GDP and the price level. 30. According to monetarists: A) the supply of money changes in response to changes in the levels of real output and prices.B) an expansionary fiscal policy will lower interest rates and overstimulate the economy. C) changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change. D) changes in the money supply are the primary cause of changes in the price level. ECO 121 (Macroeconomics) Test 4 (112912)31. According to mainstream macroeconomists, U.S. macro instability has resulted from:A. investment “booms” and “busts” and, occasionally, adverse aggregate supply shocks.B. adherence by the Fed to a monetary rule.C. government’s attempts to balance its budget.D. wide fluctuations in net exports.32. Monetarists believe the private economy is inherently:A. unstable and the public sector should be small.B. unstable and the public sector should be large.C. stable, but that the public sector should be large.D. stable and that the government sector should be small.33. The view that inappropriate monetary policy was the main reason for the depth of the Great Depression in the United States is most closely associated with:A. monetarism. C. the rational expectations theory.B. the mainstream view. D. the real-business-cycle theory.34. Rational expectations theory assumes that:A. people behave rationally and that all product and resource prices are flexible both upward and downward.B. firms pay above-market wages to elicit work effort.C. markets fail to coordinate the actions of households and businesses.D. markets are dominated by monopolistic firms.35. Most monetarists would say that: A) the MV = PQ equation provides a better understanding of the macroeconomy than does the C + Ig + Xn + G = GDP equation. B) most changes in the price level are explainable by changes in the money supply. C) the velocity of money is quite stable. D) all of the above are true. 36. Mainstream economists favor:A) the use of discretionary monetary policy and fiscal policy.B) a monetary rule.C) a balance-budget amendment.D) wage and price controls.37. The traditional monetary rule is the idea that:A. the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP.B. the annual rate of increase in the money supply should be equal to the long-term increase in the price level.C. an expansionary fiscal policy should always be accompanied by an easy monetary policy.D. monetary policy only affects the economy 6 to 9 months after the money supply is changed.38. The view that excessive growth of the money supply over long periods leads to inflation:A. is accepted by the monetarists but not by mainstream macroeconomists.B. is the main contribution of the rational expectations theory.C. had been absorbed into the mainstream of macroeconomics.D. is known as the monetary rule.39. Modern mainstream macroeconomists agree with the monetarists that: A) the Fed should increase the money supply at a fixed annual rate. B) velocity is highly stable. C) “money matters” in the macroeconomy. D) fiscal policy is largely ineffective. 40. Which of the following ideas of the rational expectations theory has been absorbed into mainstream macroeconomics? the monetary multiplierthe idea that ” money doesn’t matter “
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