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Exam 3
Final Exams Week
ECON 3313
Kenneth R. Szulczyk

These multiple choice questions will not appear on the exam, but they reflect the style of questions from the test bank.

1. _____ Deposits by depository institutions with the Fed:

(a) Are an asset to the Fed but a liability to the depository institutions.
(b) Are a liability to the Fed but an asset to the depository institutions.
(c) Represent all of the depository institutions reserves.
(d) Receive interest at market rates.

2. _____ If the Federal Reserve float increases, what happens to the monetary base and money supply?

(a) The monetary base increases, while the money supply decrease.
(b) Both the monetary base and the money supply decrease.
(c) Both the monetary base and the money supply increase.
(d) The monetary base decreases, while the money supply increase.

3. _____ The monetary base rises permanently:

(a) Whenever the federal government runs a deficit.
(b) Whenever the federal government runs a surplus.
(c) Whenever the federal government finances a deficit by selling bonds.
(d) Whenever the Fed acquires some of the bonds sold by the federal government to finance the deficit.

4. _____ If the U.S. Treasury deposits more funds at the Fed, what happens to the monetary base and money supply?

(a) The monetary base increases, while the money supply decrease.
(b) Both the monetary base and the money supply decrease.
(c) Both the monetary base and the money supply increase.
(d) The monetary base decreases, while the money supply increase.

5. _____ Which item below is a liability to the Fed?

(a) Items in the process of collection (CIPC).
(b) Gold certificates.
(c) Deferred availability cash items (DACI).
(d) Discount loans.

6. _____ The following items below appear on the Fed’s balance sheet. Which item below can the Fed control?

(a) Discount loans.
(b) The Federal Reserve float.
(c) Foreign government deposits.
(d) Special Drawing Rights.

7. _____ Why does the Fed buy U.S. government securities from the secondary market instead of the primary market?

(a) The secondary market for government securities is located in New York City, while the primary market is located in Washington, D.C.
(b) The price of the government securities on the secondary market tend to be cheaper.
(c) The Fed wants to be dependent on the Treasury Department.
(d) The Fed wants to remain independent of the Treasury Department.

8. _____ Why is the chairperson of the Board of Governors such a powerful man?

(a) The chairperson is also a member of Congress and the Secretary of the Treasury Department.
(b) He is able to use the power of the Fed to buy corporate stock and influence corporations.
(c) He informs foreign governments about the United States monetary policy.
(d) He also sits on the FOMC as the chairperson and also advises Congress and the President about the Fed’s actions.

9. _____ When a government bureaucracy does not serve the purpose that it was created for, what is this called?

(a) Public interest view.
(b) Principal-agent view.
(c) The selfish interest view.
(d) Procyclical activity view.

10. _____ Why was the Federal Reserve System broken down into 12 Fed district banks?

(a) To help centralize the central bank’s power.
(b) Congress thought 12 Fed banks were better than one.
(c) Each part of the U.S. is economically different, therefore 12 Fed banks were needed to assist each region differently.
(d) Originally Congress wanted the Fed to be controlled by the bankers.

11. _____ Why was the Federal Reserve System created in 1913?

(a) To help the U.S. Treasury to finance budget deficits.
(b) To regulate the stock market.
(c) To help spread financial panics.
(d) To perform check clearing.

12. _____ A rise in market interest rates:

(a) Encourages banks to take out discount loans but discourages their holding excess reserves.
(b) Discourages banks from taking out discount loans, but encourages their holding excess reserves.
(c) Encourages banks to take out discount loans and to hold excess reserves.
(d) Discourages banks from taking out discount loans and from holding excess reserves.

13. _____ Primary bond dealers are those:

(a) Permitted to trade directly with the Fed.
(b) Who work under the account manager at the Federal Reserve Bank of New York.
(c) Who specialize in selling bonds to small private investors.
(d) Responsible for assuming that interest rates to not decline unless the FOMC has given specific instructions that they decline.

14. _____ Which of the following statements is correct?

(a) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed.
(b) The volume of open market operations is determined jointly by the actions of banks and the Fed.
(c) The volume of open market operations is determined jointly by the actions of the public and the Fed.
(d) The volume of open market operations is determined solely by the Fed.

15. _____ When the Fed changes the percentage that banks must hold as vault cash or as deposits at the Fed in order to influence bank reserves and the money supply, what tool is the Fed using?

(a) Reserve requirements.
(b) Fed watching.
(c) Discount policy.
(d) Open market operations.

16. _____ If the Fed bought a banker’s acceptance, what impact would this have on bank reserves and the money supply?

(a) The banker’s acceptance has no impact on bank reserves and the money supply.
(b) The purchase of a banker’s acceptance has an unpredictable effect on bank reserves and the money supply.
(c) Both the money supply and bank reserves increase; it is identical to the Fed buying T-bills.
(d) Both the money supply and bank reserves decrease; it is identical to the Fed buying T-bills.

17. _____ When the Fed uses this technique during Christmas time to temporary inject reserves into the banking system, because people are withdrawing currency out of their banks to buy presents, what is this technique called?

(a) Outright purchases and sales.
(b) Federal Reserve repurchase agreement.
(c) Dynamic transactions.
(d) Defensive transactions.

18. _____ When the Fed unexpectedly changes the discount rate, this signals the financial markets of the Fed’s intentions. What is this called?

(a) Dynamic transactions.
(b) The announcement effect.
(c) Discount window.
(d) Adjustment credit.

19. _____ Which item below is a monetary policy goal of the Fed?

(a) Foreign-exchange market stability.
(b) Price instability.
(c) Low employment.
(d) High and variable interest rates.

20. _____ What is the purpose of monetary policy?

(a) To decrease the quantity of goods and services produced in the economy.
(b) To raise tax revenue for the U.S. government.
(c) To increase the well-being of society.
(d) To decrease the well-being of society.

21. _____ Which answer below is the proper sequence when the Fed implements monetary policy goal, using its monetary policy tools?

(a) The Fed’s tools influence the policy goal, which influences the operating target, which influences the intermediate target.
(b) The Fed’ tools influence the intermediate target, which influences the operating target, which influences the policy goal.
(c) The Fed’ tools influence the intermediate target, which influences the policy goal, which influences the operating target.
(d) The Fed’ tools influence the operating target, which influences the intermediate target, which influences the policy goal.

22. _____ Which answer below is the Fed’s criteria for selecting intermediate targets?

(a) The intermediate target must be variable.
(b) The intermediate target must be predictable.
(c) The intermediate target must be accountable.
(d) The correct answer is not listed above.

23. _____ If the Fed implements monetary policy that causes the economy to be more unstable, what do economists call this?

(a) Monetary policy goal.
(b) Intermediate targets.
(c) Operating targets.
(d) Procyclical monetary policy.

24. _____ Why is inflation such an important monetary policy goal?

(a) High inflation rates create uncertainty for households and businesses.
(b) Money’s function as a “store of value” breaks down, if inflation becomes too high.
(c) Money’s function as a “medium of exchange” breaks down, if inflation becomes too high.
(d) All of the above answers are correct.

25. _____ If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency:

(a) The central bank’s holdings of international reserves will fall.
(b) The domestic money supply will rise.
(c) Domestic interest rates will fall.
(d) It will buy foreign assets.

26. _____ If the U.S. current account balance is positive:

(a) U.S. citizens must have purchased more merchandise abroad than they sold abroad.
(b) The foreign-exchange value of the dollar must be rising.
(c) The foreign-exchange value of the dollar must be falling.
(d) U.S. citizens have funds to lend to foreigners.

27. _____ What are international reserves?

(a) The central bank holds foreign currency, which is an liability.
(b) The central bank holds foreign currency, which is an asset.
(c) A security issued by a central bank and this security is a promise to pay a foreign country.
(d) U.S. dollars issued by the Federal Reserve System.

28. _____ What is it called, when the Fed prevents the monetary base from changing, when the Fed conducts a foreign-exchange transaction?

(a) Balance-of-payment account.
(b) Current account deficit.
(c) Sterilized foreign-exchange intervention.
(d) Unsterilized foreign-exchange intervention.

29. _____ If the Fed believes the U.S. dollar is too strong, how can the Fed make the U.S. dollar weaker?

(a) The Fed cannot influence the exchange rate.
(b) The Fed sells U.S. dollars and buys foreign currency.
(c) The Fed sells foreign assets and buys U.S. dollars.
(d) The Fed sells foreign currency and buys U.S. dollars.

30. _____ What is one benefit of having the gold standard?

(a) Under the gold standard, a central bank can easily expand the money supply.
(b) The gold standard can cause extremely high inflation rates.
(c) If one country experiences a recession, this recession can spread to other countries.
(d) A gold standard reduces risk for international investors by fixing exchange rates.

Essay Questions

These questions reflect the style of the instructor; I will explain these in class.

1. You purchase a $1,000 computer through the mail from a company located in Texas. Using T-accounts for your bank, the computer firm's bank, and the Fed, show how the Fed clears your check.

Note: If I ask you this question on the exam, I will provide the T-accounts for you.

2. (a) The U.S. government is having a budget deficit. If the government raises taxes to pay for the budget deficit, show this transaction if you pay $300 more in taxes.

Note: Use the T-accounts for you, your bank, the Fed, and the U.S. Treasury Department. I will provide the T-accounts on the exam, if I ask this question.

(b) When the U.S. Treasury spends your tax money, what is the impact on the monetary base, money supply, and interest rates?

3. Explain in words and show graphically the impact of contractionary monetary policy in the T-bill market, when the Fed uses open-market operations. (Draw the supply and demand curves for the T-bill market),

4. Explain in words and show graphically the impact of contractionary monetary policy in the Federal Funds Market, when the Fed uses discount policy. (Draw the supply and demand curves for the Federal Funds Market).

5. (a) The Fed wants a weaker U.S. dollar exchange rate by buying $100,000 in foreign currencies. Please record this transaction on the Fed's Balance sheet.

(b) If the Fed to use sterilzed foreign-exchange intervention by using T-bills, how would this be recorded on the Fed's balance sheet?

6. (a) If a country is experiencing a balance-of-payment surplus (current account + capital account > 0), what happens to the central bank's official reserve assets?

(b) What happens to this central bank's monetary base, money supply, and interest rates?

7 The United States has a balance-of-payments deficit with Japan under the gold standard, i.e. capital account + current account < 0.

  • Which direction is the gold flowing?

  • What happens to the money supply in the United States

  • What happens to prices in the United States

  • What happens to the balance-of-payments deficit over time?

Answers:

1. b

2. c

3. d

4. b

5. c

6. a

7. d

8. d

9. b

10. c

11. d

12. a

13. a

14. d

15. a

16. c

17. b

18. b

19. a

20. c

21. d

22. b

23. d

24. d

25. a

26. d

27. b

28. c

29. b

30. d

 

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