Archive for June 2016

When a member of the nonbank public deposits currency into her bank account,

When a member of the nonbank public deposits currency into her bank account,




A) both the monetary base and bank reserves fall.
B) both the monetary base and bank reserves rise.
C) the monetary base falls, but bank reserves remain unchanged.
D) bank reserves rise, but the monetary base remains unchanged.



Answer: D

When a member of the nonbank public withdraws currency from her bank account,

When a member of the nonbank public withdraws currency from her bank account,




A) both the monetary base and bank reserves fall.
B) both the monetary base and bank reserves rise.
C) the monetary base falls, but bank reserves remain unchanged.
D) bank reserves fall, but the monetary base remains unchanged.



Answer: D

If a member of the nonbank public purchases a government bond from the Federal Reserve in exchange for currency, the monetary base will ________, but reserves will ________.

If a member of the nonbank public purchases a government bond from the Federal Reserve in exchange for currency, the monetary base will ________, but reserves will ________.




A) remain unchanged; rise
B) remain unchanged; fall
C) rise; remain unchanged
D) fall; remain unchanged



Answer: D

If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will ________, but ________.

If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will ________, but ________.




A) remain unchanged; reserves will fall
B) remain unchanged; reserves will rise
C) rise; currency in circulation will remain unchanged
D) rise; reserves will remain unchanged



Answer: D

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves.

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves.




A) has no effect on; has no effect on
B) has no effect on; increases
C) increases; has no effect on
D) decreases; increases



Answer: B

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.




A) deposits; deposits
B) deposits; currency
C) currency; deposits
D) currency; currency



Answer: C

High-powered money minus reserves equals

High-powered money minus reserves equals




A) reserves.
B) currency in circulation.
C) the monetary base.
D) the nonborrowed base.



Answer: B

The monetary base minus reserves equals

The monetary base minus reserves equals




A) currency in circulation.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.


Answer: A

Total Reserves minus vault cash equals

Total Reserves minus vault cash equals




A) bank deposits with the Fed.
B) excess reserves.
C) required reserves.
D) currency in circulation.



Answer: A

Excess reserves are equal to

Excess reserves are equal to




A) total reserves minus discount loans.
B) vault cash plus deposits with Federal Reserve banks minus required reserves.
C) vault cash minus required reserves.
D) deposits with the Fed minus vault cash plus required reserves.



Answer: B

Total reserves are the sum of ________ and ________.

Total reserves are the sum of ________ and ________.




A) excess reserves; borrowed reserves
B) required reserves; currency in circulation
C) vault cash; excess reserves
D) excess reserves; required reserves



Answer: D

Reserves are equal to the sum of

Reserves are equal to the sum of




A) required reserves and excess reserves.
B) required reserves and vault cash reserves.
C) excess reserves and vault cash reserves.
D) vault cash reserves and total reserves.



Answer: A

The monetary base consists of

The monetary base consists of




A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury's monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.



Answer: C

Both ________ and ________ are monetary liabilities of the Fed.

Both ________ and ________ are monetary liabilities of the Fed.




A) securities; loans to financial institutions
B) currency in circulation; reserves
C) securities; reserves
D) currency in circulation; loans to financial institutions



Answer: B

The monetary liabilities of the Federal Reserve include

The monetary liabilities of the Federal Reserve include




A) securities and loans to financial institutions.
B) currency in circulation and reserves.
C) securities and reserves.
D) currency in circulation and loans to financial institutions.



Answer: B

Both ________ and ________ are Federal Reserve assets.

Both ________ and ________ are Federal Reserve assets.




A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves



Answer: C

The three players in the money supply process include

The three players in the money supply process include




A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.



Answer: C

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because




A) most of it just flowed into holdings of excess reserve.
B) the Fed also increased the required reserve ratio
C) the Fed also conducted open market sales.
D) the discount loan decreased.



Answer: A

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to 




A) a huge increase in the monetary base.
B) a huge expansion of the money supply.
C) an economic expansion.
D) a high inflation.




Answer: A

The policy tool of changing reserve requirements is

The policy tool of changing reserve requirements is




A) the most widely used.
B) the preferred tool from the bank's perspective.
C) no longer used.
D) still used, even with its disadvantages.




Answer: C

Funds held in ________ are subject to reserve requirements.

Funds held in ________ are subject to reserve requirements.




A) all checkable deposits
B) all checkable and time deposits
C) all checkable, time, and money market fund deposits
D) all time deposits




Answer: A

Since 1980, ________ are subject to reserve requirements.

Since 1980, ________ are subject to reserve requirements.




A) only commercial banks
B) only the member institutions of the Federal Reserve
C) only nationally chartered depository institutions
D) all depository institutions



Answer: D

The Fed's lender-of-last-resort function

The Fed's lender-of-last-resort function




A) has proven to be ineffective.
B) cannot prevent runs by large depositors.
C) is no longer necessary due to FDIC insurance.
D) creates a moral hazard problem.




Answer: D

The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the

The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the




A) Term Securities Lending Facility.
B) Term Auction Facility.
C) Primary Dealer Credit Facility.
D) Commercial Paper Funding Facility.



Answer: B

A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that

A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that 




A) it was lowering the discount rate.
B) it would provide discount loans to any bank that would make loans to the security industry.
C) it stood ready to purchase common stocks to prevent a further slide in stock prices.
D) it was raising the discount rate.



Answer: B

At its inception, the Federal Reserve was intended to be

At its inception, the Federal Reserve was intended to be




A) the Treasury's banker.
B) the issuer of government debt.
C) a lender-of-last-resort.
D) a regulator of bank holding companies.



Answer: C

The Fed is considering eliminating

The Fed is considering eliminating 




A) primary credit lending.
B) secondary credit lending.
C) seasonal credit lending.
D) its lender of last resort function.



Answer: C

The interest rate on seasonal credit equals

The interest rate on seasonal credit equals 




A) the federal funds rate.
B) the primary credit rate.
C) the secondary credit rate.
D) an average of the federal funds rate and rates on certificates of deposits.



Answer: D

The Fed prefers that so that

The Fed prefers that so that 




A) banks borrow reserves from each other ; banks can monitor each other for credit risk.
B) banks borrow reserves from each other; the Fed can monitor banks for credit risk.
C) banks borrow reserves from the Fed; banks can monitor each other for credit risk.
D) banks borrow reserves from the Fed; the Fed can monitor banks for credit risk.



Answer: A

The discount rate is kept ________ the federal funds rate because the Fed prefers that

The discount rate is kept ________ the federal funds rate because the Fed prefers that 




A) below ; banks can monitor each other for credit risk.
B) below; the Fed can monitor banks for credit risk.
C) above ; banks can monitor each other for credit risk.
D) above; the Fed can monitor banks for credit risk.



Answer: C

The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.

The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems. 





A) seasonal credit; secondary credit; primary credit
B) secondary credit; seasonal credit; primary credit
C) primary credit; seasonal credit; secondary credit
D) seasonal credit; primary credit; secondary credit



Answer: C

Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.




A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase



Answer: B

If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.

If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.




A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise



Answer: B

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.




A) rise; defensive; drain
B) fall; defensive; drain
C) rise; dynamic; inject
D) fall; dynamic; drain



Answer: B

If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.




A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain



Answer: B

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.




A) increase; defensive; inject
B) decrease; defensive; inject
C) increase; dynamic; inject
D) decrease; dynamic; drain



Answer: A

If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.




A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain



Answer: A

If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.





A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain




Answer: B

If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.

If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.




A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase



Answer: B

The actual execution of open market operations is done at

The actual execution of open market operations is done at




A) the Board of Governors in Washington, D.C.
B) the Federal Reserve Bank of New York.
C) the Federal Reserve Bank of Philadelphia.
D) the Federal Reserve Bank of Boston.



Answer: B

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called




A) defensive open market operations.
B) dynamic open market operations.
C) offensive open market operations.
D) reactionary open market operations



Answer: A

There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.

There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.




A) defensive; dynamic
B) defensive; static
C) dynamic; defensive
D) dynamic; static



Answer: C

The two types of open market operations are

The two types of open market operations are



A) offensive and defensive.
B) dynamic and reactionary.
C) active and passive.
D) dynamic and defensive.


Answer: D

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves



A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.



Answer: B

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate 




A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.


Answer: A

Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves

Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves 




A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.


Answer: A

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate 




A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.



Answer: B

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1%

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% 




A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.


Answer: C

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2%

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2% 




A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.



Answer: B

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2% 



A) lowers the federal funds rate.
B) raises the federal funds rate
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.



Answer: C

In the market for reserves, a lower interest rate paid on excess reserves

In the market for reserves, a lower interest rate paid on excess reserves 




A) decreases the supply of reserves.
B) increases the supply of reserves.
C) decreases the effective floor for the federal funds rate.
D) increases the effective floor for the federal funds rate.



Answer: C

In the market for reserves, a lower discount rate

In the market for reserves, a lower discount rate 




A) decreases the supply of reserves.
B) increases the supply of reserves.
C) lengthens the vertical section of the supply curve of reserves.
D) shortens the vertical section of the supply curve of reserves.


Answer: D

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.




A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand



Answer: C

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant.




A) decreases; decrease
B) increases; decrease
C) increases; increase
D) decreases; increase



Answer: D

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.




A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise



Answer: B

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.





A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand




Answer: A

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.




A) sale decreases
B) sale increases
C) purchase increases
D) purchase decreases



Answer: A

When the federal funds rate equals the discount rate

When the federal funds rate equals the discount rate 




A) the supply curve of reserves is vertical.
B) the supply curve of reserves is horizontal.
C) the demand curve for reserves is vertical.
D) the demand curve for reserves is horizontal.



Answer: B

The quantity of reserves supplied equals

The quantity of reserves supplied equals




A) nonborrowed reserves minus borrowed reserves.
B) nonborrowed reserves plus borrowed reserves.
C) required reserves plus borrowed reserves.
D) total reserves minus required reserves.



Answer: B

Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings?

Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings?




A) Paying interest reduces the effective tax on deposits.
B) Paying interest will help in the implementation of monetary policy.
C) Paying interest will help the Federal Reserve have more control of the amount of discount loans.
D) Paying interest increases the capacity of the Fed's balance sheet which will make it easier to address financial crises.



Answer: C

When the federal funds rate equals the interest rate paid on excess reserves

When the federal funds rate equals the interest rate paid on excess reserves




A) the supply curve of reserves is vertical.
B) the supply curve of reserves is horizontal.
C) the demand curve for reserves is vertical.
D) the demand curve for reserves is horizontal.



Answer: D

The quantity of reserves demanded equals

The quantity of reserves demanded equals 




A) required reserves plus borrowed reserves.
B) excess reserves plus borrowed reserves.
C) required reserves plus excess reserves.
D) total reserves minus excess reserves.



Answer: C

International policy coordination refers to

International policy coordination refers to




A) central banks in major nations acting without regard to the global consequences of their policies.
B) central banks in major nations pursuing only domestic objectives.
C) central banks adopting policies in pursuit of joint objectives.
D) central banks all adopting identical policies



Answer: C

The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate.

The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate.




A) raising; lowering
B) raising; raising
C) lowering; lowering
D) lowering; raising



Answer: A

A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant.

A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant.




A) procyclical; increase; increase
B) countercyclical; increase; increase
C) procyclical; reduce; reduce
D) countercyclical; reduce; reduce



Answer: A

The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy.

The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy.




A) decrease; contractionary
B) increase; expansionary
C) increase; contractionary
D) decrease; expansionary



Answer: D

Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target.

Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target.




A) borrowed reserves
B) nonborrowed reserves
C) excess reserves
D) required reserves



Answer: A

The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed

The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed




A) had shifted to borrowed reserves as an operating target.
B) had shifted to total reserves as an operating target.
C) had shifted to the monetary base as an operating target.
D) never intended to target monetary aggregates.



Answer: D

In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it

In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it




A) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate.
B) was still very concerned with achieving interest rate stability.
C) was committed to targeting free reserves.
D) was committed to the real bills doctrine.




Answer: B

High inflation can spiral out of control when

High inflation can spiral out of control when




A) expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation.
B) expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation.
C) expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation.
D) expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation.



Answer: A

Targeting interest rates can be pro cyclical because

Targeting interest rates can be pro cyclical because




A) an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.
B) an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.
C) an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.
D) an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income.


Answer: A

During the 1950s, Fed monetary policy targeted

During the 1950s, Fed monetary policy targeted




A) the monetary base.
B) the exchange rate.
C) discount loans.
D) interest rates.



Answer: D

During the 1950s, the Fed targeted

During the 1950s, the Fed targeted



A) M1.
B) M2.
C) the monetary base.
D) money market conditions.


Answer: D

The Fed's mistakes of the early 1930s were compounded by its decision to

The Fed's mistakes of the early 1930s were compounded by its decision to




A) raise reserve requirements in 1936-1937.
B) lower reserve requirements in 1936-1937.
C) raise the monetary base in 1936-1937.
D) lower the monetary base in 1936-1937.



Answer: A

The Fed accidentally discovered open market operations when

The Fed accidentally discovered open market operations when




A) it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system.
B) it purchased securities for income following the 1920-1921 recession.
C) it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system.
D) it reinterpreted a key provision of the Federal Reserve Act.



Answer: B

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the





A) free reserves doctrine.
B) Benjamin Strong doctrine.
C) efficient liquidity doctrine.
D) real bills doctrine



Answer: D

The rate of inflation increases when

The rate of inflation increases when




A) the unemployment rate equals the NAIRU.
B) the unemployment rate exceeds the NAIRU.
C) the unemployment rate is less than the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.


Answer: C

The rate of inflation tends to remain constant when

The rate of inflation tends to remain constant when




A) the unemployment rate is above the NAIRU.
B) the unemployment rate equals the NAIRU.
C) the unemployment rate is below the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.



Answer: B

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________.

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________.




A) rise; tight
B) rise; loose
C) fall; tight
D) fall; loose



Answer: D

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target.

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target.




A) rises above; drops below
B) drops below; drops below
C) rises above; rises above
D) drops below; rises above



Answer: C

When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.




A) three-month T-bill; monetary
B) three-month T-bill; reserve
C) federal funds; monetary
D) federal funds; reserve



Answer: D

Real interest rates are difficult to measure because

Real interest rates are difficult to measure because



A) data on them are not available in a timely manner.
B) real interest rates depend on the hard-to-determine expected inflation rate.
C) they fluctuate too often to be accurate.
D) they cannot be controlled by the Fed.


Answer: B

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targetsFluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targetsFluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets




A) a monetary aggregate.
B) the monetary base.
C) an interest rate.
D) nominal GDP.



Answer: C

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,




A) fluctuations of nonborrowed reserves will be small.
B) fluctuations of nonborrowed reserves will be large.
C) the Fed will probably quickly abandon this policy, as it did in the 1960s.
D) the Fed will probably quickly abandon this policy, as it did in the 1950s.



Answer: B

Due to the lack of timely data for the price level and economic growth, the Fed's strategy

Due to the lack of timely data for the price level and economic growth, the Fed's strategy




A) targets the exchange rate, since the Fed can control this variable.
B) targets the price of gold, since it is closely related to economic activity.
C) uses an intermediate target, such as an interest rate.
D) stabilizes the consumer price index, since the Fed can control the CPI



Answer: C

Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles?

Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles?




A) The effect of increasing interest rates on asset prices is uncertain.
B) A bubble may only exist in some asset-prices and monetary policy will affect all asset prices.
C) Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy.
D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify.


Answer: D

Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.

Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.




A) less
B) about the same amount of
C) more
D) either more, less, or the same amount of


Answer: C

The "Greenspan doctrine" - central banks should not try to prick bubbles - was based on which of the following arguments?

The "Greenspan doctrine" - central banks should not try to prick bubbles - was based on which of the following arguments?




A) Asset-price bubbles are nearly impossible to identify.
B) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble.
C) Raising interest rates has often been found to cause a bubble to burst more severely.
D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy.
E) all of the above.



Answer: E

The problems of raising the level of the inflation target include

The problems of raising the level of the inflation target include




A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large.
B) the costs of higher inflation in terms of the distortions it produces in the economy are high.
C) it is more difficult to stabilize the inflation rate at a higher targeting level.
D) all of the above.



Answer: D

Lessons that economists and policy makers have learned from the recent global financial crisis include

Lessons that economists and policy makers have learned from the recent global financial crisis include



A) Developments in the financial sector have a far greater impact on economic activity than was earlier realized.
B) The zero lower bound on interest rates can be a serious problem.
C) The cost of cleaning up after a financial crisis is very high.
D) Price and output stability do not ensure financial stability.
E) All of the above.


Answer: E

When compared to the Fed's ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.

When compared to the Fed's ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.




A) nominal; inflation
B) implicit; monetary
C) nominal; monetary
D) implicit; inflation



Answer: D

Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to affect output and just over ________ for monetary policy to affect the inflation rate.

Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to affect output and just over ________ for monetary policy to affect the inflation rate.




A) 1 year; 2 years
B) 2 years; 1 year
C) 1 year; 6 months
D) 6 months; 1 year



Answer: A

Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.

Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.




A) demand: tighten
B) demand; loosen
C) supply; tighten
D) supply; loosen


Answer: B

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.




A) below; high
B) below; low
C) above; high
D) above; low


Answer: D

Which of the following is NOT a disadvantage to inflation targeting?

Which of the following is NOT a disadvantage to inflation targeting?




A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) There is a lack of transparency.


Answer: D

Which of the following is NOT an advantage of inflation targeting?

Which of the following is NOT an advantage of inflation targeting?





A) There is simplicity and clarity of the target.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) There is an immediate signal on the achievement of the target.
D) Inflation targeting reduces the effects of inflation shocks.



Answer: C

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?




A) The unemployment rate increased sharply.
B) The unemployment rate remained constant.
C) The unemployment rate has declined substantially after a sharp increase.
D) The unemployment rate declined sharply immediately after the inflation targets were adopted.



Answer: C

Which of the following is NOT an element of inflation targeting?

Which of the following is NOT an element of inflation targeting?




A) A public announcement of medium-term numerical targets for inflation
B) An institutional commitment to price stability as the primary long-run goal
C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
D) Increased accountability of the central bank for attaining its inflation objectives



Answer: C

The primary goal of the European Central Bank is

The primary goal of the European Central Bank is




A) price stability.
B) exchange rate stability.
C) interest rate stability.
D) high employment.



Answer: A

Which set of goals can, at times, conflict in the short run?

Which set of goals can, at times, conflict in the short run?




A) High employment and economic growth.
B) Interest rate stability and financial market stability.
C) High employment and price level stability.
D) Exchange rate stability and financial market stability.



Answer: C

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.




A) increase; more
B) increase; less
C) decrease; more
D) decrease; less



Answer: B

Having interest rate stability

Having interest rate stability 




A) allows for less uncertainty about future planning.
B) leads to demands to curtail the Fed's power.
C) guarantees full employment.
D) leads to problems in financial markets.



Answer: A

The Federal Reserve System was created to

The Federal Reserve System was created to




A) make it easier to finance budget deficits.
B) promote financial market stability.
C) lower the unemployment rate.
D) promote rapid economic growth.



Answer: B

Supply-side economic policies seek to

Supply-side economic policies seek to




A) raise interest rates through contractionary monetary policy.
B) increase federal government expenditures.
C) increase consumption expenditures by increasing taxes.
D) increase saving and investment using tax incentives.



Answer: D

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the




A) frictional level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) Keynesian rate level of unemployment.



Answer: C

High unemployment is undesirable because it

High unemployment is undesirable because it




A) results in a loss of output.
B) always increases inflation.
C) always increases interest rates.
D) reduces idle resources.


Answer: A

Even if the Fed could completely control the money supply, monetary policy would have critics because

Even if the Fed could completely control the money supply, monetary policy would have critics because




A) the Fed is asked to achieve many goals, some of which are incompatible with others.
B) the Fed's goals do not include high employment, making labor unions a critic of the Fed.
C) the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions.
D) it is required to keep Treasury security prices high.




Answer: A

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule.

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule.




A) inflation rate
B) unemployment rate
C) interest rate
D) foreign exchange rate



Answer: A

Monetary policy is considered time-inconsistent because

Monetary policy is considered time-inconsistent because




A) of the lag times associated with the implementation of monetary policy and its effect on the economy.
B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run.
C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.
D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.



Answer: C

A nominal anchor promotes price stability by

A nominal anchor promotes price stability by



A) outlawing inflation.
B) stabilizing interest rates.
C) keeping inflation expectations low.
D) keeping economic growth low.



Answer: C

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal



A) anchor.
B) benchmark.
C) tether.
D) guideline.



Answer: A

Inflation results in

Inflation results in



A) ease of planning for the future.
B) ease of comparing prices over time.
C) lower nominal interest rates.
D) difficulty interpreting relative price movements.



Answer: D

Which of the following statements about involuntary conversions is false?

Which of the following statements about involuntary conversions is false?




a. An involuntary conversion may result from condemnation or fire.
b. The gain or loss from an involuntary conversion may be reported as an extraordinary item.
c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets.
d. All of these answers are correct.



Answer: C

When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from

When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from




a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
b. a sale prior to the completion of the estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.




Answer: A

An expenditure made in connection with a machine being used by an enterprise should be

An expenditure made in connection with a machine being used by an enterprise should be




a. expensed immediately if it merely extends the useful life but does not improve the quality.
b. expensed immediately if it merely improves the quality but does not extend the useful life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine.



Answer: D

In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?

In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?




a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner intended
d. Expenditure made to add new asset services



Answer: C

Which of the following is not a capital expenditure?

Which of the following is not a capital expenditure?




a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement


Answer: A

Which of the following is a capital expenditure?

Which of the following is a capital expenditure?



a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of Federal income taxes
d. None of these answers are correct


Answer: D

An improvement made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be

An improvement made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be




a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.



Answer: C

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at





a. the nominal cost of taking title to it.
b. its fair value.
c. one dollar (since the site cost nothing but should be included in the balance sheet).
d. the value assigned to it by the company's directors.




Answer: B

For a nonmonetary exchange of plant assets, accounting recognition should not be given to

For a nonmonetary exchange of plant assets, accounting recognition should not be given to




a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
c. part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).
d. part of a gain when the exchange has no commercial substance and cash is received (cash paid or received is less than 25% of the fair value of the exchange).



Answer: C

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has




a. no commercial substance and additional cash is paid.
b. no commercial substance and additional cash is received.
c. commercial substance and additional cash is paid.
d. commercial substance and additional cash is received.




Answer: A



A company should immediately recognize:

A company should immediately recognize:




a. any gain when it makes a bargain purchase.
b. any loss when it ignorantly pays too much for an asset originally.
c. any gain when it constructs a piece of equipment at a cost savings.
d. any loss when it receives any asset lower than its book value.



Answer: B

Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will




a. be reported in the Other Revenues and Gains section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner's capital account



Answer: B

The cost of a non monetary asset acquired in exchange for another non monetary asset when the exchange has commercial substance is usually recorded at

The cost of a non monetary asset acquired in exchange for another non monetary asset when the exchange has commercial substance is usually recorded at




a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.



Answer: A

When boot is involved in an exchange having commercial substance

When boot is involved in an exchange having commercial substance




a. gains or losses are recognized in their entirely.
b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.



Answer: A

Which of the following nonmonetary exchange transactions represents a culmination of the earning process?

Which of the following nonmonetary exchange transactions represents a culmination of the earning process?




a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by companies in the same line of business with no difference in future cash flows.
c. Exchange of assets with a difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position.



Answer: C
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