FIN 340 EXAM 1 AND 2 – QUESTIONS & 100%
ACCURATE ANSWERS
When transactions deposits are used to make payments, the end result is
usually_____. - ANSWER An increase in the bank account of the payee and a
decrease in the bank account of the payer
An increase in the deposits of the payee's bank at the Fed and a decrease in the
deposits of the payer's bank at the Fed
One of the main reasons the Federal Reserve was created in 1913 was to _____.
Only later did the Federal Reserve begin to _____. - ANSWER Serve as a
lender of last resort to banks having liquidity problems; conduct monetary
policy to benefit the overall economy
The Federal Reserve differs from other central banks in that it has a relatively
_____ structure, which is reflected in the fact that _____. - ANSWER
Decentralized; regional Federal Reserve Banks have an important say in
monetary policy
Most economists believe that the Fed and other central banks should enjoy
_____ independence from the rest of government to ensure that they _____. -
ANSWER Substantial; can resist political pressures to adopt overly easy
monetary policies
One limit to the independence of the Fed is that _____. - ANSWER Its high-
level monetary goals have been set by Congress through the dual mandate
The diagram below shows reserve demand and reserve supply as functions of
the federal funds rate when the Fed implements monetary policy as described
1n' the textbook and class. The
reason the supply curve becomes horizontal at a federal funds rate of 10% is
that _____. The reason the demand curve becomes horizontal at a federal funds
, rate of 5% is that _____. - ANSWER Banks can borrow reserves from the Fed
at a rate of 10%; banks can earn interest of 5% on excess reserves held at the
Fed
Suppose the reserves market is initially in equilibrium at point A with a federal
funds rate of 5%. If the equilibrium funds rate changes to 7.5%, it could be
either because the Fed _____ or because the Fed _____. - ANSWER Conducts
open market sales of 200; raises interest on excess reserves by 2.5 points
The type of equilibrium represented by point A in the diagram on the previous
page is the type that existed _____. The reason the reserves market was in this
position was that _____. - ANSWER During and after the financial crisis; the
Fed had sharply increased the supply of reserves as part of its easing of
monetary policy
By "potential output," economists mean the level of output (real GDP) that
_____. While the Fed normally sets monetary policy to try to achieve this level
of output, it may sometimes aims for a lower level of output to _____. -
ANSWER Can be produced when unemployment is at the natural rate, with no
upward or downward
pressure on inflation; decrease inflation when it has become too high
In fulfilling its monetary policy responsibilities, the Fed interprets price stability
to mean a _____ rate of inflation because _____. - ANSWER Low and stable;
if inflation were zero, the Fed would have to set a lower nominal interest rate
target, giving it less ammunition to fight a recession if one occurred
Suppose the nominal interest rate is 3% and the expected rate of inflation is 5%.
Then the real interest rate is approximately _____%. Because this measure uses
expected rather than actual inflation, it is sometimes referred to as the _____
real interest rate. - ANSWER -2; ex ante
The diagram below shows aggregate expenditure as a function of the real
interest rate, r. Which of the following are reasons why the curve is downward
sloping? - ANSWER An increase m' the real interest rate increases the cost to
businesses of financing investment projects.
ACCURATE ANSWERS
When transactions deposits are used to make payments, the end result is
usually_____. - ANSWER An increase in the bank account of the payee and a
decrease in the bank account of the payer
An increase in the deposits of the payee's bank at the Fed and a decrease in the
deposits of the payer's bank at the Fed
One of the main reasons the Federal Reserve was created in 1913 was to _____.
Only later did the Federal Reserve begin to _____. - ANSWER Serve as a
lender of last resort to banks having liquidity problems; conduct monetary
policy to benefit the overall economy
The Federal Reserve differs from other central banks in that it has a relatively
_____ structure, which is reflected in the fact that _____. - ANSWER
Decentralized; regional Federal Reserve Banks have an important say in
monetary policy
Most economists believe that the Fed and other central banks should enjoy
_____ independence from the rest of government to ensure that they _____. -
ANSWER Substantial; can resist political pressures to adopt overly easy
monetary policies
One limit to the independence of the Fed is that _____. - ANSWER Its high-
level monetary goals have been set by Congress through the dual mandate
The diagram below shows reserve demand and reserve supply as functions of
the federal funds rate when the Fed implements monetary policy as described
1n' the textbook and class. The
reason the supply curve becomes horizontal at a federal funds rate of 10% is
that _____. The reason the demand curve becomes horizontal at a federal funds
, rate of 5% is that _____. - ANSWER Banks can borrow reserves from the Fed
at a rate of 10%; banks can earn interest of 5% on excess reserves held at the
Fed
Suppose the reserves market is initially in equilibrium at point A with a federal
funds rate of 5%. If the equilibrium funds rate changes to 7.5%, it could be
either because the Fed _____ or because the Fed _____. - ANSWER Conducts
open market sales of 200; raises interest on excess reserves by 2.5 points
The type of equilibrium represented by point A in the diagram on the previous
page is the type that existed _____. The reason the reserves market was in this
position was that _____. - ANSWER During and after the financial crisis; the
Fed had sharply increased the supply of reserves as part of its easing of
monetary policy
By "potential output," economists mean the level of output (real GDP) that
_____. While the Fed normally sets monetary policy to try to achieve this level
of output, it may sometimes aims for a lower level of output to _____. -
ANSWER Can be produced when unemployment is at the natural rate, with no
upward or downward
pressure on inflation; decrease inflation when it has become too high
In fulfilling its monetary policy responsibilities, the Fed interprets price stability
to mean a _____ rate of inflation because _____. - ANSWER Low and stable;
if inflation were zero, the Fed would have to set a lower nominal interest rate
target, giving it less ammunition to fight a recession if one occurred
Suppose the nominal interest rate is 3% and the expected rate of inflation is 5%.
Then the real interest rate is approximately _____%. Because this measure uses
expected rather than actual inflation, it is sometimes referred to as the _____
real interest rate. - ANSWER -2; ex ante
The diagram below shows aggregate expenditure as a function of the real
interest rate, r. Which of the following are reasons why the curve is downward
sloping? - ANSWER An increase m' the real interest rate increases the cost to
businesses of financing investment projects.
