Question

In: Economics

1. When Brazil was experiencing high rates of inflation prior to the introduction of the Real,...

1. When Brazil was experiencing high rates of inflation prior to the introduction of the Real, money was:

a.  more useful as a medium of exchange.

b.  more useful as a store of value.

c.  less useful as a unit of account.

d. more useful as a unit of account.

2. When considering policy, measures of access to credit can often be:

a. as important as the measure of money.

b. measures of individual assets.

c. included in the measures of money.

d. unimportant to the economy.

3. Illiquid assets could perform which of the following functions?

a. Cash for transactions

b. Medium of exchange

c. Store of value

d. Trade without bartering

4. A financial asset is liquid:

a. if it can be readily exchanged for another asset or good.

b. only if it takes the form of cash.

c. if it can be carried easily from one place to another.

d. if it is held by the public and earning interest.

5 If people hold onto money as cash rather than depositing it, the money multiplier will:

a. get smaller.

b. be increased by the Federal Reserve.

c. stay the same.

d. get larger.

6. Which of the following is not counted as money?

a. Federal Reserve notes

b. Bank reserves

c. Currency held by the public

d. Loans made by a bank

7. After the beginning of the 2008 recession, excess reserves rose significantly. This increase most likely:

a. decreased the money supply.

b. increased the money supply.

c. did not affect the money supply.

d. had an unpredictable effect on the money supply.

8. A bank has the following Balance Sheet:

Assets

Liabilities

Equity

Mortgages: $1,000

Checking Deposits: $800

Owners equity: $100

Reserves: $200

Savings Deposits: $300

What is the reserve ratio for this bank?

a. 18%

b. 25%

c. 37%

d. 50%

9. A bank has the following Balance Sheet:

Assets

Liabilities

Equity

Mortgages: $1,000

Checking Deposits: $800

Owners equity: $100

Reserves: $200

Savings Deposits: $300

What is the leverage ratio for this bank?

a. 11.00

b. 1.11

c. 5.00

2.67

d.

10. To decrease the nation's money supply, the Fed can:

a. increase the interest paid on reserves.

b. decrease the discount rate.

c. decrease reserve requirements.

d. buy government securities in the open market.

11. The primary tool for U.S. monetary policy is:

a. the interest rate on reserves.

b. the reserve requirement.

c. the reverse repurchase agreement

d. the discount rate.

12. In 2020, the Fed decreased the reserve requirement to zero. Ceteris paribus, this should cause the money supply to _______, and the money multiplier to ________.

a. expand, expand

b. expand, contract.

c. contract, expand

d. contract, contract

13. The Fed generally announces what it is doing with monetary policy in terms of a target for the:

a. monetary base.

b. reserve requirement.

c. discount rate.

d. federal funds rate.

14. To decrease the nation's money supply, the Fed can:

a. decrease the discount rate.

b. buy government securities in the open market.

c. decrease reserve requirements.

d. increase the interest paid on reserves.

15. If the Fed wants to implement expansionary monetary policy, it might:

a. sell government securities to increase the federal funds rate.

b. sell government securities to reduce the federal funds rate.

c. buy government securities to reduce the federal funds rate.

d. buy government securities to increase the federal funds rate.

16. Most decisions about implementing monetary policy are made by the:

a. chairman of the Fed only.

b. president and Congress.

c. Federal Open Market Committee.

d. president.

17. Which of the following is the path through which contractionary monetary policy works?

a. Money down implies interest rate up implies investment up implies income down.

b. Money down implies interest rate down implies investment up implies income down.

c. Money down implies interest rate up implies investment down implies income down.

d. Money down implies interest rate down implies investment down implies income down.

18. Read the following question carefully, the FOMC may engage in bad policy making depending on what question you got.

A.) Draw and label each of the three components of the AS/AD model such that there is an inflationary gap. Give each the subscript "1", for example AD 1. Be sure to label the X and Y axis correctly.

B.) The FOMC meets and decides to raise the IOER. How would you demonstrate this change in the model? Make the proper change and label it with the subscript "2".

C.) Is the economy now in a long-run equilibrium (it will depend on your question and how you draw it)?

D.) If there is no additional monetary or fiscal policy, what would you expect to occur over the long-run? If anything would shift endogenously, show the shift and label it with the subscript "3".

19. Solvency is having:

a. sufficient liabilities to cover long-run assets.

b. liabilities that can be readily converted into cash.

c. sufficient assets to cover long-run liabilities.

d. assets that can be readily converted into cash.

20. When there are unsustainable rapidly rising prices of some type of financial asset, such as stocks, we refer to this as a(n):

a. liquidity trap.

b. moral-hazard problem.

c. bad-precedent problem.

d. asset price bubble.

21. leverage is best defined as:

a. the practice of buying an asset with borrowed money.

b. low interest rates at the beginning of the term of a loan that later rise.

c. using friends inside the banking industry to secure loans.

d. the ability of people without income to secure mortgages.

22. Whenever a regulatory system is set up, individuals or firms being regulated will figure out ways to get around these regulations. This is referred to as the law of:

a. diminishing control.

b. demand.

c. unintended consequences.

d. diminishing returns.

23. All of the following are examples of the law of diminishing control that followed banking regulations put in place after the Great Depression except:

a. banks created new instruments to circumvent the law.

b. depositors demanded financial institutions be responsible for their financial decisions.

C. politicians were pressured to dismantle the regulations.

d. financial business migrated to unregulated institutions.

24. If a financial asset is liquid, it is:

a. an online asset and has no physical piece of paper associated with it.

b. considered to be a safe asset with no chance of being deleveraged.

c. a highly desirable asset.

d. an asset that can easily be converted into cash.

25. The government has bailed out businesses who are in danger of defaulting. Furthermore, future businesses may deduce that the government will again bail them out in the case of future economic turmoil. The government inadvertently has

a. deleveraging.

B herding.

c. moral hazard.

d. the law of diminishing control.

26 When a central bank is acting as a lender of last resort, it is:

a. providing banks with liquidity to meet their obligations.

b. buying Treasury bills directly from the public.

c. buying long-term Treasury bonds and selling short-term Treasury notes.

d. providing banks with Treasury bills for free.

27. Why are financial-sector crises scarier than collapses in other sectors of the economy?

a. If the financial sector fails, it can bring the whole economy down with it.

b. The financial sector is the biggest sector.

c. Most people work in the financial sector.

d. Financial-sector crises happen more often than collapses in other sectors.

Solutions

Expert Solution

1.Option B more useful as store of value

One of the functions of money in an economy is that it serves as a store of value. A store of value is something that people use to transfer purchasing power from the present to the future. Gold and silver, for example, act as stores of value.

The Plano Real intended to stabilize the domestic currency in nominal terms after a string of failed plans to control inflation. It created the Unidade Real de Valor (Unit of Real Value), which served as a key step to the implementation of the new (and still current) currency, the real. A series of contracting fiscal and monetary policies was enacted, restricting the government expenses and raising interest rates.It was largely effective in reducing the rate of inflation.

2. Option A

As important as measure of money

Monetary policy includes measures employed by governments to influence economic activity, specifically by manipulating the supplies of money and credit and by altering rates of interest.

3. Option C store of value

Illiquid assets cannot serve as medium of exchange cash or trade because they cannot be easily changed into other goods and assets but they can serve as store of value.

4.Option A if it can be readily exchanged for other asset or good.

To be liquid means to be easily changed into other asset or good.


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