CH.15 Principles of MacroEconomics

Why is it important for the members of the Board of Governors of the Federal Reserve to have longer terms in office than elected officials, like the President?

• To maintain the independence and stability of the Federal Reserve from short-term political pressures.

• To ensure the Board of Governors can make decisions without any accountability
• To allow the Board of Governors to serve for life without any term limits
• To give the Board of Governors more power than the President

Given the danger of bank runs, why do banks not keep the majority of deposits on hand to meet the demands of depositors?

• Banks do not keep the majority of deposits on hand because they are not aware of the potential risks of bank runs
• Banks do not keep the majority of deposits on hand because they prefer to keep the money for themselves
• Banks do not keep the majority of deposits on hand because they do not have the physical space to store the money
• Banks do not keep the majority of deposits on hand because they use the funds to make loans and investments, which allows them to earn interest and generate profits.

Why might banks want to hold excess reserves in time of recession?

• To invest in high-risk assets
• To reduce the amount of money available for lending
• To increase the interest rates for customers
• To ensure they have enough liquidity to meet customer withdrawals and cover potential loan losses.

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If the central bank sells $500 in bonds to a bank that has issued $10,000 in loans and is exactly meeting the reserve requirement of 10%, what will happen to the amount of loans and to the money supply in general?

• The amount of loans will increase and the money supply will increase.
• The amount of loans will decrease and the money supply will increase.
• The amount of loans will increase and the money supply will decrease.
• The amount of loans will decrease and the money supply will decrease.

What would be the effect of increasing the banks' reserve requirements on the money supply?

• The effect of increasing the banks' reserve requirements on the money supply would be a decrease.
• The money supply would remain constant
• There would be no effect on the money supply
• The effect would be an increase in the money supply

Why does contractionary monetary policy cause interest rates to rise?

• Contractionary monetary policy increases the money supply, leading to higher demand for the remaining funds, which in turn causes interest rates to rise.
• Contractionary monetary policy reduces the money supply, leading to higher demand for the remaining funds, which in turn causes interest rates to rise.
• Contractionary monetary policy has no impact on the money supply, so interest rates remain unchanged.
• Contractionary monetary policy reduces the money supply, leading to lower demand for the remaining funds, which in turn causes interest rates to rise.

Why does expansionary monetary policy causes interest rates to drop?

• Expansionary monetary policy causes interest rates to drop because it increases the money supply and competition among lenders.
• Expansionary monetary policy causes interest rates to drop because it leads to higher demand for loans and higher interest rates.
• Expansionary monetary policy causes interest rates to drop because it reduces inflation and increases the value of money.
• Expansionary monetary policy causes interest rates to drop because it decreases the money supply and competition among lenders.

Why might the velocity of money change unexpectedly?

• The velocity of money might change unexpectedly due to changes in the popularity of online shopping
• The velocity of money might change unexpectedly due to changes in the number of banks in the country
• The velocity of money might change unexpectedly due to changes in the price of gold
• The velocity of money might change unexpectedly due to factors such as changes in consumer confidence, shifts in government policies, or unexpected economic events.

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How do the expansionary and contractionary monetary policy affect the quantity of money?

• Expansionary and contractionary monetary policy have no effect on the quantity of money
• Contractionary monetary policy increases the quantity of money
• Expansionary monetary policy decreases the quantity of money
• Expansionary monetary policy increases the quantity of money, while contractionary monetary policy decreases the quantity of money.

How do tight and loose monetary policy affect interest rates?

• Tight monetary policy tends to increase interest rates, while loose monetary policy tends to decrease interest rates.
• Tight monetary policy tends to decrease interest rates
• Loose monetary policy tends to increase interest rates
• Tight monetary policy has no effect on interest rates