6 Chapter 9 — Test Bank

CHAPTER NINE

Global Money and Banking — Where Central

Banks Fit into the World Economy

True/False
1. When the Bank of England was made independent of the government in 1997 estimates of the
expected level of inflation in Britain almost immediately fell.
Ans: True
Dif: E

2. The Bank of England was the first central bank.

Ans: False
Dif: E

3. The most recently established major central bank is the European Central Bank.
Ans: True
Dif: E

4. Today there are only three central banks that can engage in policymaking activities that would affect
the global economy.
Ans: True
Dif: M

5. The central banks of the individual European countries that joined the European Monetary Union
were dissolved when the European Central Bank took over.
Ans: False
Dif: E

6. The U.S. Federal Reserve serves as a bank for the U.S. Treasury.
Ans: True
Dif: E

7. Much of the debt issued by the U.S. Treasury is sold at auctions conducted by the Federal Reserve
Bank.
Ans: True
Dif: M

8. Bank runs can occur when there is no deposit insurance or lender of last resort because banks
typically keep only a fraction of the deposits at the bank.
Ans: True
Dif: M
7 Chapter 9 — Test Bank

9. A systemic banking failure is one where large numbers of banks fail.

Ans: True
Dif: E

10. The interest rate that banks charge each other on loans of excess reserves is called the discount rate.
Ans: False
Dif: M

11. The interest rate that the Federal Reserve charges on loans to private banks is called the fed funds rate.
Ans: False
Dif: M

12. One of the purposes of SDRs has been to provide an international currency to settle transactions
between governments.
Ans: True
Dif: M

13. Currency notes are the major asset at most central banks.
Ans: False
Dif: M

14. The two basic components of M1 are currency and transactions deposits.
Ans: True
Dif: E

15. Eurodollar deposits are defined as deposits of dollars held in European banks.
Ans: False
Dif: M

16. The monetary base comprises the major liabilities of most large central banks.
Ans: True
Dif: M

17. The Lombard rate is the below market interest rate that the ECB charges to private banks to borrow
from the ECB.
Ans: False
Dif: M

18. The money multiplier can be increased by reducing the required reserve ratio on transaction accounts.
Ans: True
Dif: M

19. If the central bank purchases government securities normally we can expect interest rates to fall.
Ans: True
Dif: M
 Global Money and Banking — Where Central Banks Fit into the World Economy 8

20. If the Federal Reserve wishes to temporarily increase the money supply they could enter into a
reverse repurchase agreement.
Ans: True
Dif: D

21. Generally speaking, the money supply and interest rates vary inversely.
Ans: True
Dif: E

22. National income is equal to national output which is also equal to national income.
Ans: True
Dif: E

23. Measuring prices at their final value, nominal GDP is the sum of (price * quantity) for all goods and
services produced within a country’s borders during a given time period.
Ans: True
Dif: M

24. If prices have always been steadily rising and 1996 is the base year for calculating the GDP deflator,
then for all years priors to 1996 real GDP will be greater than nominal GDP and for all years after
1996 real GDP will be less than nominal GDP.
Ans: True
Dif: D

25. Ceteris paribus, an increase in the money supply will result in a depreciation in the currency value.
Ans: True
Dif: M

26. One of the main purposes of central banks ‘leaning with the wind’ policies is to reduce currency
volatility.
Ans: False
Dif: M

27. The U.S. Treasury, instead of the Federal Reserve, has the primary responsibility for initiating foreign
exchange interventions.
Ans: True
Dif: M

28. Dominguez and Frankel found that announcement effects of government interventions had larger
effects on currency values than the magnitude of the interventions themselves, thus providing strong
evidence for the portfolio balance effect.
Ans: False
Dif: M
9 Chapter 9 — Test Bank

Multiple Choice
1. The first central bank was established in what century?
A) sixteenth century
B) seventeenth century
C) eighteenth century
D) nineteenth century
E) twentieth century
Ans: B
Dif: M

2. The first central bank was established in what country?

A) America
B) England
C) France
D) Switzerland
E) Sweden
Ans: E
Dif: M

3. Central banks often serve as fiscal agents for the national government. This implies that they
A) issue, service and redeem government debt.
B) monitor the nation’s banking systems.
C) manage foreign exchange values.
D) implement monetary policy.
E) none of the above
Ans: A
Dif: M

4. Central banks in less developed countries often have expanded fiscal agent duties including

I. finding buyers for government debt.

II. directly buying government debt.
III. requiring the government to reduce its debt level.

A) I only
B) II only
C) I and II only
D) I and III only
E) I, II and III
Ans: C
Dif: M
 Global Money and Banking — Where Central Banks Fit into the World Economy 10

5. In broad terms the role of a central bank includes all but which one of the following?
A) providing banking services to the government
B) acting as a fiscal agent for the government
C) monitoring banking systems to ensure stability
D) directing and implementing monetary policy
E) directing and implementing fiscal policy
Ans: E
Dif: E

6. When the majority of a bank’s depositors seek to withdraw their deposits at the same time this is
called a
A) systemic failure.
B) bank run.
C) lender of last resort.
D) temporary reserve deficit.
E) contagion.
Ans: B
Dif: E

7. When the central bank meets temporary shortfalls in liquidity at a bank it is fulfilling its __________
function.
A) monetary policy
B) fiscal agent
C) lender of last resort
D) monitoring
E) systemic
Ans: C
Dif: E

8. The major category of assets of the Federal Reserve and the Bank of Japan are
A) national currency.
B) foreign currency reserves.
C) securities issued by their national government.
D) gold and SDR certificates.
E) government deposits.
Ans: C
Dif: E

9. Most central banks devote the bulk of their resources to their __________ function.
A) monetary policy
B) fiscal agent
C) lender of last resort
D) bank monitoring
E) foreign exchange monitoring
Ans: B
Dif: M
11 Chapter 9 — Test Bank

10. Which of the following two central banks engage in proportionately the most discount window
lending?

I. the U.S. Federal Reserve

II. the Bank of Japan
III. the ECB

A) I and II
B) I and III
C) II and III
D) All three engage in approximately equal amounts of this type lending.
Ans: C
Dif: M

11. The interest rate that the Federal Reserve charges on loans to private banks is called the
A) Lombard rate.
B) fed funds rate.
C) prime rate.
D) LIBOR rate.
E) none of the above
Ans: E
Dif: E

12. Total domestic securities plus loans held as assets by a central bank are called
A) M1.
B) M2.
C) M3.
D) the monetary base.
E) none of the above
Ans: E
Dif: M

13. Excess reserves are

A) reserves that banks must hold at the central bank to back loans.
B) reserves that banks must hold at the central bank to back deposits.
C) vault cash and reserves held at the central bank in excess of required reserves.
D) loaned between banks for short time periods at the discount rate.
E) none of the above
Ans: C
Dif: E

14. The fundamental functions of money include all but which one of the following?
A) medium of exchange
B) store of value
C) unit of account
D) maintaining constant purchasing power
E) standard of deferred payment
Ans: D
Dif: M
 Global Money and Banking — Where Central Banks Fit into the World Economy 12

15. The standard of deferred payment function is most similar to which other function of money?
A) medium of exchange
B) store of value
C) unit of account
D) maintaining constant purchasing power
Ans: B
Dif: M

16. If the price of a new tire for your car is twenty loaves of bread this would violate which of the
functions of money?
A) medium of exchange
B) store of value
C) unit of account
D) maintaining constant purchasing power
E) standard of deferred payment
Ans: C
Dif: M

17. Central bank holdings of domestic securities, loans and foreign exchange reserves are called
A) the monetary aggregate
B) the monetary base
C) M1
D) M2
E) domestic credit
Ans: B
Dif: E

18. The narrowest measure of money is

A) M1.
B) M2.
C) M3.
D) the monetary base.
E) checkable deposits.
Ans: D
Dif: E

19. The monetary aggregate that is designed to measure immediately spendable funds is called
A) M1.
B) M2.
C) M3.
D) the monetary base.
E) checkable deposits.
Ans: A
Dif: M
13 Chapter 9 — Test Bank

20. M2 includes which of the following components?

I. M1
II. savings accounts
III. time deposits greater than $100,000
IV. overnight repurchase agreements

A) I only
B) I and II only
C) I, II and III only
D) II, III and IV only
E) I, II, III and IV
Ans: B
Dif: M

21. Suppose that the Federal Reserve wishes to stimulate the economy. Which of the following could be
used to help accomplish this goal?

I. purchase government securities

II. increase the discount rate
III. lower reserve requirements

A) I only
B) II only
C) I and II only
D) I and III only
E) I, II and III
Ans: D
Dif: M

22. Which one of the following monetary policy tools is used less frequently by central banks of less
developed economies?
A) open market operations
B) changes in the discount rate
C) credit controls
D) interest rate controls
E) reserve requirements
Ans: A
Dif: E
 Global Money and Banking — Where Central Banks Fit into the World Economy 14

23. Which of the following actions would cause the money multiplier to be overstated following a central
bank’s actions to increase bank reserves?

I. A loan customer withdraws the loan proceeds from the bank and holds it in the form of
cash.
II. A loan customer uses the loan proceeds to pay off his credit card.
III. A bank increases it holdings of excess reserves.

A) I only
B) II only
C) I and II only
D) I and III only
E) I, II and III
Ans: D
Dif: D

24. The Federal Reserve increases bank reserves by $8 million. If reserve requirements are 10%, by how
much should deposits increase?
A) $8 million
B) $0.8 million
C) $80 million
D) $8.8 million
E) none of the above
Ans: C
Dif: E

25. If deposits decrease by $50 million as a result of a Federal Reserve action to decrease bank reserves
and if reserve requirements are 12%, by how much did the Fed change bank reserves?
A) $6 million
B) $416.7 million
C) $44 million
D) $9 million
E) none of the above
Ans: A
Dif: M

26. The final value of all goods and services produced within a country’s borders during a given period is
called
A) GNP.
B) GDP.
C) GDP deflator.
D) exports.
E) central bank reserves.
Ans: B
Dif: B
15 Chapter 9 — Test Bank

27. You notice that nominal GDP rose by 3% in a country last year. Which one of the following must be
true?
A) The real production of goods and services in that country rose by 3%.
B) The real production of goods and services in that country rose by more than 3%.
C) The real production of goods and services in that country rose by less than 3%.
D) The real production of goods and services in that country could have risen by more or less than
3%.
E) The GDP deflator must be less than one.
Ans: D
Dif: E

28. Total nominal income for a country is equal to $200 billion when the GDP deflator is equal to 1.25.
Real income must be
A) $160 billion.
B) $200 billion.
C) $250 billion.
D) $185 billion.
E) $175 billion.
Ans: A
Dif: E

29. The aggregate demand curve is downward sloping because an increase in the price level

I. increases the real value of the money in circulation.

II. reduces the real value of liquid asset holdings, inducing people to borrow more.
III. reduces foreign demand for domestic goods and services.

A) I only
B) II only
C) II and III only
D) I and III only
E) I, II and III
Ans: C
Dif: D

30. If the long run aggregate supply curve is vertical then in the long run an increase in the money supply
causes
A) real growth and some inflation.
B) inflation only.
C) inflation and a drop in domestic currency value, but no sustained real growth in output.
D) some inflation and some increase in currency value.
E) a change in the money multiplier.
Ans: C
Dif: D
 Global Money and Banking — Where Central Banks Fit into the World Economy 16

31. A central bank intervenes by buying foreign currency reserves when the domestic currency’s value
has recently been declining. This is an example of
A) leaning against the wind.
B) leaning with the wind.
C) a crawling peg.
D) a G5 intervention.
E) an aggregate supply change.
Ans: B
Dif: M

32. Suppose that over time a country’s productivity grows significantly. This is an example of a/an
A) increase in aggregate demand.
B) decrease in aggregate demand.
C) increase in aggregate supply.
D) decrease in aggregate supply.
E) none of the above
Ans: C
Dif: D

33. The Federal Reserve increases the U.S. money supply. This is an example of a/an
A) increase in aggregate demand.
B) decrease in aggregate demand.
C) increase in aggregate supply.
D) decrease in aggregate supply.
E) none of the above
Ans: A
Dif: M

34. Suppose that the Bank of Japan sells yen on the open market. To sterilize this transaction with open
market operations the Bank of Japan should
A) buy Japanese government bonds.
B) sell Japanese government bonds.
C) raise reserve requirements.
D) lower the discount rate.
E) reduce credit controls on banks.
Ans: B
Dif: D
17 Chapter 9 — Test Bank

35. If the Federal Reserve buys yen bonds and sells dollar bonds, the resulting portfolio balance effect
should cause which of the following?

I. an increase in the price of dollar denominated bonds.

II. a decrease in the rate of return of dollar denominated bonds.
III. an increase in the value of the yen.

A) I only
B) I and II only
C) II and III only
D) I and III only
E) I, II and III
Ans: E
Dif: D

36. If the Federal Reserve buys dollar denominated bonds and sells euro denominated bonds in the
foreign exchange market, which of the following is true?

I. The dollar should fall in value.

II. The announcement effect may be greater than the portfolio balance effect.
II. U.S interest rates should rise.

A) I only
B) II only
C) II and III only
D) I and III only
E) I, II and III
Ans: B
Dif: D

37. Which of the following statements about non-sterilized interventions by the major central banks is
true?

I. They probably have little permanent effect on currency values.

II. They may contribute to foreign exchange volatility.
III. They can lead to large taxpayer losses due to the greater currency risks undertaken by the
central banks.

A) I only
B) II only
C) II and III only
D) I and III only
E) I, II and III
Ans: E
Dif: E
 Global Money and Banking — Where Central Banks Fit into the World Economy 18

38. The purpose of sterilized interventions in the foreign exchange markets is to

A) change the currency value without affecting the domestic money supply.
B) change the domestic money supply affecting the currency’s value.
C) change both the currency value and the domestic money supply.
D) stability the currency’s value and the domestic money supply.
E) stabilize the money supply while allowing the currency value to float.
Ans: A
Dif: M