Question Details

The impact on this monetary aggregate of extensive financial innovation 



"The deficit will mainly be financed by selling bonds to the general public and not to the central bank." 
1. What happens to the money supply if the deficit is financed by selling bonds to the general public? 
a) the money supply increases b) the money supply decreases 
c) the money supply is unaffected 
d) we cannot tell what will happen to the money supply 
2. What happens to the money supply if the deficit is financed by selling bonds to the central bank? 
a) the money supply increases b) the money supply decreases 
c) the money supply is unaffected 
d) we cannot tell what will happen to the money supply 46 
3. "The Fed can "pay" for its bond purchases simply by crediting the amount of its purchases to the account of the bank involved in the transaction. As a result, ........" Complete this clipping. 
a) bank reserves ultimately increase by this amount times the money multiplier 
b) bank reserves ultimately decrease by this amount times the money multiplier 
c) the money supply ultimately increases by this amount times the money multiplier 
d) the money supply ultimately decreases by this amount times the money multiplier 
4. "The annual growth rate in what had once been the officially-watched aggregate, M1, was 4 percent last year, but for M2, the rate was 12 percent." Why might M2 be growing so much faster than M1? 
a) the central bank was increasing M2 reserves faster than M1 reserves 
b) the central bank was increasing M1 reserves faster than M2 reserves 
c) people were holding their money wealth mainly in term deposits rather than checking accounts 
d) people were holding their money wealth mainly in checking accounts rather than term deposits 
5. "Money deposited for a term is not left in bank vaults but is loaned out by the banks (subject to minimum cash reserve requirements). This means that a dollar on deposit can flow back into the banking system one or more times and that dollar can expand the money supply." What terminology do economists use to refer to the process described in this clip? 
a) the multiplier b) the money multiplier 
c) required reserve ratio d) open market operations 
6. "The impact on this monetary aggregate of extensive financial innovation - the changes in the kinds of deposits and services offered by banks - led the central bank to drop M1 as an intermediate target. With the changes in the way the public was holding payments balances, the M1 aggregate no longer had the same reliable link to ...." Complete this clipping. 
a) tax rates b) the money supply c) aggregate demand d) government spending 
7. "Although he didn't say so, this may ultimately compel the central bank to resort increasingly to managing the money supply by managing banks' excess cash reserves - the stuff from which the banks create loans." How would the central bank manage these excess reserves? 
a) by buying bonds b) by selling bonds 
c) by changing reserve requirements d) all of the above



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