5. The discount rate is ________.

A) the interest rate the Fed charges on loans to banks.

B) the price the Fed pays for government securities.

C) the interest rate that banks charge their most preferred customers.

D) the price banks pay the Fed for government securities.

6. Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets________.

A) a monetary aggregate.

B) the monetary base.

C) an interest rate.

D) nominal GDP.

7. In the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% ________.; when the federal funds rate is 5%, lowering the discount rate from 5% to 4% ________.

A) lowers the federal funds rate, has no effect on the federal funds rate

B) has no effect on the federal funds rate, lowers the federal funds rate

C) raises the federal funds rate, has no effect on the federal funds rate

D) has no effect on the federal funds rate, raises the federal funds rate

8. Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the central bank, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.

A) ten

B) twenty

C) eighty

D) ninety

9. The money multiplier is ________

A) negatively related to high-powered money.

B) positively related to the excess reserves ratio.

C) negatively related to the required reserve ratio.

D) positively related to holdings of excess reserves.

11. What is the return on a 10 percent coupon bond that initially sells for $1,000 and sells for $1100 in two years?

A) 0 percent

B) 10 percent

C) 20 percent

D) none of the above

12. If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will ________

A) rise by 6 percent.

B) rise by 2 percent.

C) fall by 6 percent.

D) fall by 2 percent.

13. Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

A) increase; appreciate

B) increase; depreciate

C) decrease; appreciate

D) decrease; depreciate

14. Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate.

A) purchase; increase

B) purchase; decrease

C) sale; increase

D) sale; decrease

15. If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

A) lose; decreasing

B) lose; increasing

C) acquire; decreasing

D) acquire; increasing