MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 3

Question 1

Which interest rate does the Federal Reserve directly set as its primary policy instrument?

Accepted Answer

The federal funds rate

Answer

The FOMC sets a target range for the federal funds rate—the overnight rate at which depository institutions lend reserves to each other.

Question 2

A yield curve inverts when:

Accepted Answer

Short-term rates rise above long-term rates

Answer

An inverted yield curve occurs when short-term interest rates exceed long-term rates, often signaling an expected future decline in short rates or a recession.

Question 3

Under the fractional reserve banking system, the money multiplier in its simplest form equals:

Accepted Answer

1 divided by the required reserve ratio

Answer

In the simple deposit multiplier model, an injection of $1 of reserves supports 1/rr dollars of deposits, where rr is the required reserve ratio.

Question 4

Credit rationing occurs in loan markets when:

Accepted Answer

Lenders supply less credit than borrowers demand even at prevailing rates due to adverse selection

Answer

Stiglitz and Weiss showed that raising interest rates attracts riskier borrowers (adverse selection), so banks may ration credit rather than raise rates to clear excess demand.

Question 5

Which monetary aggregate includes currency in circulation, demand deposits, and other checkable deposits?

Accepted Answer

M1

Answer

M1 comprises the most liquid forms of money: physical currency held by the public plus demand deposits and other checkable deposits at depository institutions.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 3