Macroeconomics 8

The European Central Bank …

• Works independently of national central banks in the euro area.
• Has as its primary objective guaranteeing a low level of unemployment throughout the European Union.
• Is responsible for conducting fiscal policy.
• Is completely free from influence of national governments or European institutions.
• None of these statements are accurate.

How does the European Central Bank most frequently affect the supply of money?

• The ECB increases interest rates and then prints more money so that borrowers will be able to pay the higher rates.
• The ECB sells government bonds, which increases aggregate demand and requires more money to be printed.
• The ECB lends euros to commercial banks against collateral.
• The ECB increases the reserve requirements of bank and thus banks must obtain additional funds from the ECB.
• The ECB decreases the reserve requirements of banks, thus allowing more money to be in circulation.

Suppose the European Central Bank purchases €5 million in government bonds from First Liquidity Bank. Which one of the following statements is NOT true?

• The reserves of First Liquidity Bank at the ECB will increase by €5 million.
• The value of the money supply will be expected to ultimately increase by more than €5 million.
• The value of government bonds held by the ECB will increase by €5 million.
• First Liquidity Bank will now be able to make more than €5 million in new loans.
• The holdings of government bonds held by First Liquidity Bank will decrease by €5 million.

What is the equation for the money multiplier?

• = Money supply / monetary base
• = monetary base / Money supply
• = monetary base * Money supply
• = Money supply + monetary base
• = Money supply – monetary base

Which one of the following actions by the European Central Bank would likely decrease the money supply?

• The ECB reduces the discount rate
• The ECB increases the reserve requirements for banks
• The ECB purchases government bonds on the open market
• The ECB increases the monetary base
• None of the above

Which one of the following statements is FALSE?

• The deposit facility pays interest rates higher than the average money market rates.
• A central bank would rarely act to decrease the money supply in a growing economy.
• If a bank falls short of having the required amount of reserves on hand, it can borrow funds from the marginal lending facility.
• The money multiplier in the Euro area, based on M1, is currently around 3.6.
• The largest part of the money supply in an economy is deposit money created by banks.

Interest rates on loans offered to consumers are higher than the ECB’s main refinancing rate. Which one of the following is NOT a reason to that?

• Loans from banks to households have a much longer term than the opposite operation with the ECB.
• Commercial banks diminish the risk of losses caused by not being repaid by accumulating provisions.
• The ECB requires commercial banks to charge a higher interest rate to households, to avoid inflationary pressures.
• Commercial banks must cover their administrative costs.
• Commercial banks need to make profits.

Considering an expansionary monetary policy, which one of the following statements is MOST LIKELY to be TRUE?

• Investment in real estate would fall.
• Interest rates would increase.
• The economy would go into a recession.
• Aggregate expenditure levels would rise.
• None of the above is likely to happen.

Considering a contractionary monetary policy, which one of the following statements is MOST LIKELY to be TRUE?

• Equilibrium GDP would rise.
• Economic activity would decrease.
• Interest rates would be lowered.
• Inflationary pressures would be strengthened.
• None of the above is likely to happen.

Which one of the following statements is FALSE?

• There is no relation between aggregate expenditure and inflation.
• A contractionary monetary policy would be prescribed if the economy seems to be heading toward inflation.
• An expansionary monetary policy influences output through encouraging investment.
• An accommodating monetary policy aims to counteract recessionary tendencies in an economy.
• Contractionary monetary policies are implemented by restricting the credit and money supply of an economy.