Question 1

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are:

Accepted Answer

A)   A liability of the Federal Reserve Banks and commercial banks
B)   An asset of the Federal Reserve Banks and commercial banks
C)   A liability of the Federal Reserve Banks and an asset for commercial banks
D)   An asset of the Federal Reserve Banks and a liability for commercial banksE) A) and B)
F) C) and D)

Question 2

When the Fed wants to lower the Federal funds rate, it:

Accepted Answer

A)   Increases the discount rate
B)   Increases the reserve ratio
C)   Buys bonds from banks and the public
D)   Sells bonds to banks and the publicE) B) and D)
F) A) and C)

Question 3

The level of GDP, ceteris paribus, will tend to increase when:

Accepted Answer

A)   Reserve requirements are increased
B)   There is an increase in the discount rate
C)   The Federal Reserve buys government securities in the open market
D)   The Federal Reserve sells government securities in the open marketE) A) and D)
F) A) and B)

Question 4

1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate demand curve AD3. What policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP? A)  Increase the money supply from $75 to $150 billion B)  Increase the money supply from $150 to $225 billion C)  Decrease the money supply from $225 to $150 billion D)  Make no change in the money supply" class="answers-bank-image d-inline" rel="preload" > Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate demand curve AD3. What policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Accepted Answer

A)   Increase the money supply from $75 to $150 billion
B)   Increase the money supply from $150 to $225 billion
C)   Decrease the money supply from $225 to $150 billion
D)   Make no change in the money supplyE) A) and D)
F) B) and C)

Question 5

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Accepted Answer

A) True 
 B)False

Question 6

The purchase and sale of government securities by the Fed is called:

Accepted Answer

A)   Federal funds market
B)   Open market operations
C)   Money market transactions
D)   Term auction facilityE) A) and B)
F) None of the above

Question 7

Disequilibrium in the money market is mainly corrected via a change in:

Accepted Answer

A)   Bond prices
B)   The price level
C)   Saving levels
D)   The money supplyE) A) and B)
F) A) and C)

Question 8

Quantitative easing (QE) differs from open-market purchases in that QE shrank the assets of the Fed whereas open market purchases expands the Fed's assets.

Accepted Answer

A) True 
 B)False

Question 9

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Accepted Answer

A)   Stimulate the economy
B)   Increase the money supply
C)   Reduce the cost of credit
D)   Reduce inflationary pressures in the economyE) B) and C)
F) None of the above

Question 10

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

Accepted Answer

A)   Banking system now has excess reserves of $3 billion
B)   Monetary multiplier has decreased
C)   Maximum money-creating potential of the banking system has been increased by $7 billion
D)   Fed has decided that money supply needed to be reducedE) A) and D)
F) A) and B)

Question 11

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to:

Accepted Answer

A)   Completing the circle
B)   Pushing on a string
C)   Filling in the blanks
D)   Checking the listE) B) and C)
F) A) and D)

Question 12

There is an asset demand for money primarily because of which function of money?

Accepted Answer

A)   Legal tender
B)   Store of value
C)   Measure of value
D)   Medium of exchangeE) A) and C)
F) All of the above

Question 13

The use of monetary policy to shift aggregate demand to the right in a severe recession is like:

Accepted Answer

A)   Pushing on a string
B)   Putting all eggs in one basket
C)   Pulling on one's purse-strings
D)   Pushing the envelopeE) A) and B)
F) A) and C)

Question 14

An increase in nominal GDP will:

Accepted Answer

A)   Increase the transactions demand and the total demand for money
B)   Decrease the transactions demand and the total demand for money
C)   Increase the transactions demand for money but decrease the total demand for money
D)   Decrease the transactions demand for money but increase the total demand for moneyE) B) and C)
F) A) and D)

Question 15

Monetary policy actions by the Fed are:

Accepted Answer

A)   More effective in a restrictive direction than they are in an expansionary direction
B)   More effective in an expansionary direction than they are in a restrictive direction
C)   Equally effective in both expansionary and restrictive directions
D)   Only effective when coupled with fiscal policy actionsE) All of the above
F) None of the above

Question 16

If the Federal funds rate:

Accepted Answer

A)   Increases, the prime interest rate will decrease
B)   Decreases, the prime interest rate will increase
C)   Increases, the prime interest rate will increase
D)   Decreases, the prime interest rate will not changeE) B) and C)
F) A) and D)

Question 17

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars.  In the balance sheet above for the Federal Reserve, the assets would be items 5 and:

Accepted Answer

A)   1 and 2
B)   2 and 3
C)   3 and 4
D)   4 and 6E) None of the above
F) A) and B)

Question 18

The price of a bond with no expiration date is $1,000 and the fixed annual interest payment is $100. If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Accepted Answer

A) True 
 B)False

Question 19

In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that:

Accepted Answer

A)   Banks did not have enough reserves to continue lending to banks
B)   The Fed injected reserves into the banking system, but the interest rates remained high
C)   Firms did not want to borrow from banks because they had little need for extra liquidity
D)   Banks held on to excess reserves and people chose to pay off loans rather than spendE) None of the above
F) All of the above

Question 20

Refer to the graph above. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be:

Accepted Answer

A)   1 percent
B)   2 percent
C)   3 percent
D)   4 percentE) B) and C)
F) C) and D)

Exam 16: Interest Rates and Monetary Policy

The use of monetary policy to shift aggregate demand to the right in a severe recession is like:

Correct Answer
verified

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Correct Answer
verified

An increase in nominal GDP will:

Correct Answer
verified

If the Federal funds rate:

Correct Answer
verified

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are:

Correct Answer
verified

The purchase and sale of government securities by the Fed is called:

Correct Answer
verified

The level of GDP, ceteris paribus, will tend to increase when:

Correct Answer
verified

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to:

Correct Answer
verified

Refer to the graph above. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be:

Correct Answer
verified

Quantitative easing (QE) differs from open-market purchases in that QE shrank the assets of the Fed whereas open market purchases expands the Fed's assets.

Correct Answer
verified

In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that:

Correct Answer
verified

Monetary policy actions by the Fed are:

Correct Answer
verified

When the Fed wants to lower the Federal funds rate, it:

Correct Answer
verified

Correct Answer
verified

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Correct Answer
verified

The price of a bond with no expiration date is $1,000 and the fixed annual interest payment is $100. If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Correct Answer
verified

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

Correct Answer
verified

Disequilibrium in the money market is mainly corrected via a change in:

Correct Answer
verified

There is an asset demand for money primarily because of which function of money?

Correct Answer
verified

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

The use of monetary policy to shift aggregate demand to the right in a severe recession is like:

Correct AnswerverifiedShow Answer

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Correct AnswerverifiedShow Answer

An increase in nominal GDP will:

Correct AnswerverifiedShow Answer

If the Federal funds rate:

Correct AnswerverifiedShow Answer

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are:

Correct AnswerverifiedShow Answer

The purchase and sale of government securities by the Fed is called:

Correct AnswerverifiedShow Answer

The level of GDP, ceteris paribus, will tend to increase when:

Correct AnswerverifiedShow Answer

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to:

Correct AnswerverifiedShow Answer

Refer to the graph above. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be:

Correct AnswerverifiedShow Answer

Quantitative easing (QE) differs from open-market purchases in that QE shrank the assets of the Fed whereas open market purchases expands the Fed's assets.

Correct AnswerverifiedShow Answer

In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that:

Correct AnswerverifiedShow Answer

Monetary policy actions by the Fed are:

Correct AnswerverifiedShow Answer

When the Fed wants to lower the Federal funds rate, it:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Correct AnswerverifiedShow Answer

The price of a bond with no expiration date is $1,000 and the fixed annual interest payment is $100. If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Correct AnswerverifiedShow Answer

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

Correct AnswerverifiedShow Answer

Disequilibrium in the money market is mainly corrected via a change in:

Correct AnswerverifiedShow Answer

There is an asset demand for money primarily because of which function of money?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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