Question 1

The asset demand for money is most closely related to money functioning as a

Accepted Answer

A)  unit of account.
B)  medium of exchange.
C)  store of value.
D)  measure of value.E) None of the above
F) A) and B)

Question 2

Which of the following statements about quantitative easing (or "QE")  and open-market purchase is true?

Accepted Answer

A)  QE is similar to open-market purchase in that both are aimed at reducing short-term interest rates in the economy.
B)  QE is different from open-market purchase in that QE involves not just T-bonds but also bonds issued by other government agencies and government-backed corporations.
C)  QE is done by the U.S.Treasury, whereas open-market purchase is done by the Federal Reserve System.
D)  QE has to have Congressional approval, whereas open-market purchase does not.Difficulty: 02 MediumE) A) and D)
F) A) and B)

Question 3

The effects on aggregate demand of an open market purchase and a tax cut are similar.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following monetary policy tools was introduced in 2008?

Accepted Answer

A)  the discount rate
B)  the federal funds rate
C)  open-market operations
D)  paying interest on excess reserves held at the FedE) B) and C)
F) A) and C)

Question 5

The lending ability of commercial banks increases when the

Accepted Answer

A)  reserve ratio is raised.
B)  Treasury collects tax revenues.
C)  Fed sells securities in the open market.
D)  Fed buys securities in the open market.E) None of the above
F) B) and C)

Question 6

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 actions.E) A) and B)
F) All of the above

Question 7

It is inconceivable and impossible for a central bank to pursue a negative-interest rate policy because interest rates simply cannot turn negative.

Accepted Answer

A) True 
 B)False

Question 8

After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?

Accepted Answer

A)  Regulatory changes in response to the financial crisis significantly restricted the use of the federal funds rate target.
B)  The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
C)  Borrowing of excess reserves moved from traditional banks to the shadow banking industry.
D)  The federal funds rate rose significantly and would not respond to Fed changes in the supply of reserves.E) None of the above
F) A) and D)

Question 9

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

Accepted Answer

A)  horizontally adding the transactions and the asset demand for money.
B)  vertically subtracting the transactions demand from the asset demand for money.
C)  horizontally subtracting the asset demand from the transactions demand for money.
D)  vertically adding the transactions and the asset demand for money.E) A) and B)
F) All of the above

Question 10

Holding money as an asset presents a risk of capital loss.

Accepted Answer

A) True 
 B)False

Question 11

If the economy is operating in the relatively steep (upper)  portion of its aggregate supply curve, a reduction in the money supply will

Accepted Answer

A)  increase the interest rate and increase employment.
B)  reduce the interest rate and increase employment.
C)  increase the interest rate and reduce the price level, assuming it is flexible downward.
D)  reduce the interest rate and increase the price level.E) None of the above
F) C) and D)

Question 12

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

Accepted Answer

A)  A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B)  A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C)  An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D)  An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.E) None of the above
F) B) and C)

Question 13

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

Accepted Answer

A)  reduce inflation.
B)  save the banking industry.
C)  stimulate the economy.
D)  improve the savings rate.E) C) and D)
F) A) and C)

Question 14

Other things equal, a reduction in income taxes would

Accepted Answer

A)  reduce productivity and reduce aggregate supply.
B)  increase consumption and increase aggregate demand.
C)  increase the supply of money and reduce investment.
D)  increase government spending and increase aggregate demanD.E) A) and C)
F) A) and B)

Question 15

A decrease in the interest rate will cause a(n)

Accepted Answer

A)  increase in the transactions demand for money.
B)  decrease in the transactions demand for money.
C)  decrease in the amount of money held as an asset.
D)  increase in the amount of money held as an asset.E) A) and B)
F) B) and C)

Question 16

To increase the federal funds rate, the Fed historically has

Accepted Answer

A)  bought government bonds from the public.
B)  decreased the discount rate.
C)  decreased the prime interest rate.
D)  sold government bonds to commercial banks.E) A) and D)
F) All of the above

Question 17

Ben Bernanke is the current (2016) chair of the Board of Governors.

Accepted Answer

A) True 
 B)False

Question 18

If the Fed sells government securities to the general public in the open market,

Accepted Answer

A)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will increase commercial bank reserves at the Fed.
B)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed.
C)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will increase their reserves at the Fed.
D)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will decrease their reserves atE) A) and C)
F) A) and D)

Question 19

In a repo transaction, the Fed money; in a reverse repo transaction, the Fed money.

Accepted Answer

A)  borrows; loans.
B)  loans; borrows.
C)  prints new; destroys.
D)  destroys; prints new.E) B) and D)
F) A) and B)

Question 20

The transactions demand for money will shift to the

Accepted Answer

A)  left when nominal GDP increases.
B)  left when nominal GDP decreases.
C)  right when nominal GDP decreases.
D)  right when the interest rate increases.E) A) and D)
F) All of the above

Exam 36: Interest Rates and Monetary Policy

The transactions demand for money will shift to the

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If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will

Correct AnswerverifiedShow Answer

The asset demand for money is most closely related to money functioning as a

Correct AnswerverifiedShow Answer

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

Correct AnswerverifiedShow Answer

It is inconceivable and impossible for a central bank to pursue a negative-interest rate policy because interest rates simply cannot turn negative.

Correct AnswerverifiedShow Answer

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

Correct AnswerverifiedShow Answer

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

Correct AnswerverifiedShow Answer

Which of the following monetary policy tools was introduced in 2008?

Correct AnswerverifiedShow Answer

After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?

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The effects on aggregate demand of an open market purchase and a tax cut are similar.

Correct AnswerverifiedShow Answer

Ben Bernanke is the current (2016) chair of the Board of Governors.

Correct AnswerverifiedShow Answer

If the Fed sells government securities to the general public in the open market,

Correct AnswerverifiedShow Answer

To increase the federal funds rate, the Fed historically has

Correct AnswerverifiedShow Answer

Holding money as an asset presents a risk of capital loss.

Correct AnswerverifiedShow Answer

A decrease in the interest rate will cause a(n)

Correct AnswerverifiedShow Answer

The lending ability of commercial banks increases when the

Correct AnswerverifiedShow Answer

Monetary policy actions by the Fed are

Correct AnswerverifiedShow Answer

In a repo transaction, the Fed money; in a reverse repo transaction, the Fed money.

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Which of the following statements about quantitative easing (or "QE") and open-market purchase is true?

Correct AnswerverifiedShow Answer

Other things equal, a reduction in income taxes would

Correct AnswerverifiedShow Answer

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