Question 1

Which of the following is considered a limitation of monetary policy?

Accepted Answer

A)  the cause-effect chain
B)  its cyclical asymmetry
C)  its isolation from political pressure
D)  the speed with which it can be implementedE) A) and C)
F) All of the above

Question 2

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes.This situation means that the

Accepted Answer

A)  supply of money curve is vertical.
B)  supply of money curve is horizontal.
C)  demand for money curve is directly related to the interest rate.
D)  supply of money curve is inversely related to the interest rate.E) All of the above
F) A) and B)

Question 3

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to

Accepted Answer

A)  decrease the money supply.
B)  increase the money supply.
C)  foreclose on a failed bank.
D)  raise interest rates.E) B) and D)
F) None of the above

Question 4

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

Accepted Answer

A) True 
 B)False

Question 5

The asset demand for money is downsloping because

Accepted Answer

A)  the opportunity cost of holding money increases as the interest rate rises.
B)  it is more attractive to hold money at high interest rates than at low interest rates.
C)  bond prices rise as interest rates rise.
D)  the opportunity cost of holding money declines as the interest rate rises.E) A) and B)
F) A) and C)

Question 6

When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Accepted Answer

A) True 
 B)False

Question 7

The purpose of a restrictive monetary policy is to

Accepted Answer

A)  alleviate recessions.
B)  raise interest rates and restrict the availability of bank credit.
C)  increase aggregate demand and GDP.
D)  increase investment spending.E) All of the above
F) A) and C)

Question 8

In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed

Accepted Answer

A)  raised reserve requirements.
B)  raised the amount of interest paid on reserves held at Fed banks.
C)  declared a series of bank holidays to give banks a chance to recover from excessive withdrawals from customer accounts.
D)  lowered the federal funds target rate.E) A) and D)
F) A) and C)

Question 9

(Last Word)  Which of the following is a concern about a central bank going below the zero lower bound and setting negative interest rates to stimulate the economy?

Accepted Answer

A)  Depositors will withdraw their money, reducing the ability of banks to make loans.
B)  Negative interest rates promote financial uncertainty that reduces aggregate demand.
C)  Reduced spending will start a deflationary spiral.
D)  The weakening of the domestic currency would increase that nation's (or area's)  trade deficit.E) C) and D)
F) B) and C)

Question 10

If the quantity of money demanded exceeds the quantity supplied,

Accepted Answer

A)  the supply-of-money curve will shift to the left.
B)  the demand-for-money curve will shift to the right.
C)  the interest rate will rise.
D)  the interest rate will fall.E) B) and C)
F) C) and D)

Question 11

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks.As a result, commercial bank reserves will

Accepted Answer

A)  increase by $10 billion.
B)  remain unchanged.
C)  decrease by $2 billion.
D)  increase by $2 billion.E) A) and B)
F) B) and D)

Question 12

(Consider This) "Repo" stands for "Repossession purchase" and describes when the Fed buys mortgage-backed securities from banks.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is least likely to be a problem for monetary policy?

Accepted Answer

A)  the recognition lag
B)  the operational lag
C)  the administrative lag
D)  cyclical asymmetryE) A) and B)
F) A) and C)

Question 14

The sale of government bonds by the Federal Reserve Banks to commercial banks will

Accepted Answer

A)  increase aggregate supply.
B)  decrease aggregate supply.
C)  increase aggregate demand.
D)  decrease aggregate demand.E) None of the above
F) C) and D)

Question 15

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce

Accepted Answer

A)  excess reserves by $8 million.
B)  excess reserves by $200 million.
C)  the money supply by potentially $200 million.
D)  the money supply by potentially $400 million.E) A) and B)
F) C) and D)

Question 16

If the amount of money demanded exceeds the amount supplied, the

Accepted Answer

A)  demand-for-money curve will shift to the left.
B)  money-supply curve will shift to the right.
C)  interest rate will rise.
D)  interest rate will fall.E) A) and B)
F) None of the above

Question 17

Which of the following statements is most accurate about the Fed's attempt to normalize monetary policy after the Great Recession?

Accepted Answer

A)  Normalization through raising the IOER and using reverse repos has occurred as planned.
B)  Normalization has been hindered by the zero lower bound problem.
C)  Nonbank lending to banks limits the potential of raising the IOER alone, but reverse repos are a way to soak up excess nonbank cash.
D)  Increasing the IOER has been frustrated by nonbank use of reverse repos.E) A) and D)
F) A) and C)

Question 18

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except

Accepted Answer

A)  exchange rate.
B)  discount rate.
C)  interest on reserves.
D)  open-market operations.E) None of the above
F) B) and D)

Question 19

The impact of monetary policy on investment spending may be weakened

Accepted Answer

A)  because of the Treasury's desire for high interest rates.
B)  if the rate at which dollars are spent changes in the same direction as the money supply.
C)  if the investment-demand curve shifts to the right during inflation and to the left during recession.
D)  if the investment-demand curve is very flat.E) A) and C)
F) C) and D)

Question 20

Interest paid on excess reserves held at the Fed

Accepted Answer

A)  is available to the general public, but not to commercial banks.
B)  incentivizes financial institutions to hold more reserves and reduce risky lending.
C)  is determined by the federal funds rate.
D)  totaled over $1 trillion in 2012.Difficulty: 01 EasyE) B) and D)
F) All of the above

Exam 36: Interest Rates and Monetary Policy

The sale of government bonds by the Federal Reserve Banks to commercial banks will

Correct AnswerverifiedShow Answer

The asset demand for money is downsloping because

Correct AnswerverifiedShow Answer

In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed

Correct AnswerverifiedShow Answer

The impact of monetary policy on investment spending may be weakened

Correct AnswerverifiedShow Answer

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes.This situation means that the

Correct AnswerverifiedShow Answer

The purpose of a restrictive monetary policy is to

Correct AnswerverifiedShow Answer

Which of the following statements is most accurate about the Fed's attempt to normalize monetary policy after the Great Recession?

Correct AnswerverifiedShow Answer

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks.As a result, commercial bank reserves will

Correct AnswerverifiedShow Answer

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to

Correct AnswerverifiedShow Answer

Which of the following is considered a limitation of monetary policy?

Correct AnswerverifiedShow Answer

(Consider This) "Repo" stands for "Repossession purchase" and describes when the Fed buys mortgage-backed securities from banks.

Correct AnswerverifiedShow Answer

(Last Word) Which of the following is a concern about a central bank going below the zero lower bound and setting negative interest rates to stimulate the economy?

Correct AnswerverifiedShow Answer

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce

Correct AnswerverifiedShow Answer

Which of the following is least likely to be a problem for monetary policy?

Correct AnswerverifiedShow Answer

When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Correct AnswerverifiedShow Answer

Interest paid on excess reserves held at the Fed

Correct AnswerverifiedShow Answer

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

Correct AnswerverifiedShow Answer

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except

Correct AnswerverifiedShow Answer

If the amount of money demanded exceeds the amount supplied, the

Correct AnswerverifiedShow Answer

If the quantity of money demanded exceeds the quantity supplied,

Correct AnswerverifiedShow Answer

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