Question 1

Which of the following statements is true?

Accepted Answer

A)   Bond prices and the interest rate are inversely related.
B)   A lower interest rate raises the opportunity cost of holding money.
C)   The supply of money is directly related to the interest rate.
D)   The total demand for money is directly related to the interest rate.E) A) and C)
F) All of the above

Question 2

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the general public, this action has the potential to increase money supply by a maximum of

Accepted Answer

A)   $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks.
B)   $14 billion, but by $16 billion if the securities are purchased directly from commercial banks.
C)   $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.
D)   $14 billion, and by $20 billion if the securities are purchased directly from commercial banks.E) A) and D)
F) B) and D)

Question 3

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) B) and C)
F) All of the above

Question 4

Refer to the graph. If the equilibrium interest rate is 4 percent, the supply of money must be

Accepted Answer

A)   $250 billion.
B)   $200 billion.
C)   $150 billion.
D)   $100 billion.E) A) and B)
F) None of the above

Question 5

A bond with no expiration date is priced at $10,000 when the interest rate in the economy is 6 percent. If the interest rate falls to 5.5
percent, then this bond's price would decrease.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)   the federal funds market.
B)   open-market operations.
C)   money market transactions.
D)   term auction facility.E) A) and B)
F) A) and D)

Question 7

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

Accepted Answer

A)   the discount rate.
B)   interest on reserves.
C)   the federal funds rate.
D)   the prime rate.E) None of the above
F) A) and B)

Question 8

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) All of the above
F) A) and B)

Question 9

What policy tool of the Federal Reserve relies on banks borrowing to be effective?

Accepted Answer

A)   open-market operations
B)   check collection
C)   the reserve ratio
D)   the discount rateE) B) and D)
F) B) and C)

Question 10

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) A) and B)
F) All of the above

Question 11

The conduct of monetary policy in the United States is the main responsibility of the

Accepted Answer

A)   U.S. Treasury.
B)   Federal Reserve System.
C)   Oﬃce of Management and Budget.
D)   Bureau of Economic Analysis.E) A) and B)
F) None of the above

Question 12

When a commercial bank borrows from a Federal Reserve Bank,

Accepted Answer

A)   the supply of money automatically increases.
B)   it indicates that the commercial bank is unsound ﬁnancially.
C)   the commercial bank's lending ability is increased.
D)   the commercial bank's reserves are reduced.E) C) and D)
F) B) and D)

Question 13

What are the implications of a liquidity trap for the Federal Reserve?

Accepted Answer

A liquidity trap is a situation in a sev...

Question 14

If the dollars held for transactions purposes are, on the average, spent four times a year for ﬁnal goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Accepted Answer

A)   4 percent of nominal GDP.
B)   25 percent of nominal GDP.
C)   nominal GDP multiplied times 4.
D)   nominal GDP divided by 25.E) B) and D)
F) B) and C)

Question 15

Which of the following statements is correct? Other things equal,

Accepted Answer

A)   a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B)   a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged.
C)   deﬂation will shift both the transactions demand curve for money and the total money demand curve to the left.
D)   inﬂation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.E) None of the above
F) All of the above

Question 16

Loans of the Federal Reserve Banks to commercial banks are

Accepted Answer

A)   a liability of the Federal Reserve Banks and of the commercial banks.
B)   an asset of the Federal Reserve Banks and of the 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 banks.E) A) and D)
F) A) and C)

Question 17

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the
zero bound problem.

Accepted Answer

A) True 
 B)False

Question 18

Refer to the diagram of the market for money. Given  Dm and Sm an interest rate of I3D _ { m } 	ext { and } S _ { m } 	ext { an interest rate of } I _ { 3 }Dm​ and Sm​ an interest rate of I3​  is not sustainable because the

Accepted Answer

A)   supply of bonds in the bond market will decline and the interest rate will rise.
B)   supply of bonds in the bond market will increase and the interest rate will decline.
C)   demand for bonds in the bond market will decline and the interest rate will rise.
D)   demand for bonds in the bond market will rise and the interest rate will fall. E) A) and B)
F) A) and C)

Question 19

The major problem facing the economy is high unemployment and weak economic growth. The inﬂation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed
Would reinforce each other to achieve that objective?

Accepted Answer

A)   selling government securities, doing reverse repos, and raising the discount rate
B)   selling government securities, doing repos, and lowering the discount rate
C)   buying government securities, doing repos, and lowering the discount rate
D)   buying government securities, doing reverse repos, and raising the reserve ratioE) B) and D)
F) A) and C)

Question 20

The Fed's normalization plan for monetary policy included

Accepted Answer

A)   raising the federal funds target rate.
B)   raising the interest rate paid on excess reserves.
C)   using repos to insure adequate excess reserves in the banking system.
D)   raising the reserve ratio on deposits to soak up the excess liquidity in the system.E) A) and D)
F) All of the above

Exam 16: Interest Rates and Monetary Policy

Loans of the Federal Reserve Banks to commercial banks are

Correct Answer
verified

Which of the following statements is correct? Other things equal,

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the general public, this action has the potential to increase money supply by a maximum of

Correct Answer
verified

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

Correct Answer
verified

A bond with no expiration date is priced at $10,000 when the interest rate in the economy is 6 percent. If the interest rate falls to 5.5 percent, then this bond's price would decrease.

Correct Answer
verified

The Fed's normalization plan for monetary policy included

Correct Answer
verified

What are the implications of a liquidity trap for the Federal Reserve?

Correct Answer
verified
A liquidity trap is a situation in a sev...
View Answer

When a commercial bank borrows from a Federal Reserve Bank,

Correct Answer
verified

The conduct of monetary policy in the United States is the main responsibility of the

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the zero bound problem.

Correct Answer
verified

Refer to the graph. If the equilibrium interest rate is 4 percent, the supply of money must be

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

What policy tool of the Federal Reserve relies on banks borrowing to be effective?

Correct Answer
verified

If the dollars held for transactions purposes are, on the average, spent four times a year for ﬁnal goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Correct Answer
verified

The transactions demand for money will shift to the

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

Loans of the Federal Reserve Banks to commercial banks are

Correct AnswerverifiedShow Answer

Which of the following statements is correct? Other things equal,

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the general public, this action has the potential to increase money supply by a maximum of

Correct AnswerverifiedShow Answer

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

Correct AnswerverifiedShow Answer

A bond with no expiration date is priced at $10,000 when the interest rate in the economy is 6 percent. If the interest rate falls to 5.5 percent, then this bond's price would decrease.

Correct AnswerverifiedShow Answer

The Fed's normalization plan for monetary policy included

Correct AnswerverifiedShow Answer

What are the implications of a liquidity trap for the Federal Reserve?

Correct AnswerverifiedA liquidity trap is a situation in a sev...View AnswerShow Answer

When a commercial bank borrows from a Federal Reserve Bank,

Correct AnswerverifiedShow Answer

The conduct of monetary policy in the United States is the main responsibility of the

Correct AnswerverifiedShow Answer

Refer to the diagram of the market for money. Given Dm and Sm an interest rate of I3D _ { m } \text { and } S _ { m } \text { an interest rate of } I _ { 3 }Dm​ and Sm​ an interest rate of I3​ is not sustainable because the

Correct AnswerverifiedShow Answer

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

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

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the zero bound problem.

Correct AnswerverifiedShow Answer

Refer to the graph. If the equilibrium interest rate is 4 percent, the supply of money must be

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What policy tool of the Federal Reserve relies on banks borrowing to be effective?

Correct AnswerverifiedShow Answer

If the dollars held for transactions purposes are, on the average, spent four times a year for ﬁnal goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Correct AnswerverifiedShow Answer

The transactions demand for money will shift to the

Correct AnswerverifiedShow Answer

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verified
A liquidity trap is a situation in a sev...
View Answer

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Correct Answer
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