Question 1

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 ﬁrms.
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 spend.E) A) and D)
F) A) and C)

Question 2

Raising the interest paid on reserves has the effect of making it

Accepted Answer

A)   more costly for banks to hold excess reserves.
B)   less costly for banks to hold excess reserves.
C)   more attractive for banks to lend out their excess reserves.
D)   less attractive for banks to hold required reserves.E) A) and B)
F) A) and C)

Question 3

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Accepted Answer

The dual mandate was given to the Federa...

Question 4

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

Accepted Answer

The limitations on the speed of monetary...

Question 5

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Accepted Answer

A)   real GDP is $800.
B)   nominal GDP is $800.
C)   the money supply must be $800.
D)   nominal GDP is $1,200.E) All of the above
F) C) and D)

Question 6

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Accepted Answer

A)   $4,700.
B)   $5,030.
C)   $7,128.
D)   $8,333.E) A) and D)
F) A) and C)

Question 7

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

Accepted Answer

A) True 
 B)False

Question 8

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to
3) 5 percent, bank reserves will

Accepted Answer

A)   increase by $1 billion and the money supply will increase by $5 billion.
B)   decline by $1 billion and the money supply will decline by $10 billion.
C)   increase by $1 billion and the money supply will increase by $10 billion.
D)   increase by $10 billion and the money supply will increase by $100 billion.E) None of the above
F) B) and C)

Question 9

When the interest rate falls, the

Accepted Answer

A)   asset demand for money decreases.
B)   transactions demand for money increases.
C)   total amount of money demanded increases.
D)   total amount of money demanded decreases.E) C) and D)
F) B) and C)

Question 10

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 at the Fed.E) A) and B)
F) C) and D)

Question 11

Accepted Answer

A)   B
B)   E
C)   F
D)   IE) A) and D)
F) B) and C)

Question 12

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 money.E) A) and B)
F) A) and C)

Question 13

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) A) and B)

Question 14

Which of the following statements is true?

Accepted Answer

A)   The Federal Reserve sets the federal funds rate.
B)   The Federal Reserve sets the target for the federal funds rate, and then uses the reserve ratio to push banks toward that target.
C)   The Federal Reserve does not set the federal funds rate, but historically has inﬂuenced it using its open-market operations.
D)   The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.E) A) and C)
F) None of the above

Question 15

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

Accepted Answer

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

Question 16

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

Accepted Answer

A)   sell bonds, which would cause bond prices to fall and the interest rate to rise.
B)   buy bonds, which would cause bond prices to fall and the interest rate to rise.
C)   sell bonds, which would cause bond prices to rise and the interest rate to rise.
D)   buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.E) C) and D)
F) All of the above

Question 17

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

Accepted Answer

A)   of commercial banks are unchanged, but their reserves increase.
B)   and reserves of commercial banks both decrease.
C)   of commercial banks are unchanged, but their reserves decrease.
D)   and reserves of commercial banks are both unchanged.E) All of the above
F) A) and B)

Question 18

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Accepted Answer

A)   the unemployment rate.
B)   the inﬂation rate.
C)   the target federal funds rate.
D)   the discount rate.E) A) and C)
F) None of the above

Question 19

The possible asymmetry of monetary policy is the central idea of the

Accepted Answer

A)   invisible hand concept.
B)   ratchet analogy.
C)   pushing-on-a-string analogy.
D)   bandwagon effect.E) All of the above
F) B) and C)

Question 20

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

Accepted Answer

A)   a tax increase and an increase in the money supply
B)   a tax reduction and an increase in the money supply
C)   a reduction in government expenditures and a decline in the money supply
D)   a tax increase and an increase in the interest rateE) All of the above
F) A) and B)

Exam 16: Interest Rates and Monetary Policy

When the interest rate falls, the

Correct Answer
verified

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

Correct Answer
verified

The possible asymmetry of monetary policy is the central idea of the

Correct Answer
verified

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Correct Answer
verified
The dual mandate was given to the Federa...
View Answer

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

Correct Answer
verified

An increase in nominal GDP will

Correct Answer
verified

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

Correct Answer
verified

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Correct Answer
verified

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

Correct Answer
verified

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

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

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

Correct Answer
verified
The limitations on the speed of monetary...
View Answer

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Correct Answer
verified

The lending ability of commercial banks increases when the

Correct Answer
verified

Raising the interest paid on reserves has the effect of making it

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

When the interest rate falls, the

Correct AnswerverifiedShow Answer

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

Correct AnswerverifiedShow Answer

The possible asymmetry of monetary policy is the central idea of the

Correct AnswerverifiedShow Answer

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Correct AnswerverifiedThe dual mandate was given to the Federa...View AnswerShow Answer

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

Correct AnswerverifiedShow Answer

An increase in nominal GDP will

Correct AnswerverifiedShow Answer

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

Correct AnswerverifiedShow Answer

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Correct AnswerverifiedShow Answer

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

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

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

Correct AnswerverifiedThe limitations on the speed of monetary...View AnswerShow Answer

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Correct AnswerverifiedShow Answer

The lending ability of commercial banks increases when the

Correct AnswerverifiedShow Answer

Raising the interest paid on reserves has the effect of making it

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified
The dual mandate was given to the Federa...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The limitations on the speed of monetary...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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