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Exam 16: Interest Rates and Monetary Policy

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Question 71

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Which of the following would most likely result from the Fed imposing negative nominal interest rates in response to a financial crisis and recession?

A) The negative interest rates would stimulate massive borrowing and spending, triggering rapid inflation in the short term.
B) It would signal trouble to financial markets, causing people to deposit more money in banks to enhance feelings of financial security.
C) Banks would freeze customer accounts so that they couldn't withdraw money, inciting financial panic.
D) Customers would withdraw deposits, banks would have less money to lend, and the money supply and aggregate demand would both fall.

E) B) and D)
F) B) and C)

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Question 72

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The purpose of a restrictive monetary policy is to

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) A) and D)
F) A) and C)

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Question 73

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Beginning in 2008, the Fed was allowed to

The Fed's response to the zero lower bound problem was

Describe how the usefulness of the federal funds rate has changed from before the financial crisis to after.

The transactions demand for money is least likely to be a function of the

$\begin{array} { | c | c | c | c | } \hline \text { Interest Rate } & \begin{array} { c } \text { Transactions Demand for } \\\text { Money }\end{array} & \begin{array} { c } \text { Asset Demand for } \\\text { Money }\end{array} &Money~Supply\\\hline 2 \% & \$ 220 & \$ 300 & \$ 460 \\\hline 4 & 220 & 280 & 460 \\\hline 6 & 220 & 260 & 460 \\\hline 8 & 220 & 240 & 460 \\\hline 10 & 220 & 220 & 460 \\\hline\end{array}$ Based on the given table, at equilibrium in the given market for money, the total amount of money demanded is

If the Federal Reserve System buys government securities from commercial banks and the public,

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

The interest rate will fall when the

Other things equal, an increase in productivity will

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

Since the financial crisis of 2008, the main tool of expansionary monetary policy used by the Fed has been

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

$\begin{array} { | l | r | } \hline { \text { Item in Balance Sheet } } & \text { Amount } \\\hline \text { 1) Treasury Deposits } & \$ 7 \\\hline \text { 2) Reserves of Commercial Banks } & 31 \\\hline \text { 3) Federal Reserve Notes } & 275 \\\hline \text { 4) Loans to Commercial Banks } & 1 \\\hline \text { 5) All Other Assets } & 64 \\\hline \text { 6) Securities } & 255 \\\hline \text { 7) All Other Liabilities and Net Worth } & 7 \\\hline\end{array}$ The table shows items and ?gures taken from a consolidated balance sheet of the 12 Federal Reserve Banks. All ?gures are in billions of dollars. In this balance sheet, the assets would be items 5 and

The ZIRP (zero interest rate policy) of the Fed led to the so-called zero lower bound problem, which refers to the problem of

A restrictive monetary policy may be frustrated if the investment-demand curve shifts to the left.

In a repo (or repurchase agreement), if the Fed buys securities from Firm A with an agreement that Firm A will buy back the securities from the Fed on the following day, then the Fed is acting as the lender and Firm A the borrower.

Bond prices and interest rates are directly or positively related.

A money loan is said to be collateralized when