Question 1

Which of the following best describes the cause-effect chain of an expansionary 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,increase investment spending,and increase aggregate demand and GDP.E) A) and B)
F) All of the above

Question 2

The discount rate is the interest:

Accepted Answer

A)   rate at which the central banks lend to the U.S.Treasury.
B)   rate at which the Federal Reserve Banks lend to commercial banks.
C)   yield on long-term government bonds.
D)   rate at which commercial banks lend to the public.E) A) and B)
F) A) and C)

Question 3

The price of government bonds and the interest rate received by a bond buyer are:

Accepted Answer

A)   positively related.
B)   unrelated.
C)   inversely related.
D)   independent of Federal Reserve open-market operations.E) All of the above
F) A) and B)

Question 4

If severe demand-pull inflation was occurring in the economy,proper government policies would involve a government:

Accepted Answer

A)   deficit,the purchase of securities in the open market,a higher discount rate,and higher reserve requirements.
B)   deficit,the sale of securities in the open market,a higher discount rate,and lower reserve requirements.
C)   surplus,the sale of securities in the open market,a higher discount rate,and higher reserve requirements.
D)   surplus,the purchase of securities in the open market,a lower discount rate,and lower reserve requirements.E) All of the above
F) B) and C)

Question 5

The federal funds rate target is the most frequently used monetary policy tool.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

In response to the zero lower bound problem:

Accepted Answer

A)   the Fed implemented the zero interest rate policy (ZIRP) .
B)   Congress approved additional fiscal stimulus in 2010.
C)   the Fed pursued quantitative easing.
D)   the Fed ended its forward commitment in order to encourage further lending.E) All of the above
F) A) and B)

Question 8

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) A) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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) All of the above
F) None of the above

Question 11

The total demand for money will shift to the left as a result of:

Accepted Answer

A)   a decline in nominal GDP.
B)   an increase in the price level.
C)   a change in the interest rate.
D)   an increase in nominal GDP.E) A) and D)
F) A) and C)

Question 12

A contraction of the money supply:

Accepted Answer

A)   increases the interest rate and decreases aggregate demand.
B)   increases both the interest rate and aggregate demand.
C)   lowers the interest rate and increases aggregate demand.
D)   lowers both the interest rate and aggregate demand.E) A) and D)
F) None of the above

Question 13

The Fed directly sets:

Accepted Answer

A)   the prime interest rate but not the federal funds rate.
B)   both the federal funds rate and the prime interest rate.
C)   neither the federal funds rate nor the prime interest rate.
D)   the discount rate and the prime interest rate.E) None of the above
F) A) and B)

Question 14

Other things equal,an increase in input prices will:

Accepted Answer

A)   reduce aggregate supply and reduce real output.
B)   increase the interest rate and lower the international value of the dollar.
C)   increase aggregate supply and increase the price level.
D)   increase net exports,increase investment,and reduce aggregate demand.E) C) and D)
F) A) and B)

Question 15

(Consider This) During and immediately following the severe recession of 2007-2009,on the consolidated balance sheet of the 12 Federal Reserve Banks:

Accepted Answer

A)   commercial bank reserves grew significantly because the Fed increased the required reserve ratio.
B)   liabilities fell significantly as commercial banks drained reserve accounts to meet their own deposit liabilities.
C)   assets fell significantly as a result of heavy withdrawals from commercial banks.
D)   assets grew significantly from Fed purchases of securities from financial institutions.E) C) and D)
F) B) and C)

Question 16

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)   Interest on reserves held at the Fed.E) C) and D)
F) B) and C)

Question 17

The problem of cyclical asymmetry refers to the idea that:

Accepted Answer

A)   a restrictive monetary policy can force a contraction of the money supply,but an expansionary monetary policy may not achieve an increase in the money supply.
B)   the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy.
C)   cyclical downswings are typically of longer duration than cyclical upswings.
D)   an expansionary monetary policy can force an expansion of the money supply,but a restrictive monetary policy may not achieve a contraction of the money supply.E) None of the above
F) B) and D)

Question 18

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) A) and C)

Question 19

Which of the following is a primary difference between QE2 and QE3?

Accepted Answer

A)   QE2 was vague about the size of the bond purchases;QE3 gave specific values.
B)   There were no significant differences;QE3 was just a continuation of QE2.
C)   QE2 had a specific deadline;QE3 was open-ended.
D)   QE2 was open-ended;QE3 had a specific deadline.E) A) and D)
F) A) and B)

Question 20

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Accepted Answer

A)   There is no difference between the two policy tools.
B)   Open-market operations are done in order to lower interest rates;quantitative easing is merely intended to increase bank reserves.
C)   Quantitative easing is focused exclusively on U.S.government bonds;open-market operations also include the buying and selling of debt issued by government agencies and government-sponsored entities.
D)   Open-market operations involve forward commitment;quantitative easing is intentionally vague to maintain flexibility.E) None of the above
F) A) and B)

Exam 35: Interest Rates and Monetary Policy

The price of government bonds and the interest rate received by a bond buyer are:

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The Fed directly sets:

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The discount rate is the interest:

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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:

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The problem of cyclical asymmetry refers to the idea that:

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If severe demand-pull inflation was occurring in the economy,proper government policies would involve a government:

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Which of the following is a primary difference between QE2 and QE3?

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The total demand for money will shift to the left as a result of:

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Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

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In response to the zero lower bound problem:

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The federal funds rate target is the most frequently used monetary policy tool.

Correct AnswerverifiedShow Answer

(Consider This) During and immediately following the severe recession of 2007-2009,on the consolidated balance sheet of the 12 Federal Reserve Banks:

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A contraction of the money supply:

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When a commercial bank borrows from a Federal Reserve Bank:

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Other things equal,an increase in input prices will:

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

Correct AnswerverifiedShow Answer

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