Question 1

Big Bucks Bank currently holds $20 million in excess reserves.If the Fed increases the rate of interest it pays on reserves held at the Fed,we would expect Big Bucks Bank to:

Accepted Answer

A)   use those excess reserves to increase its lending.
B)   not change its lending activity,as excess reserves are not eligible to receive interest paid on reserve accounts.
C)   move a portion of those excess reserves into its required reserve account.
D)   hold more of those excess reserves in its reserve account at the Fed,reducing the amount it is willing to lend.E) A) and B)
F) None of the above

Question 2

The transactions demand for money is most closely related to money functioning as a:

Accepted Answer

A)   unit of account.
B)   medium of exchange.
C)   store of value.
D)   measure of value.E) C) and D)
F) B) and D)

Question 3

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

Question 4

The asset demand for money:

Accepted Answer

A)   is unrelated to both the interest rate and the level of GDP.
B)   varies inversely with the rate of interest.
C)   varies inversely with the level of real GDP.
D)   varies directly with the level of nominal GDP.E) A) and D)
F) All of the above

Question 5

Answer the question on the basis of the information in the following table.  Money Supply‾$400400400400400 Money  Demanc ‾$600500400300200 Interest Rate ‾2%3456Investment (at Interest Rate Shown) ‾$700600500300200\begin{array}{c}\begin{array}{c}\	ext {Money}\\underline{	ext { Supply}}\ \$ 400 \400\400\400\400\end{array}\begin{array}{c}\	ext { Money }\\underline{	ext { Demanc }} \ \$ 600 \500 \400 \300 \200\end{array}\begin{array}{c}\	ext { Interest}\\underline{	ext { Rate }} \ 2 \% \3 \4 \5 \6\end{array}\begin{array}{c}	ext {Investment }\	ext {(at Interest}\\underline{	ext { Rate Shown) }}\\$ 700 \600 \500 \300 \200\end{array}\end{array}Money Supply​$400400400400400​ Money  Demanc ​$600500400300200​ Interest Rate ​2%3456​Investment (at Interest Rate Shown) ​$700600500300200​​ 
 Refer to the table.The amount of investment that will be forthcoming in this economy at equilibrium is:

Accepted Answer

A)   $700.
B)   $600.
C)   $500.
D)   $300. E) B) and D)
F) None of the above

Question 6

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones.   Assets‾ Reserves Securities Loans Property$60140260400 Liabilities & Net Worth ‾ Checkable Deposits Stock Shares$600260\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{	ext { Assets}}\	ext { Reserves}\	ext { Securities}\	ext { Loans}\	ext { Property} \end{array}\begin{array}{l}\\$ 60 \140 \260 \400 \end{array}\begin{array}{lll}\quad\quad \underline{	ext { Liabilities \& Net Worth }}\	ext { Checkable Deposits}\	ext {  Stock Shares}\\\\end{array}\begin{array}{lll}\\$600\260\\\\end{array}\end{array} Assets​ Reserves Securities Loans Property​$60140260400​ Liabilities & Net Worth ​ Checkable Deposits Stock Shares​$600260​​

Refer to the given data.Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation.Assuming that the money multiplier is operating to full effect,to accomplish the desired reduction,the Fed could:

Accepted Answer

A)   sell $20 billion of U.S.securities to the banks.
B)   buy $20 billion of U.S.securities from the banks.
C)   sell $40 billion of U.S.securities to the banks.
D)   buy $40 billion of U.S.securities from the banks. E) B) and D)
F) C) and D)

Question 7

According to the Taylor rule:

Accepted Answer

A)   if real GDP rises by 2 percent above potential GDP,the Fed should raise the real federal funds rate by 1 percentage point.
B)   when real GDP is equal to potential GDP and inflation is equal to its target of 4 percent,the federal funds rate should be kept at 2 percent.
C)   if inflation falls by 1 percentage point below its target of 2 percent,then the Fed should raise the real federal funds rate by one-half a percentage point.
D)   all of these are appropriate Fed actions.E) B) and C)
F) A) and B)

Question 8

According to the Taylor rule,if real GDP falls by 1 percent below potential GDP,the Fed should lower the federal funds rate by one-half a percentage point.

Accepted Answer

A) True 
 B)False

Question 9

According to the Taylor rule,when real GDP is at its potential and inflation is at its target rate of 2 percent,the Fed should:

Accepted Answer

A)   carefully lower the federal funds rate in an attempt to stimulate noninflationary real GDP growth.
B)   raise the federal funds rate in an attempt to eliminate the remaining inflation.
C)   lower the federal funds rate to lower borrowing costs for the federal government.
D)   keep the federal funds rate at 4 percent.E) B) and D)
F) None of the above

Question 10

The discount rate is the rate of interest at which:

Accepted Answer

A)   Federal Reserve Banks lend to commercial banks.
B)   savings and loan associations lend to some builders.
C)   Federal Reserve Banks lend to large corporations.
D)   commercial banks lend to large corporations.E) None of the above
F) B) and C)

Question 11

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals,who deposit the cash in checking accounts. As a result of the given transactions,the supply of money in the economy will:

Accepted Answer

A)   remain unchanged.
B)   rise by $500.
C)   fall by $100.
D)   fall by $500.E) B) and D)
F) None of the above

Question 12

A commercial bank can add to its actual reserves by:

Accepted Answer

A)   lending money to bank customers.
B)   buying government securities from the public.
C)   buying government securities from a Federal Reserve Bank.
D)   borrowing from a Federal Reserve Bank.E) None of the above
F) All of the above

Question 13

Which of the following is true about the effects of ZIRP,QE,and Operation Twist?

Accepted Answer

A)   The massive monetary stimulus created high rates of inflation.
B)   They were unsuccessful at lowering interest rates.
C)   By lowering borrowing costs,they encouraged expansion of federal budget deficits.
D)   Pension plan and retirement fund returns increased dramatically.E) B) and C)
F) A) and D)

Question 14

The commercial banking system borrows from the Federal Reserve Banks.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) B) and D)
F) A) and C)

Question 15

(Consider This)In March 2010,total bank reserves held at the Fed exceeded total checkable deposits held by the banks.

Accepted Answer

A) True 
 B)False

Question 16

When the reserve requirement is increased:

Accepted Answer

A)   required reserves are changed into excess reserves.
B)   the excess reserves of member banks are increased.
C)   a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D)   the excess reserves of member banks are reduced.E) A) and D)
F) A) and B)

Question 17

Suppose the demand for money and the supply of money increase simultaneously.We can:

Accepted Answer

A)   expect the interest rate to rise and bond prices to fall.
B)   expect the interest rate to fall and bond prices to rise.
C)   the nominal GDP to expand.
D)   not accurately predict what will happen to interest rates or bond prices.E) C) and D)
F) B) and D)

Question 18

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Accepted Answer

A)   The discount rate.
B)   The reserve ratio.
C)   Open-market operations.
D)   The federal funds rate.E) B) and D)
F) B) and C)

Question 19

In recent years,the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Accepted Answer

A)   growth of the money supply.
B)   federal funds rate.
C)   prime interest rate.
D)   U.S.dollar-foreign currency exchange rate.E) None of the above
F) B) and C)

Question 20

The objective of Operation Twist was to:

Accepted Answer

A)   stimulate aggregate demand by lowering long-term interest rates.
B)   stimulate aggregate demand by lowering short-term interest rates.
C)   reduce inflationary pressure by raising long-term interest rates.
D)   reduce inflationary pressure by raising short-term interest rates.E) A) and D)
F) B) and C)

Exam 35: Interest Rates and Monetary Policy

Correct Answer
verified

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Correct Answer
verified

The commercial banking system borrows from the Federal Reserve Banks.As a result,the checkable deposits:

Correct Answer
verified

In recent years,the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Correct Answer
verified

The objective of Operation Twist was to:

Correct Answer
verified

According to the Taylor rule:

Correct Answer
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Suppose the demand for money and the supply of money increase simultaneously.We can:

Correct Answer
verified

According to the Taylor rule,when real GDP is at its potential and inflation is at its target rate of 2 percent,the Fed should:

Correct Answer
verified

The transactions demand for money is most closely related to money functioning as a:

Correct Answer
verified

The discount rate is the rate of interest at which:

Correct Answer
verified

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

Correct Answer
verified

According to the Taylor rule,if real GDP falls by 1 percent below potential GDP,the Fed should lower the federal funds rate by one-half a percentage point.

Correct Answer
verified

Which of the following is true about the effects of ZIRP,QE,and Operation Twist?

Correct Answer
verified

The asset demand for money:

Correct Answer
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A commercial bank can add to its actual reserves by:

Correct Answer
verified

Big Bucks Bank currently holds $20 million in excess reserves.If the Fed increases the rate of interest it pays on reserves held at the Fed,we would expect Big Bucks Bank to:

Correct Answer
verified

When the reserve requirement is increased:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

(Consider This)In March 2010,total bank reserves held at the Fed exceeded total checkable deposits held by the banks.

Correct Answer
verified

Exam 35: Interest Rates and Monetary Policy

Correct AnswerverifiedShow Answer

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Correct AnswerverifiedShow Answer

The commercial banking system borrows from the Federal Reserve Banks.As a result,the checkable deposits:

Correct AnswerverifiedShow Answer

In recent years,the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Correct AnswerverifiedShow Answer

The objective of Operation Twist was to:

Correct AnswerverifiedShow Answer

According to the Taylor rule:

Correct AnswerverifiedShow Answer

Suppose the demand for money and the supply of money increase simultaneously.We can:

Correct AnswerverifiedShow Answer

According to the Taylor rule,when real GDP is at its potential and inflation is at its target rate of 2 percent,the Fed should:

Correct AnswerverifiedShow Answer

The transactions demand for money is most closely related to money functioning as a:

Correct AnswerverifiedShow Answer

The discount rate is the rate of interest at which:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the Taylor rule,if real GDP falls by 1 percent below potential GDP,the Fed should lower the federal funds rate by one-half a percentage point.

Correct AnswerverifiedShow Answer

Which of the following is true about the effects of ZIRP,QE,and Operation Twist?

Correct AnswerverifiedShow Answer

The asset demand for money:

Correct AnswerverifiedShow Answer

A commercial bank can add to its actual reserves by:

Correct AnswerverifiedShow Answer

Big Bucks Bank currently holds $20 million in excess reserves.If the Fed increases the rate of interest it pays on reserves held at the Fed,we would expect Big Bucks Bank to:

Correct AnswerverifiedShow Answer

When the reserve requirement is increased:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

(Consider This)In March 2010,total bank reserves held at the Fed exceeded total checkable deposits held by the banks.

Correct AnswerverifiedShow Answer

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