Question 1

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in

Accepted Answer

A)  money supply M1.
B)  Bank A's excess reserves.
C)  Bank A's liabilities.
D)  Bank A's required reserves.E) B) and C)
F) A) and B)

Question 2

The price of a bond with no expiration date is $1,000, and the fixed annual interest payment is $100.If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Accepted Answer

A) True 
 B)False

Question 3

Beginning in 2008, the Fed was allowed to

Accepted Answer

A)  lend directly to consumers.
B)  alter tax rates.
C)  pay interest on excess reserves deposited at Fed banks.
D)  require commercial banks to loan a certain percentage of their excess reserves.E) A) and B)
F) A) and C)

Question 4

When the Fed does repos and reverse repos (or repurchase agreements)  with financial institutions, the collateral used in these transactions is

Accepted Answer

A)  corporate stock.
B)  municipal bonds.
C)  government bonds.
D)  certificates of deposits.E) B) and C)
F) A) and B)

Question 5

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.Topic: The Consolidated Balance Sheet of the Federal Reserve Banks

Accepted Answer

A) True 
 B)False

Question 6

The desire to hold money for transactions purposes arises because

Accepted Answer

A)  receipts of income and expenditures are not perfectly synchronized.
B)  people fear that prices will rise.
C)  households want money on hand in case a good financial investment opportunity arises.
D)  low interest rates reduce the opportunity cost of holding money.E) C) and D)
F) None of the above

Question 7

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 tend to offset each other in trying to achieve that objective?

Accepted Answer

A)  selling government securities and raising the discount rate
B)  selling government securities and raising the reserve ratio
C)  buying government securities and raising the discount rate
D)  buying government securities and lowering the reserve ratioE) None of the above
F) B) and D)

Question 8

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1,000 at a price of $10,000.If the interest rate in the economy is now 12.5 percent a year and you want to sell the bond, the maximum price that you can get for it is

Accepted Answer

A)  $7,500.
B)  $8,000.
C)  $9,750.
D)  $12,500.E) A) and C)
F) None of the above

Question 9

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the

Accepted Answer

A)  discount rate.
B)  term auction rate.
C)  prime interest rate.
D)  real interest rate.E) A) and B)
F) A) and C)

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) B) and D)
F) None of the above

Question 11

Which of the following combinations of Fed actions would be most effective in "mopping up" reserves away from the banking system?

Accepted Answer

A)  reducing the interest paid on excess reserves and also doing "repos" with banks and nonbanks
B)  raising the interest paid on excess reserves and also doing "repos" with banks and nonbanks
C)  reducing the interest paid on excess reserves and also doing "reverse repos" with banks and nonbanks
D)  raising the interest paid on excess reserves and also doing "reverse repos" with banks and nonbanksE) All of the above
F) None of the above

Question 12

Reserves must be deposited in the Federal Reserve Banks by

Accepted Answer

A)  only commercial banks that are members of the Federal Reserve System.
B)  all depository institutions, that is, all commercial banks and thrift institutions.
C)  state-chartered commercial banks only.
D)  federally chartered commercial banks only.E) B) and C)
F) B) and D)

Question 13

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the

Accepted Answer

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

Question 14

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

Accepted Answer

A)  budget deficit, the purchase of securities in the open market, a higher discount rate, and higher reserve requirements.
B)  budget deficit, the sale of securities in the open market, a higher discount rate, and lower reserve requirements.
C)  budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
D)  budget surplus, the purchase of securities in the open market, a lower discount rate, and lower reserve requirements.E) None of the above
F) B) and C)

Question 15

The Fed can induce banks to increase their reserve holdings by

Accepted Answer

A)  increasing the discount rate.
B)  reducing the required reserve ratio.
C)  increasing the interest on reserves.
D)  selling securities in the open market.E) A) and B)
F) All of the above

Question 16

Which of the following would not be a consequence of negative interest rates?

Accepted Answer

A)  Peopleâ€™s deposits in banks would have shrinking balances over time.
B)  People would get paid to borrow money.
C)  People would want to put more money in banks.
D)  People would rather hold cash than bank deposits.E) All of the above
F) A) and C)

Question 17

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent.If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Accepted Answer

A)  $1,000.
B)  $2,000.
C)  $800.
D)  $5,000.E) All of the above
F) A) and B)

Question 18

Which of the following tools of monetary policy has not been used since 1992?

Accepted Answer

A)  paying interest on excess reserves
B)  the reserve ratio
C)  open-market operations
D)  the federal funds rateE) B) and C)
F) C) and D)

Question 19

The prime interest rate

Accepted Answer

A)  affects investment spending, while the federal funds rate affects consumption spending.
B)  affects consumption spending, while the federal funds rate affects investment spending.
C)  has no effect on exchange rates and net exports.
D)  affects investment spending, while the federal funds rate affects overnight borrowing of bank reserves.E) B) and C)
F) C) and D)

Question 20

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

Exam 36: Interest Rates and Monetary Policy

The price of a bond with no expiration date is $1,000, and the fixed annual interest payment is $100.If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Correct Answer
verified

The prime interest rate

Correct Answer
verified

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent.If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Correct Answer
verified

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1,000 at a price of $10,000.If the interest rate in the economy is now 12.5 percent a year and you want to sell the bond, the maximum price that you can get for it is

Correct Answer
verified

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the

Correct Answer
verified

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the

Correct Answer
verified

Correct Answer
verified

Which of the following tools of monetary policy has not been used since 1992?

Correct Answer
verified

The Fed can induce banks to increase their reserve holdings by

Correct Answer
verified

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.Topic: The Consolidated Balance Sheet of the Federal Reserve Banks

Correct Answer
verified

When the Fed does repos and reverse repos (or repurchase agreements) with financial institutions, the collateral used in these transactions is

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Which of the following combinations of Fed actions would be most effective in "mopping up" reserves away from the banking system?

Correct Answer
verified

Reserves must be deposited in the Federal Reserve Banks by

Correct Answer
verified

The discount rate is the rate of interest at which

Correct Answer
verified

Which of the following would not be a consequence of negative interest rates?

Correct Answer
verified

Beginning in 2008, the Fed was allowed to

Correct Answer
verified

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in

Correct Answer
verified

The desire to hold money for transactions purposes arises because

Correct Answer
verified

Exam 36: Interest Rates and Monetary Policy

The price of a bond with no expiration date is $1,000, and the fixed annual interest payment is $100.If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 20 percent.

Correct AnswerverifiedShow Answer

The prime interest rate

Correct AnswerverifiedShow Answer

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent.If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Correct AnswerverifiedShow Answer

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1,000 at a price of $10,000.If the interest rate in the economy is now 12.5 percent a year and you want to sell the bond, the maximum price that you can get for it is

Correct AnswerverifiedShow Answer

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the

Correct AnswerverifiedShow Answer

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following tools of monetary policy has not been used since 1992?

Correct AnswerverifiedShow Answer

The Fed can induce banks to increase their reserve holdings by

Correct AnswerverifiedShow Answer

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.Topic: The Consolidated Balance Sheet of the Federal Reserve Banks

Correct AnswerverifiedShow Answer

When the Fed does repos and reverse repos (or repurchase agreements) with financial institutions, the collateral used in these transactions is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following combinations of Fed actions would be most effective in "mopping up" reserves away from the banking system?

Correct AnswerverifiedShow Answer

Reserves must be deposited in the Federal Reserve Banks by

Correct AnswerverifiedShow Answer

The discount rate is the rate of interest at which

Correct AnswerverifiedShow Answer

Which of the following would not be a consequence of negative interest rates?

Correct AnswerverifiedShow Answer

Beginning in 2008, the Fed was allowed to

Correct AnswerverifiedShow Answer

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in

Correct AnswerverifiedShow Answer

The desire to hold money for transactions purposes arises because

Correct AnswerverifiedShow Answer

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