Question 1

In traditional monetary policy, if the Fed targeted a lower federal funds rate, then it was pursuing a restrictive monetary policy.

Accepted Answer

A) True 
 B)False

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 D)

Question 3

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

Accepted Answer

A)  the discount rate.
B)  interest on reserves.
C)  the federal funds rate.
D)  the prime rate.E) B) and D)
F) All of the above

Question 4

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 through the use of 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 5

If the demand for money and the supply of money both decrease, the equilibrium

Accepted Answer

A)  interest rate will decline, but we cannot predict the change in the equilibrium quantity of money.
B)  quantity of money and the equilibrium interest rate will both increase.
C)  quantity of money will increase, but we cannot predict the change in the equilibrium interest rate.
D)  quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.E) A) and D)
F) A) and C)

Question 6

The purchase and sale of government securities by the Fed is called

Accepted Answer

A)  Federal funds market.
B)  open-market operations.
C)  money market transactions.
D)  term auction facility.E) A) and B)
F) B) and C)

Question 7

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

Accepted Answer

A)  The required reserve ratio will increase.
B)  The money supply will decrease.
C)  The deposits of commercial banks will decline.
D)  Commercial bank reserves will increase.E) A) and B)
F) None of the above

Question 8

When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

According to the Taylor rule, if real GDP is 4 percent below potential GDP, the Fed should

Accepted Answer

A)  lower the federal funds rate by 2 percentage points.
B)  lower the federal funds rate by 4 percentage points.
C)  lower the federal funds rate by 8 percentage points.
D)  do nothing, as the economy will correct itself.E) A) and B)
F) B) and C)

Question 11

Other things equal, a restrictive monetary policy during a period of demand-pull inflation will

Accepted Answer

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

Question 12

Which of the following will increase commercial bank reserves?

Accepted Answer

A)  the purchase of government bonds in the open market by the Federal Reserve Banks
B)  a decrease in the reserve ratio
C)  an increase in the discount rate
D)  the sale of government bonds in the open market by the Federal Reserve BanksE) B) and C)
F) A) and C)

Question 13

A restrictive monetary policy is designed to shift the

Accepted Answer

A)  aggregate demand curve rightward.
B)  aggregate demand curve leftward.
C)  aggregate supply curve rightward.
D)  aggregate supply curve leftward.E) A) and D)
F) A) and C)

Question 14

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities.If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of

Accepted Answer

A)  $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks.
B)  $14 billion, but by $16 billion if the securities are purchased directly from commercial banks.
C)  $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.
D)  $14 billion, and by $20 billion if the securities are purchased directly from commercial banks.E) A) and B)
F) None of the above

Question 15

If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should

Accepted Answer

A)  raise the real federal funds rate by 1 percentage point.
B)  reduce the real federal funds rate by 1 percentage point.
C)  raise the inflation rate by 1 percentage point.
D)  change the real federal funds rate until inflation hits the target rate of 4 percent.E) All of the above
F) B) and D)

Question 16

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

Accepted Answer

A)  the discount rate
B)  the reserve ratio
C)  open-market operations
D)  paying interest on excess reservesE) A) and B)
F) C) and D)

Question 17

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 D)
F) A) and C)

Question 18

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) B) and D)
F) A) and B)

Question 19

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times a year.

Accepted Answer

A) True 
 B)False

Question 20

A wealthy executive is holding money, waiting for a good time to invest in the stock market.This action would be an example of the

Accepted Answer

A)  transactions demand for money.
B)  asset demand for money.
C)  creation of fiat money.
D)  use of money as a medium of exchange.E) None of the above
F) C) and D)

Exam 36: Interest Rates and Monetary Policy

If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should

Correct AnswerverifiedShow Answer

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities.If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of

Correct AnswerverifiedShow Answer

In traditional monetary policy, if the Fed targeted a lower federal funds rate, then it was pursuing a restrictive monetary policy.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Other things equal, a restrictive monetary policy during a period of demand-pull inflation will

Correct AnswerverifiedShow Answer

A wealthy executive is holding money, waiting for a good time to invest in the stock market.This action would be an example of the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

If the demand for money and the supply of money both decrease, the equilibrium

Correct AnswerverifiedShow Answer

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times a year.

Correct AnswerverifiedShow Answer

The discount rate is the interest

Correct AnswerverifiedShow Answer

The purchase and sale of government securities by the Fed is called

Correct AnswerverifiedShow Answer

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

Correct AnswerverifiedShow Answer

According to the Taylor rule, if real GDP is 4 percent below potential GDP, the Fed should

Correct AnswerverifiedShow Answer

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

Correct AnswerverifiedShow Answer

A restrictive monetary policy is designed to shift the

Correct AnswerverifiedShow Answer

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

Correct AnswerverifiedShow Answer

Which of the following will increase commercial bank reserves?

Correct AnswerverifiedShow Answer

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