Question 1

When the Fed pays interest on reserves held at Fed banks,the interest rate used is the discount rate.

Accepted Answer

A) True 
 B)False

Question 2

Answer the question on the basis of the following table:   Interest  Rate 2%46810TransactionDemand forMoney‾$220220220220220Asset Demand for Money‾$300280260240220MoneySupply‾$460460460460460\begin{array}{c}\begin{array}{c}\	ext { Interest }\	ext { Rate } \\hline 2 \% \4 \6 \8 \10 \end{array}\begin{array}{c}	ext {Transaction}\	ext {Demand for}\\underline{	ext {Money}}\ \$ 220 \220\220\220\220\end{array}\begin{array}{c}\	ext {Asset Demand }\\underline{	ext {for Money}}\\$ 300 \280 \260 \240 \220\end{array}\begin{array}{c}\	ext {Money}\\underline{	ext {Supply}}\\$ 460 \460\460\460\460\end{array}\end{array} Interest  Rate 2%46810​​TransactionDemand forMoney​$220220220220220​Asset Demand for Money​$300280260240220​MoneySupply​$460460460460460​​

Refer to the given table.The equilibrium interest rate is:

Accepted Answer

A)   2 percent.
B)   4 percent.
C)   6 percent.
D)   8 percent. E) All of the above
F) B) and D)

Question 3

The pushing-on-a-string analogy makes the point that monetary policy may be better at:

Accepted Answer

A)   controlling demand-pull inflation than cost-push inflation.
B)   pulling the aggregate demand curve leftward than pushing it rightward.
C)   pulling the unemployment rate downward than pushing the economic growth rate upward.
D)   keeping rapid inflation from occurring than reducing it once it has begun.E) All of the above
F) A) and C)

Question 4

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond falls by $200,the interest rate will:

Accepted Answer

A)   rise by 2.5 percentage points.
B)   rise by 5 percentage points.
C)   fall by 2.5 percentage points.
D)   fall by 5 percentage points.E) C) and D)
F) A) and D)

Question 5

Beginning in 2008,the Fed was allowed to:

Accepted Answer

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

Question 6

When the Fed lends money to a commercial bank,the bank:

Accepted Answer

A)   increases its reserves and enhances its ability to extend credit to bank customers.
B)   decreases its reserves and reduces its ability to extend credit to bank customers.
C)   pays the federal funds interest rate on the loan.
D)   pays the prime interest rate on the loan.E) C) and D)
F) A) and D)

Question 7

(Consider This) The Fed is like a sponge in that it can:

Accepted Answer

A)   clean up economic problems just as one would wash dirt off a car.
B)   squeeze new reserves into the banking system,or soak up reserves if the banking reserve "bowl" is too full.
C)   wipe away inflation when used with the "soap" of fiscal policy.
D)   wash the "windows" of the banking system so that monetary policy is more transparent.E) B) and D)
F) None of the above

Question 8

An increase in the legal reserve ratio:

Accepted Answer

A)   increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B)   decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C)   increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D)   decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.E) A) and C)
F) All of the above

Question 9

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

Accepted Answer

A)   Interest on reserves.
B)   The reserve ratio.
C)   Open-market operations.
D)   The federal funds rate.E) A) and B)
F) None of the above

Question 10

The opportunity cost of holding money:

Accepted Answer

A)   is zero because money is not an economic resource.
B)   varies inversely with the interest rate.
C)   varies directly with the interest rate.
D)   varies inversely with the level of economic activity.E) B) and C)
F) A) and C)

Question 11

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 reserves.E) C) and D)
F) B) and D)

Question 12

(Consider This) The Fed's ability to alter the level of reserves in the banking system is the main idea of the:

Accepted Answer

A)   sponge analogy.
B)   squeegee analogy.
C)   pushing-on-a-string analogy.
D)   hose analogy.E) All of the above
F) C) and D)

Question 13

The Fed increases interest rates mainly by selling government securities.

Accepted Answer

A) True 
 B)False

Question 14

Reserves borrowed at the federal funds rate are usually repaid:

Accepted Answer

A)   in one year.
B)   in five years.
C)   at the end of the month.
D)   the next day.E) C) and D)
F) B) and D)

Question 15

Suppose that,for every 1-percentage-point decline of the discount rate,commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks.Also assume that the reserve ratio is 20 percent.If the Fed increases the discount rate from 4.0 percent to 4.25 percent,bank reserves will:

Accepted Answer

A)   increase by $0.5 billion and the money supply will increase by $2.5 billion.
B)   decline by $0.5 billion and the money supply will decline by $2.5 billion.
C)   increase by $0.75 billion and the money supply will increase by $3.75 billion.
D)   increase by $1 billion and the money supply will increase by $5 billion.E) B) and C)
F) B) and D)

Question 16

When the required reserve ratio is decreased,the excess reserves of member banks are:

Accepted Answer

A)   reduced,but the multiple by which the commercial banking system can lend is unaffected.
B)   reduced and the multiple by which the commercial banking system can lend is increased.
C)   increased and the multiple by which the commercial banking system can lend is increased.
D)   increased and the multiple by which the commercial banking system can lend is reduced.E) A) and B)
F) A) and C)

Question 17

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.Suppose the legal reserve requirement is 10 percent and initially there are no excess reserves in the banking system.If the Fed wished to reduce the interest rate by 1 percentage point,it would:

Accepted Answer

A)   sell $10 of government bonds in the open market.
B)   buy $100 of government bonds in the open market.
C)   sell $100 of government bonds in the open market.
D)   buy $10 of government bonds in the open market. E) B) and D)
F) B) and C)

Question 18

If the economy were encountering a severe recession,proper monetary and fiscal policies would call for:

Accepted Answer

A)   selling government securities,raising the reserve ratio,lowering the discount rate,increasing interest paid on reserves held at Fed banks,and a budgetary surplus.
B)   buying government securities,reducing the reserve ratio,reducing the discount rate,reducing interest paid on reserves held at Fed banks,and a budgetary deficit.
C)   buying government securities,raising the reserve ratio,raising the discount rate,reducing interest paid on reserves held at Fed banks,and a budgetary surplus.
D)   buying government securities,reducing the reserve ratio,raising the discount rate,reducing interest paid on reserves held at Fed banks,and a budgetary deficit.E) B) and D)
F) A) and C)

Question 19

Which of the following is a tool of monetary policy?

Accepted Answer

A)   Open-market operations.
B)   Changes in banking laws.
C)   Changes in tax rates.
D)   Changes in government spending.E) All of the above
F) A) and B)

Question 20

A federal funds rate reduction that is caused by monetary policy will:

Accepted Answer

A)   increase the prime interest rate.
B)   decrease the size of the monetary multiplier.
C)   increase the Fed's discount rate.
D)   decrease the prime interest rate.E) All of the above
F) A) and B)

Exam 35: Interest Rates and Monetary Policy

(Consider This) The Fed is like a sponge in that it can:

Correct Answer
verified

The opportunity cost of holding money:

Correct Answer
verified

Beginning in 2008,the Fed was allowed to:

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond falls by $200,the interest rate will:

Correct Answer
verified

(Consider This) The Fed's ability to alter the level of reserves in the banking system is the main idea of the:

Correct Answer
verified

An increase in the legal reserve ratio:

Correct Answer
verified

If the economy were encountering a severe recession,proper monetary and fiscal policies would call for:

Correct Answer
verified

The pushing-on-a-string analogy makes the point that monetary policy may be better at:

Correct Answer
verified

When the Fed pays interest on reserves held at Fed banks,the interest rate used is the discount rate.

Correct Answer
verified

A federal funds rate reduction that is caused by monetary policy will:

Correct Answer
verified

The Fed increases interest rates mainly by selling government securities.

Correct Answer
verified

Which of the following is a tool of monetary policy?

Correct Answer
verified

Suppose that,for every 1-percentage-point decline of the discount rate,commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks.Also assume that the reserve ratio is 20 percent.If the Fed increases the discount rate from 4.0 percent to 4.25 percent,bank reserves will:

Correct Answer
verified

Reserves borrowed at the federal funds rate are usually repaid:

Correct Answer
verified

When the Fed lends money to a commercial bank,the bank:

Correct Answer
verified

When the required reserve ratio is decreased,the excess reserves of member banks are:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Exam 35: Interest Rates and Monetary Policy

(Consider This) The Fed is like a sponge in that it can:

Correct AnswerverifiedShow Answer

The opportunity cost of holding money:

Correct AnswerverifiedShow Answer

Beginning in 2008,the Fed was allowed to:

Correct AnswerverifiedShow Answer

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

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

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond falls by $200,the interest rate will:

Correct AnswerverifiedShow Answer

(Consider This) The Fed's ability to alter the level of reserves in the banking system is the main idea of the:

Correct AnswerverifiedShow Answer

An increase in the legal reserve ratio:

Correct AnswerverifiedShow Answer

If the economy were encountering a severe recession,proper monetary and fiscal policies would call for:

Correct AnswerverifiedShow Answer

The pushing-on-a-string analogy makes the point that monetary policy may be better at:

Correct AnswerverifiedShow Answer

When the Fed pays interest on reserves held at Fed banks,the interest rate used is the discount rate.

Correct AnswerverifiedShow Answer

A federal funds rate reduction that is caused by monetary policy will:

Correct AnswerverifiedShow Answer

The Fed increases interest rates mainly by selling government securities.

Correct AnswerverifiedShow Answer

Which of the following is a tool of monetary policy?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Reserves borrowed at the federal funds rate are usually repaid:

Correct AnswerverifiedShow Answer

When the Fed lends money to a commercial bank,the bank:

Correct AnswerverifiedShow Answer

When the required reserve ratio is decreased,the excess reserves of member banks are:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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