Question 1

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

Accepted Answer

A)   Excess reserves by $8 million
B)   Excess reserves by $200 million
C)   The money supply by potentially $200 million
D)   The money supply by potentially $400 millionE) B) and C)
F) All of the above

Question 2

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

Accepted Answer

A)   Open-market operations
B)   Check collection
C)   The reserve ratio
D)   The discount rateE) A) and B)
F) None of the above

Question 3

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the zero bound problem.

Accepted Answer

A) True 
 B)False

Question 4

The major purpose of the Federal Reserve buying government securities in open market operations is to:

Accepted Answer

A)   Increase interest rates
B)   Raise money for government spending
C)   Reduce the excess reserves of banks
D)   Allow banks to increase their lendingE) B) and C)
F) A) and D)

Question 5

The transactions demand for money will shift to the:

Accepted Answer

A)   Left when nominal GDP increases
B)   Left when nominal GDP decreases
C)   Right when nominal GDP decreases
D)   Right when the interest rate increasesE) All of the above
F) B) and C)

Question 6

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Accepted Answer

A)   The purchase of government securities in the open market and an increase in taxes
B)   The sale of government securities in the open market and a decrease in taxes
C)   The sale of government securities in the open market and a decrease in government spending
D)   The purchase of government securities in the open market and an increase in government spendingE) C) and D)
F) B) and C)

Question 7

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars.  In the balance sheet above for the Federal Reserve, there would be assets of:

Accepted Answer

A)   $246 billion
B)   $313 billion
C)   $320 billion
D)   $387 billionE) B) and C)
F) None of the above

Question 8

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 non-bank 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 banksE) C) and D)
F) A) and B)

Question 9

Assume that the MPC is 0.75 and that the price level is "sticky". If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to:

Accepted Answer

A)   Increase by $6 billion
B)   Increase by $8 billion
C)   Increase by $32 billion
D)   Decrease by $8 billionE) A) and B)
F) A) and C)

Question 10

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

Accepted Answer

A)   The interest rate increases and nominal GDP increases
B)   The interest rate increases and nominal GDP decreases
C)   The interest rate decreases and nominal GDP decreases
D)   The interest rate decreases and nominal GDP increasesE) A) and C)
F) B) and C)

Question 11

In the cause-effect chain of monetary policy an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market.

Accepted Answer

A) True 
 B)False

Question 12

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce:

Accepted Answer

A)   The unemployment rate
B)   The inflation rate
C)   The target federal funds rate
D)   The discount rateE) A) and B)
F) A) and C)

Question 13

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:

Accepted Answer

A)   Exchange rate
B)   Discount rate
C)   Interest on reserves
D)   Open market operationsE) None of the above
F) A) and D)

Question 14

In response to the financial crisis and the Great Recession, the Fed took the following actions, except:

Accepted Answer

A)   Reduced the federal funds rate to practically zero
B)   Lowered the required reserve ratio
C)   Initiated a few rounds of quantitative easing
D)   Engaged in a policy of forward commitmentE) B) and D)
F) None of the above

Question 15

1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP? A)  Increase the money supply from $75 to $150 billion B)  Increase the money supply from $150 to $225 billion C)  Decrease the money supply from $225 to $150 billion D)  Make no change in the money supply" class="answers-bank-image d-inline" rel="preload" > Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP?

Accepted Answer

A)   Increase the money supply from $75 to $150 billion
B)   Increase the money supply from $150 to $225 billion
C)   Decrease the money supply from $225 to $150 billion
D)   Make no change in the money supplyE) B) and C)
F) B) and D)

Question 16

If the monetary authority wishes to rein in inflation, it would buy government securities in the open market.

Accepted Answer

A) True 
 B)False

Question 17

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

Accepted Answer

A)   A decrease in aggregate demand will increase output
B)   An increase in the money supply will decrease the rate of interest
C)   A decrease in excess reserves will increase the money supply
D)   A decrease in the rate of interest will decrease aggregate demandE) A) and C)
F) B) and D)

Question 18

The largest liability item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013)  is:

Accepted Answer

A)   Treasury deposits
B)   Federal Reserve Notes
C)   Reserves of commercial banks
D)   Loans to commercial banksE) B) and C)
F) A) and B)

Question 19

A decrease in the interest rate will cause a(n) :

Accepted Answer

A)   Increase in the transactions demand for money
B)   Decrease in the transactions demand for money
C)   Decrease in the amount of money held as an asset
D)   Increase in the amount of money held as an assetE) A) and D)
F) C) and D)

Question 20

The Federal Reserve could reduce the money supply by:

Accepted Answer

A)   Lowering the required reserve ratio
B)   Buying government bonds in the open market
C)   Increasing the interest on reserves
D)   Reducing the discount rateE) A) and B)
F) All of the above

Exam 16: Interest Rates and Monetary Policy

If the monetary authority wishes to rein in inflation, it would buy government securities in the open market.

Correct Answer
verified

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

Correct Answer
verified

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, there would be assets of:

Correct Answer
verified

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 non-bank public, this action has the potential to increase money supply by a maximum of:

Correct Answer
verified

A decrease in the interest rate will cause a(n) :

Correct Answer
verified

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

Correct Answer
verified

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Correct Answer
verified

The transactions demand for money will shift to the:

Correct Answer
verified

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce:

Correct Answer
verified

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

Correct Answer
verified

The Federal Reserve could reduce the money supply by:

Correct Answer
verified

In the cause-effect chain of monetary policy an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market.

Correct Answer
verified

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the zero bound problem.

Correct Answer
verified

Assume that the MPC is 0.75 and that the price level is "sticky". If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to:

Correct Answer
verified

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:

Correct Answer
verified

The largest liability item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

Correct Answer
verified

Correct Answer
verified

The major purpose of the Federal Reserve buying government securities in open market operations is to:

Correct Answer
verified

In response to the financial crisis and the Great Recession, the Fed took the following actions, except:

Correct Answer
verified

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

If the monetary authority wishes to rein in inflation, it would buy government securities in the open market.

Correct AnswerverifiedShow Answer

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

Correct AnswerverifiedShow Answer

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, there would be assets of:

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 non-bank public, this action has the potential to increase money supply by a maximum of:

Correct AnswerverifiedShow Answer

A decrease in the interest rate will cause a(n) :

Correct AnswerverifiedShow Answer

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

Correct AnswerverifiedShow Answer

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Correct AnswerverifiedShow Answer

The transactions demand for money will shift to the:

Correct AnswerverifiedShow Answer

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce:

Correct AnswerverifiedShow Answer

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

Correct AnswerverifiedShow Answer

The Federal Reserve could reduce the money supply by:

Correct AnswerverifiedShow Answer

In the cause-effect chain of monetary policy an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market.

Correct AnswerverifiedShow Answer

The zero interest rate policy (ZIRP) presented a policy problem when the economy remained weak, and that problem is known as the zero bound problem.

Correct AnswerverifiedShow Answer

Assume that the MPC is 0.75 and that the price level is "sticky". If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to:

Correct AnswerverifiedShow Answer

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:

Correct AnswerverifiedShow Answer

The largest liability item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The major purpose of the Federal Reserve buying government securities in open market operations is to:

Correct AnswerverifiedShow Answer

In response to the financial crisis and the Great Recession, the Fed took the following actions, except:

Correct AnswerverifiedShow Answer

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

Correct AnswerverifiedShow Answer

Correct Answer
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