Exam 14: The Federal Reserve and Monetary Policy

Which of the following will most likely cause a decrease in the quantity of money demanded?

An increase in the price level increases the transaction demand for money.

Reductions in the real interest rate cause increases in investment.

Figure 14.1 -Refer to Figure 14.1. The money demand curve will shift from

An increase in the U.S. interest rate relative to the British interest rate will cause a(an):

A country's currency depreciates relative to a foreign currency if:

Figure 14.1 -Refer to Figure 14.1. A movement from Point A to Point B can be caused by:

The Fed indirectly controls long- term interest rates by:

Explain the transaction and speculative motives for holding money.

A Fed sale of government bonds will cause a reduction in the interest rate and an increase in the equilibrium quantity of money.

If the quantity of money demanded is less than the quantity of money supplied, then the interest rate will:

Identify the different actions that the Fed needs to undertake if it seeks to decrease the money supply.

A decrease in the price level will lead to a decrease in the interest rate.

As interest rate falls, people hold _______ money instead of bonds because the opportunity cost of holding money _______ .

Figure 14.5 -Refer to Figure 14.5. Assume the interest rate equals 8%. What would cause the money supply to shift from

MAKING THE FEDERAL RESERVE MORE TRANSPARENT What are the advantages and disadvantages of the Federal Reserve becoming more transparent about its actions and decisions and disclosing more information to the public? In recent years, the Fed has gradually become more open in its deliberations. For many years, the Fed would not even say if it had changed interest rates. These policies began to change slowly in the 1990s. Starting in 2000, after each FOMC meeting the Fed announces its target for the federal funds rate and makes a brief statement explaining its actions. But should the Fed go further in describing its intended future policies? There was enough interest on this very topic for the FOMC to hold a special meeting—the first since 1979—to discuss the issue. Some members of the FOMC, including the current chairman Ben Bernanke, believed that the financial markets needed more information so that they would have a clearer idea of what future Fed policy—and short-term interest rates—were likely to be. Other members, including William Poole, the president of the St. Louis Federal Reserve Bank, disagreed. Poole felt that the financial markets understood the implicit rules that the Fed followed and that issuing a more complex public statement would just confuse matters. The special meeting did not lead to any dramatic change in the Fed’s communication policies. But now the members of the FOMC participate in drafting statements. The Fed clearly recognizes that its statements may be just as important as its actions. -According to the application, the Fed currently makes its future policy intentions perfectly clear to the financial market.

If a bond has a promised value next year of $2100 and the interest rate is 5 percent, then the price of a bond today is:

Figure 14.2 -Refer to Figure 14.2. At an interest rate of 4%, there is an:

Which of the following policies tends to cause the dollar to appreciate?

Increasing the required reserve ratio shifts the money supply curve to the _______ and _______ the equilibrium interest rate.