Question 1

An expansionary monetary policy raises nominal income but never raises real income.True or False? Explain.

Accepted Answer

This is a false statement.An expansionar

Question 2

The defensive and offensive actions of the Fed differ because offensive actions are designed to:

Accepted Answer

A) tighten monetary policy and defensive actions are designed to ease monetary policy. 
B) ease monetary policy and defensive actions are designed to tighten monetary policy. 
C) change the current monetary policy while defensive actions are designed to reinforce the current monetary policy. 
D) reinforce the current monetary policy while defensive actions are designed to change the current monetary policy. 
A) tighten monetary policy and defensive actions are designed to ease monetary policy. 
B) ease monetary policy and defensive actions are designed to tighten monetary policy. 
C) change the current monetary policy while defensive actions are designed to reinforce the current monetary policy. 
D) reinforce the current monetary policy while defensive actions are designed to change the current monetary policy.

Question 3

The discount rate is the interest rate:

Accepted Answer

A) commercial banks charge their largest customers. 
B) the Fed charges on loans to individuals. 
C) the Fed charges on loans to commercial banks. 
D) the interest rate commercial banks charge one another for overnight loans. 
A) commercial banks charge their largest customers. 
B) the Fed charges on loans to individuals. 
C) the Fed charges on loans to commercial banks. 
D) the interest rate commercial banks charge one another for overnight loans.

Question 4

Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have:

Accepted Answer

A) reduced expected inflation. 
B) increased expected inflation. 
C) increased expected inflation less than it reduced real interest rates. 
D) reduced real interest rates less than it increased expected inflation. 
A) reduced expected inflation. 
B) increased expected inflation. 
C) increased expected inflation less than it reduced real interest rates. 
D) reduced real interest rates less than it increased expected inflation.

Question 5

A reduction in the federal funds rate could be caused by an:

Accepted Answer

A) open market sale of government securities. 
B) increase in the reserve requirement. 
C) increase in the discount rate. 
D) increase in the excess reserves of the banking system. 
A) open market sale of government securities. 
B) increase in the reserve requirement. 
C) increase in the discount rate. 
D) increase in the excess reserves of the banking system.

Question 6

If the Federal Reserve reduced its reserve requirement from 6.5 percent to 5 percent, and banks held no excess reserves, this policy would:

Accepted Answer

A) increase both the money multiplier and the money supply. 
B) increase the money multiplier but decrease the money supply. 
C) decrease the money multiplier but increase the money supply. 
D) decrease both the money multiplier and the money supply. 
A) increase both the money multiplier and the money supply. 
B) increase the money multiplier but decrease the money supply. 
C) decrease the money multiplier but increase the money supply. 
D) decrease both the money multiplier and the money supply.

Question 7

The predictions of Fed behavior provided by the Taylor rule are:

Accepted Answer

A) never accurate. 
B) seldom accurate. 
C) reasonably accurate. 
D) extremely accurate. 
A) never accurate. 
B) seldom accurate. 
C) reasonably accurate. 
D) extremely accurate.

Question 8

What is the Taylor rule and why is it important for monetary policy?

Accepted Answer

The Taylor rule states that,if the econo

Question 9

The interest rate banks charge each other to borrow excess reserves is called the:

Accepted Answer

A) discount rate. 
B) required reserve ratio. 
C) prime rate. 
D) federal funds rate. 
A) discount rate. 
B) required reserve ratio. 
C) prime rate. 
D) federal funds rate.

Question 10

When the Fed raised interest rates between 2004 and 2007, the Federal Reserve:

Accepted Answer

A) bought U.S. government securities, thereby creating and supplying additional federal funds. 
B) sold U.S. government securities, thereby contracting the amount of funds available to the federal funds market. 
C) sped up the clearing of checks to make more funds available to banks. 
D) encouraged banks to loan out funds to ease their reserve requirements and thus lower the demand for federal funds. 
A) bought U.S. government securities, thereby creating and supplying additional federal funds. 
B) sold U.S. government securities, thereby contracting the amount of funds available to the federal funds market. 
C) sped up the clearing of checks to make more funds available to banks. 
D) encouraged banks to loan out funds to ease their reserve requirements and thus lower the demand for federal funds.

Question 11

According to the AS/AD model, a contractionary monetary policy is appropriate:

Accepted Answer

A) when saving is less than investment. 
B) when saving is greater than investment. 
C) when saving equals investment. 
D) whatever the level of saving and investment. 
A) when saving is less than investment. 
B) when saving is greater than investment. 
C) when saving equals investment. 
D) whatever the level of saving and investment.

Question 12

Which of the following is the path through which contractionary monetary policy works?

Accepted Answer

A) Money down implies interest rate up implies investment down implies income down. 
B) Money down implies interest rate down implies investment down implies income down. 
C) Money down implies interest rate up implies investment up implies income down. 
D) Money down implies interest rate down implies investment up implies income down. 
A) Money down implies interest rate up implies investment down implies income down. 
B) Money down implies interest rate down implies investment down implies income down. 
C) Money down implies interest rate up implies investment up implies income down. 
D) Money down implies interest rate down implies investment up implies income down.

Question 13

Imagine you are a Federal Reserve board governor and you are examining the economy.You discover that the money supply is currently $2,000,000,that banks have $1,000,000 in reserves.You want to increase the money supply by $500,000 using an open market operation.What would you do?

Accepted Answer

Increasing the money supply using open m

Question 14

An increase in the federal funds rate could be caused by:

Accepted Answer

A) higher than expected bank deposits. 
B) higher than expected bank reserves. 
C) lower than expected loan demand. 
D) higher than expected withdrawals. 
A) higher than expected bank deposits. 
B) higher than expected bank reserves. 
C) lower than expected loan demand. 
D) higher than expected withdrawals.

Question 15

During the latter half of 2004 and the beginning of 2007, the Fed adopted a policy that consistently increased the federal funds rate. The most likely goal of this policy was to:

Accepted Answer

A) decrease inflation by decreasing aggregate demand. 
B) decrease inflation by increasing aggregate demand. 
C) increase output by decreasing aggregate demand. 
D) increase output by increasing aggregate demand. 
A) decrease inflation by decreasing aggregate demand. 
B) decrease inflation by increasing aggregate demand. 
C) increase output by decreasing aggregate demand. 
D) increase output by increasing aggregate demand.

Question 16

Refer to the graph shown. Which of the curves represents a normal yield curve?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
A) A 
B) B 
C) C 
D) D

Question 17

To target a rate that is higher than the current interest rate, the Fed can:

Accepted Answer

A) purchase government securities to reduce reserves. 
B) purchase government securities to increase reserves. 
C) sell government securities to reduce reserves. 
D) sell government securities to increase reserves. 
A) purchase government securities to reduce reserves. 
B) purchase government securities to increase reserves. 
C) sell government securities to reduce reserves. 
D) sell government securities to increase reserves.

Question 18

One of the duties of the Fed is to:

Accepted Answer

A) change the demand for money. 
B) set the market interest rate. 
C) offer financial advising to the government. 
D) offer financial advising to the public. 
A) change the demand for money. 
B) set the market interest rate. 
C) offer financial advising to the government. 
D) offer financial advising to the public.

Question 19

If short-term and long-term interest rates are currently equal and the Fed contracts the money supply, the yield curve would be expected to:

Accepted Answer

A) become downward sloping. 
B) become upward sloping. 
C) become vertical. 
D) be unaffected. 
A) become downward sloping. 
B) become upward sloping. 
C) become vertical. 
D) be unaffected.

Question 20

If a contractionary monetary policy reduces nominal income in the short run, but not real income, it must be true that prices:

Accepted Answer

A) are perfectly flexible. 
B) are at least partially flexible. 
C) are completely inflexible. 
D) have not fully adjusted to the change in aggregate demand. 
A) are perfectly flexible. 
B) are at least partially flexible. 
C) are completely inflexible. 
D) have not fully adjusted to the change in aggregate demand.

Exam 29: Monetary Policy

An expansionary monetary policy raises nominal income but never raises real income.True or False? Explain.

The defensive and offensive actions of the Fed differ because offensive actions are designed to:

The discount rate is the interest rate:

Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have:

A reduction in the federal funds rate could be caused by an:

If the Federal Reserve reduced its reserve requirement from 6.5 percent to 5 percent, and banks held no excess reserves, this policy would:

The predictions of Fed behavior provided by the Taylor rule are:

What is the Taylor rule and why is it important for monetary policy?

The interest rate banks charge each other to borrow excess reserves is called the:

When the Fed raised interest rates between 2004 and 2007, the Federal Reserve:

According to the AS/AD model, a contractionary monetary policy is appropriate:

Which of the following is the path through which contractionary monetary policy works?

Imagine you are a Federal Reserve board governor and you are examining the economy.You discover that the money supply is currently $2,000,000,that banks have $1,000,000 in reserves.You want to increase the money supply by $500,000 using an open market operation.What would you do?

An increase in the federal funds rate could be caused by:

During the latter half of 2004 and the beginning of 2007, the Fed adopted a policy that consistently increased the federal funds rate. The most likely goal of this policy was to:

Refer to the graph shown. Which of the curves represents a normal yield curve?

To target a rate that is higher than the current interest rate, the Fed can:

One of the duties of the Fed is to:

If short-term and long-term interest rates are currently equal and the Fed contracts the money supply, the yield curve would be expected to:

If a contractionary monetary policy reduces nominal income in the short run, but not real income, it must be true that prices:

Economics and Economic Reasoning

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