Question 1

If the federal funds rate falls below the Fed's target range, the Fed could take:

Accepted Answer

A) a defensive action and sell government bonds. 
B) a defensive action and buy government bonds. 
C) an offensive action and sell government bonds. 
D) an offensive action and buy government bonds. 
A) a defensive action and sell government bonds. 
B) a defensive action and buy government bonds. 
C) an offensive action and sell government bonds. 
D) an offensive action and buy government bonds.

Question 2

Expansionary monetary policy is always expected to increase:

Accepted Answer

A) nominal income but never real income. 
B) real income but never nominal income. 
C) nominal income. 
D) real income. 
A) nominal income but never real income. 
B) real income but never nominal income. 
C) nominal income. 
D) real income.

Question 3

Many economists argue that the Fed contributed to the housing bubble by:

Accepted Answer

A) passing laws that allowed financial institutions to create credit default swaps. 
B) paying interest on bank reserves. 
C) keeping the Fed funds rate lower than what the Taylor rule predicts. 
D) buying mortgage-backed securities for foreclosed homes. 
A) passing laws that allowed financial institutions to create credit default swaps. 
B) paying interest on bank reserves. 
C) keeping the Fed funds rate lower than what the Taylor rule predicts. 
D) buying mortgage-backed securities for foreclosed homes.

Question 4

A decrease in the federal funds rate is an indication that monetary policy is expansionary.

Accepted Answer

A) True 
 B)False

Question 5

FOMC stands for:

Accepted Answer

A) Federal Open Money Committee. 
B) Federal Open Market Committee. 
C) Fixed Open Market Commitments. 
D) Federation of Open Monies Committee. 
A) Federal Open Money Committee. 
B) Federal Open Market Committee. 
C) Fixed Open Market Commitments. 
D) Federation of Open Monies Committee.

Question 6

To achieve its target when the federal funds rate is below the target range, the Fed could:

Accepted Answer

A) buy bonds. 
B) reduce the reserve requirement. 
C) increase the reserve requirement. 
D) cut the discount rate. 
A) buy bonds. 
B) reduce the reserve requirement. 
C) increase the reserve requirement. 
D) cut the discount rate.

Question 7

In the AS/AD model, higher interest rates are produced by:

Accepted Answer

A) an expansionary monetary policy. 
B) an activist monetary policy. 
C) a contractionary monetary policy. 
D) a steady-as-you-go monetary policy. 
A) an expansionary monetary policy. 
B) an activist monetary policy. 
C) a contractionary monetary policy. 
D) a steady-as-you-go monetary policy.

Question 8

When the Fed sells bonds, the:

Accepted Answer

A) federal funds rate increases. 
B) reserve requirement falls. 
C) discount rate increases. 
D) discount rate decreases. 
A) federal funds rate increases. 
B) reserve requirement falls. 
C) discount rate increases. 
D) discount rate decreases.

Question 9

Who buys and sells in the Fed funds market?

Accepted Answer

A) Only commercial banks and depository institutions 
B) All large financial institutions 
C) Financial institutions and large corporations 
D) Anyone with a computer and an Internet connection can participate 
A) Only commercial banks and depository institutions 
B) All large financial institutions 
C) Financial institutions and large corporations 
D) Anyone with a computer and an Internet connection can participate

Question 10

If the actual federal funds rate is 7 percent and the Fed's target federal funds rate is 8 percent, the Fed is most likely to adopt which of the following policies?

Accepted Answer

A) A sale of government bonds 
B) A purchase of government bonds 
C) A reduction in the reserve requirement 
D) A more expansionary monetary policy 
A) A sale of government bonds 
B) A purchase of government bonds 
C) A reduction in the reserve requirement 
D) A more expansionary monetary policy

Question 11

A liquidity trap occurs when:

Accepted Answer

A) a bank is short of reserves and must stop making new loans. 
B) the money multiplier falls enough to offset the effect of increases in reserves. 
C) the Fed buys reserves from banks, driving up the interest rate. 
D) the interest rate is below the inflation rate. 
A) a bank is short of reserves and must stop making new loans. 
B) the money multiplier falls enough to offset the effect of increases in reserves. 
C) the Fed buys reserves from banks, driving up the interest rate. 
D) the interest rate is below the inflation rate.

Question 12

Suppose the money multiplier in the United States is 4. If the Fed wants to expand the money supply by 600 it should:

Accepted Answer

A) buy government securities worth 150. 
B) buy government securities worth 600. 
C) sell government securities worth 150. 
D) sell government securities worth 600. 
A) buy government securities worth 150. 
B) buy government securities worth 600. 
C) sell government securities worth 150. 
D) sell government securities worth 600.

Question 13

The reserve requirement is the:

Accepted Answer

A) maximum ratio of reserves to deposits that a bank can have. 
B) minimum ratio of reserves to deposits that a bank can have. 
C) maximum level of reserves a bank can have. 
D) minimum level of reserves a bank can have. 
A) maximum ratio of reserves to deposits that a bank can have. 
B) minimum ratio of reserves to deposits that a bank can have. 
C) maximum level of reserves a bank can have. 
D) minimum level of reserves a bank can have.

Question 14

To achieve its target when the federal funds rate is above the target range, the Fed could:

Accepted Answer

A) buy bonds. 
B) sell bonds. 
C) increase the reserve requirement. 
D) increase the discount rate. 
A) buy bonds. 
B) sell bonds. 
C) increase the reserve requirement. 
D) increase the discount rate.

Question 15

(a)Show the effects of expansionary and contractionary open market operations on the interest rate using demand and supply curves and the market for government bonds.
(b)What should the Fed do if the interest rate is below its target rate? What should the Fed do if the interest rate is above its target rate?

Accepted Answer

(a)An open market purchase (expansionary

Question 16

In 2008 the Fed added a new monetary tool. What is that tool?

Accepted Answer

A) The discount rate required for banks to borrow money 
B) Open market operations meant to change the supply of money 
C) The fed funds rate for overnight funds 
D) Interest payments to banks on their bank reserves 
A) The discount rate required for banks to borrow money 
B) Open market operations meant to change the supply of money 
C) The fed funds rate for overnight funds 
D) Interest payments to banks on their bank reserves

Question 17

If prices are inflexible, monetary policy:

Accepted Answer

A) affects both nominal and real income. 
B) affects real income but not nominal income. 
C) affects nominal income but not real income. 
D) does not affect real or nominal income. 
A) affects both nominal and real income. 
B) affects real income but not nominal income. 
C) affects nominal income but not real income. 
D) does not affect real or nominal income.

Question 18

In 2008, the Fed followed an expansionary monetary policy, which was evident by the:

Accepted Answer

A) decrease in the federal funds rate from 4 percent in January to 0.25 percent in December. 
B) increase in the federal funds rate from 0.25 percent in January to 4 percent in December. 
C) decrease in the repo rate from 4 percent in January to 0.25 percent in December. 
D) increase in the discount rate and decrease in the Fed fund rate by the same amount. 
A) decrease in the federal funds rate from 4 percent in January to 0.25 percent in December. 
B) increase in the federal funds rate from 0.25 percent in January to 4 percent in December. 
C) decrease in the repo rate from 4 percent in January to 0.25 percent in December. 
D) increase in the discount rate and decrease in the Fed fund rate by the same amount.

Question 19

When there are no vacancies, how many people serve on the Board of Governors of the Federal Reserve system?

Accepted Answer

A) 5 
B) 7 
C) 11 
D) 12 
A) 5 
B) 7 
C) 11 
D) 12

Question 20

The situation in which the central bank increases the money supply, but the money multiplier falls enough to offset increases in reserves is known as a:

Accepted Answer

A) liquidity trap. 
B) reserve trap. 
C) interest rate trap. 
D) Fed trap. 
A) liquidity trap. 
B) reserve trap. 
C) interest rate trap. 
D) Fed trap.

Exam 29: Monetary Policy

If the federal funds rate falls below the Fed's target range, the Fed could take:

Expansionary monetary policy is always expected to increase:

Many economists argue that the Fed contributed to the housing bubble by:

A decrease in the federal funds rate is an indication that monetary policy is expansionary.

FOMC stands for:

To achieve its target when the federal funds rate is below the target range, the Fed could:

In the AS/AD model, higher interest rates are produced by:

When the Fed sells bonds, the:

Who buys and sells in the Fed funds market?

If the actual federal funds rate is 7 percent and the Fed's target federal funds rate is 8 percent, the Fed is most likely to adopt which of the following policies?

A liquidity trap occurs when:

Suppose the money multiplier in the United States is 4. If the Fed wants to expand the money supply by 600 it should:

The reserve requirement is the:

To achieve its target when the federal funds rate is above the target range, the Fed could:

In 2008 the Fed added a new monetary tool. What is that tool?

If prices are inflexible, monetary policy:

In 2008, the Fed followed an expansionary monetary policy, which was evident by the:

When there are no vacancies, how many people serve on the Board of Governors of the Federal Reserve system?

The situation in which the central bank increases the money supply, but the money multiplier falls enough to offset increases in reserves is known as a:

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