Question 1

If the level of excess reserves in the banking system drops suddenly, we might expect that the:

Accepted Answer

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

Question 2

If there are significant excess reserves, a liquidity trap:

Accepted Answer

A) cannot exist. 
B) is inevitable. 
C) is possible. 
D) Excess reserves and the liquidity trap are unrelated. 
A) cannot exist. 
B) is inevitable. 
C) is possible. 
D) Excess reserves and the liquidity trap are unrelated.

Question 3

What ultimately limits the amount of expansionary pressure the Fed can create? Has the Fed ever found itself up against this limit?

Accepted Answer

The Fed cannot reduce the nominal intere

Question 4

Define the term "liquidity trap" and describe the problem it creates for the Fed.

Accepted Answer

A liquidity trap is a situation in which

Question 5

Contractionary monetary policy is most likely to:

Accepted Answer

A) increases interest rates, raises investment, and increases income. 
B) decreases interest rates, raises investment, and increases income. 
C) increases interest rates, reduces investment, and decreases income. 
D) decreases interest rates, reduces investment, and decreases income. 
A) increases interest rates, raises investment, and increases income. 
B) decreases interest rates, raises investment, and increases income. 
C) increases interest rates, reduces investment, and decreases income. 
D) decreases interest rates, reduces investment, and decreases income.

Question 6

In the short run, if the Fed undertakes contractionary monetary policy, the effect will be to shift the:

Accepted Answer

A) AD curve out to the right. 
B) AD curve in to the left. 
C) SAS curve up. 
D) SAS curve down. 
A) AD curve out to the right. 
B) AD curve in to the left. 
C) SAS curve up. 
D) SAS curve down.

Question 7

What are the Fed's ultimate targets? Explain how the Fed achieves ultimate economic targets using its available tools.

Accepted Answer

The Fed's ultimate targets are stable pr

Question 8

As financial markets develop new and complex financial instruments, the Fed has:

Accepted Answer

A) more control over the long-term interest rate. 
B) less control over the long-term interest rate. 
C) no control over the short-term interest rate. 
D) full control over the short-term interest rate. 
A) more control over the long-term interest rate. 
B) less control over the long-term interest rate. 
C) no control over the short-term interest rate. 
D) full control over the short-term interest rate.

Question 9

The curve most economists use to follow the relationship between the interest rates and bonds' time to maturity is the:

Accepted Answer

A) effective supply of money curve. 
B) aggregate demand curve. 
C) yield curve. 
D) demand of money curve. 
A) effective supply of money curve. 
B) aggregate demand curve. 
C) yield curve. 
D) demand of money curve.

Question 10

Which of the following is not directly affected by monetary policy?

Accepted Answer

A) The money supply 
B) The banking system 
C) The availability of credit 
D) The budget deficit 
A) The money supply 
B) The banking system 
C) The availability of credit 
D) The budget deficit

Question 11

What is the Federal funds rate and how does the Fed use it as an operating target? How does the Fed influence the Federal Funds rate?

Accepted Answer

Federal funds are overnight loans of exc

Question 12

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

Accepted Answer

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

Question 13

Monetary policy directly affects:

Accepted Answer

A) social spending. 
B) tax rates. 
C) the availability of credit. 
D) the antitrust laws. 
A) social spending. 
B) tax rates. 
C) the availability of credit. 
D) the antitrust laws.

Question 14

Which of the following is an operating target for the Fed?

Accepted Answer

A) Sustainable growth 
B) Federal funds rate 
C) Stable prices 
D) Stock prices 
A) Sustainable growth 
B) Federal funds rate 
C) Stable prices 
D) Stock prices

Question 15

If banks are short of reserves, the Fed funds rate will:

Accepted Answer

A) increase. 
B) decrease. 
C) stay the same. 
D) rise or fall; it cannot be determined with the information given. 
A) increase. 
B) decrease. 
C) stay the same. 
D) rise or fall; it cannot be determined with the information given.

Question 16

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Accepted Answer

A) 6.5. 
B) 4.5. 
C) 3.5. 
D) 3.0. 
A) 6.5. 
B) 4.5. 
C) 3.5. 
D) 3.0.

Question 17

If nominal interest rates increase:

Accepted Answer

A) the expected inflation rate must have gone up. 
B) the real interest rate must have gone up. 
C) either the expected inflation rate went up, the real interest rate went up, or both. 
D) either the expected inflation rate went down, the real interest rate went down, or both. 
A) the expected inflation rate must have gone up. 
B) the real interest rate must have gone up. 
C) either the expected inflation rate went up, the real interest rate went up, or both. 
D) either the expected inflation rate went down, the real interest rate went down, or both.

Question 18

In the AS/AD model, an increase in the money supply causes an increase in the interest rate and an increase in investment spending.

Accepted Answer

A) True 
 B)False

Question 19

To achieve its target when the federal funds rate is below the Fed's target range, the Fed should:

Accepted Answer

A) follow expansionary policy. 
B) follow contractionary policy. 
C) print money. 
D) do nothing. 
A) follow expansionary policy. 
B) follow contractionary policy. 
C) print money. 
D) do nothing.

Question 20

Assuming an economy is initially at potential output, in the long run, an expansionary monetary policy is expected:

Accepted Answer

A) not to affect output in the long run. 
B) not to affect output in either the short run or the long run. 
C) to affect output, but only in the long run. 
D) to affect output in both the short run and the long run. 
A) not to affect output in the long run. 
B) not to affect output in either the short run or the long run. 
C) to affect output, but only in the long run. 
D) to affect output in both the short run and the long run.

Exam 29: Monetary Policy

If the level of excess reserves in the banking system drops suddenly, we might expect that the:

If there are significant excess reserves, a liquidity trap:

What ultimately limits the amount of expansionary pressure the Fed can create? Has the Fed ever found itself up against this limit?

Define the term "liquidity trap" and describe the problem it creates for the Fed.

Contractionary monetary policy is most likely to:

In the short run, if the Fed undertakes contractionary monetary policy, the effect will be to shift the:

What are the Fed's ultimate targets? Explain how the Fed achieves ultimate economic targets using its available tools.

As financial markets develop new and complex financial instruments, the Fed has:

The curve most economists use to follow the relationship between the interest rates and bonds' time to maturity is the:

Which of the following is not directly affected by monetary policy?

What is the Federal funds rate and how does the Fed use it as an operating target? How does the Fed influence the Federal Funds rate?

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

Monetary policy directly affects:

Which of the following is an operating target for the Fed?

If banks are short of reserves, the Fed funds rate will:

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

If nominal interest rates increase:

In the AS/AD model, an increase in the money supply causes an increase in the interest rate and an increase in investment spending.

To achieve its target when the federal funds rate is below the Fed's target range, the Fed should:

Assuming an economy is initially at potential output, in the long run, an expansionary monetary policy is expected:

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Market Failure Versus Government Failure

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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