Question 1

Before the financial crisis of 2008, restrictive monetary policy by the Fed involved

Accepted Answer

A) raising the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
B) raising the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
C) reducing the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
D) reducing the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
A) raising the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
B) raising the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
C) reducing the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
D) reducing the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target.

Question 2

Open-market operations include

Accepted Answer

A) changes in the reserve ratio. 
B) repos and reverse repos. 
C) paying interest on excess reserves held at Federal Reserve Banks. 
D) changes in the discount rate. 
A) changes in the reserve ratio. 
B) repos and reverse repos. 
C) paying interest on excess reserves held at Federal Reserve Banks. 
D) changes in the discount rate.

Question 3

In order to stimulate the economy and reduce unemployment, the Fed would traditionally set a lower target for the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 4

Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

Accepted Answer

A) increased and the Federal funds rate decreased. 
B) increased and the Federal funds rate increased. 
C) decreased and the Federal funds rate decreased. 
D) decreased and the Federal funds rate increased. 
A) increased and the Federal funds rate decreased. 
B) increased and the Federal funds rate increased. 
C) decreased and the Federal funds rate decreased. 
D) decreased and the Federal funds rate increased.

Question 5

(Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold?

Accepted Answer

A) $200 
B) $120 
C) $320 
D) $160 
A) $200 
B) $120 
C) $320 
D) $160

Question 6

The major problem facing the economy is high unemployment and weak economic growth.The inflation rate is low and stable.Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth.Which policy changes by the Fed would reinforce each other to achieve that objective?

Accepted Answer

A) selling government securities, doing reverse repos, and raising the discount rate 
B) selling government securities, doing repos, and lowering the discount rate 
C) buying government securities, doing repos, and lowering the discount rate 
D) buying government securities, doing reverse repos, and raising the reserve ratio 
A) selling government securities, doing reverse repos, and raising the discount rate 
B) selling government securities, doing repos, and lowering the discount rate 
C) buying government securities, doing repos, and lowering the discount rate 
D) buying government securities, doing reverse repos, and raising the reserve ratio

Question 7

The higher the interest rate, the larger will be the amount of money demanded for transaction purposes.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is correct?

Accepted Answer

A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. 
B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. 
C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. 
D) The asset demand for money is downsloping because bond prices and the interest rate are directly related. 
A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. 
B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. 
C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. 
D) The asset demand for money is downsloping because bond prices and the interest rate are directly related.

Question 9

Big Bucks Bank currently holds $20 million in excess reserves.If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to

Accepted Answer

A) use those excess reserves to increase its lending. 
B) not change its lending activity, as excess reserves are not eligible to receive interest paid on reserve accounts. 
C) move a portion of those excess reserves into its required reserve account. 
D) hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend. 
A) use those excess reserves to increase its lending. 
B) not change its lending activity, as excess reserves are not eligible to receive interest paid on reserve accounts. 
C) move a portion of those excess reserves into its required reserve account. 
D) hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.

Question 10

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

Accepted Answer

A) crowding-out effect. 
B) cyclical asymmetry of monetary policy. 
C) administrative lag that occurs in formulating monetary and fiscal policies. 
D) operational lag in monetary policy. 
A) crowding-out effect. 
B) cyclical asymmetry of monetary policy. 
C) administrative lag that occurs in formulating monetary and fiscal policies. 
D) operational lag in monetary policy.

Question 11

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

Accepted Answer

A) It is blunter and more politically obvious than fiscal policy. 
B) It does not have any of the time lags of fiscal policy. 
C) It is relatively isolated from political pressure. 
D) It is cyclically asymmetrical. 
A) It is blunter and more politically obvious than fiscal policy. 
B) It does not have any of the time lags of fiscal policy. 
C) It is relatively isolated from political pressure. 
D) It is cyclically asymmetrical.

Question 12

Expansionary monetary policy after 2008 consists mainly of quantitative easing (QE) and massive bond purchases by the Fed to expand bank reserves.

Accepted Answer

A) True 
 B)False

Question 13

Generally, the prime interest rate

Accepted Answer

A) moves in the opposite direction as the federal funds rate. 
B) remains constant over long periods of time. 
C) is highly inflexible downward. 
D) moves in the same direction as the federal funds rate. 
A) moves in the opposite direction as the federal funds rate. 
B) remains constant over long periods of time. 
C) is highly inflexible downward. 
D) moves in the same direction as the federal funds rate.

Question 14

A commercial bank can add to its actual reserves by

Accepted Answer

A) lending money to bank customers. 
B) buying government securities from the public. 
C) buying government securities from a Federal Reserve Bank. 
D) borrowing from a Federal Reserve Bank. 
A) lending money to bank customers. 
B) buying government securities from the public. 
C) buying government securities from a Federal Reserve Bank. 
D) borrowing from a Federal Reserve Bank.

Question 15

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

Accepted Answer

A) loans to commercial banks 
B) Federal Reserve Notes in circulation 
C) Treasury deposits 
D) reserves of commercial banks 
A) loans to commercial banks 
B) Federal Reserve Notes in circulation 
C) Treasury deposits 
D) reserves of commercial banks

Question 16

In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession.Japan's experience is an illustration of

Accepted Answer

A) the crowding-out effect. 
B) "pulling on a string." 
C) the Taylor rule. 
D) the liquidity trap. 
A) the crowding-out effect. 
B) "pulling on a string." 
C) the Taylor rule. 
D) the liquidity trap.

Question 17

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S.securities from the public, which deposits this amount into checking accounts.As a result of these transactions, the supply of money is

Accepted Answer

A) not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million. 
B) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million. 
C) directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million. 
D) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million. 
A) not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million. 
B) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million. 
C) directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million. 
D) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Question 18

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the

Accepted Answer

A) prime rate. 
B) federal funds rate. 
C) discount rate. 
D) consumer price index. 
A) prime rate. 
B) federal funds rate. 
C) discount rate. 
D) consumer price index.

Question 19

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Accepted Answer

A) A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment. 
B) A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment. 
C) The money supply is decreased, which increases the interest rate and causes investment spending, output, and employment to decrease. 
D) The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase. 
A) A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment. 
B) A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment. 
C) The money supply is decreased, which increases the interest rate and causes investment spending, output, and employment to decrease. 
D) The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase.

Question 20

Which of the following statements about quantitative easing is most accurate?

Accepted Answer

A) Quantitative easing occurred in three rounds from 2009 to 2014, with the Fed buying nearly $4 trillion in securities. 
B) Quantitative easing has become one of the permanently recognized tools of monetary policy. 
C) Quantitative easing significantly lowered interest rates in the aftermath of the financial crisis. 
D) Quantitative easing is the new official name for open-market operations. 
A) Quantitative easing occurred in three rounds from 2009 to 2014, with the Fed buying nearly $4 trillion in securities. 
B) Quantitative easing has become one of the permanently recognized tools of monetary policy. 
C) Quantitative easing significantly lowered interest rates in the aftermath of the financial crisis. 
D) Quantitative easing is the new official name for open-market operations.

Exam 36: Interest Rates and Monetary Policy

Before the financial crisis of 2008, restrictive monetary policy by the Fed involved

Open-market operations include

In order to stimulate the economy and reduce unemployment, the Fed would traditionally set a lower target for the federal funds rate.

Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

The higher the interest rate, the larger will be the amount of money demanded for transaction purposes.

Which of the following is correct?

Big Bucks Bank currently holds $20 million in excess reserves.If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

Expansionary monetary policy after 2008 consists mainly of quantitative easing (QE) and massive bond purchases by the Fed to expand bank reserves.

Generally, the prime interest rate

A commercial bank can add to its actual reserves by

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession.Japan's experience is an illustration of

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S.securities from the public, which deposits this amount into checking accounts.As a result of these transactions, the supply of money is

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Which of the following statements about quantitative easing is most accurate?

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

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Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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