Question 1

The Fed's response to the zero lower bound problem was

Accepted Answer

A) to raise the lower bound. 
B) quantitative easing. 
C) to lower the reserve ratio. 
D) restrictive monetary policy. 
A) to raise the lower bound. 
B) quantitative easing. 
C) to lower the reserve ratio. 
D) restrictive monetary policy.

Question 2

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks.Also assume that the reserve ratio is 10 percent.If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will

Accepted Answer

A) increase by $1 billion and the money supply will increase by $5 billion. 
B) decline by $1 billion and the money supply will decline by $10 billion. 
C) increase by $1 billion and the money supply will increase by $10 billion. 
D) increase by $10 billion and the money supply will increase by $100 billion. 
A) increase by $1 billion and the money supply will increase by $5 billion. 
B) decline by $1 billion and the money supply will decline by $10 billion. 
C) increase by $1 billion and the money supply will increase by $10 billion. 
D) increase by $10 billion and the money supply will increase by $100 billion.

Question 3

The interest rate will fall when the

Accepted Answer

A) quantity of money demanded exceeds the quantity of money supplied. 
B) quantity of money supplied exceeds the quantity of money demanded. 
C) demand for money increases. 
D) supply of money decreases. 
A) quantity of money demanded exceeds the quantity of money supplied. 
B) quantity of money supplied exceeds the quantity of money demanded. 
C) demand for money increases. 
D) supply of money decreases.

Question 4

The Fed's initial step in pursuing restrictive monetary policy using the federal funds rate is to

Accepted Answer

A) announce a higher target. 
B) sell bonds to banks and the public. 
C) raise the discount rate. 
D) raise the prime interest rate. 
A) announce a higher target. 
B) sell bonds to banks and the public. 
C) raise the discount rate. 
D) raise the prime interest rate.

Question 5

When a commercial bank borrows from a Federal Reserve Bank,

Accepted Answer

A) the supply of money automatically increases. 
B) it indicates that the commercial bank is unsound financially. 
C) the commercial bank's lending ability is increased. 
D) the commercial bank's reserves are reduced. 
A) the supply of money automatically increases. 
B) it indicates that the commercial bank is unsound financially. 
C) the commercial bank's lending ability is increased. 
D) the commercial bank's reserves are reduced.

Question 6

The largest single liability of the Federal Reserve Banks is their outstanding loans to commercial banks.

Accepted Answer

A) True 
 B)False

Question 7

According to the Taylor rule,

Accepted Answer

A) if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point. 
B) when real GDP is equal to potential GDP and inflation is equal to its target of 4 percent, the federal funds rate should be kept at 2 percent. 
C) if inflation falls by 1 percentage point below its target of 2 percent, then the Fed should raise the real federal funds rate by one-half a percentage point. 
D) all of these are appropriate Fed actions. 
A) if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point. 
B) when real GDP is equal to potential GDP and inflation is equal to its target of 4 percent, the federal funds rate should be kept at 2 percent. 
C) if inflation falls by 1 percentage point below its target of 2 percent, then the Fed should raise the real federal funds rate by one-half a percentage point. 
D) all of these are appropriate Fed actions.

Question 8

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

Accepted Answer

A) can be implemented more quickly. 
B) is subject to closer political scrutiny. 
C) does not produce a net export effect. 
D) entails a larger spending income multiplier effect on real GDP. 
A) can be implemented more quickly. 
B) is subject to closer political scrutiny. 
C) does not produce a net export effect. 
D) entails a larger spending income multiplier effect on real GDP.

Question 9

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad.This situation is a problem of

Accepted Answer

A) "putting all your eggs in one basket." 
B) "not in my backyard." 
C) "There ain't no such thing as a free lunch." 
D) "You can lead a horse to water, but you can't make it drink." 
A) "putting all your eggs in one basket." 
B) "not in my backyard." 
C) "There ain't no such thing as a free lunch." 
D) "You can lead a horse to water, but you can't make it drink."

Question 10

One new element of the Fedâ€™s open market operations is the use of government securities as collateral for loans to banks and other financial institutions.

Accepted Answer

A) True 
 B)False

Question 11

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, reserves in the banking system will

Accepted Answer

A) remain unchanged. 
B) rise by $100. 
C) fall by $100. 
D) rise by $1,000. 
A) remain unchanged. 
B) rise by $100. 
C) fall by $100. 
D) rise by $1,000.

Question 12

The price of government bonds and the interest rate received by a bond buyer are

Accepted Answer

A) positively related. 
B) unrelated. 
C) inversely related. 
D) independent of Federal Reserve open-market operations. 
A) positively related. 
B) unrelated. 
C) inversely related. 
D) independent of Federal Reserve open-market operations.

Question 13

(Consider This) When the Fed engages in a repo transaction,

Accepted Answer

A) it involves a bank repurchasing a collateralized loan it previously sold to the Fed. 
B) the Fed repossesses securities held by a failing bank. 
C) the Fed buys real property that a bank owns after repossessing it from a defaulted lender. 
D) it is part of a restrictive monetary policy action. 
A) it involves a bank repurchasing a collateralized loan it previously sold to the Fed. 
B) the Fed repossesses securities held by a failing bank. 
C) the Fed buys real property that a bank owns after repossessing it from a defaulted lender. 
D) it is part of a restrictive monetary policy action.

Question 14

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1,000.If the price of this bond increases by $2,500, the interest rate in effect will

Accepted Answer

A) decrease by 1 percentage point. 
B) decrease by 2 percentage points. 
C) increase by 1 percentage point. 
D) increase by 2 percentage points. 
A) decrease by 1 percentage point. 
B) decrease by 2 percentage points. 
C) increase by 1 percentage point. 
D) increase by 2 percentage points.

Question 15

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Accepted Answer

A) $200 billion. 
B) $400 billion. 
C) $800 billion. 
D) $3,200 billion. 
A) $200 billion. 
B) $400 billion. 
C) $800 billion. 
D) $3,200 billion.

Question 16

If the Fed does a reverse repo of bonds with banks, then the banksâ€™ reserves will increase.

Accepted Answer

A) True 
 B)False

Question 17

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

Accepted Answer

A) a decrease in aggregate demand will increase output. 
B) an increase in the money supply will decrease the rate of interest. 
C) a decrease in excess reserves will increase the money supply. 
D) a decrease in the rate of interest will decrease aggregate demand. 
A) a decrease in aggregate demand will increase output. 
B) an increase in the money supply will decrease the rate of interest. 
C) a decrease in excess reserves will increase the money supply. 
D) a decrease in the rate of interest will decrease aggregate demand.

Question 18

According to the Taylor rule, if real GDP falls by 1 percent below potential GDP, the Fed should lower the federal funds rate by one-half a percentage point.

Accepted Answer

A) True 
 B)False

Question 19

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district.As a result,

Accepted Answer

A) commercial bank reserves are increased by $10,000. 
B) the supply of money automatically declines by $7,500. 
C) commercial bank reserves are increased by $7,500. 
D) the supply of money is automatically increased by $10,000. 
A) commercial bank reserves are increased by $10,000. 
B) the supply of money automatically declines by $7,500. 
C) commercial bank reserves are increased by $7,500. 
D) the supply of money is automatically increased by $10,000.

Question 20

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, the supply of money in the economy will

Accepted Answer

A) remain unchanged. 
B) rise by $500. 
C) fall by $100. 
D) fall by $500. 
A) remain unchanged. 
B) rise by $500. 
C) fall by $100. 
D) fall by $500.

Exam 36: Interest Rates and Monetary Policy

The Fed's response to the zero lower bound problem was

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks.Also assume that the reserve ratio is 10 percent.If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will

The interest rate will fall when the

The Fed's initial step in pursuing restrictive monetary policy using the federal funds rate is to

When a commercial bank borrows from a Federal Reserve Bank,

The largest single liability of the Federal Reserve Banks is their outstanding loans to commercial banks.

According to the Taylor rule,

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad.This situation is a problem of

One new element of the Fedâ€™s open market operations is the use of government securities as collateral for loans to banks and other financial institutions.

The price of government bonds and the interest rate received by a bond buyer are

(Consider This) When the Fed engages in a repo transaction,

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1,000.If the price of this bond increases by $2,500, the interest rate in effect will

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

If the Fed does a reverse repo of bonds with banks, then the banksâ€™ reserves will increase.

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

According to the Taylor rule, if real GDP falls by 1 percent below potential GDP, the Fed should lower the federal funds rate by one-half a percentage point.

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district.As a result,

Limits, Alternatives, and Choices

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