Question 1

A consumer holds money to meet spending needs.This would be an example of the

Accepted Answer

A) use of money as a measure of value. 
B) use of money as legal tender. 
C) transactions demand for money. 
D) asset demand for money. 
A) use of money as a measure of value. 
B) use of money as legal tender. 
C) transactions demand for money. 
D) asset demand for money.

Question 2

A decrease in the reserve ratio increases the

Accepted Answer

A) amount of actual reserves in the banking system. 
B) amount of excess reserves in the banking system. 
C) number of government securities held by the Federal Reserve Banks. 
D) ratio of coins to paper currency in the economy. 
A) amount of actual reserves in the banking system. 
B) amount of excess reserves in the banking system. 
C) number of government securities held by the Federal Reserve Banks. 
D) ratio of coins to paper currency in the economy.

Question 3

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

Accepted Answer

A) True 
 B)False

Question 4

(Last Word) In 2014, the European Central Bank (EC)

Accepted Answer

A) began paying interest on the excess reserves of banks in the European Union. 
B) implemented quantitative easing. 
C) set negative interest rates to encourage bank lending. 
D) engaged in reverse repos to increase interest rates. 
A) began paying interest on the excess reserves of banks in the European Union. 
B) implemented quantitative easing. 
C) set negative interest rates to encourage bank lending. 
D) engaged in reverse repos to increase interest rates.

Question 5

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should

Accepted Answer

A) grow the money supply at a rate of 6 percent per year. 
B) raise the real federal funds rate by 6 percentage points. 
C) raise the real federal funds rate by 3 percentage points. 
D) raise the real federal funds rate by 12 percentage points. 
A) grow the money supply at a rate of 6 percent per year. 
B) raise the real federal funds rate by 6 percentage points. 
C) raise the real federal funds rate by 3 percentage points. 
D) raise the real federal funds rate by 12 percentage points.

Question 6

The securities held as assets by the Federal Reserve Banks consist mainly of

Accepted Answer

A) corporate bonds. 
B) Treasury bills, Treasury notes, and Treasury bonds. 
C) common stock. 
D) certificates of deposit. 
A) corporate bonds. 
B) Treasury bills, Treasury notes, and Treasury bonds. 
C) common stock. 
D) certificates of deposit.

Question 7

The Federal Reserve System regulates the money supply primarily by

Accepted Answer

A) controlling the production of coins at the U.S.mint. 
B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. 
C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. 
D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. 
A) controlling the production of coins at the U.S.mint. 
B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. 
C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. 
D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

Question 8

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

A) There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP. 
B) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP. 
C) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP. 
D) There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP. 
A) There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP. 
B) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP. 
C) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP. 
D) There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.

Question 9

(Last Word) Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?

Accepted Answer

A) Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions. 
B) The rate of deflation that one would expect at the negative lower bound would keep real interest rates at or above zero. 
C) Because of the premium that banks charge on loans over what they pay depositors, up to a point they are always guaranteed to earn a positive rate of interest. 
D) Negative lower bounds refer only to real rates of interest, not nominal rates. 
A) Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions. 
B) The rate of deflation that one would expect at the negative lower bound would keep real interest rates at or above zero. 
C) Because of the premium that banks charge on loans over what they pay depositors, up to a point they are always guaranteed to earn a positive rate of interest. 
D) Negative lower bounds refer only to real rates of interest, not nominal rates.

Question 10

According to the Taylor rule, when real GDP is equal to potential GDP and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be

Accepted Answer

A) 2 percent, and this implies a real interest rate of 0 percent. 
B) 2 percent, and this implies a real interest rate of 4 percent. 
C) 4 percent, and this implies a real interest rate of 2 percent. 
D) 4 percent, and this implies a real interest rate of 4 percent. 
A) 2 percent, and this implies a real interest rate of 0 percent. 
B) 2 percent, and this implies a real interest rate of 4 percent. 
C) 4 percent, and this implies a real interest rate of 2 percent. 
D) 4 percent, and this implies a real interest rate of 4 percent.

Question 11

(Consider This) In reverse repurchase agreements (reverse repos),

Accepted Answer

A) banks borrow from nonbanks. 
B) the Fed buys bonds from banks with the promise to sell them back the next day. 
C) banks sell bonds to the Fed with the promise to buy them back the next day. 
D) the Fed sells bonds to the bank with the promise to buy them back the next day. 
A) banks borrow from nonbanks. 
B) the Fed buys bonds from banks with the promise to sell them back the next day. 
C) banks sell bonds to the Fed with the promise to buy them back the next day. 
D) the Fed sells bonds to the bank with the promise to buy them back the next day.

Question 12

In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the Federal funds rate between

Accepted Answer

A) 2.5 percent and 3.0 percent. 
B) 2 percent and 2.5 percent. 
C) 1.0 percent and 1.25 percent. 
D) 0 and 0.25 percent. 
A) 2.5 percent and 3.0 percent. 
B) 2 percent and 2.5 percent. 
C) 1.0 percent and 1.25 percent. 
D) 0 and 0.25 percent.

Question 13

Assume the economy faces high unemployment but stable prices.Which combination of government policies is most likely to reduce unemployment?

Accepted Answer

A) the purchase of government securities in the open market and an increase in taxes 
B) the sale of government securities in the open market and a decrease in taxes 
C) the sale of government securities in the open market and a decrease in government spending 
D) the purchase of government securities in the open market and an increase in government spending 
A) the purchase of government securities in the open market and an increase in taxes 
B) the sale of government securities in the open market and a decrease in taxes 
C) the sale of government securities in the open market and a decrease in government spending 
D) the purchase of government securities in the open market and an increase in government spending

Question 14

According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, then the Fed should

Accepted Answer

A) raise the real federal funds rate by one percentage point. 
B) lower the real federal funds rate by one percentage point. 
C) raise the real federal funds rate by half of a percentage point. 
D) lower the real federal funds rate by half of a percentage point. 
A) raise the real federal funds rate by one percentage point. 
B) lower the real federal funds rate by one percentage point. 
C) raise the real federal funds rate by half of a percentage point. 
D) lower the real federal funds rate by half of a percentage point.

Question 15

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Accepted Answer

A) issuing currency 
B) check collection 
C) open-market operations 
D) required reserve ratio 
A) issuing currency 
B) check collection 
C) open-market operations 
D) required reserve ratio

Question 16

The Fed directly sets

Accepted Answer

A) the prime interest rate but not the federal funds rate. 
B) both the federal funds rate and the prime interest rate. 
C) neither the federal funds rate nor the prime interest rate. 
D) the discount rate and the prime interest rate. 
A) the prime interest rate but not the federal funds rate. 
B) both the federal funds rate and the prime interest rate. 
C) neither the federal funds rate nor the prime interest rate. 
D) the discount rate and the prime interest rate.

Question 17

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system.This is because

Accepted Answer

A) Congress has taken this power away from the Fed. 
B) there is a massive amount of excess reserves already in the banking system. 
C) the federal funds rate has become rigidly fixed by law. 
D) banks are no longer holding any excess reserves. 
A) Congress has taken this power away from the Fed. 
B) there is a massive amount of excess reserves already in the banking system. 
C) the federal funds rate has become rigidly fixed by law. 
D) banks are no longer holding any excess reserves.

Question 18

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Accepted Answer

A) True 
 B)False

Question 19

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Accepted Answer

A) the discount rate 
B) the reserve ratio 
C) open-market operations 
D) the federal funds rate 
A) the discount rate 
B) the reserve ratio 
C) open-market operations 
D) the federal funds rate

Exam 36: Interest Rates and Monetary Policy

A consumer holds money to meet spending needs.This would be an example of the

A decrease in the reserve ratio increases the

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

(Last Word) In 2014, the European Central Bank (EC)

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should

The securities held as assets by the Federal Reserve Banks consist mainly of

The Federal Reserve System regulates the money supply primarily by

Which of the following best describes what occurs when monetary authorities sell government securities?

(Last Word) Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?

According to the Taylor rule, when real GDP is equal to potential GDP and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be

(Consider This) In reverse repurchase agreements (reverse repos),

In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the Federal funds rate between

Assume the economy faces high unemployment but stable prices.Which combination of government policies is most likely to reduce unemployment?

According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, then the Fed should

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

The Fed directly sets

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system.This is because

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

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

Measuring Domestic Output and National Income

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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