Question 1

The equilibrium rate of interest in the market for money is determined by the intersection of the

Accepted Answer

A) supply-of-money curve and the asset-demand-for-money curve. 
B) supply-of-money curve and the transactions-demand-for-money curve. 
C) supply-of-money curve and the total-demand-for-money curve. 
D) investment-demand curve and the total-demand-for-money curve. 
A) supply-of-money curve and the asset-demand-for-money curve. 
B) supply-of-money curve and the transactions-demand-for-money curve. 
C) supply-of-money curve and the total-demand-for-money curve. 
D) investment-demand curve and the total-demand-for-money curve.

Question 2

Which of the following statements is true?

Accepted Answer

A) The Federal funds rate is higher than the prime interest rate. 
B) The prime interest rate is higher than the Federal funds rate. 
C) The Federal funds rate and the prime interest rate are often the same. 
D) The prime interest rate is often the same as the discount rate. 
A) The Federal funds rate is higher than the prime interest rate. 
B) The prime interest rate is higher than the Federal funds rate. 
C) The Federal funds rate and the prime interest rate are often the same. 
D) The prime interest rate is often the same as the discount rate.

Question 3

The Fed reduces interest rates mainly by selling government securities.Topic: Tools of Monetary Policy

Accepted Answer

A) True 
 B)False

Question 4

The interest rate that banks charge one another on overnight loans is called the

Accepted Answer

A) discount rate. 
B) prime lending rate. 
C) overnight lending rate. 
D) federal funds rate. 
A) discount rate. 
B) prime lending rate. 
C) overnight lending rate. 
D) federal funds rate.

Question 5

A money loan is said to be collateralized when

Accepted Answer

A) an asset is pledged by the borrower to the lender in case of default. 
B) the borrower pays periodic repayments of principal plus interest to the lender. 
C) the loan is used to purchase a capital asset. 
D) interest on the loan is compounded on an annual basis. 
A) an asset is pledged by the borrower to the lender in case of default. 
B) the borrower pays periodic repayments of principal plus interest to the lender. 
C) the loan is used to purchase a capital asset. 
D) interest on the loan is compounded on an annual basis.

Question 6

Other things equal, an increase in input prices will

Accepted Answer

A) reduce aggregate supply and reduce real output. 
B) increase the interest rate and lower the international value of the dollar. 
C) increase aggregate supply and increase the price level. 
D) increase net exports, increase investment, and reduce aggregate demand. 
A) reduce aggregate supply and reduce real output. 
B) increase the interest rate and lower the international value of the dollar. 
C) increase aggregate supply and increase the price level. 
D) increase net exports, increase investment, and reduce aggregate demand.

Question 7

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Accepted Answer

A) 4 percent of nominal GDP. 
B) 25 percent of nominal GDP. 
C) nominal GDP multiplied times 4. 
D) nominal GDP divided by 25. 
A) 4 percent of nominal GDP. 
B) 25 percent of nominal GDP. 
C) nominal GDP multiplied times 4. 
D) nominal GDP divided by 25.

Question 8

Which of the following statements is correct?

Accepted Answer

A) The Federal funds rate is derived based on the prime rate. 
B) The Federal funds rate is the rate banks charge their most creditworthy customers. 
C) The discount rate is the rate banks charge one another on overnight loans. 
D) The prime rate involves longer, more risky loans than the Federal funds rate. 
A) The Federal funds rate is derived based on the prime rate. 
B) The Federal funds rate is the rate banks charge their most creditworthy customers. 
C) The discount rate is the rate banks charge one another on overnight loans. 
D) The prime rate involves longer, more risky loans than the Federal funds rate.

Question 9

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Accepted Answer

A) Its effectiveness was limited by the zero lower bound problem. 
B) It created a surge in inflation. 
C) It forced nominal interest rates to below zero. 
D) It had the desired effect, promoting full recovery by 2010. 
A) Its effectiveness was limited by the zero lower bound problem. 
B) It created a surge in inflation. 
C) It forced nominal interest rates to below zero. 
D) It had the desired effect, promoting full recovery by 2010.

Question 10

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, excess 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 11

What does it mean when economists say that the Fed has attempted to "normalize" monetary policy after the Great Recession?

Accepted Answer

A) The Fed has tried to use monetary policy to restore the unemployment rate to its normal full employment rate of around 5 percent. 
B) The Fed has tried to use monetary policy to raise excess reserves back up to normal prerecession levels. 
C) The Fed has tried to make all of the monetary policy actions used during the financial crisis a normal part of the monetary policy tool kit. 
D) The Fed has tried to use monetary policy to bring interest rates back to the historically normal range of 3 percent or higher. 
A) The Fed has tried to use monetary policy to restore the unemployment rate to its normal full employment rate of around 5 percent. 
B) The Fed has tried to use monetary policy to raise excess reserves back up to normal prerecession levels. 
C) The Fed has tried to make all of the monetary policy actions used during the financial crisis a normal part of the monetary policy tool kit. 
D) The Fed has tried to use monetary policy to bring interest rates back to the historically normal range of 3 percent or higher.

Question 12

If the monetary authority wished to rein in inflation, it would buy government securities in the open market.

Accepted Answer

A) True 
 B)False

Question 13

Open-market operations refer to

Accepted Answer

A) purchases of stocks in the New York Stock Exchange. 
B) the purchase or sale of government securities, as well as collateralized money loans, by the Fed. 
C) central bank lending to commercial banks. 
D) the specifying of loan maximums on stock purchases. 
A) purchases of stocks in the New York Stock Exchange. 
B) the purchase or sale of government securities, as well as collateralized money loans, by the Fed. 
C) central bank lending to commercial banks. 
D) the specifying of loan maximums on stock purchases.

Question 14

Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to

Accepted Answer

A) fall by 4 percentage points. 
B) fall by 2 percentage points. 
C) rise by 4 percentage points. 
D) rise by 2 percentage points. 
A) fall by 4 percentage points. 
B) fall by 2 percentage points. 
C) rise by 4 percentage points. 
D) rise by 2 percentage points.

Question 15

What is one of the advantages of monetary policy over fiscal policy?

Accepted Answer

A) its control over the size of Federal budget deficits 
B) the quickness with which it can be used 
C) the opportunity for broad political influence 
D) It can guarantee an expansion of aggregate demand when needed. 
A) its control over the size of Federal budget deficits 
B) the quickness with which it can be used 
C) the opportunity for broad political influence 
D) It can guarantee an expansion of aggregate demand when needed.

Question 16

Which of the following statements is correct? Other things equal,

Accepted Answer

A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. 
B) a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged. 
C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. 
D) inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged. 
A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. 
B) a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged. 
C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. 
D) inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.

Question 17

According to the Taylor rule, when real GDP is at its potential and inflation is at its target rate of 2 percent, the Fed should

Accepted Answer

A) carefully lower the federal funds rate in an attempt to stimulate noninflationary real GDP growth. 
B) raise the federal funds rate in an attempt to eliminate the remaining inflation. 
C) lower the federal funds rate to lower borrowing costs for the federal government. 
D) keep the federal funds rate at 4 percent. 
A) carefully lower the federal funds rate in an attempt to stimulate noninflationary real GDP growth. 
B) raise the federal funds rate in an attempt to eliminate the remaining inflation. 
C) lower the federal funds rate to lower borrowing costs for the federal government. 
D) keep the federal funds rate at 4 percent.

Question 18

Other things equal, an increase in productivity will

Accepted Answer

A) reduce aggregate supply and increase real output. 
B) reduce both the interest rate and the international value of the dollar. 
C) increase both aggregate supply and real output. 
D) increase net exports, increase investment, and reduce aggregate demand. 
A) reduce aggregate supply and increase real output. 
B) reduce both the interest rate and the international value of the dollar. 
C) increase both aggregate supply and real output. 
D) increase net exports, increase investment, and reduce aggregate demand.

Question 19

When the Fed sells bonds to the bank and the public, the expected result is that

Accepted Answer

A) the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur. 
B) the supply of federal funds will rise, the federal funds rate will fall, and an expansion of the money supply will occur. 
C) the supply of federal funds will fall, the federal funds rate will fall, and an expansion of the money supply will occur. 
D) the supply of federal funds will rise, the federal funds rate will rise, and a contraction of the money supply will occur. 
A) the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur. 
B) the supply of federal funds will rise, the federal funds rate will fall, and an expansion of the money supply will occur. 
C) the supply of federal funds will fall, the federal funds rate will fall, and an expansion of the money supply will occur. 
D) the supply of federal funds will rise, the federal funds rate will rise, and a contraction of the money supply will occur.

Question 20

A federal funds rate reduction that is caused by monetary policy will

Accepted Answer

A) increase the prime interest rate. 
B) decrease the size of the monetary multiplier. 
C) increase the Fed's discount rate. 
D) decrease the prime interest rate. 
A) increase the prime interest rate. 
B) decrease the size of the monetary multiplier. 
C) increase the Fed's discount rate. 
D) decrease the prime interest rate.

Exam 36: Interest Rates and Monetary Policy

The equilibrium rate of interest in the market for money is determined by the intersection of the

Which of the following statements is true?

The Fed reduces interest rates mainly by selling government securities.Topic: Tools of Monetary Policy

The interest rate that banks charge one another on overnight loans is called the

A money loan is said to be collateralized when

Other things equal, an increase in input prices will

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Which of the following statements is correct?

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

What does it mean when economists say that the Fed has attempted to "normalize" monetary policy after the Great Recession?

If the monetary authority wished to rein in inflation, it would buy government securities in the open market.

Open-market operations refer to

Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to

What is one of the advantages of monetary policy over fiscal policy?

Which of the following statements is correct? Other things equal,

According to the Taylor rule, when real GDP is at its potential and inflation is at its target rate of 2 percent, the Fed should

Other things equal, an increase in productivity will

When the Fed sells bonds to the bank and the public, the expected result is that

A federal funds rate reduction that is caused by monetary policy will

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

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Money, Banking, and Financial Institutions

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Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

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The Balance of Payments, Exchange Rates, and Trade Deficits

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