Question 1

If the Fed buys government securities from commercial banks in the open market,

Accepted Answer

A)  the Fed gives the securities to the commercial banks and increases the banks' reserves. 
B)  the Fed gives the securities to the commercial banks and decreases the banks' reserves. 
C)  commercial banks give the securities to the Fed, and the Fed increases the banks' reserves. 
D)  commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves. 
A)  the Fed gives the securities to the commercial banks and increases the banks' reserves. 
B)  the Fed gives the securities to the commercial banks and decreases the banks' reserves. 
C)  commercial banks give the securities to the Fed, and the Fed increases the banks' reserves. 
D)  commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves.

Question 2

Accepted Answer

A)  $75. 
B)  $125. 
C)  $200. 
D)  $325. 
A)  $75. 
B)  $125. 
C)  $200. 
D)  $325.

Question 3

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

Accepted Answer

A)  a liability of the Federal Reserve Banks and commercial banks. 
B)  an asset of the Federal Reserve Banks and commercial banks. 
C)  a liability of the Federal Reserve Banks and an asset for commercial banks. 
D)  an asset of the Federal Reserve Banks and a liability for commercial banks. 
A)  a liability of the Federal Reserve Banks and commercial banks. 
B)  an asset of the Federal Reserve Banks and commercial banks. 
C)  a liability of the Federal Reserve Banks and an asset for commercial banks. 
D)  an asset of the Federal Reserve Banks and a liability for commercial banks.

Question 4

In recent years (after the ﬁnancial crisis of 2008), the Fed has added a new element to its open-market operations, which is

Accepted Answer

A)  buying and selling foreign-government securities. 
B)  taking government bonds as collateral on loans to banks and other ﬁnancial institutions. 
C)  the trading of state- and local-government bonds. 
D)  accepting corporate stocks and bonds as bank reserves. 
A)  buying and selling foreign-government securities. 
B)  taking government bonds as collateral on loans to banks and other ﬁnancial institutions. 
C)  the trading of state- and local-government bonds. 
D)  accepting corporate stocks and bonds as bank reserves.

Question 5

The Fed's inability to stimulate the economy by reducing interest rates is known as the

Accepted Answer

A)  zero lower bound problem. 
B)  zero upper bound problem. 
C)  negative interest rate problem. 
D)  quantitative easing problem. 
A)  zero lower bound problem. 
B)  zero upper bound problem. 
C)  negative interest rate problem. 
D)  quantitative easing problem.

Question 6

Which of the following Fed actions increases the excess reserves of commercial banks?

Accepted Answer

A)  selling bonds to the public 
B)  selling bonds to commercial banks 
C)  increasing the discount rate 
D)  lowering the reserve ratio 
A)  selling bonds to the public 
B)  selling bonds to commercial banks 
C)  increasing the discount rate 
D)  lowering the reserve ratio

Question 7

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Accepted Answer

A)  $1,000. 
B)  $2,000. 
C)  $800. 
D)  $5,000. 
A)  $1,000. 
B)  $2,000. 
C)  $800. 
D)  $5,000.

Question 8

$$\begin{array} { | c | c | } 
\hline \text { Interest Rate } & \text { Asset Demand for Money (Billions) } \
\hline 7 \% & \$ 200 \
\hline 6 & 300 \
\hline 5 & 400 \
\hline 4 & 500 \
\hline
\end{array}$$ Refer to the table. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to

Accepted Answer

A)  rise to 7 percent. 
B)  rise to 6 percent. 
C)  fall to 4 percent. 
D)  fall to 5 percent. 
A)  rise to 7 percent. 
B)  rise to 6 percent. 
C)  fall to 4 percent. 
D)  fall to 5 percent.

Question 9

An expansionary monetary policy may be less effective than a restrictive monetary policy because

Accepted Answer

A)  the Federal Reserve Banks are always willing to make loans to commercial banks that are short of reserves. 
B)  ﬁscal policy always works at cross purposes with an expansionary monetary policy. 
C)  changes in exchange rates complicate an expansionary monetary policy more than they do a restrictive monetary policy. 
D)  commercial banks may not be able to ﬁnd good loan customers. 
A)  the Federal Reserve Banks are always willing to make loans to commercial banks that are short of reserves. 
B)  ﬁscal policy always works at cross purposes with an expansionary monetary policy. 
C)  changes in exchange rates complicate an expansionary monetary policy more than they do a restrictive monetary policy. 
D)  commercial banks may not be able to ﬁnd good loan customers.

Question 10

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

Accepted Answer

A) True 
 B)False

Question 11

The interest rate that banks charge one another for the loan of excess reserves is the

Accepted Answer

A)  prime interest rate. 
B)  federal funds rate. 
C)  discount rate. 
D)  interest on reserves. 
A)  prime interest rate. 
B)  federal funds rate. 
C)  discount rate. 
D)  interest on reserves.

Question 12

$$\begin{array} { | l | c | } 
\hline { \text { Item in Balance Sheet } } & \text { Amount } \
\hline \text { 1) Treasury Deposits } & \$ 7 \
\hline \text { 2) Reserves of Commercial Banks } & 31 \
\hline \text { 3) Federal Reserve Notes } & 275 \
\hline \text { 4) Loans to Commercial Banks } & 1 \
\hline \text { 5) All Other Assets } & 64 \
\hline \text { 6) Securities } & 255 \
\hline \text { 7) All Other Liabilities and Net Worth } & 7 \
\hline
\end{array}$$ The table shows items and ?gures taken from a consolidated balance sheet of the 12 Federal Reserve Banks. All ?gures are in billions of dollars. In this balance sheet, the liabilities and net worth would be items 7 and

Accepted Answer

A)  1, 3, and 5. 
B)  2, 4, and 5. 
C)  1, 2, and 3. 
D)  4, 5, and 6. 
A)  1, 3, and 5. 
B)  2, 4, and 5. 
C)  1, 2, and 3. 
D)  4, 5, and 6.

Question 13

Before the ﬁnancial crisis of 2008, expansionary monetary policy would have entailed the Fed targeting a lower federal funds rate and
using open-market purchases to increase bank reserves to cause the federal funds rate to hit its target.

Accepted Answer

A) True 
 B)False

Question 14

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

Accepted Answer

A)  reduce inﬂation. 
B)  save the banking industry. 
C)  stimulate the economy. 
D)  improve the savings rate. 
A)  reduce inﬂation. 
B)  save the banking industry. 
C)  stimulate the economy. 
D)  improve the savings rate.

Question 15

Holding money as an asset presents a risk of capital loss.

Accepted Answer

A) True 
 B)False

Question 16

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

Accepted Answer

A)  increase the excess reserves of member banks and thus increase the money supply. 
B)  increase the excess reserves of member banks and thus decrease the money supply. 
C)  decrease the excess reserves of member banks and thus decrease the money supply. 
D)  decrease the excess reserves of member banks and thus increase the money supply. 
A)  increase the excess reserves of member banks and thus increase the money supply. 
B)  increase the excess reserves of member banks and thus decrease the money supply. 
C)  decrease the excess reserves of member banks and thus decrease the money supply. 
D)  decrease the excess reserves of member banks and thus increase the money supply.

Question 17

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

Accepted Answer

A)  recall Federal Reserve Notes from circulation 
B)  raise the legal reserve requirement 
C)  buy bonds in the open market 
D)  raise the discount rate 
A)  recall Federal Reserve Notes from circulation 
B)  raise the legal reserve requirement 
C)  buy bonds in the open market 
D)  raise the discount rate

Question 18

Refer to the diagram of the market for money. The downward slope of the money demand curve $D _ { m }$ is best explained in terms of the

Accepted Answer

A)  transactions demand for money. 
B)  direct or positive relationship between bond prices and interest rates. 
C)  asset demand for money. 
D)  wealth or real-balances effect. 
A)  transactions demand for money. 
B)  direct or positive relationship between bond prices and interest rates. 
C)  asset demand for money. 
D)  wealth or real-balances effect.

Question 19

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 20

The Fed, at the end of 2015, announced its intent to start "normalizing" monetary policy and returning short-term interest rates to their normal range. Its normalization plan had two major tools,

Accepted Answer

A)  taxation and spending. 
B)  discount rate and reserve requirements. 
C)  quantitative easing and open-market operations. 
D)  raising the interest on excess reserves held at Fed banks and quantitative tightening. 
A)  taxation and spending. 
B)  discount rate and reserve requirements. 
C)  quantitative easing and open-market operations. 
D)  raising the interest on excess reserves held at Fed banks and quantitative tightening.

If the Fed buys government securities from commercial banks in the open market,

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

In recent years (after the ﬁnancial crisis of 2008), the Fed has added a new element to its open-market operations, which is

The Fed's inability to stimulate the economy by reducing interest rates is known as the

Which of the following Fed actions increases the excess reserves of commercial banks?

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Interest Rate Asset Demand for Money (Billions) 7\% \ 200 6 300 5 400 4 500 Refer to the table. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to

An expansionary monetary policy may be less effective than a restrictive monetary policy because

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

The interest rate that banks charge one another for the loan of excess reserves is the

Before the ﬁnancial crisis of 2008, expansionary monetary policy would have entailed the Fed targeting a lower federal funds rate and using open-market purchases to increase bank reserves to cause the federal funds rate to hit its target.

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

Holding money as an asset presents a risk of capital loss.

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

$Refer to the diagram of the market for money. The downward slope of the money demand curve D _ { m } is best explained in terms of the$ Refer to the diagram of the market for money. The downward slope of the money demand curve $D _ { m }$ is best explained in terms of the

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

The Fed, at the end of 2015, announced its intent to start "normalizing" monetary policy and returning short-term interest rates to their normal range. Its normalization plan had two major tools,

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters

Exam 16: Interest Rates and Monetary Policy

If the Fed buys government securities from commercial banks in the open market,

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

In recent years (after the ﬁnancial crisis of 2008), the Fed has added a new element to its open-market operations, which is

The Fed's inability to stimulate the economy by reducing interest rates is known as the

Which of the following Fed actions increases the excess reserves of commercial banks?

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

Interest Rate Asset Demand for Money (Billions) 7\% \ 200 6 300 5 400 4 500 Refer to the table. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to

An expansionary monetary policy may be less effective than a restrictive monetary policy because

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

The interest rate that banks charge one another for the loan of excess reserves is the

Before the ﬁnancial crisis of 2008, expansionary monetary policy would have entailed the Fed targeting a lower federal funds rate and using open-market purchases to increase bank reserves to cause the federal funds rate to hit its target.

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to

Holding money as an asset presents a risk of capital loss.

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

Refer to the diagram of the market for money. The downward slope of the money demand curve DmD _ { m }Dm​ is best explained in terms of the

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

The Fed, at the end of 2015, announced its intent to start "normalizing" monetary policy and returning short-term interest rates to their normal range. Its normalization plan had two major tools,

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters

$Refer to the diagram of the market for money. The downward slope of the money demand curve D _ { m } is best explained in terms of the$ Refer to the diagram of the market for money. The downward slope of the money demand curve $D _ { m }$ is best explained in terms of the