Question 1

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

Accepted Answer

A)  of commercial banks are unchanged, but their reserves increase. 
B)  and reserves of commercial banks both decrease. 
C)  of commercial banks are unchanged, but their reserves decrease. 
D)  and reserves of commercial banks are both unchanged. 
A)  of commercial banks are unchanged, but their reserves increase. 
B)  and reserves of commercial banks both decrease. 
C)  of commercial banks are unchanged, but their reserves decrease. 
D)  and reserves of commercial banks are both unchanged.

Question 2

The possible asymmetry of monetary policy is the central idea of the

Accepted Answer

A)  invisible hand concept. 
B)  ratchet analogy. 
C)  pushing-on-a-string analogy. 
D)  bandwagon effect. 
A)  invisible hand concept. 
B)  ratchet analogy. 
C)  pushing-on-a-string analogy. 
D)  bandwagon effect.

Question 3

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Accepted Answer

A)  the unemployment rate. 
B)  the inﬂation rate. 
C)  the target federal funds rate. 
D)  the discount rate. 
A)  the unemployment rate. 
B)  the inﬂation rate. 
C)  the target federal funds rate. 
D)  the discount rate.

Question 4

Which of the following statements is true?

Accepted Answer

A)  The Federal Reserve sets the federal funds rate. 
B)  The Federal Reserve sets the target for the federal funds rate, and then uses the reserve ratio to push banks toward that target. 
C)  The Federal Reserve does not set the federal funds rate, but historically has inﬂuenced it using its open-market operations. 
D)  The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy. 
A)  The Federal Reserve sets the federal funds rate. 
B)  The Federal Reserve sets the target for the federal funds rate, and then uses the reserve ratio to push banks toward that target. 
C)  The Federal Reserve does not set the federal funds rate, but historically has inﬂuenced it using its open-market operations. 
D)  The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.

Question 5

Raising the interest paid on reserves has the effect of making it

Accepted Answer

A)  more costly for banks to hold excess reserves. 
B)  less costly for banks to hold excess reserves. 
C)  more attractive for banks to lend out their excess reserves. 
D)  less attractive for banks to hold required reserves. 
A)  more costly for banks to hold excess reserves. 
B)  less costly for banks to hold excess reserves. 
C)  more attractive for banks to lend out their excess reserves. 
D)  less attractive for banks to hold required reserves.

Question 6

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

Accepted Answer

A)  a tax increase and an increase in the money supply 
B)  a tax reduction and an increase in the money supply 
C)  a reduction in government expenditures and a decline in the money supply 
D)  a tax increase and an increase in the interest rate 
A)  a tax increase and an increase in the money supply 
B)  a tax reduction and an increase in the money supply 
C)  a reduction in government expenditures and a decline in the money supply 
D)  a tax increase and an increase in the interest rate

Question 7

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 8

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

Accepted Answer

The limitations on the speed of monetary

Question 9

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Accepted Answer

A)  $4,700. 
B)  $5,030. 
C)  $7,128. 
D)  $8,333. 
A)  $4,700. 
B)  $5,030. 
C)  $7,128. 
D)  $8,333.

Question 10

Accepted Answer

A)  B 
B)  E 
C)  F 
D)  I 
A)  B 
B)  E 
C)  F 
D)  I

Question 11

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Accepted Answer

A)  real GDP is $800. 
B)  nominal GDP is $800. 
C)  the money supply must be $800. 
D)  nominal GDP is $1,200. 
A)  real GDP is $800. 
B)  nominal GDP is $800. 
C)  the money supply must be $800. 
D)  nominal GDP is $1,200.

Question 12

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

Accepted Answer

A)  sell bonds, which would cause bond prices to fall and the interest rate to rise. 
B)  buy bonds, which would cause bond prices to fall and the interest rate to rise. 
C)  sell bonds, which would cause bond prices to rise and the interest rate to rise. 
D)  buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate. 
A)  sell bonds, which would cause bond prices to fall and the interest rate to rise. 
B)  buy bonds, which would cause bond prices to fall and the interest rate to rise. 
C)  sell bonds, which would cause bond prices to rise and the interest rate to rise. 
D)  buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Question 13

When the interest rate falls, the

Accepted Answer

A)  asset demand for money decreases. 
B)  transactions demand for money increases. 
C)  total amount of money demanded increases. 
D)  total amount of money demanded decreases. 
A)  asset demand for money decreases. 
B)  transactions demand for money increases. 
C)  total amount of money demanded increases. 
D)  total amount of money demanded decreases.

Question 14

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Accepted Answer

The dual mandate was given to the Federa

Question 15

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

Accepted Answer

A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent. 
A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent.

Question 16

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

Accepted Answer

A) True 
 B)False

Question 17

In the recent ﬁnancial and economic crises, the economy fell into a so-called liquidity trap, which means that

Accepted Answer

A)  banks did not have enough reserves to continue lending to ﬁrms. 
B)  the Fed injected reserves into the banking system, but the interest rates remained high. 
C)  ﬁrms did not want to borrow from banks because they had little need for extra liquidity. 
D)  banks held on to excess reserves and people chose to pay off loans rather than spend. 
A)  banks did not have enough reserves to continue lending to ﬁrms. 
B)  the Fed injected reserves into the banking system, but the interest rates remained high. 
C)  ﬁrms did not want to borrow from banks because they had little need for extra liquidity. 
D)  banks held on to excess reserves and people chose to pay off loans rather than spend.

Question 18

An increase in nominal GDP will

Accepted Answer

A)  increase the transactions demand and the total demand for money. 
B)  decrease the transactions demand and the total demand for money. 
C)  increase the transactions demand for money but decrease the total demand for money. 
D)  decrease the transactions demand for money but increase the total demand for money. 
A)  increase the transactions demand and the total demand for money. 
B)  decrease the transactions demand and the total demand for money. 
C)  increase the transactions demand for money but decrease the total demand for money. 
D)  decrease the transactions demand for money but increase the total demand for money.

Question 19

If the Fed sells government securities to the general public in the open market,

Accepted Answer

A)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will increase commercial bank reserves at the Fed. 
B)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed. 
C)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will increase their reserves at the Fed. 
D)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will decrease their reserves at the Fed. 
A)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will increase commercial bank reserves at the Fed. 
B)  the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed. 
C)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will increase their reserves at the Fed. 
D)  the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will decrease their reserves at the Fed.

Question 20

The lending ability of commercial banks increases when the

Accepted Answer

A)  reserve ratio is raised. 
B)  Treasury collects tax revenues. 
C)  Fed sells securities in the open market. 
D)  Fed buys securities in the open market. 
A)  reserve ratio is raised. 
B)  Treasury collects tax revenues. 
C)  Fed sells securities in the open market. 
D)  Fed buys securities in the open market.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

The possible asymmetry of monetary policy is the central idea of the

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Which of the following statements is true?

Raising the interest paid on reserves has the effect of making it

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

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

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

When the interest rate falls, the

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

In the recent ﬁnancial and economic crises, the economy fell into a so-called liquidity trap, which means that

An increase in nominal GDP will

If the Fed sells government securities to the general public in the open market,

The lending ability of commercial banks increases when the

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

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

The possible asymmetry of monetary policy is the central idea of the

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

Which of the following statements is true?

Raising the interest paid on reserves has the effect of making it

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

One of the advantages of monetary policy is its speed and ﬂexibility, but there are limitations. Explain.

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would

When the interest rate falls, the

Deﬁne the Federal Reserve's dual mandate, and explain how the Fed complies with this congressional directive.

Refer to the graph. If the supply of money was $200 billion, the interest rate would be

Repos are a tool used by the Fed to increase bank reserves and encourage lending.

In the recent ﬁnancial and economic crises, the economy fell into a so-called liquidity trap, which means that

An increase in nominal GDP will

If the Fed sells government securities to the general public in the open market,

The lending ability of commercial banks increases when the

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