Question 1

Which of the following is a monetary policy intended to rein in inﬂation?

Accepted Answer

A)  increase the money supply to shift the aggregate demand curve rightward 
B)  reduce interest rates to increase investment spending 
C)  reduce the interest paid on banks' reserves 
D)  decrease the money supply to shift the aggregate demand curve leftward 
A)  increase the money supply to shift the aggregate demand curve rightward 
B)  reduce interest rates to increase investment spending 
C)  reduce the interest paid on banks' reserves 
D)  decrease the money supply to shift the aggregate demand curve leftward

Question 2

Refer to the given market-for-money diagrams. If the Federal Reserve increased the stock of money, the

Accepted Answer

A)  S curve would shift leftward and the equilibrium interest rate would rise. 
B)  S curve would shift rightward and the equilibrium interest rate would fall. 
C)  D3 curve would shift leftward and the equilibrium interest rate would fall. 
D)  D3 curve would shift leftward and the equilibrium interest rate would rise. 
A)  S curve would shift leftward and the equilibrium interest rate would rise. 
B)  S curve would shift rightward and the equilibrium interest rate would fall. 
C)  D3 curve would shift leftward and the equilibrium interest rate would fall. 
D)  D3 curve would shift leftward and the equilibrium interest rate would rise.

Question 3

The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess
reserves.

Accepted Answer

A) True 
 B)False

Question 4

Which line in the graph would best illustrate the supply of money curve?

Accepted Answer

A)  Line 4 
B)  Line 3 
C)  Line 2 
D)  Line 1 
A)  Line 4 
B)  Line 3 
C)  Line 2 
D)  Line 1

Question 5

If the economy were encountering a severe recession, proper monetary and ﬁscal policies would call for

Accepted Answer

A)  selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. 
B)  buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit. 
C)  buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus. 
D)  buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit. 
A)  selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. 
B)  buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit. 
C)  buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus. 
D)  buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit.

Question 6

The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

Accepted Answer

A) True 
 B)False

Question 7

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from the Federal Reserve Bank in its district. The interest rate on the loan is called the

Accepted Answer

A)  prime rate. 
B)  federal funds rate. 
C)  Treasury bill rate. 
D)  discount rate. 
A)  prime rate. 
B)  federal funds rate. 
C)  Treasury bill rate. 
D)  discount rate.

Question 8

The federal funds rate is the interest rate that _______ charge(s) _______.

Accepted Answer

A)  banks; other banks 
B)  the Fed; commercial banks 
C)  banks; their best corporate customers 
D)  banks; on federal student loans 
A)  banks; other banks 
B)  the Fed; commercial banks 
C)  banks; their best corporate customers 
D)  banks; on federal student loans

Question 9

In 2008, the Fed acquired a fourth tool of monetary policy, which is the

Accepted Answer

A)  open-market operation. 
B)  discount rate. 
C)  paying of interest on excess reserves held at Fed banks. 
D)  reserve ratio. 
A)  open-market operation. 
B)  discount rate. 
C)  paying of interest on excess reserves held at Fed banks. 
D)  reserve ratio.

Question 10

In a reverse repo transaction,

Accepted Answer

A)  banks return foreclosed property to the previous owner. 
B)  banks sell foreclosed property to new owners. 
C)  the Fed borrows money from ﬁnancial institutions. 
D)  the Fed loans money to ﬁnancial institutions. 
A)  banks return foreclosed property to the previous owner. 
B)  banks sell foreclosed property to new owners. 
C)  the Fed borrows money from ﬁnancial institutions. 
D)  the Fed loans money to ﬁnancial institutions.

Question 11

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the
same as if the Fed sold the securities to the public instead.

Accepted Answer

A) True 
 B)False

Question 12

Since the 2008 ﬁnancial crisis, the Federal Reserve has added a signiﬁcant amount of which of the following securities?

Accepted Answer

A)  corporate bonds 
B)  mortgage-backed securities 
C)  common stock of ﬁnancial institutions 
D)  certiﬁcates of deposit 
A)  corporate bonds 
B)  mortgage-backed securities 
C)  common stock of ﬁnancial institutions 
D)  certiﬁcates of deposit

Question 13

Explain how a change in the interest rate on reserves affects the money supply.

Accepted Answer

The ability to pay interest on reserves

Question 14

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

Accepted Answer

A)  The required reserve ratio will increase. 
B)  The money supply will decrease. 
C)  The deposits of commercial banks will decline. 
D)  Commercial bank reserves will increase. 
A)  The required reserve ratio will increase. 
B)  The money supply will decrease. 
C)  The deposits of commercial banks will decline. 
D)  Commercial bank reserves will increase.

Question 15

Accepted Answer

A)  $175. 
B)  $125. 
C)  $75. 
D)  $0. 
A)  $175. 
B)  $125. 
C)  $75. 
D)  $0.

Question 16

According to the Taylor rule, if the inﬂation rate is 5 percent and the unemployment rate is 4.3 percent, the

Accepted Answer

A)  inﬂation gap is 2 percent. 
B)  economic gap is 0.7 percent. 
C)  unemployment gap is 4.3 percent. 
D)  inﬂation gap is 3 percent. 
A)  inﬂation gap is 2 percent. 
B)  economic gap is 0.7 percent. 
C)  unemployment gap is 4.3 percent. 
D)  inﬂation gap is 3 percent.

Question 17

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

Accepted Answer

A)  $600 million, and also by $600 million if the securities are purchased directly from commercial banks. 
B)  $800 million, and also by $800 million if the securities are purchased directly from commercial banks. 
C)  $600 million, but by $800 million if the securities are purchased directly from commercial banks. 
D)  $800 million, but only by $600 million if the securities are purchased directly from commercial banks. 
A)  $600 million, and also by $600 million if the securities are purchased directly from commercial banks. 
B)  $800 million, and also by $800 million if the securities are purchased directly from commercial banks. 
C)  $600 million, but by $800 million if the securities are purchased directly from commercial banks. 
D)  $800 million, but only by $600 million if the securities are purchased directly from commercial banks.

Question 18

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

Accepted Answer

A)  horizontally adding the transactions and the asset demand for money. 
B)  vertically subtracting the transactions demand from the asset demand for money. 
C)  horizontally subtracting the asset demand from the transactions demand for money. 
D)  vertically adding the transactions and the asset demand for money. 
A)  horizontally adding the transactions and the asset demand for money. 
B)  vertically subtracting the transactions demand from the asset demand for money. 
C)  horizontally subtracting the asset demand from the transactions demand for money. 
D)  vertically adding the transactions and the asset demand for money.

Question 19

According to the Taylor rule, if the unemployment rate is 3.3 percent and there is no inﬂation gap, the Fed should

Accepted Answer

A)  raise the Fed's targeted interest rate by 1 percentage point. 
B)  lower the Fed's targeted interest rate by 1 percentage point. 
C)  lower the federal funds rate by 3.3 percentage points. 
D)  do nothing, as the economy will correct itself. 
A)  raise the Fed's targeted interest rate by 1 percentage point. 
B)  lower the Fed's targeted interest rate by 1 percentage point. 
C)  lower the federal funds rate by 3.3 percentage points. 
D)  do nothing, as the economy will correct itself.

Question 20

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

Accepted Answer

A)  decrease; decrease 
B)  decrease; increase 
C)  increase; increase 
D)  increase; decrease 
A)  decrease; decrease 
B)  decrease; increase 
C)  increase; increase 
D)  increase; decrease

Which of the following is a monetary policy intended to rein in inﬂation?

Refer to the given market-for-money diagrams. If the Federal Reserve increased the stock of money, the

The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves.

Which line in the graph would best illustrate the supply of money curve?

If the economy were encountering a severe recession, proper monetary and ﬁscal policies would call for

The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from the Federal Reserve Bank in its district. The interest rate on the loan is called the

The federal funds rate is the interest rate that _ charge(s) _.

In 2008, the Fed acquired a fourth tool of monetary policy, which is the

In a reverse repo transaction,

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

Since the 2008 ﬁnancial crisis, the Federal Reserve has added a signiﬁcant amount of which of the following securities?

Explain how a change in the interest rate on reserves affects the money supply.

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

According to the Taylor rule, if the inﬂation rate is 5 percent and the unemployment rate is 4.3 percent, the

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

According to the Taylor rule, if the unemployment rate is 3.3 percent and there is no inﬂation gap, the Fed should

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to , which will ___ investment spending.

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

Which of the following is a monetary policy intended to rein in inﬂation?

Refer to the given market-for-money diagrams. If the Federal Reserve increased the stock of money, the

The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves.

Which line in the graph would best illustrate the supply of money curve?

If the economy were encountering a severe recession, proper monetary and ﬁscal policies would call for

The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from the Federal Reserve Bank in its district. The interest rate on the loan is called the

The federal funds rate is the interest rate that _______ charge(s) _______.

In 2008, the Fed acquired a fourth tool of monetary policy, which is the

In a reverse repo transaction,

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

Since the 2008 ﬁnancial crisis, the Federal Reserve has added a signiﬁcant amount of which of the following securities?

Explain how a change in the interest rate on reserves affects the money supply.

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

According to the Taylor rule, if the inﬂation rate is 5 percent and the unemployment rate is 4.3 percent, the

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

According to the Taylor rule, if the unemployment rate is 3.3 percent and there is no inﬂation gap, the Fed should

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

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

The federal funds rate is the interest rate that _ charge(s) _.

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to , which will ___ investment spending.