Question 1

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 2

The Federal Reserve will use an inﬂation rate target of 2 percent to

Accepted Answer

A)  compensate for upward measurement bias in how the inﬂation rate is calculated. 
B)  allow for downward wage ﬂexibility. 
C)  avoid the zero lower bound problem. 
D)  All of these choices are correct. 
A)  compensate for upward measurement bias in how the inﬂation rate is calculated. 
B)  allow for downward wage ﬂexibility. 
C)  avoid the zero lower bound problem. 
D)  All of these choices are correct.

Question 3

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Accepted Answer

A) True 
 B)False

Question 4

Other things equal, if the supply of money is reduced,

Accepted Answer

A)  the demand for money will increase. 
B)  the interest rate will fall. 
C)  bond prices will fall. 
D)  investment spending will increase. 
A)  the demand for money will increase. 
B)  the interest rate will fall. 
C)  bond prices will fall. 
D)  investment spending will increase.

Question 5

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

Accepted Answer

A)  sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks. 
B)  buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks. 
C)  sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks. 
D)  sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks. 
A)  sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks. 
B)  buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks. 
C)  sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks. 
D)  sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.

Question 6

If the amount of money demanded exceeds the amount supplied, the

Accepted Answer

A)  demand-for-money curve will shift to the left. 
B)  money-supply curve will shift to the right. 
C)  interest rate will rise. 
D)  interest rate will fall. 
A)  demand-for-money curve will shift to the left. 
B)  money-supply curve will shift to the right. 
C)  interest rate will rise. 
D)  interest rate will fall.

Question 7

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 8

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Accepted Answer

A)  7.5 percent. 
B)  3 percent. 
C)  2 percent. 
D)  1 percent. 
A)  7.5 percent. 
B)  3 percent. 
C)  2 percent. 
D)  1 percent.

Question 9

Lowering the reserve ratio

Accepted Answer

A)  increases the total reserves in the banking system. 
B)  also reduces the discount rate. 
C)  turns required reserves into excess reserves. 
D)  reduces the amount of excess reserves the banks keep. 
A)  increases the total reserves in the banking system. 
B)  also reduces the discount rate. 
C)  turns required reserves into excess reserves. 
D)  reduces the amount of excess reserves the banks keep.

Question 10

In terms of the mechanics of quantitative easing,

Accepted Answer

A)  quantitative easing formally changes interest rates; open-market operations only inﬂuence rates. 
B)  it works the same as open-market operations. 
C)  it differs from open-market operations in that the securities purchases occur directly from households. 
D)  it only changes the interest rate; it doesn't inﬂuence bank reserves. 
A)  quantitative easing formally changes interest rates; open-market operations only inﬂuence rates. 
B)  it works the same as open-market operations. 
C)  it differs from open-market operations in that the securities purchases occur directly from households. 
D)  it only changes the interest rate; it doesn't inﬂuence bank reserves.

Question 11

The level of GDP, ceteris paribus, will tend to increase when

Accepted Answer

A)  reserve requirements are increased. 
B)  there is an increase in the discount rate. 
C)  the Federal Reserve buys government securities in the open market. 
D)  the Federal Reserve sells government securities in the open market. 
A)  reserve requirements are increased. 
B)  there is an increase in the discount rate. 
C)  the Federal Reserve buys government securities in the open market. 
D)  the Federal Reserve sells government securities in the open market.

Question 12

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

Accepted Answer

A)  Negative nominal interest rates would stimulate borrowing and spending, increasing aggregate demand. 
B)  Negative interest rates would stimulate so much lending that it would unfairly increase banks' power in the market. 
C)  Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses. 
D)  The Fed would lose the ability to raise the interest rates above zero in the future. 
A)  Negative nominal interest rates would stimulate borrowing and spending, increasing aggregate demand. 
B)  Negative interest rates would stimulate so much lending that it would unfairly increase banks' power in the market. 
C)  Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses. 
D)  The Fed would lose the ability to raise the interest rates above zero in the future.

Question 13

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Accepted Answer

A)  decrease by 1 percentage point. 
B)  decrease by 2 percentage points. 
C)  increase by 1 percentage point. 
D)  increase by 2 percentage points. 
A)  decrease by 1 percentage point. 
B)  decrease by 2 percentage points. 
C)  increase by 1 percentage point. 
D)  increase by 2 percentage points.

Question 14

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Accepted Answer

A)  has dropped signiﬁcantly because the rate has increased. 
B)  has replaced open-market operations as the most frequently used tool of monetary policy. 
C)  virtually never happens, as most banks have suﬃcient excess reserves. 
D)  has increased signiﬁcantly, as banks struggle to maintain enough reserves. 
A)  has dropped signiﬁcantly because the rate has increased. 
B)  has replaced open-market operations as the most frequently used tool of monetary policy. 
C)  virtually never happens, as most banks have suﬃcient excess reserves. 
D)  has increased signiﬁcantly, as banks struggle to maintain enough reserves.

Question 15

Which line in the graph would best illustrate the asset demand for money curve?

Accepted Answer

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

Question 16

$$\begin{array} { | c | c | c | c | } 
\hline \text { Interest Rate } & \begin{array} { c } 
\text { Transactions Demand for } \
\text { Money }
\end{array} & \text { Asset Demand for Money } & \text { Money Supply } \
\hline 2 \% & \$ 220 & \$ 300 & \$ 460 \
\hline 4 & 220 & 280 & 460 \
\hline 6 & 220 & 260 & 460 \
\hline 8 & 220 & 240 & 460 \
\hline 10 & 220 & 220 & 460 \
\hline
\end{array}$$ Based on the given table, the equilibrium interest rate is

Accepted Answer

A)  2 percent. 
B)  4 percent. 
C)  6 percent. 
D)  8 percent. 
A)  2 percent. 
B)  4 percent. 
C)  6 percent. 
D)  8 percent.

Question 17

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Accepted Answer

A)  $200 billion. 
B)  $400 billion. 
C)  $800 billion. 
D)  $3,200 billion. 
A)  $200 billion. 
B)  $400 billion. 
C)  $800 billion. 
D)  $3,200 billion.

Question 18

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Accepted Answer

A)  A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. 
B)  A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. 
C)  An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. 
D)  An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. 
A)  A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. 
B)  A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. 
C)  An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. 
D)  An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Question 19

The Fed increases interest rates mainly by selling government securities.

Accepted Answer

A) True 
 B)False

Question 20

Accepted Answer

A)  decrease aggregate demand from AD $$A D _ { 1 } \text { to } A D _ { 2 }$$ 
B)  increase the money supply from $75 to $150 billion 
C)  increase interest rates from 4 to 8 percent 
D)  make no change in monetary policy 
A)  decrease aggregate demand from AD $$A D _ { 1 } \text { to } A D _ { 2 }$$ 
B)  increase the money supply from $75 to $150 billion 
C)  increase interest rates from 4 to 8 percent 
D)  make no change in monetary policy

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

The Federal Reserve will use an inﬂation rate target of 2 percent to

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Other things equal, if the supply of money is reduced,

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

If the amount of money demanded exceeds the amount supplied, the

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

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Lowering the reserve ratio

In terms of the mechanics of quantitative easing,

The level of GDP, ceteris paribus, will tend to increase when

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Which line in the graph would best illustrate the asset demand for money curve?

Interest Rate Transactions Demand for Money Asset Demand for Money Money Supply 2\% \ 220 \ 300 \ 460 4 220 280 460 6 220 260 460 8 220 240 460 10 220 220 460 Based on the given table, the equilibrium interest rate is

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

The Fed increases interest rates mainly by selling government securities.

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

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Exam 16: Interest Rates and Monetary Policy

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

The Federal Reserve will use an inﬂation rate target of 2 percent to

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Other things equal, if the supply of money is reduced,

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

If the amount of money demanded exceeds the amount supplied, the

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

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Lowering the reserve ratio

In terms of the mechanics of quantitative easing,

The level of GDP, ceteris paribus, will tend to increase when

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Which line in the graph would best illustrate the asset demand for money curve?

Interest Rate Transactions Demand for Money Asset Demand for Money Money Supply 2\% \ 220 \ 300 \ 460 4 220 280 460 6 220 260 460 8 220 240 460 10 220 220 460 Based on the given table, the equilibrium interest rate is

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

The Fed increases interest rates mainly by selling government securities.

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