Question 1

When the Fed undertakes reverse repo transactions with ﬁnancial institutions, it is trying to

Accepted Answer

A)  increase the money supply. 
B)  reduce the money supply. 
C)  increase the federal budget deﬁcit. 
D)  reduce the federal budget deﬁcit. 
A)  increase the money supply. 
B)  reduce the money supply. 
C)  increase the federal budget deﬁcit. 
D)  reduce the federal budget deﬁcit.

Question 2

What is the goal of monetary policy?

Accepted Answer

The goal of monetary policy is

Question 3

Changes in the interest rate are more likely to affect investment spending than consumer spending.

Accepted Answer

A) True 
 B)False

Question 4

Even after the ﬁnancial crisis, the federal funds rate target remains the most frequently used monetary policy tool.

Accepted Answer

A) True 
 B)False

Question 5

According to the Taylor rule, if the current inﬂation rate is 5 percent and the current unemployment rate is 3.8 percent, the Fed's targeted interest rate should be

Accepted Answer

A)  5 percent. 
B)  8.8 percent. 
C)  1.2 percent. 
D)  9 percent. 
A)  5 percent. 
B)  8.8 percent. 
C)  1.2 percent. 
D)  9 percent.

Question 6

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the nonbank securities dealers, then, as a result of this transaction, the lending ability of the commercial
Banking system will increase by

Accepted Answer

A)  $4.5 billion. 
B)  $9 billion. 
C)  $12 billion. 
D)  $15 billion. 
A)  $4.5 billion. 
B)  $9 billion. 
C)  $12 billion. 
D)  $15 billion.

Question 7

Other things equal, an appreciation of the U.S. dollar would

Accepted Answer

A)  increase productivity and increase aggregate supply. 
B)  decrease net exports and decrease aggregate demand. 
C)  increase the prices of imported resources and decrease aggregate supply. 
D)  decrease the supply of money and decrease aggregate demand. 
A)  increase productivity and increase aggregate supply. 
B)  decrease net exports and decrease aggregate demand. 
C)  increase the prices of imported resources and decrease aggregate supply. 
D)  decrease the supply of money and decrease aggregate demand.

Question 8

Refer to the given balance sheets. If the reserve ratio is 25 percent, commercial banks have excess reserves of

Accepted Answer

A)  $12. 
B)  $22. 
C)  $16. 
D)  $24. 
A)  $12. 
B)  $22. 
C)  $16. 
D)  $24.

Question 9

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

Accepted Answer

A)  a line parallel to the horizontal axis. 
B)  a vertical line. 
C)  a downsloping line or curve from left to right. 
D)  an upsloping line or curve from left to right. 
A)  a line parallel to the horizontal axis. 
B)  a vertical line. 
C)  a downsloping line or curve from left to right. 
D)  an upsloping line or curve from left to right.

Question 10

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

Accepted Answer

A)  not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million. 
B)  directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million. 
C)  directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million. 
D)  directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million. 
A)  not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million. 
B)  directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million. 
C)  directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million. 
D)  directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Question 11

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the

Accepted Answer

A)  banking system now has excess reserves of $3 billion. 
B)  monetary multiplier has decreased. 
C)  maximum money-creating potential of the banking system has been increased by $7 billion. 
D)  Fed has decided that money supply needed to be reduced. 
A)  banking system now has excess reserves of $3 billion. 
B)  monetary multiplier has decreased. 
C)  maximum money-creating potential of the banking system has been increased by $7 billion. 
D)  Fed has decided that money supply needed to be reduced.

Question 12

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

Accepted Answer

A)  crowding-out effect. 
B)  cyclical asymmetry of monetary policy. 
C)  administrative lag that occurs in formulating monetary and ﬁscal policies. 
D)  operational lag in monetary policy. 
A)  crowding-out effect. 
B)  cyclical asymmetry of monetary policy. 
C)  administrative lag that occurs in formulating monetary and ﬁscal policies. 
D)  operational lag in monetary policy.

Question 13

When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.

Accepted Answer

A) True 
 B)False

Question 14

Which tool of monetary policy is most important? Why?

Accepted Answer

Open market operations are the most impo

Question 15

When the Fed undertakes a "repo" transaction with a ﬁnancial institution, the Fed in essence

Accepted Answer

A)  grants a collateralized loan to the ﬁnancial institution. 
B)  provides an insurance coverage to the ﬁnancial institution. 
C)  buys shares of stock of the ﬁnancial institution. 
D)  reduces the reserves of the ﬁnancial institution. 
A)  grants a collateralized loan to the ﬁnancial institution. 
B)  provides an insurance coverage to the ﬁnancial institution. 
C)  buys shares of stock of the ﬁnancial institution. 
D)  reduces the reserves of the ﬁnancial institution.

Question 16

Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new 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 17

Suppose the economy is experiencing a recession and high unemployment. How would an expansionary monetary policy address this
problem?

Accepted Answer

The Federal Reserve could attempt to exp

Question 18

Other things equal, a restrictive monetary policy during a period of demand-pull inﬂation will

Accepted Answer

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

Question 19

If the Fed is trying to make interest rates go down, it may want

Accepted Answer

A)  the money supply to decrease. 
B)  the price level to decrease. 
C)  unemployment to decrease. 
D)  investment to decrease. 
A)  the money supply to decrease. 
B)  the price level to decrease. 
C)  unemployment to decrease. 
D)  investment to decrease.

Question 20

Before the ﬁnancial crisis of 2008, restrictive monetary policy by the Fed involved

Accepted Answer

A)  raising the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
B)  raising the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
C)  reducing the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
D)  reducing the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
A)  raising the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
B)  raising the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target. 
C)  reducing the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target. 
D)  reducing the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target.

Exam 16: Interest Rates and Monetary Policy

When the Fed undertakes reverse repo transactions with ﬁnancial institutions, it is trying to

What is the goal of monetary policy?

Changes in the interest rate are more likely to affect investment spending than consumer spending.

Even after the ﬁnancial crisis, the federal funds rate target remains the most frequently used monetary policy tool.

According to the Taylor rule, if the current inﬂation rate is 5 percent and the current unemployment rate is 3.8 percent, the Fed's targeted interest rate should be

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the nonbank securities dealers, then, as a result of this transaction, the lending ability of the commercial Banking system will increase by

Other things equal, an appreciation of the U.S. dollar would

Refer to the given balance sheets. If the reserve ratio is 25 percent, commercial banks have excess reserves of

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

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.

Which tool of monetary policy is most important? Why?

When the Fed undertakes a "repo" transaction with a ﬁnancial institution, the Fed in essence

Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be

Suppose the economy is experiencing a recession and high unemployment. How would an expansionary monetary policy address this problem?

Other things equal, a restrictive monetary policy during a period of demand-pull inﬂation will

If the Fed is trying to make interest rates go down, it may want

Before the ﬁnancial crisis of 2008, restrictive monetary policy by the Fed involved

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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