Exam 13: Monetary Policy

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?

If you buy for $100 a bond that pays 4.57 percent in annual interest and the current interest yield on the bond rises to 5.13 percent, then the price of the bond has fallen.

Assume that banks lend out all their excess reserves. Currently, the legal reserves that banks must hold equal $11.5 billion. If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for the whole banking system to raise the money supply by:

The desire to keep assets in cash to take advantage of favorable changes in the value of non-cash assets is called the:

Scenario 13.1 Assume the following conditions hold. a.At all banks, excess reserves are zero. b.The deposit expansion multiplier is 3. c.The investment spending function is as illustrated in the figure below. Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent. -Refer to Scenario 13.1. What is the change in excess reserves following the open market operation by the Fed?

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 -Refer to Figure 13.2. Given a target exchange rate of MXP 11 = $1 with S1 the relevant supply curve and a decline in Mexican demand for U.S. dollars from D₁ to D₂ the Fed intervenes in the foreign exchange market by:

If funds are being loaned from one commercial bank's excess reserves on deposit with the Federal Reserve to another commercial bank's deposit account at the Fed, the transaction is taking place in:

Which of the following will be observed if the Fed raises the reserve requirement?

Suppose a bond sells for $2,000 and pays $200 per year in interest. What will happen to the current interest rate if the price of the bond changes to $1,800?

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:

After the year 2000, the FOMC changed some of its operating procedures. In particular, it stopped setting:

A change in the interest rate does not affect the quantity of money supplied. This means that:

A decrease in the discount rate:

The Federal Open Market Committee consists of:

Suppose that the Fed decides to decrease the money supply by 0.87 percent. If the velocity of money is constant, then the quantity theory of money predicts that:

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 -Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D₂ to D₁ and the relevant supply curve is S₁:

When the Fed uses money growth rates as an intermediate target, it implicitly assumes that the velocity of money is constant over time, at least in the short run.

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP. Figure 13.3 -Refer to Figure 13.3. Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then:

Table 13.1 Balance Sheet Assets Liabilities Vault Cash \ 1,150 Checking Accounts \ 11,300 Reserve Deposits \ 1,650 Savings Accounts \ 3,200 Loans \ 11,700 Total Assets \ 14,500 Total Liabilities \ 14,500 Assume that this is the balance sheet of the only bank in this economy and that the money supply is entirely kept by the bank in either a checking or a savings account. -Refer to Table 13.1. Given a reserve requirement of 8 percent, what is the maximum potential increase in the money supply?