Question 1

In recent years,the Federal Reserve has:

Accepted Answer

A)  paid closer attention to M1 than M2 in setting monetary targets. 
B)  relied more on changes in the discount rate than open-market operations in establishing monetary policy. 
C)  has increased M2 at a fixed annual rate,regardless of the health of the economy. 
D)  taken an activist,pragmatic approach to monetary policy,paying close attention to interest rates. 
A)  paid closer attention to M1 than M2 in setting monetary targets. 
B)  relied more on changes in the discount rate than open-market operations in establishing monetary policy. 
C)  has increased M2 at a fixed annual rate,regardless of the health of the economy. 
D)  taken an activist,pragmatic approach to monetary policy,paying close attention to interest rates.

Question 2

If the quantity of money demanded exceeds the quantity supplied:

Accepted Answer

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

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

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

Question 5

If,in the market for money,the quantity of money demanded exceeds the money supply,the interest rate will:

Accepted Answer

A)  fall,causing households and businesses to hold less money. 
B)  rise,causing households and businesses to hold less money. 
C)  rise,causing households and businesses to hold more money. 
D)  fall,causing households and businesses to hold more money. 
A)  fall,causing households and businesses to hold less money. 
B)  rise,causing households and businesses to hold less money. 
C)  rise,causing households and businesses to hold more money. 
D)  fall,causing households and businesses to hold more money.

Question 6

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

Accepted Answer

A) True 
 B)False

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

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property} 
\end{array}
\begin{array}{l}
\
\$ 200 \
300 \
500 \
400 
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text {  Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$1,100\
400\
\
\
\end{array}
\end{array}$

Refer to the given data.Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy.To accomplish this,it could lower the reserve requirement from 20 percent to:

Accepted Answer

A)  10 percent. 
B)  12 percent. 
C)  14 percent. 
D)  15 percent. 
A)  10 percent. 
B)  12 percent. 
C)  14 percent. 
D)  15 percent.

Question 9

An expansionary monetary policy is one that reduces the supply of money.

Accepted Answer

A) True 
 B)False

Question 10

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 11

The prime interest rate and the federal funds rate normally change in opposite directions.

Accepted Answer

A) True 
 B)False

Question 12

As part of its zero interest rate policy (ZIRP),the Federal Reserve:

Accepted Answer

A)  cut the reserve ratio to zero percent on all checkable and saving deposit accounts. 
B)  lowered the discount rate to zero to 0.25 percent. 
C)  lowered the interest rate paid on reserves held at the Fed to zero percent. 
D)  used open-market operations to keep the federal funds rate between zero and 0.25 percent. 
A)  cut the reserve ratio to zero percent on all checkable and saving deposit accounts. 
B)  lowered the discount rate to zero to 0.25 percent. 
C)  lowered the interest rate paid on reserves held at the Fed to zero percent. 
D)  used open-market operations to keep the federal funds rate between zero and 0.25 percent.

Question 13

The asset demand for money varies inversely with the nominal GDP.

Accepted Answer

A) True 
 B)False

Question 14

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property} 
\end{array}
\begin{array}{l}
\
\$ 60 \
140 \
260 \
400 
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text {  Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$600\
260\
\
\
\end{array}
\end{array}$
  Refer to the given data.Suppose the Fed sold $10 billion of U.S.securities to the banks.This would:

Accepted Answer

A)  increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately increase the money supply (checkable deposits)by $100 billion. 
B)  increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion. 
C)  reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately increase the money supply (checkable deposits)by $100 billion. 
D)  reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion. 
A)  increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately increase the money supply (checkable deposits)by $100 billion. 
B)  increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion. 
C)  reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately increase the money supply (checkable deposits)by $100 billion. 
D)  reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion.

Question 15

According to the Taylor rule,if real GDP is 4 percent below potential GDP,the Fed should:

Accepted Answer

A)  lower the federal funds rate by 2 percentage points. 
B)  lower the federal funds rate by 4 percentage points. 
C)  lower the federal funds rate by 8 percentage points. 
D)  do nothing,as the economy will correct itself. 
A)  lower the federal funds rate by 2 percentage points. 
B)  lower the federal funds rate by 4 percentage points. 
C)  lower the federal funds rate by 8 percentage points. 
D)  do nothing,as the economy will correct itself.

Question 16

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 17

According to the Taylor rule:

Accepted Answer

A)  for every 1 percentage point that unemployment exceeds the natural rate of unemployment,there is a 2-percentage-point gap between potential and actual GDP. 
B)  growth in the money supply should be limited to the long-run average growth rate of real GDP. 
C)  if inflation rises by 1 percentage point above its target,then the Fed should raise the real federal funds rate by one-half a percentage point. 
D)  the rate of money growth should be set at 4 percent per year. 
A)  for every 1 percentage point that unemployment exceeds the natural rate of unemployment,there is a 2-percentage-point gap between potential and actual GDP. 
B)  growth in the money supply should be limited to the long-run average growth rate of real GDP. 
C)  if inflation rises by 1 percentage point above its target,then the Fed should raise the real federal funds rate by one-half a percentage point. 
D)  the rate of money growth should be set at 4 percent per year.

Question 18

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property} 
\end{array}
\begin{array}{l}
\
\$ 200 \
300 \
500 \
400 
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text {  Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$1,000\
400\
\
\
\end{array}
\end{array}$

Refer to the given data.Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation.To accomplish this,it could increase the reserve requirement from 20 percent to:

Accepted Answer

A)  22 percent. 
B)  25 percent. 
C)  30 percent. 
D)  33 percent. 
A)  22 percent. 
B)  25 percent. 
C)  30 percent. 
D)  33 percent.

Question 19

Between March 2001 and November 2002,the Fed reduced the federal funds rate from 5 percent to just above 1 percent.The Fed's purpose was to:

Accepted Answer

A)  prevent rising inflation. 
B)  reduce the public debt. 
C)  promote recovery from recession. 
D)  strengthen the international value of the dollar. 
A)  prevent rising inflation. 
B)  reduce the public debt. 
C)  promote recovery from recession. 
D)  strengthen the international value of the dollar.

Question 20

Operation Twist was aimed at lowering long-term interest rates.

Accepted Answer

A) True 
 B)False

In recent years,the Federal Reserve has:

If the quantity of money demanded exceeds the quantity supplied:

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

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

If,in the market for money,the quantity of money demanded exceeds the money supply,the interest rate will:

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

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

An expansionary monetary policy is one that reduces the supply of money.

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

The prime interest rate and the federal funds rate normally change in opposite directions.

As part of its zero interest rate policy (ZIRP),the Federal Reserve:

The asset demand for money varies inversely with the nominal GDP.

According to the Taylor rule,if real GDP is 4 percent below potential GDP,the Fed should:

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:

According to the Taylor rule:

Between March 2001 and November 2002,the Fed reduced the federal funds rate from 5 percent to just above 1 percent.The Fed's purpose was to:

Operation Twist was aimed at lowering long-term interest rates.

Income Inequality Poverty and Discrimination

Health Care

Immigration

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

The Balance of Payments, Exchange Rates, and Trade Deficits

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

The United States and the Global Economy

Filters

Exam 35: Interest Rates and Monetary Policy

In recent years,the Federal Reserve has:

If the quantity of money demanded exceeds the quantity supplied:

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

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

If,in the market for money,the quantity of money demanded exceeds the money supply,the interest rate will:

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

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

An expansionary monetary policy is one that reduces the supply of money.

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

The prime interest rate and the federal funds rate normally change in opposite directions.

As part of its zero interest rate policy (ZIRP),the Federal Reserve:

The asset demand for money varies inversely with the nominal GDP.

According to the Taylor rule,if real GDP is 4 percent below potential GDP,the Fed should:

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:

According to the Taylor rule:

Between March 2001 and November 2002,the Fed reduced the federal funds rate from 5 percent to just above 1 percent.The Fed's purpose was to:

Operation Twist was aimed at lowering long-term interest rates.

Income Inequality Poverty and Discrimination

Health Care

Immigration

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

The Balance of Payments, Exchange Rates, and Trade Deficits

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

The United States and the Global Economy

Filters

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