Exam 16: Interest Rates and Monetary Policy

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

One feature of the second round of QE ("QE2") was that the Fed engaged in "forward commitment," by pre-announcing exactly the quantity of bonds it was going to buy and for how long the buying would last. This change in policy was intended to:

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown_, then the asset demand for money will increase by:

The effects on aggregate demand of an open market purchase and a tax cut are similar.

Which of the following statements is correct?

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:

According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Fed should:

Holding money as an asset presents a risk of capital loss.

When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the Federal funds market:

The transactions demand for money is least likely to be a function of the:

An increase in the money supply, ceteris paribus, usually:

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

The interest rate that banks charge one another for the loan of excess reserves is the:

Refer to the graphs above, in which the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Q_f in the economy, the Fed should try to:

The Federal Reserve alters the amount of the nation's money supply by:

Other things equal, an increase in taxes on businesses will:

An expansionary monetary policy is less effective in influencing aggregate demand compared to a restrictive monetary policy.

Refer to the graphs above, in which the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP?

The purpose of an expansionary monetary policy is to increase: