Question 1

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

Accepted Answer

A)  Increase the excess reserves of member banks and thus increase the money supply 
B)  Increase the excess reserves of member banks and thus decrease the money supply 
C)  Decrease the excess reserves of member banks and thus decrease the money supply 
D)  Decrease the excess reserves of member banks and thus increase the money supply 
A)  Increase the excess reserves of member banks and thus increase the money supply 
B)  Increase the excess reserves of member banks and thus decrease the money supply 
C)  Decrease the excess reserves of member banks and thus decrease the money supply 
D)  Decrease the excess reserves of member banks and thus increase the money supply

Question 2

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

Accepted Answer

A)  Reduce inflation 
B)  Save the banking industry 
C)  Stimulate the economy 
D)  Improve the savings rate 
A)  Reduce inflation 
B)  Save the banking industry 
C)  Stimulate the economy 
D)  Improve the savings rate

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Excess reserves may be found by subtracting actual from required reserves 
B)  The supply of money declines when the public purchases securities from commercial banks 
C)  Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks 
D)  Commercial banks reduce the supply of money when they purchase government bonds from the public 
A)  Excess reserves may be found by subtracting actual from required reserves 
B)  The supply of money declines when the public purchases securities from commercial banks 
C)  Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks 
D)  Commercial banks reduce the supply of money when they purchase government bonds from the public

Question 4

The conduct of monetary policy in the United States is the main responsibility of the:

Accepted Answer

A)  U.S. Treasury 
B)  Federal Reserve System 
C)  Office of Management and Budget 
D)  Bureau of Economic Analysis 
A)  U.S. Treasury 
B)  Federal Reserve System 
C)  Office of Management and Budget 
D)  Bureau of Economic Analysis

Question 5

Which of the following is considered a limitation of monetary policy?

Accepted Answer

A)  The cause-effect chain 
B)  Its cyclical asymmetry 
C)  Its isolation from political pressure 
D)  The speed with which it can be implemented 
A)  The cause-effect chain 
B)  Its cyclical asymmetry 
C)  Its isolation from political pressure 
D)  The speed with which it can be implemented

Question 6

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following varies directly with the interest rate?

Accepted Answer

A)  The opportunity cost of holding money 
B)  The transactions demand for money 
C)  The asset demand for money 
D)  The level of investment 
A)  The opportunity cost of holding money 
B)  The transactions demand for money 
C)  The asset demand for money 
D)  The level of investment

Question 8

The major advantages of monetary policy include its flexibility, speed, and political palatability.

Accepted Answer

A) True 
 B)False

Question 9

The most frequently used instrument of the Federal Reserve System to control the money supply is the required reserve ratio.

Accepted Answer

A) True 
 B)False

Question 10

According to the Taylor rule, when real GDP is equal to potential GDP, and the inflation rate is equal to its target rate of two percent, the Federal funds rate should be:

Accepted Answer

A)  2 percent and this implies a real interest rate of 0 percent 
B)  2 percent and this implies a real interest rate of 4 percent 
C)  4 percent and this implies a real interest rate of 2 percent 
D)  4 percent and this implies a real interest rate of 4 percent 
A)  2 percent and this implies a real interest rate of 0 percent 
B)  2 percent and this implies a real interest rate of 4 percent 
C)  4 percent and this implies a real interest rate of 2 percent 
D)  4 percent and this implies a real interest rate of 4 percent

Question 11

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

Accepted Answer

A)  Four percent of nominal GDP 
B)  25 percent of nominal GDP 
C)  Nominal GDP multiplied times 4 
D)  Nominal GDP divided by 25 
A)  Four percent of nominal GDP 
B)  25 percent of nominal GDP 
C)  Nominal GDP multiplied times 4 
D)  Nominal GDP divided by 25

Question 12

Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 13

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

Accepted Answer

A)  "Putting all your eggs in one basket" 
B)  "Not in my own back yard" 
C)  "There ain't no such thing as a free lunch" 
D)  "You can lead a horse to water, but you can't make it drink" 
A)  "Putting all your eggs in one basket" 
B)  "Not in my own back yard" 
C)  "There ain't no such thing as a free lunch" 
D)  "You can lead a horse to water, but you can't make it drink"

Question 14

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, 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 15

Loans of the Federal Reserve Banks to commercial banks are:

Accepted Answer

A)  A liability of the Federal Reserve Banks and of the commercial banks 
B)  An asset of the Federal Reserve Banks and of the commercial banks 
C)  A liability of the Federal Reserve Banks and an asset for commercial banks 
D)  An asset of the Federal Reserve Banks and a liability for commercial banks 
A)  A liability of the Federal Reserve Banks and of the commercial banks 
B)  An asset of the Federal Reserve Banks and of the commercial banks 
C)  A liability of the Federal Reserve Banks and an asset for commercial banks 
D)  An asset of the Federal Reserve Banks and a liability for commercial banks

Question 16

A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Accepted Answer

A)  Reduce inflation in the economy 
B)  Raise interest rates 
C)  Ease monetary policy 
D)  Tighten monetary policy 
A)  Reduce inflation in the economy 
B)  Raise interest rates 
C)  Ease monetary policy 
D)  Tighten monetary policy

Question 17

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 18

Which of the following statements is true?

Accepted Answer

A)  Bond prices and the interest rate are inversely related 
B)  A lower interest rate raises the opportunity cost of holding money 
C)  The supply of money is directly related to the interest rate 
D)  The total demand for money is directly related to the interest rate 
A)  Bond prices and the interest rate are inversely related 
B)  A lower interest rate raises the opportunity cost of holding money 
C)  The supply of money is directly related to the interest rate 
D)  The total demand for money is directly related to the interest rate

Question 19

If bond prices decrease, then the:

Accepted Answer

A)  Interest rate decreases 
B)  Interest rate increases 
C)  Transactions demand for money will decrease 
D)  Transactions demand for money will increase 
A)  Interest rate decreases 
B)  Interest rate increases 
C)  Transactions demand for money will decrease 
D)  Transactions demand for money will increase

Question 20

When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Accepted Answer

A) True 
 B)False

Exam 16: Interest Rates and Monetary Policy

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

Which of the following statements is correct?

The conduct of monetary policy in the United States is the main responsibility of the:

Which of the following is considered a limitation of monetary policy?

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

Which of the following varies directly with the interest rate?

The major advantages of monetary policy include its flexibility, speed, and political palatability.

The most frequently used instrument of the Federal Reserve System to control the money supply is the required reserve ratio.

According to the Taylor rule, when real GDP is equal to potential GDP, and the inflation rate is equal to its target rate of two percent, the Federal funds rate should be:

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, the interest rate in effect will:

Loans of the Federal Reserve Banks to commercial banks are:

A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Lowering the reserve ratio:

Which of the following statements is true?

If bond prices decrease, then the:

When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role 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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