Question 1

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:

Accepted Answer

A)  Transactions demand for money 
B)  Asset demand for money 
C)  Creation of fiat money 
D)  Use of money as a medium of exchange 
A)  Transactions demand for money 
B)  Asset demand for money 
C)  Creation of fiat money 
D)  Use of money as a medium of exchange

Question 2

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 B on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should:

Accepted Answer

A)  Decrease the interest rate from 10 to 8 percent 
B)  Decrease the interest rate from 8 to 6 percent 
C)  Decrease the interest rate from 6 to 4 percent 
D)  Increase investment spending from $30 to $60 billion 
A)  Decrease the interest rate from 10 to 8 percent 
B)  Decrease the interest rate from 8 to 6 percent 
C)  Decrease the interest rate from 6 to 4 percent 
D)  Increase investment spending from $30 to $60 billion

Question 3

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the:

Accepted Answer

A)  Discount rate 
B)  Term auction rate 
C)  Prime interest rate 
D)  Real interest rate 
A)  Discount rate 
B)  Term auction rate 
C)  Prime interest rate 
D)  Real interest rate

Question 4

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the:

Accepted Answer

A)  Supply of money curve is vertical 
B)  Supply of money curve is horizontal 
C)  Demand for money curve is directly related to the interest rate 
D)  Supply of money curve is inversely related to the interest rate 
A)  Supply of money curve is vertical 
B)  Supply of money curve is horizontal 
C)  Demand for money curve is directly related to the interest rate 
D)  Supply of money curve is inversely related to the interest rate

Question 5

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

Accepted Answer

A)  $125 
B)  $175 
C)  $200 
D)  $225 
A)  $125 
B)  $175 
C)  $200 
D)  $225

Question 6

What is one of the advantages of monetary policy over fiscal policy?

Accepted Answer

A)  Its control over the size of Federal budget deficits 
B)  The quickness with which it can be used 
C)  The opportunity for broad political influence 
D)  It can guarantee an expansion of aggregate demand when needed 
A)  Its control over the size of Federal budget deficits 
B)  The quickness with which it can be used 
C)  The opportunity for broad political influence 
D)  It can guarantee an expansion of aggregate demand when needed

Question 7

Monetary policy, unlike fiscal policy, does not have any time lags.

Accepted Answer

A) True 
 B)False

Question 8

U.S. Treasury deposits at the Federal Reserve Banks are:

Accepted Answer

A)  A liability of the Federal Reserve Banks and the U.S. Treasury 
B)  An asset of the Federal Reserve Banks and the U.S. Treasury 
C)  A liability of the Federal Reserve Banks and an asset for the U.S. Treasury 
D)  An asset of the Federal Reserve Banks and a liability for the U.S. Treasury 
A)  A liability of the Federal Reserve Banks and the U.S. Treasury 
B)  An asset of the Federal Reserve Banks and the U.S. Treasury 
C)  A liability of the Federal Reserve Banks and an asset for the U.S. Treasury 
D)  An asset of the Federal Reserve Banks and a liability for the U.S. Treasury

Question 9

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

Accepted Answer

A) True 
 B)False

Question 10

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately:

Accepted Answer

A)  Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million 
B)  Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million 
C)  Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million 
D)  Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million 
A)  Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million 
B)  Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million 
C)  Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million 
D)  Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million

Question 11

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Accepted Answer

A)  $600 million, and also by $600 million if the securities are purchased directly from commercial banks 
B)  $800 million, and also by $800 million if the securities are purchased directly from commercial banks 
C)  $600 million, but by $800 million if the securities are purchased directly from commercial banks 
D)  $800 million, but only by $600 million if the securities are purchased directly from commercial banks 
A)  $600 million, and also by $600 million if the securities are purchased directly from commercial banks 
B)  $800 million, and also by $800 million if the securities are purchased directly from commercial banks 
C)  $600 million, but by $800 million if the securities are purchased directly from commercial banks 
D)  $800 million, but only by $600 million if the securities are purchased directly from commercial banks

Question 12

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Accepted Answer

A)  A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment 
B)  A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment 
C)  The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease 
D)  The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase 
A)  A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment 
B)  A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment 
C)  The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease 
D)  The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

Question 13

When the interest rate in the economy was 10%, the price of a bond with no expiration date and pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, the price of this bond will be about:

Accepted Answer

A)  $4,700 
B)  $5,030 
C)  $7,128 
D)  $8,333 
A)  $4,700 
B)  $5,030 
C)  $7,128 
D)  $8,333

Question 14

If the Fed seeks to maintain a fixed targeted interest rate, then it will have to increase the money supply when the demand for money increases as income increases.

Accepted Answer

A) True 
 B)False

Question 15

Refer to the figure above. If the Federal funds market is at equilibrium at point C and the Federal Reserve decides to conduct an open-market sale, then it must be trying to set a:

Accepted Answer

A)  Higher target federal funds rate by increasing the amount of reserves in the market 
B)  Higher target federal funds rate by reducing the amount of reserves in the market 
C)  Lower target federal funds rate by increasing the amount of reserves in the market 
D)  Lower target federal funds rate by reducing the amount of reserves in the market 
A)  Higher target federal funds rate by increasing the amount of reserves in the market 
B)  Higher target federal funds rate by reducing the amount of reserves in the market 
C)  Lower target federal funds rate by increasing the amount of reserves in the market 
D)  Lower target federal funds rate by reducing the amount of reserves in the market

Question 16

When the Fed sells government securities in the open market, its intent is to try to increase aggregate demand.

Accepted Answer

A) True 
 B)False

Question 17

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in:

Accepted Answer

A)  Money supply M1 
B)  Bank A's excess reserves 
C)  Bank A's liabilities 
D)  Bank A's required reserves 
A)  Money supply M1 
B)  Bank A's excess reserves 
C)  Bank A's liabilities 
D)  Bank A's required reserves

Question 18

The Federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

Accepted Answer

A) True 
 B)False

Question 19

In order to stimulate the economy and reduce unemployment, the Fed will set a lower target for the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 20

When the Fed buys government securities in the open market, it:

Accepted Answer

A)  Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate 
B)  Increases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate 
C)  Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus increasing the Federal funds rate 
D)  Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate 
A)  Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate 
B)  Increases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate 
C)  Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus increasing the Federal funds rate 
D)  Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate

Exam 16: Interest Rates and Monetary Policy

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the:

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the:

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

What is one of the advantages of monetary policy over fiscal policy?

Monetary policy, unlike fiscal policy, does not have any time lags.

U.S. Treasury deposits at the Federal Reserve Banks are:

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately:

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

When the interest rate in the economy was 10%, the price of a bond with no expiration date and pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, the price of this bond will be about:

If the Fed seeks to maintain a fixed targeted interest rate, then it will have to increase the money supply when the demand for money increases as income increases.

Refer to the figure above. If the Federal funds market is at equilibrium at point C and the Federal Reserve decides to conduct an open-market sale, then it must be trying to set a:

When the Fed sells government securities in the open market, its intent is to try to increase aggregate demand.

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in:

The Federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

In order to stimulate the economy and reduce unemployment, the Fed will set a lower target for the federal funds rate.

When the Fed buys government securities in the open market, it:

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

Filters

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. If the interest rate was 4 percent, the asset demand for money would be: