Question 1

All the following affect short-run operating targets of the FOMC, except:

Accepted Answer

A) the federal funds rate. 
B) the rate of inflation. 
C) the budget deficit. 
D) the foreign exchange rate. 
E) the growth of real GDP. 
A) the federal funds rate. 
B) the rate of inflation. 
C) the budget deficit. 
D) the foreign exchange rate. 
E) the growth of real GDP. C

Question 2

Sterilization occurs when a central bank offsets the effects of expansionary monetary policy through foreign exchange market intervention.

Accepted Answer

A) True 
 B)False  False

Question 3

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?

Accepted Answer

A) It decreases by 10 percentage points. 
B) It increases by 10 percentage points. 
C) It remains unchanged. 
D) It increases by 1 percentage point. 
E) It decreases by 1 percentage point. 
A) It decreases by 10 percentage points. 
B) It increases by 10 percentage points. 
C) It remains unchanged. 
D) It increases by 1 percentage point. 
E) It decreases by 1 percentage point. D

Question 4

Assume that there is an unexpected increase in the demand for U.S.dollars in Switzerland.If the foreign currency price of the U.S.dollar is fixed, the U.S.Federal Reserve must intervene in the foreign exchange market such that:

Accepted Answer

A) the supply of U.S.dollars increases. 
B) the U.S.demand for the Swiss franc falls. 
C) the supply of U.S.dollars decreases. 
D) Swiss imports from the United States are reduced. 
E) the Swiss currency is devalued. 
A) the supply of U.S.dollars increases. 
B) the U.S.demand for the Swiss franc falls. 
C) the supply of U.S.dollars decreases. 
D) Swiss imports from the United States are reduced. 
E) the Swiss currency is devalued.

Question 5

Refer to Scenario 13.1.What is the change in investment spending following the open market operation by the Fed?

Accepted Answer

A) -$20 billion 
B) -$10 billion 
C) +$20 billion 
D) +$30 billion 
E) +$50 billion 
A) -$20 billion 
B) -$10 billion 
C) +$20 billion 
D) +$30 billion 
E) +$50 billion

Question 6

The bank rate is the interest rate charged by the commercial banks to its borrowers.

Accepted Answer

A) True 
 B)False

Question 7

If the U.S.dollar depreciates against the yen below the targeted exchange rate, the U.S.Federal Reserve has to intervene in the foreign exchange market such that:

Accepted Answer

A) the U.S.demand for yen rises. 
B) the supply of U.S.dollars rises. 
C) U.S.exports to Japan fall. 
D) the U.S.dollar is devalued. 
E) the supply of U.S.dollars falls. 
A) the U.S.demand for yen rises. 
B) the supply of U.S.dollars rises. 
C) U.S.exports to Japan fall. 
D) the U.S.dollar is devalued. 
E) the supply of U.S.dollars falls.

Question 8

The quantity of excess reserves in the banking system and the federal funds rate can serve as short-run operating targets for the FOMC and help it perform the open market operation.

Accepted Answer

A) True 
 B)False

Question 9

An outward shift of the money demand function indicates an increase in the market rate of interest and hence a decrease in the level of investment in the economy.

Accepted Answer

A) True 
 B)False

Question 10

The transactions demand for money increases when more people want to hold some of their wealth in the form of money to reduce the risks associated with unexpected emergencies.

Accepted Answer

A) True 
 B)False

Question 11

According to the equation of exchange, a contractionary monetary policy must be adopted to offset any decrease in the velocity of money.

Accepted Answer

A) True 
 B)False

Question 12

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1   Refer to Figure 13.1.If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:

Accepted Answer

A) there is a shortage of British pounds at E1. 
B) no intervention is necessary to achieve the exchange rate E1. 
C) there is a permanent surplus of U.S.dollars at E1. 
D) there is a permanent surplus of U.S.dollars at E2. 
E) there is a permanent shortage of U.S.dollars at E3. 
A) there is a shortage of British pounds at E1. 
B) no intervention is necessary to achieve the exchange rate E1. 
C) there is a permanent surplus of U.S.dollars at E1. 
D) there is a permanent surplus of U.S.dollars at E2. 
E) there is a permanent shortage of U.S.dollars at E3.

Question 13

The interest rate represents the opportunity cost of holding non-monetary assets.

Accepted Answer

A) True 
 B)False

Question 14

The sum of the coins and currencies in the bank's vault and its deposit in the Fed is called:

Accepted Answer

A) vault cash. 
B) transaction deposits. 
C) legal reserves. 
D) required reserves. 
E) loanable funds. 
A) vault cash. 
B) transaction deposits. 
C) legal reserves. 
D) required reserves. 
E) loanable funds.

Question 15

If a percentage decrease in money supply is followed by a proportional percentage decrease in prices and output, this means that:

Accepted Answer

A) the velocity of money is constant. 
B) the economy is in a recession. 
C) the velocity of money has fallen. 
D) real GDP is constant. 
E) the economy is not at maximum capacity 
A) the velocity of money is constant. 
B) the economy is in a recession. 
C) the velocity of money has fallen. 
D) real GDP is constant. 
E) the economy is not at maximum capacity

Question 16

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720.If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.

Accepted Answer

A) increase;15 percent 
B) increase;17.5 percent 
C) decrease;7.5 percent 
D) decrease;10 percent 
E) increase;13 percent 
A) increase;15 percent 
B) increase;17.5 percent 
C) decrease;7.5 percent 
D) decrease;10 percent 
E) increase;13 percent

Question 17

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

Accepted Answer

A) tend to be revalued. 
B) tend to increase in value over other currencies. 
C) be high demand in the foreign exchange market. 
D) tend to depreciate. 
E) tend to appreciate. 
A) tend to be revalued. 
B) tend to increase in value over other currencies. 
C) be high demand in the foreign exchange market. 
D) tend to depreciate. 
E) tend to appreciate.

Question 18

Scenario 13.1 Assume the following conditions hold.
  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 required reserves following the open market operation by the Fed?

Accepted Answer

A) +$0.33 billion 
B) -$0.33 billion 
C) +$0.67 billion 
D) -$0.67 billion 
E) +1.0 billion 
A) +$0.33 billion 
B) -$0.33 billion 
C) +$0.67 billion 
D) -$0.67 billion 
E) +1.0 billion

Question 19

If M = quantity of money, V = velocity of money, P = price level, and Q = the quantity of output, then the equation of exchange will be defined as:

Accepted Answer

A) MV = PQ 
B) MQ = PV 
C) MP = VQ 
D) MV = P/Q 
E) MQ = V/P 
A) MV = PQ 
B) MQ = PV 
C) MP = VQ 
D) MV = P/Q 
E) MQ = V/P

Question 20

The velocity of circulation of money is the ratio of the real gross domestic product to the money supply.

Accepted Answer

A) True 
 B)False

Exam 22: Monetary Policy

All the following affect short-run operating targets of the FOMC, except:

Sterilization occurs when a central bank offsets the effects of expansionary monetary policy through foreign exchange market intervention.

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?

Assume that there is an unexpected increase in the demand for U.S.dollars in Switzerland.If the foreign currency price of the U.S.dollar is fixed, the U.S.Federal Reserve must intervene in the foreign exchange market such that:

Refer to Scenario 13.1.What is the change in investment spending following the open market operation by the Fed?

The bank rate is the interest rate charged by the commercial banks to its borrowers.

If the U.S.dollar depreciates against the yen below the targeted exchange rate, the U.S.Federal Reserve has to intervene in the foreign exchange market such that:

The quantity of excess reserves in the banking system and the federal funds rate can serve as short-run operating targets for the FOMC and help it perform the open market operation.

An outward shift of the money demand function indicates an increase in the market rate of interest and hence a decrease in the level of investment in the economy.

The transactions demand for money increases when more people want to hold some of their wealth in the form of money to reduce the risks associated with unexpected emergencies.

According to the equation of exchange, a contractionary monetary policy must be adopted to offset any decrease in the velocity of money.

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:

The interest rate represents the opportunity cost of holding non-monetary assets.

The sum of the coins and currencies in the bank's vault and its deposit in the Fed is called:

If a percentage decrease in money supply is followed by a proportional percentage decrease in prices and output, this means that:

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720.If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.

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

If M = quantity of money, V = velocity of money, P = price level, and Q = the quantity of output, then the equation of exchange will be defined as:

The velocity of circulation of money is the ratio of the real gross domestic product to the money supply.

Economics: The World Around You

Choice, Opportunity Costs, and Specialization

Markets, Demand and Supply, and the Price System

The Market System and the Private and Public Sector

Elasticity: Demand and Supply

National Income Accounting

an Introduction to the Foreign Exchange Market and the Balance of Payments

Consumer Choice

Supply: The Costs of Doing Business

Unemployment and Inflation

Macroeconomic Equilibrium: Aggregate Demand and Supply

Profit Maximization

Aggregate Expenditures

Perfect Competition

Income and Expenditures Equilibrium

Monopoly

Fiscal Policy

Monopolistic Competition and Oligopoly

Antitrust and Regulation

Money and Banking

Market Failures, Government Failures, and Rent Seeking

Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles

Resource Markets

Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

The Labor Market

Capital Markets

Economic Growth

Development Economics

the Land Market and Natural Resources

Aging, Social Security and Health Care

Globalization

Elasticity: Demand and Supply

Income Distribution, Poverty and Government Policy

World Trade Equilibrium

Consumer Choice

International Trade Restrictions

World Trade Equilibrium

Exchange Rates and Financial Links Between Countries

International Trade Restrictions

Supply: the Costs of Doing Business

Exchange Rates and Financial Links Between Countries

Profit Maximization

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Antitrust and Regulation

Market Failures, Government Failures, and Rent Seeking

Resource Markets

The Labor Market

Capital Markets

The Land Market and Natural Resources

Aging, Social Security and Health Care

Income Distribution, Poverty and Government Policy

World Trade Equilibrium

International Trade Restrictions

Exchange Rates and Financial Links Between Countries

Filters

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.If the exchange rate is fixed at E₂ but the free market equilibrium rate is E₁ then:

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720.If the supply of bonds increases and the price of the bond falls to $600, the interest rate will to .