Question 1

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.

Question 2

Lowering the discount rate has the effect of

Accepted Answer

A) turning required into excess reserves. 
B) turning excess into required reserves. 
C) making it less expensive for commercial banks to borrow from central banks. 
D) forcing commercial banks to call in outstanding loans from their best customers.

Question 3

Other things equal, an increase in consumer wealth will

Accepted Answer

A) increase aggregate supply. 
B) increase aggregate demand. 
C) reduce the price level. 
D) reduce the money supply.

Question 4

The Fed, at the end of 2015, announced its intent to start "normalizing" monetary policy and returning short-term interest rates to their normal range of 3 percent or higher.Its normalization plan had two major tools,

Accepted Answer

A) taxation and spending. 
B) discount rate and reserve requirements. 
C) quantitative easing and open-market operations. 
D) paying interest on excess reserves held at Fed banks and reverse repos.

Question 5

An increase in the legal reserve ratio

Accepted Answer

A) increases the money supply by increasing excess reserves and increasing the monetary multiplier. 
B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. 
C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. 
D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

Question 6

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

Question 7

Quantitative easing (QE) and traditional open-market purchase differ in that

Accepted Answer

A) the goal of an open-market purchase was to raise the federal funds rate, while QE intends to reduce it. 
B) open-market purchases raises the reserves in the banking system, while QE does not affect the amount of reserves. 
C) an open-market purchase was intended to reduce the federal funds rate, while QE is not intended to do so. 
D) open-market purchases increase the reserves in the banking system, while QE reduces the amount of reserves.

Question 8

The Federal Reserve Banks buy government securities from commercial banks.As a result, the checkable deposits

Accepted Answer

A) of commercial banks are unchanged, but their reserves increase. 
B) and reserves of commercial banks both decrease. 
C) of commercial banks are unchanged, but their reserves decrease. 
D) and reserves of commercial banks are both unchanged.

Question 9

The federal funds rate is

Accepted Answer

A) higher than both the prime interest rate and the discount rate. 
B) lower than both the prime interest rate and the discount rate. 
C) higher than the prime interest rate but lower than the discount rate. 
D) lower than the prime interest rate but higher than the discount rate.

Question 10

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

Accepted Answer

A) selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. 
B) buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit. 
C) buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus. 
D) buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

Question 11

A restrictive monetary policy may be frustrated if the investment-demand curve shifts to the left.

Accepted Answer

A) True 
 B)False

Question 12

Monetary policy is thought to be

Accepted Answer

A) equally effective in moving the economy out of a depression as in controlling demand-pull inflation. 
B) more effective in moving the economy out of a depression than in controlling demand-pull inflation. 
C) more effective in controlling demand-pull inflation than in moving the economy out of a recession. 
D) only effective in moving the economy out of a depression.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.If the price of this bond increases to $1,250, the interest rate will

Accepted Answer

A) fall to 9 percent. 
B) fall to 8 percent. 
C) rise to 11 percent. 
D) rise to 12 percent.Accessibility: Keyboard Navigation

Question 15

The Fed's normalization plan for monetary policy included

Accepted Answer

A) raising the federal funds target rate. 
B) raising the interest rate paid on excess reserves. 
C) using repos to insure adequate excess reserves in the banking system. 
D) raising the reserve ratio on deposits to soak up the excess liquidity in the system.Difficulty: 02 Medium

Question 16

If the Fed were to reduce the legal reserve ratio, we would expect

Accepted Answer

A) lower interest rates, an expanded GDP, and a higher rate of inflation. 
B) lower interest rates, an expanded GDP, and a lower rate of inflation. 
C) higher interest rates, a contracted GDP, and a higher rate of inflation. 
D) higher interest rates, a contracted GDP, and a lower rate of inflation.

Question 17

The prime interest rate usually

Accepted Answer

A) rises when the federal funds rate rises. 
B) rises when the discount rate falls. 
C) falls when the federal funds rate rises. 
D) falls when the Fed sells bonds in the open market.

Question 18

Since the financial crisis of 2007-2009, borrowing at the federal funds rate

Accepted Answer

A) has dropped significantly because the rate has increased. 
B) has replaced open-market operations as the most frequently used tool of monetary policy. 
C) virtually never happens, as most banks have sufficient excess reserves. 
D) has increased significantly, as banks struggle to maintain enough reserves.

Question 19

Before the financial crisis of 2008, if the Fed bought government securities in the open market, it

Accepted Answer

A) decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the 
B) increased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the 
C) decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus increasing the 
D) increased the excess reserves of the banking system, raising excess reserves for overnight loans in the Federal funds market, thus lowering the

Question 20

There is an asset demand for money primarily because of which function of money?

Accepted Answer

A) legal tender 
B) store of value 
C) measure of value 
D) medium of exchange

Exam 36: Interest Rates and Monetary Policy