Question 1

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?

Accepted Answer

A)  The federal funds rate 
B)  The primary lending rate 
C)  Quantitative easing 
D)  Legal reserves 
E)  The bank rate

Question 3

If you buy for $100 a bond that pays 4.57 percent in annual interest and the current interest yield on the bond rises to 5.13 percent, then the price of the bond has fallen.

Accepted Answer

A) True 
 B)False

Question 4

Assume that banks lend out all their excess reserves. Currently, the legal reserves that banks must hold equal $11.5 billion. If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for the whole banking system to raise the money supply by:

Accepted Answer

A)  $11.5 billion. 
B)  $230 billion. 
C)  $115 billion. 
D)  $57.5 billion. 
E)  $575 billion.

Question 5

The desire to keep assets in cash to take advantage of favorable changes in the value of non-cash assets is called the:

Accepted Answer

A)  speculative demand for money. 
B)  wealth demand for money. 
C)  risk interest in money. 
D)  precautionary demand for money. 
E)  transactions demand for money.

Question 6

Scenario 13.1
Assume the following conditions hold.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
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 excess reserves following the open market operation by the Fed?

Accepted Answer

A)  F1F1F1S1F1F1F10$3 billion 
B)  F1F1F1S1F1F1F10$0.67 billion 
C)  +$0.67 billion 
D)  +$3 billion 
E)  +$5 billion

Question 7

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.
Figure 13.2
 
-Refer to Figure 13.2. Given a target exchange rate of MXP 11 = $1 with S1 the relevant supply curve and a decline in Mexican demand for U.S. dollars from D1 to D2 the Fed intervenes in the foreign exchange market by:

Accepted Answer

A)  selling Q3 amount of pesos. 
B)  selling Q3 amount of U.S. dollars. 
C)  buying (Q2 - Q1) amount of pesos. 
D)  buying (Q1 - Q3) amount of U.S. dollars. 
E)  buying (Q2 - Q3) amount of U.S dollars.

Question 8

If funds are being loaned from one commercial bank's excess reserves on deposit with the Federal Reserve to another commercial bank's deposit account at the Fed, the transaction is taking place in:

Accepted Answer

A)  the discount market. 
B)  the currency exchange market. 
C)  the federal funds market. 
D)  the open market. 
E)  the reserves market

Question 9

Which of the following will be observed if the Fed raises the reserve requirement?

Accepted Answer

A)  The deposit expansion multiplier will fall 
B)  The discount rate will decline 
C)  The interest rate ceilings will fall 
D)  Excess reserves will increase 
E)  Money supply will increase

Question 10

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.

Question 11

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.

Question 12

After the year 2000, the FOMC changed some of its operating procedures. In particular, it stopped setting:

Accepted Answer

A)  explicit interest rates for commercial banks to charge. 
B)  explicit ranges for money growth targets. 
C)  explicit number of government bonds to be bought and sold. 
D)  standardized real GDP targets. 
E)  explicit numbers for the targeted natural rates of unemployment.

Question 13

A change in the interest rate does not affect the quantity of money supplied. This means that:

Accepted Answer

A)  the money supply curve is negatively sloped. 
B)  the money supply curve is vertical. 
C)  the money supply curve is horizontal. 
D)  the money supply curve is a 45 degree line drawn from the origin. 
E)  the money supply curve is kinked.

Question 14

A decrease in the discount rate:

Accepted Answer

A)  increases reserve holdings of the commercial banks. 
B)  leads to an increase in the interbank rate charged by commercial banks. 
C)  lowers the cost of borrowing from the Fed. 
D)  causes an increase in the federal funds rate. 
E)  decreases the money supply.

Question 15

The Federal Open Market Committee consists of:

Accepted Answer

A)  the 12-member Board of Governors. 
B)  seven members of the Board of Governors and five district presidents. 
C)  the president of the New York district bank and the members of the Council of Economic Advisers. 
D)  the chairman of the Board of Governors and five district presidents. 
E)  seven members of the Board of Governors and a nine-member board of directors of the district banks.

Question 16

Suppose that the Fed decides to decrease the money supply by 0.87 percent. If the velocity of money is constant, then the quantity theory of money predicts that:

Accepted Answer

A)  nominal GDP will remain unchanged. 
B)  the quantity of output will rise by 0.87 percent. 
C)  nominal GDP will fall by 0.87 percent. 
D)  the price level will fall by 0.87 percent. 
E)  real GDP will fall by 0.87 percent.

Question 17

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.
Figure 13.2
 
-Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D2 to D1 and the relevant supply curve is S1:

Accepted Answer

A)  the U.S. dollar depreciates in value relative to the peso. 
B)  the Mexican peso depreciates in value relative to the U.S. dollar. 
C)  the Mexican peso appreciates in value relative to the U.S. dollar 
D)  U.S. imports from Mexico decreases. 
E)  Mexican net exports to the United States becomes positive.

Question 18

When the Fed uses money growth rates as an intermediate target, it implicitly assumes that the velocity of money is constant over time, at least in the short run.

Accepted Answer

A) True 
 B)False

Question 19

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then:

Accepted Answer

A)  investment spending will decline. 
B)  bond prices will decline. 
C)  equilibrium real GDP will fall. 
D)  interest rates will fall. 
E)  money demand will decline.

Question 20

Table 13.1
 $\begin{array}{c}
\text { Balance Sheet }\
\quad\quad\quad\text { Assets } \quad\quad\quad\quad\quad\quad\quad\quad \text { Liabilities }\
\begin{array}{|c|c|c|c|}
\hline\text { Vault Cash } & \$ 1,150 & \begin{array}{c}
\text { Checking } \
\text { Accounts }
\end{array} & \$ 11,300 \
\hline \begin{array}{c}
\text { Reserve } \
\text { Deposits }
\end{array} & \$ 1,650 & \text { Savings Accounts } & \$ 3,200 \
\hline \text { Loans } & \$ 11,700 & & \
\hline \text { Total Assets } & \$ 14,500 & \text { Total Liabilities } & \$ 14,500\
\hline
\end{array}\end{array}$

Assume that this is the balance sheet of the only bank in this economy and that the money supply is entirely kept by the bank in either a checking or a savings account.
-Refer to Table 13.1. Given a reserve requirement of 8 percent, what is the maximum potential increase in the money supply?

Accepted Answer

A)  $20,500 
B)  $2,800 
C)  $224 
D)  $11,700 
E)  $35,000

Exam 13: Monetary Policy

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?

If you buy for $100 a bond that pays 4.57 percent in annual interest and the current interest yield on the bond rises to 5.13 percent, then the price of the bond has fallen.

Assume that banks lend out all their excess reserves. Currently, the legal reserves that banks must hold equal $11.5 billion. If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for the whole banking system to raise the money supply by:

The desire to keep assets in cash to take advantage of favorable changes in the value of non-cash assets is called the:

If funds are being loaned from one commercial bank's excess reserves on deposit with the Federal Reserve to another commercial bank's deposit account at the Fed, the transaction is taking place in:

Which of the following will be observed if the Fed raises the reserve requirement?

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?

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

After the year 2000, the FOMC changed some of its operating procedures. In particular, it stopped setting:

A change in the interest rate does not affect the quantity of money supplied. This means that:

A decrease in the discount rate:

The Federal Open Market Committee consists of:

Suppose that the Fed decides to decrease the money supply by 0.87 percent. If the velocity of money is constant, then the quantity theory of money predicts that:

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 -Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D₂ to D₁ and the relevant supply curve is S₁:

When the Fed uses money growth rates as an intermediate target, it implicitly assumes that the velocity of money is constant over time, at least in the short run.

Exam 13: Monetary Policy

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?

If you buy for $100 a bond that pays 4.57 percent in annual interest and the current interest yield on the bond rises to 5.13 percent, then the price of the bond has fallen.

Assume that banks lend out all their excess reserves. Currently, the legal reserves that banks must hold equal $11.5 billion. If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for the whole banking system to raise the money supply by:

The desire to keep assets in cash to take advantage of favorable changes in the value of non-cash assets is called the:

If funds are being loaned from one commercial bank's excess reserves on deposit with the Federal Reserve to another commercial bank's deposit account at the Fed, the transaction is taking place in:

Which of the following will be observed if the Fed raises the reserve requirement?

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?

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

After the year 2000, the FOMC changed some of its operating procedures. In particular, it stopped setting:

A change in the interest rate does not affect the quantity of money supplied. This means that:

A decrease in the discount rate:

The Federal Open Market Committee consists of:

Suppose that the Fed decides to decrease the money supply by 0.87 percent. If the velocity of money is constant, then the quantity theory of money predicts that:

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 -Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D2 to D1 and the relevant supply curve is S1:

When the Fed uses money growth rates as an intermediate target, it implicitly assumes that the velocity of money is constant over time, at least in the short run.

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 -Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D₂ to D₁ and the relevant supply curve is S₁: