Question 1

The money demand curve,with the interest rate on the vertical axis,has a

Accepted Answer

A)  positive slope. 
B)  negative slope. 
C)  zero slope. 
D)  positive slope for low levels of money demand, and a negative slope for high levels of money demand.

Question 2

Inflation targeting allows monetary policy to focus on inflation and inflation forecasts except during times of severe recession.

Accepted Answer

A) True 
 B)False

Question 3

If the Fed pursues expansionary monetary policy then

Accepted Answer

A)  the money supply will decrease, interest rates will rise and GDP will fall. 
B)  the money supply will decrease, interest rates will fall and GDP will fall. 
C)  the money supply will increase, interest rates will rise and GDP will rise. 
D)  the money supply will increase, interest rates will fall and GDP will rise.

Question 4

The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.

Accepted Answer

A) True 
 B)False

Question 5

When the Fed buys a security from a financial firm and the financial firm agrees to buy back the security the next day,the transaction is known as

Accepted Answer

A)  a repurchase agreement. 
B)  a reverse repurchase agreement. 
C)  an open market flip-flop. 
D)  a federal funds swap.

Question 6

Figure 17-9
 
-Refer to Figure 17-9.In the figure above suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

Accepted Answer

A)  a decrease in income taxes 
B)  an increase in the required reserve ratio 
C)  an open market purchase of Treasury bills 
D)  an open market sale of Treasury bills

Question 7

Figure 17-1
 
-Refer to Figure 17-1.In the figure above,the money demand curve would move from Money demand₁ to Money demand₂ if

Accepted Answer

A)  real GDP decreased. 
B)  the price level increased. 
C)  the interest rate decreased. 
D)  the Federal Reserve sold Treasury securities.

Question 8

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Accepted Answer

A) True 
 B)False

Question 9

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.

Accepted Answer

A) True 
 B)False

Question 10

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending,as in the 2001 recession,than in a recession caused by an increase in oil prices,as in the 1974-75 recession?

Accepted Answer

The answer of Would the Federal Reserve respond more aggressively...

Question 11

The interest rate the Fed pays banks on their reserve holdings

Accepted Answer

A)  guarantees a specific federal funds rate. 
B)  sets a ceiling for the federal funds rate. 
C)  sets a floor for the federal funds rate. 
D)  has no impact on the federal funds rate.

Question 12

The interest rate that banks charge other banks for overnight loans is the

Accepted Answer

A)  prime rate. 
B)  discount rate. 
C)  federal funds rate. 
D)  Treasury bill rate.

Question 13

According to the Taylor rule,the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate,the current inflation rate,one-half times the ________,and one-half times the ________.

Accepted Answer

A)  interest rate gap; inflation gap 
B)  interest rate gap; output gap 
C)  inflation gap; output gap 
D)  unemployment gap; government-spending gap

Question 14

Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.

Accepted Answer

The answer of Using the money demand and money supply...

Question 15

The rate of interest banks charge other banks for overnight loans of reserves is the

Accepted Answer

A)  discount rate. 
B)  prime rate. 
C)  federal funds rate. 
D)  real rate.

Question 16

The Fed

Accepted Answer

A)  can easily distinguish the minor ups and downs of the economy from a recession. 
B)  can have difficulty distinguishing the minor ups and downs of the economy from a recession. 
C)  always times its policy responses correctly. 
D)  can easily determine if a drop in production means a recession is inevitable.

Question 17

The Fed seeks to promote stability of financial markets because

Accepted Answer

A)  they want to lift the self-esteem of workers. 
B)  Congress directed them to do so by the Employment Act of 1946. 
C)  lower output occurs over time when there is not an efficient matching of savers and borrowers. 
D)  unstable markets result in increased efficiency.

Question 18

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 19

Contractionary monetary policy on the part of the Fed results in

Accepted Answer

A)  an increase in the money supply, an increase in interest rates, and an increase in GDP. 
B)  a decrease in the money supply, an increase in interest rates, and a decrease in GDP. 
C)  an increase in the money supply, a decrease in interest rates, and an increase in GDP. 
D)  a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.

Question 20

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.

Accepted Answer

A) True 
 B)False

Exam 17: Monetary Policy

The money demand curve,with the interest rate on the vertical axis,has a

Inflation targeting allows monetary policy to focus on inflation and inflation forecasts except during times of severe recession.

If the Fed pursues expansionary monetary policy then

The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.

When the Fed buys a security from a financial firm and the financial firm agrees to buy back the security the next day,the transaction is known as

Figure 17-9 -Refer to Figure 17-9.In the figure above suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

Figure 17-1 -Refer to Figure 17-1.In the figure above,the money demand curve would move from Money demand₁ to Money demand₂ if

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending,as in the 2001 recession,than in a recession caused by an increase in oil prices,as in the 1974-75 recession?

The interest rate the Fed pays banks on their reserve holdings

The interest rate that banks charge other banks for overnight loans is the

According to the Taylor rule,the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate,the current inflation rate,one-half times the ,and one-half times the .

Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.

The rate of interest banks charge other banks for overnight loans of reserves is the

The Fed

The Fed seeks to promote stability of financial markets because

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively and real GDP to be relatively .

Contractionary monetary policy on the part of the Fed results in

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.