Question 1

An increase in nominal GDP increases the demand for money because:

Accepted Answer

A)  interest rates will rise. 
B)  more money is needed to finance a larger volume of transactions. 
C)  bond prices will fall. 
D)  the opportunity cost of holding money will decline.

Question 2

Open-market operations change:

Accepted Answer

A)  the size of the monetary multiplier but not commercial bank reserves. 
B)  commercial bank reserves but not the size of the monetary multiplier. 
C)  neither commercial bank reserves nor the size of the monetary multiplier. 
D)  both commercial bank reserves and the size of the monetary multiplier.

Question 3

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Accepted Answer

A)  10 percent. 
B)  12 percent. 
C)  14 percent. 
D)  16 percent.

Question 4

Other things equal,a restrictive monetary policy during a period of demand-pull inflation will:

Accepted Answer

A)  lower the interest rate,increase investment,and reduce net exports. 
B)  lower the price level,increase investment,and increase aggregate demand. 
C)  increase productivity,aggregate supply,and real output. 
D)  increase the interest rate,reduce investment,and reduce aggregate demand.

Question 5

It is costly to hold money because:

Accepted Answer

A)  deflation may reduce its purchasing power. 
B)  in doing so,one sacrifices interest income. 
C)  bond prices are highly variable. 
D)  the rate at which money is spent may decline.

Question 6

Which of the following statements is true?

Accepted Answer

A)  The Federal Reserve sets the federal funds rate. 
B)  The Federal Reserve sets the target for the federal funds rate,and then uses the reserve ratio to push banks toward that target. 
C)  The Federal Reserve does not set the federal funds rate,but it influences it through the use of its open-market operations. 
D)  The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.

Question 7

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property} 
\end{array}
\begin{array}{l}
\
\$ 200 \
300 \
500 \
400 
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text {  Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$1,100\
400\
\
\
\end{array}
\end{array}$

Refer to the given data.If the Fed reduced the reserve requirement from 20 percent to 16 percent,excess reserves in the commercial banking system would increase by _____ and the monetary multiplier would rise to ____.

Accepted Answer

A)  $10 billion;5 
B)  $40 billion;6.25 
C)  $10 billion;10 
D)  $40 billion;12.5

Question 8

The Fed reduces interest rates mainly by selling government securities.

Accepted Answer

A) True 
 B)False

Question 9

A restrictive monetary policy is designed to shift the:

Accepted Answer

A)  aggregate demand curve rightward. 
B)  aggregate demand curve leftward. 
C)  aggregate supply curve rightward. 
D)  aggregate supply curve leftward.

Question 10

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 11

Operation Twist:

Accepted Answer

A)  ended the forward commitment policy of the Fed. 
B)  involved the Fed simultaneously selling long-term government bonds and buying short-term government bonds. 
C)  involved the Fed simultaneously selling short-term government bonds and buying long-term government bonds. 
D)  was intended to raise short-term interest rates and lower long-term rates until the two were equal.

Question 12

Other things equal,a reduction in income taxes would:

Accepted Answer

A)  reduce productivity and reduce aggregate supply. 
B)  increase consumption and increase aggregate demand. 
C)  increase the supply of money and reduce investment. 
D)  increase government spending and increase aggregate demand.

Question 13

If the Fed wants to lower the federal funds rate,it should:

Accepted Answer

A)  increase the discount rate. 
B)  increase the reserve ratio. 
C)  buy government securities in the open market. 
D)  sell government securities in the open market.

Question 14

The higher the interest rate,the larger will be the amount of money demanded for transaction purposes.

Accepted Answer

A) True 
 B)False

Question 15

The demand for federal funds is

Accepted Answer

A)  downsloping because higher interest rates discourage commercial banks from borrowing federal funds,but lower rates will encourage borrowing. 
B)  downsloping because higher interest rates encourage commercial banks to borrow federal funds. 
C)  upsloping because higher interest rates encourage commercial banks to lend federal funds. 
D)  upsloping because higher interest rates discourage commercial banks from lending federal funds.

Question 16

Interest paid on reserves held at the Fed:

Accepted Answer

A)  is available to the general public,but not to commercial banks. 
B)  incentivizes financial institutions to hold more reserves and reduce risky lending. 
C)  is determined by the federal funds rate. 
D)  totaled over $1 trillion in 2012.

Question 17

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

Accepted Answer

A) True 
 B)False

Question 18

Answer the question on the basis of the following table in which columns (1)and (2)indicate the transactions demand (Dt)for money and columns (1)and (3)show the asset demand (Da)for money: $\begin{array}{c}
\begin{array}{c}
(1)\
\underline{\text {Interest Rate}}\
12 \% \
10 \
8 \
6 \
4 \
2
\end{array}
\begin{array}{c}
(2)\
\underline{D_{t} }\
 \$ 100 \
100 \
100 \
100 \
100 \
100
\end{array}
\begin{array}{c}
(3)\
\underline{D_{a}} \
\$ 0 \
20 \
40 \
60 \
80 \
100
\end{array}
\end{array}$
 The given data suggest that the amount of money that society wishes to hold as an asset:

Accepted Answer

A)  varies directly with the interest rate. 
B)  varies inversely with the interest rate. 
C)  varies inversely with nominal GDP. 
D)  is independent of the interest rate.

Question 19

The interest rate that banks charge one another on overnight loans is called the:

Accepted Answer

A)  discount rate. 
B)  prime lending rate. 
C)  overnight lending rate. 
D)  federal funds rate.

Question 20

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. Refer to the given information.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.

Exam 35: Interest Rates and Monetary Policy

An increase in nominal GDP increases the demand for money because:

Open-market operations change:

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Other things equal,a restrictive monetary policy during a period of demand-pull inflation will:

It is costly to hold money because:

Which of the following statements is true?

The Fed reduces interest rates mainly by selling government securities.

A restrictive monetary policy is designed to shift the:

The prime interest rate usually:

Operation Twist:

Other things equal,a reduction in income taxes would:

If the Fed wants to lower the federal funds rate,it should:

The higher the interest rate,the larger will be the amount of money demanded for transaction purposes.

The demand for federal funds is

Interest paid on reserves held at the Fed:

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

The interest rate that banks charge one another on overnight loans is called the: