Deck 14: The Federal Reserve and Monetary Policy

Question 1

The nominal interest rate is determined in the

A) stock market.
B) money market.
C) exchange market.
D) bond market.

Answer 1

money market.

Question 2

We use interest rates to measure the opportunity cost of holding money.

Answer 2

True

Question 3

A decrease in the price level in the economy leads to

A) a leftward shift in the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve.
D) a rightward movement along the demand for money curve.

Answer 3

a leftward shift in the demand for money curve.

Question 4

The Fed has immense power and there are no limits to the extent to which it can effectively control the economy.

Question 5

At higher interest rates the

A) money supply is higher.
B) money supply is indeterminate.
C) quantity of money demanded is higher.
D) quantity of money demanded is lower.

Question 6

At lower interest rates the

A) money supply is indeterminate.
B) money supply is lower.
C) quantity of money demanded is higher.
D) quantity of money demanded is lower.

Question 7

The opportunity cost of holding money is

A) heavy and awkward.
B) the probability of theft or loss.
C) the ease of conducting everyday business.
D) the return that could have been earned from holding wealth in other assets.

Question 8

The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds is called the

A) transactions demand for money.
B) liquidity demand for money.
C) opportunity cost demand for money.
D) speculative demand for money.

Question 9

Suppose that the interest rate available to you on a long-term bond is 4 percent. If you hold $1,000 of your wealth in currency instead of in the form of a bond, the annual opportunity cost is

A) $0.04.
B) $4.
C) $40.
D) $400.

Question 10

What is the motivation for individuals to hold money?

A) to reduce risk
B) to have liquidity
C) to facilitate transactions
D) all of the above

Question 11

When the Federal Reserve increases interest rates, investment spending ________ and GDP ________.

A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases

Question 12

Generally, when the Federal Reserve lowers interest rates, investment spending ________ and GDP ________.

A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases

Question 13

A decrease in the level of real GDP in the economy leads to

A) a leftward shift in the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve.
D) a rightward movement along the demand for money curve.

Question 14

An increase in the price level in the economy leads to

A) a leftward shift in the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve.
D) a rightward movement along the demand for money curve.

Question 15

Which of the following factors does NOT shift the demand curve for money?

A) changes in the interest rate
B) changes in the price level in the economy
C) changes in real income
D) changes in real GDP

Question 16

In the short run when prices don't have enough time to change, the Federal Reserve

A) can influence the level of interest rates in the economy.
B) cannot influence the level of interest rates in the economy.
C) can influence the level of interest rates in the economy but generally will not because it would be destabilizing.
D) can only affect the amount of money in the economy.

Question 17

If your wealth is held as currency or in checking accounts, or other assets that you can convert to money on short notice, your assets are considered to be

A) abundant.
B) fast moving.
C) interest bearing.
D) liquid.

Question 18

The transaction demand for money comes mostly from the fact that

A) money is a store of value.
B) money is a medium of exchange.
C) money is a unit of account.
D) money has low opportunity cost.

Question 19

An increase in the level of real GDP in the economy leads to

A) a leftward shift in the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve.
D) a rightward movement along the demand for money curve.

Question 20

The demand for money that arises so that individuals or firms can make purchases on quick notice is called the

A) real demand for money.
B) transaction demand for money.
C) liquidity demand for money.
D) speculative demand for money.

Question 21

If your assets are highly liquid, this means you can make transactions on short notice.

Question 22

From time to time, the Federal Reserve buys back government bonds from the private sector through a process called

A) bond recall procedures.
B) open market purchases.
C) backflip bond investments.
D) voluntary redemption procedures.

Question 23

Both increases in the price level and increases in real GDP will decrease the demand for money.

Question 24

By raising the discount rate, the Federal Reserve ________ banks from borrowing more reserves.

A) encourages
B) discourages
C) prohibits
D) short-changes

Question 25

What would be a way for the Federal Reserve to slow down the economy when it is growing too quickly or is inflationary?

A) print more money
B) buy back government bonds on the open market
C) sell more government bonds
D) encourage the stock market

Question 26

The one organization that has the power to change the total amount of reserves in the banking system is the

A) Congress.
B) Executive Branch of the Federal Government.
C) U.S. Treasury.
D) Federal Reserve System.

Question 27

From time to time, the Federal Reserve sells various quantities of government bonds to the private sector through a process called

A) bond recall procedures.
B) backflip bond investments.
C) open market sales.
D) voluntary redemption procedures.

Question 28

To increase the money supply using the reserve requirements, what would the Fed typically do?

A) increase the reserve requirement for banks
B) reduce the reserve requirement for banks
C) make each bank set its own reserve levels
D) let each bank get more currency from the Treasury

Question 29

An open market purchase by the Fed

A) increases the total amount of reserves in the banking system.
B) decreases the total amount of reserves in the banking system.
C) does not change the total amount of reserves in the banking system.
D) causes the reserve requirement to fall.

Question 30

If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to

A) buy bonds on the open market.
B) sell bonds on the open market.
C) change the level of reserves required to be held by banks.
D) change the federal funds rate.

Question 31

What would be a way for the Federal Reserve to stimulate a sluggish economy?

A) print more money
B) buy government bonds on the open market
C) sell more government bonds
D) encourage the stock market

Question 32

The quantity of money demanded will increase as interest rates increase.

Question 33

What three factors affect the demand for money?

Question 34

Explain the three different types of money demand.

Question 35

Selling government bonds through open market operations allows the Federal Reserve to

A) decrease money in the Treasury.
B) decrease the money supply in the private sector.
C) receive discounts on future sales.
D) receive a high rate of interest on the bonds.

Question 36

How can the Federal Reserve actually increase the money supply?

A) by delaying transfer of money among banks
B) by raising the discount rate
C) by doubling the reserve requirement
D) by purchasing more government bonds in the open market

Question 37

Increased investment spending in the economy would be a possible result of

A) an increase in interest rates.
B) an open market purchase of bonds by the Fed.
C) an open market sale of bonds by the Fed.
D) a decrease in the money supply.

Question 38

The most commonly used tool in monetary policy is

A) changes in required reserve ratios.
B) changes in the discount rate.
C) open market operations.
D) express lending transactions.

Question 39

To decrease the money supply using the reserve requirements, what would the Fed typically do?

A) raise the reserve requirement for banks
B) reduce the reserve requirement for banks
C) make each bank voluntarily set its own reserve levels
D) let each bank get less currency from the Treasury

Question 40

Decreased investment spending in the economy would be a possible result of

A) a decrease in interest rates.
B) an open market purchase of bonds by the Fed.
C) an open market sale of bonds by the Fed.
D) an increase in the money supply.

Question 41

In addition to lowering the discount rate to increase the money supply, the Fed could also

A) purchase bonds on the open market and raise reserve requirements.
B) sell bonds on the open market and raise reserve requirements.
C) purchase bonds on the open market and lower reserve requirements.
D) sell bonds on the open market and lower reserve requirements.

Question 42

Recall the Application about the Fed's expanded involvement in the economy following the financial crisis in 2008 to answer the following question(s).
Recall the Application. During 2008, the value of the Fed's total assets

A) fell by over $2 trillion.
B) remained virtually unchanged.
C) became negative.
D) more than doubled.

Question 43

Recall the Application about the Fed's expanded involvement in the economy following the financial crisis in 2008 to answer the following question(s).
According to the Application, in 2010 the Fed

A) the Fed ended its support of the mortgage market.
B) the Fed converted all its assets to cash.
C) held over $1 trillion in mortgage-backed securities.
D) stopped trading in Treasury securities.

Question 44

An open market sale of bonds by the Federal Reserve will lead to an increase of reserves in banks.

Question 45

A decrease in the discount rate will

A) decrease the money supply.
B) not affect the money supply.
C) increase the money supply.
D) have an unclear effect on the money supply.

Question 46

Recall the Application about the Fed's expanded involvement in the economy following the financial crisis in 2008 to answer the following question(s).
Recall the Application. Prior to the financial crisis in 2008, the Fed's traditional method of conducting monetary policy to expand the money supply was

A) purchasing Treasury securities.
B) purchasing mortgage-backed securities.
C) lowering reserve requirements.
D) raising the discount rate.

Question 47

An increase in the discount rate

A) reduces the cost of reserves borrowed from the Fed.
B) signals the Fed's desire to increase the money supply.
C) signals the Fed's desire to lend increased reserves to banks.
D) increases the cost of reserves borrowed from the Fed.

Question 48

Recall the Application about the Fed's expanded involvement in the economy following the financial crisis in 2008 to answer the following question(s).
Recall the Application. Prior to the financial crisis, the Fed primarily held ________ as assets.

A) mortgage-backed securities
B) cash
C) corporate stocks and bonds.
D) Treasury securities

Question 49

The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate.

A) federal funds
B) discount
C) prime
D) commercial paper

Question 50

Which action could the Fed use to decrease the money supply?

A) an open market purchase
B) an increase in the required reserve ratio
C) a tax increase
D) a decrease in the discount rate

Question 51

A change in the reserve requirement is used infrequently by the Fed because it

A) is disruptive to the banking system.
B) does not influence the money supply.
C) does not affect bank reserves.
D) does not affect the money multiplier.

Question 52

When the Federal Reserve decreases the money supply, it generally does so by purchasing bonds.

Question 53

What impact does the Fed's raising the interest rate have on the money supply and on the price level?

A) An increase in interest rates raises the money supply and eventually reduces prices.
B) An increase in interest rates reduces the money demand which will slow the growth in prices.
C) An increase in interest rates lowers the money supply and raises the money demand, which will neutralize price increases.
D) An increase in interest rates will increase investment spending and GDP, which will lower prices.

Question 54

When the Federal Reserve buys bonds on the open market, it decreases the money supply.

Question 55

What impact would the Fed's raising the interest rate have on any inflationary pressure in the economy?

A) An increase in interest rates decreases the money demand, which could slow increases in the price level.
B) An increase in interest rates increases the money supply, which could cause the price level to increase.
C) An increase in interest rates decreases the exchange rate, which causes net exports to rise, generating inflation.
D) An increase in interest rates increases real GDP, which creates inflation in an economy.

Question 56

In practice, the Federal Reserve keeps the discount rate close to the ________ rate in order to avoid large swings in borrowed reserves by banks.

A) inflation
B) six-month Treasury bill
C) federal funds
D) prime

Question 57

An increase in the discount rate will

A) decrease the money supply.
B) not affect the money supply.
C) increase the money supply.
D) have an unclear effect on the money supply.

Question 58

The Fed can change the money supply by buying or selling long-term Treasury bonds. Purchasing long-term securities is commonly called

A) open market operations.
B) discount operations.
C) federal funds speculation.
D) quantitative easing.

Question 59

The federal funds rate is the interest rate that

A) the Fed charges to banks that borrow from it.
B) banks charge the Fed for using their reserves.
C) the Fed pays on bank reserves.
D) banks charge each other for borrowed money.

Question 60

A decrease in the discount rate

A) reduces the cost of borrowing from the Fed.
B) signals the Fed's desire to decrease the money supply.
C) signals the Fed's desire to reduce lending to commercial banks.
D) increases the cost of reserves borrowed from the Fed.

Question 61

If a bond was to pay off one year from now for $440 and the interest rate is 10 percent, what is the price of the bond?

A) $44
B) $400
C) $440
D) $484

Question 62

If the Federal Reserve is interested in conducting contractionary policy, what types of policies should it consider?

Question 63

Banks can obtain funds to make loans by borrowing reserves from other banks through the federal funds market.

Question 64

Based on the model of the money market, if the Federal Reserve increases the reserve requirement, the equilibrium interest rate should

A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the demand for money increases.

Question 65

If the Federal Reserve conducts an open market purchase, the

A) interest rate will not change.
B) interest rate will increase.
C) interest rate will decrease.
D) money supply is decreased.

Question 66

Based on the model of the money market, when real income decreases, the equilibrium interest rate should

A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.

Question 67

The Federal Reserve influences the level of interest rates in the short run by changing the

A) demand for money through open market operations.
B) demand for money through changes in reserve requirements.
C) supply of money through open market operations.
D) supply of money through changes in stock market operations.

Question 68

If the Federal Reserve conducts an open market sale, the

A) interest rate will not change.
B) interest rate will increase.
C) interest rate will decrease.
D) money supply is increased.

Question 69

If the quantity of money demanded is less than the quantity of money supplied, then the

A) interest rate stays the same.
B) interest rate will increase.
C) interest rate will decrease.
D) effect on the interest rate is indeterminate.

Question 70

How would the Fed's changing the discount rate affect the money supply?

Question 71

As interest rates fall, the

A) price of bonds rises.
B) price of bonds falls.
C) face values of bonds fall.
D) promised payments of bonds fall.

Question 72

The prime rate is the interest rate at which banks can borrow from the Fed.

Question 73

Based on the model of the money market, when real GDP increases, the equilibrium interest rate should

A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.

Question 74

How would the Fed's reduction of the reserve ratio requirement affect the money supply?

Question 75

How would the Fed's sale of government bonds on the open market affect the money supply?

Question 76

Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should

A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.

Question 77

The ________ determines the supply of money.

A) Congress
B) President
C) Federal Reserve
D) banking system

Question 78

Equilibrium in the money market occurs when

A) the quantity of money demanded equals the quantity of money supplied.
B) the quantity of money demanded is less than the quantity of money supplied.
C) the quantity of money demanded is more than the quantity of money supplied.
D) the interest rate equals the money supply.

Question 79

If the quantity of money demanded exceeds the quantity of money supplied, then the

A) equilibrium interest rate stays the same.
B) equilibrium interest rate will increase.
C) equilibrium interest rate will decrease.
D) effect on the equilibrium interest rate is indeterminate.

Question 80

If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase.