Deck 17: Monetary Policy

Question 1

How many Federal Reserve districts comprise the Federal Reserve System?

A) 10
B) 11
C) 12
D) 13

Answer 1

C

Question 2

How many members constitute the Board of Governors of the Federal Reserve System?

A) seven
B) eight
C) 10
D) 12

Answer 2

A

Question 3

The members of the Board of Governors of the Federal Reserve System serve a _____-year nonrenewable term.

A) four
B) eight
C) 10
D) 14

Answer 3

D

Question 4

Which body within the Federal Reserve System is responsible for monetary policy decisions?

A) the Federal Advisory Committee
B) the Board of Governors
C) the Federal Open-Market Committee
D) the Federal Reserve Banks

Question 5

Which of the following is NOT a function of the Federal Reserve System?

A) conducting monetary policy
B) conducting fiscal policy
C) regulating member commercial banks
D) stabilizing the financial system

Question 6

Which of the following is a member of the Federal Open-Market Committee?

A) the president of the United States
B) the Treasury secretary
C) the president of the New York Federal Reserve Bank
D) the speaker of the House of Representatives

Question 7

Monetary policy refers to the policies that the _____ uses to manage _____ in efforts to stabilize the economy.

A) federal government; taxes
B) Federal Reserve; taxes
C) federal government; money supply and interest rates
D) Federal Reserve; money supply and interest rates

Question 8

Monetary policy refers to the policies that the Federal Reserve uses to manage _____ and _____ in efforts to stabilize the economy.

A) interest rates; taxes
B) interest rates; government spending
C) government spending; the money supply
D) interest rates; the money supply

Question 9

Which one of the following is a tool of monetary policy?

A) discount rate
B) tax rate
C) federal funds rate
D) money supply

Question 10

Which one of the following is NOT a tool of monetary policy?

A) open-market operations
B) discount rate
C) reserve requirement
D) money supply

Question 11

A policy that _____ money supply and _____ interest rate is known as an expansionary monetary policy.

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

Question 12

Expansionary monetary policy _____ the interest rate and _____ investment spending by firms.

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

Question 13

An increase in money supply _____ the interest rate and ______ aggregate demand.

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

Question 14

An increase in money supply _____ investment spending and _____ aggregate demand.

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

Question 15

A policy that _____ the money supply and _____ interest rate is known as a contractionary monetary policy.

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

Question 16

Contractionary monetary policy _____ the interest rate and _____ investment spending by firms.

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

Question 17

A decrease in the money supply _____ the interest rate and ______ aggregate demand.

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

Question 18

A decrease in the money supply _____ investment spending and _____ aggregate demand.

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

Question 19

The Federal Reserve's purchases and sales of Treasury securities is called:

A) open-market operations.
B) discount lending.
C) term lending.
D) Treasury auctions.

Question 20

If the Federal Reserve buys securities in the open market, then the money supply will _____, leading to _____ in the interest rate.

A) increase; an increase
B) increase; a decrease
C) decrease; an increase
D) decrease; a decrease

Question 21

If the Federal Reserve _____ securities in the open market, the money supply will increase, which leads to _____ in the interest rate.

A) buys; an increase
B) buys; a decrease
C) sells; an increase
D) sells; a decrease

Question 22

If the Federal Reserve sells securities in the open market, the money supply will _____, which leads to _____ in the interest rate.

A) increase; an increase
B) increase; a decrease
C) decrease; an increase
D) decrease; a decrease

Question 23

If the Federal Reserve _____ securities in the open market, the money supply will decrease, which leads to _____ in the interest rate.

A) buys; an increase
B) buys; a decrease
C) sells; an increase
D) sells; a decrease

Question 24

The interest rate that banks charge each other for short-term loans is known as the:

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

Question 25

Which of the following statements is NOT true?

A) The Federal Reserve directly controls the federal funds rate.
B) The purchase of securities in the open market increases money supply.
C) An increase in the federal funds rate leads to an increase in other interest rates in the economy.
D) An easy money policy leads to a decrease in the federal funds rate.

Question 26

Which of the following statements is NOT true?

A) An easy money policy leads to a decrease in the federal funds rate.
B) A decrease in the federal funds rate leads to an increase in the interest rates that banks charge their customers.
C) The Federal Reserve influences the federal funds rate by changing the amount of reserves in the banking system.
D) The federal funds rate is the interest rate at which banks lend money to each other in the short term.

Question 27

The interest rate that the Federal Reserve banks charge financial institutions for short-term loans is known as the _____ rate.

A) federal funds
B) required
C) discount
D) excess reserve

Question 28

Which of the following statements is NOT true?

A) The Federal Reserve directly controls the discount rate.
B) A higher discount rate leads to lower interest rates for consumers.
C) A higher discount rate leads to a decrease in spending by consumers.
D) The federal funds rate is determined by the supply and demand for reserves.

Question 29

An increase in the discount rate _____ the interest rate that banks charge their customers, which leads to _____ in the total spending in the economy.

A) increases; an increase
B) decreases; an increase
C) increases; a decrease
D) decreases; a decrease

Question 30

A decrease in the discount rate _____ the interest rate that banks charge their customers, which leads to _____ in the total spending in the economy.

A) increases; an increase
B) decreases; an increase
C) increases; a decrease
D) decreases; a decrease

Question 31

Reserve requirements are the percentage of deposits that banks:

A) must give out as loans to consumers.
B) can use to buy Treasury securities.
C) can loan to other banks in the market for reserves.
D) must hold either in their vaults or in their accounts at the Federal Reserve.

Question 32

Assume that all money in the economy is deposited with banks and that banks hold no excess reserves. If the reserve requirement is 10 percent and the Federal Reserve buys $10 million worth of Treasury securities, then the money supply will increase by:

A) $1 million.
B) $10 million.
C) $100 million.
D) $1 billion

Question 33

Assume that all money in the economy is deposited with banks and that banks hold no excess reserves. If the Federal Reserve buys $25 million worth of Treasury securities and the money supply increases by $250 million, then the reserve requirement is _____ percent.

A) 1
B) 5
C) 10
D) 15

Question 34

Assume that all money in the economy is deposited with banks and that banks hold no excess reserves. If the reserve requirement for banks is 5 percent and the Federal Reserve wants to decrease money supply by $100 million, then the Fed must _____ million worth of Treasury securities.

A) buy $20
B) buy $5
C) sell $20
D) sell $5

Question 35

Assume that all money in the economy is deposited with banks and that banks hold no excess reserves. If the reserve requirement for banks is 10 percent and the Federal Reserve wants to increase money supply by $50 million, then the Fed must _____ million worth of Treasury securities.

A) buy $50
B) buy $5
C) sell $50
D) sell $5

Question 36

If the Federal Reserve raises the reserve requirement, banks can lend out a _____ percentage of their deposits; therefore, _____ money will be created when the Fed buys Treasury securities.

A) greater; more
B) greater; less
C) lesser; more
D) lesser; less

Question 37

If the Federal Reserve lowers the reserve requirement, banks can lend out a _____ percentage of their deposits; therefore, _____ money will be created when the Fed buys Treasury securities.

A) greater; more
B) greater; less
C) lesser; more
D) lesser; less

Question 38

_____ Treasury securities and _____ the discount rate are examples of the expansionary monetary policy of the Federal Reserve.

A) Buying; increasing
B) Buying; decreasing
C) Selling; increasing
D) Selling; decreasing

Question 39

_____ the reserve requirement and _____ the discount rate are examples of the expansionary monetary policy of the Federal Reserve.

A) Increasing; increasing
B) Increasing; decreasing
C) Decreasing; increasing
D) Decreasing; decreasing

Question 40

_____ Treasury securities and _____ reserve requirements are examples of the expansionary monetary policy of the Federal Reserve.

A) Buying; increasing
B) Buying; decreasing
C) Selling; increasing
D) Selling; decreasing

Question 41

If the Federal Reserve wants to decrease the total spending in the economy, it can either _____ the discount rate or _____ the reserve requirement.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 42

If the Federal Reserve wants to decrease the total spending in the economy, it can either _____ Treasury securities or _____ the reserve requirement.

A) sell; increase
B) sell; decrease
C) buy; increase
D) buy; decrease

Question 43

If the Federal Reserve wants to decrease the total spending in the economy, it can either _____ the discount rate or _____ Treasury securities.

A) decrease; buy
B) decrease; sell
C) increase; buy
D) increase; sell

Question 44

The number of times that the average unit of currency is spent in one year is known as the:

A) velocity of money.
B) elasticity of money.
C) spending multiplier.
D) money multiplier.

Question 45

The relationship between money supply (M), price level (P), real GDP (Y), and velocity of money (V) is given by:

A) M = PYV.
B) PV = YM.
C) MV = PY.
D) Y = MPV.

Question 46

If the total money supply in the economy is $1,000, the price level is $10, and the real GDP is 600 units, then the velocity of money must be:

A) 10.
B) 8.
C) 6.
D) 4.

Question 47

If the total expenditure in an economy is $10,000 per year and the money supply is $2,000, then the velocity of money is:

A) 5.
B) 4.
C) 0.5.
D) 0.4.

Question 48

If the total expenditure in an economy is $10,000 per year and the velocity of money is 5, then the supply of money in the economy is:

A) $5,000.
B) $4,000.
C) $3,000.
D) $2,000.

Question 49

According to the monetarists, in the equation of exchange, ______ are relatively unchanged in the short run.

A) velocity and price level
B) money supply and real GDP
C) price level and real GDP
D) real GDP and velocity

Question 50

According to the quantity theory of money, an increase in the supply of money leads to a proportionate increase in _____, while leaving _____ unchanged.

A) velocity; price level
B) real GDP; price level
C) price level; real GDP
D) velocity; real GDP

Question 51

According to the quantity theory of money, if the Federal Reserve increases money supply by 10 percent, then the price level will _____ by 10 percent, and real GDP will:

A) increase; increase.
B) increase; remain unchanged.
C) decrease; decrease.
D) decrease; remain unchanged.

Question 52

Which of the following statements is NOT true?

A) According to the monetarists, velocity and nominal GDP are relatively unchanged in the short run.
B) According to the quantity theory of money, an increase in money supply leads a proportionate increase in price level.
C) According to the monetarists, discretionary monetary policy is ineffective in stabilizing an economy.
D) According to the monetarists, optimal monetary policy is a slow, steady increase in money supply.

Question 53

Higher the interest rate, the _____ the opportunity cost of holding money, and _____ the quantity demanded of money.

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

Question 54

The demand for money that arises from a desire to take advantage of investment opportunities or to avoid losses from anticipated changes in value of alternative investments is known as the _____ demand for money.

A) precautionary
B) speculative
C) transaction
D) investment

Question 55

All else equal, a higher interest rate implies a _____ quantity of money demanded and therefore a ____ the money demand curve.

A) lower; leftward shift of
B) lower; movement along
C) higher; rightward shift of
D) higher; movement long

Question 56

All else equal, a higher price level implies a _____ transaction demand for money and therefore a _____ shift in the money demand curve.

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

Question 57

All else equal, a lower price level implies a lower _____ demand for money and therefore a _____ shift in the money demand curve.

A) speculative; rightward
B) transaction; rightward
C) speculative; leftward
D) transaction; leftward

Question 58

All else equal, an increase in the real GDP _____ the transaction demand for money and therefore causes a _____ shift in the money demand curve.

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

Question 59

All else equal, an increase in the real GDP increases the _____ demand for money and therefore causes a _____ shift in the money demand curve.

A) precautionary; rightward
B) transaction; rightward
C) precautionary; leftward
D) transaction; leftward

Question 60

All else equal, a decrease in the real GDP _____ the ______ demand for money.

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

Question 61

All else equal, a decrease in the real GDP _____ the transaction demand for money and therefore causes a _____ shift in the money demand curve.

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

Question 62

If more checking account deposits start paying interest, then we can expect the demand for money to _____ and the money demand curve to shift:

A) increase; left.
B) decrease; left.
C) increase; right.
D) decrease; right.

Question 63

If the people who live in a developing country increasingly use ATM machines to dispense cash, then the overall demand for money in that economy will ______, and the demand curve for money will shift:

A) decrease; left.
B) increase; left.
C) decrease; right.
D) increase; right.

Question 64

Because the Federal Reserve determines the total amount of money in the economy, the money _____ curve is _____ at that quantity of money.

A) demand; horizontal
B) demand; vertical
C) supply; vertical
D) supply; horizontal

Question 65

All else equal, an increase in the real GDP in the economy leads to a _____ shift in the money _____ curve.

A) leftward; supply
B) leftward; demand
C) rightward; supply
D) rightward; demand

Question 66

All else equal, an increase in the price level leads to a _____ shift in the money _____ curve.

A) leftward; supply
B) leftward; demand
C) rightward; supply
D) rightward; demand

Question 67

Which of the following statements is NOT true?

A) All else equal, an increase in the real GDP leads to a rightward shift of the money supply curve.
B) All else equal, an increase in the interest rate leads to a movement along the money demand curve.
C) All else equal, a decrease in the price level leads to a leftward shift in the money demand curve.
D) All else equal, a decrease in the real GDP has no effect on the money supply curve.

Question 68

Which of the following statements is true?

A) All else equal, an increase in the interest rate shifts the money supply curve right.
B) All else equal, an increase in the interest rate shifts the money demand curve left.
C) All else equal, an increase in the real GDP shifts the money supply curve right.
D) All else equal, an increase in the price level shifts the money demand curve right.

Question 69

Which of the following statements is NOT true?

A) All else equal, an increase in the price level shifts the money demand curve right.
B) All else equal, an increase in the real GDP shifts the money demand curve right.
C) All else equal, a decrease in the money supply shifts money supply curve left.
D) All else equal, a decrease in the interest rate shifts the money demand curve left.

Question 70

All else equal, if the real GDP of an economy increases, then the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ the money supply to bring the interest rate back to its original value.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question 71

All else equal, if the price level in an economy decreases, then the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ the money supply to bring the interest rate back to its original value.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question 72

All else equal, if the price level in an economy increases, then the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ the money supply to bring the interest rate back to its original level.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question 73

All else equal, if the real GDP of an economy decreases, then the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ the money supply to bring the interest rate back to its original value.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question 74

All else equal, if the Federal Reserve follows a contractionary monetary policy, then the money supply curve will shift _____, and the equilibrium interest rate will:

A) left; decrease.
B) left; increase.
C) right; decrease.
D) right; increase.

Question 75

All else equal, if the Federal Reserve follows an expansionary monetary policy, then the money supply curve will shift _____, and the equilibrium interest rate will:

A) left; decrease.
B) left; increase.
C) right; decrease.
D) right; increase.

Question 76

All else equal, if the Federal Reserve purchases Treasury securities in the open market, then the money supply curve will shift _____, and the equilibrium interest rate will:

A) left; decrease.
B) left; increase.
C) right; decrease.
D) right; increase.

Question 77

All else equal, if the Federal Reserve sells Treasury securities in the open market, then the money supply curve will shift _____, and the equilibrium interest rate will:

A) left; decrease.
B) left; increase.
C) right; decrease.
D) right; increase.

Question 78

All else equal, if the Federal Reserve follows _____ monetary policy, then the money supply curve will shift right, and the equilibrium interest rate will:

A) an expansionary; increase.
B) an expansionary; decrease.
C) a contractionary; increase.
D) a contractionary; decrease.

Question 79

All else equal, if the Federal Reserve follows _____ monetary policy, then the money supply curve will shift left, and the equilibrium interest rate will:

A) an expansionary; increase.
B) an expansionary; decrease.
C) a contractionary; increase.
D) a contractionary; decrease.

Question 80

All else equal, if the real GDP of the United States increases, the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ Treasury securities in the open market to bring the interest rate back to its original level.

A) increase; sell
B) increase; buy
C) decrease; sell
D) decrease; buy