Deck 14: The Monetary Policy Approach to Stabilization  

Question 1

Which one of the following statements is true?

A) The federal funds rate is the rate the Fed charges member banks when they borrow reserves.
B) The federal funds rate cannot be changed without an act of Congress.
C) Traditionally, the Fed has kept the discount rate above the federal funds rate.
D) Traditionally, the Fed has kept the discount rate below the federal funds rate.

Answer 1

Traditionally, the Fed has kept the discount rate above the federal funds rate.

Question 2

The tool of monetary policy that is most frequently used by the Fed is

A) changes in the reserve requirement.
B) changes in the discount rate.
C) open market operations.
D) changes in margin requirements.

Answer 2

open market operations.

Question 3

If the prevailing rate of interest in the economy were to rise, what effect would this have on the market price of existing bonds?

A) The market price would also rise.
B) The market price would fall.
C) The market price is not related to the prevailing rate of interest, thus no change.
D) The market price falls when the real interest rate is negative.

Answer 3

The market price would fall.

Question 4

Which of the following tools does the Fed rarely use?

A) Changing the discount rate
B) Buying government bonds
C) Selling government bonds
D) Changing the required reserve ratio

Question 5

Increases in the discount rate

A) encourage banks to risk letting their reserves run below the required ratio.
B) increase the cost to banks of borrowing from the Fed.
C) decrease the cost to banks of borrowing from the Fed.
D) decrease the size of the potential money multiplier.

Question 6

How is the effect of a contractionary monetary policy depicted in an aggregate supply-aggregate demand graph?

A) The aggregate supply curve shifts right.
B) The aggregate supply curve shifts left.
C) The aggregate demand curve shifts left.
D) The equilibrium level of income decreases, but neither curve shifts.

Question 7

When the Fed implements an expansionary monetary policy,

A) it creates a business environment in which the supply of credit increases.
B) it creates a financial environment in which interest rates are high.
C) it creates a financial environment in which firms are unable to obtain loans.
D) the effect is to decrease nominal GDP.

Question 8

The goal of expansionary monetary policy is

A) to fight a recession.
B) to fight inflation.
C) to reduce the price of basic resources.
D) to increase sales tax revenue for the government.

Question 9

The goal of contractionary monetary policy is

A) to fight a recession.
B) to fight inflation.
C) to reduce the price of basic resources.
D) to counteract the impact of fiscal policy.

Question 10

If the Fed increases the reserve requirement,

A) banks will issue more loans.
B) banks will issue fewer loans.
C) consumers will save more.
D) consumers will save less.

Question 11

If the Fed decreases the reserve requirement,

A) banks will issue more loans.
B) banks will issue fewer loans.
C) consumers will save more.
D) consumers will save less.

Question 12

If the Fed increases the discount rate,

A) it will then increase the required reserve ratio as well.
B) it will then decrease the required reserve ratio to offset any possible contractionary effect.
C) it will be easier for banks to secure the reserves needed to support a higher volume of commercial loans.
D) banks will face a higher cost of borrowing and will pass some of this cost onto customers in terms of higher interest rates.

Question 13

If the Fed sells U.S. government securities on the open market,

A) there will be no effect on the money supply, but aggregate demand will decrease.
B) there will be no effect on the money supply, but aggregate demand will increase.
C) reserves in the banking system will decrease.
D) interest rates will decrease.

Question 14

The direct effect of an increase in the money supply is that

A) people will spend the extra money, causing the aggregate demand curve to shift to the left and resulting in a recession.
B) people will save the money, causing an increase in bank deposits with the result that interest rates will increase.
C) people will save more money, causing a decrease in economic activity and a fall in prices.
D) people will spend the extra money, causing the aggregate demand curve to shift to the right and resulting in a boost to economic activity.

Question 15

In the long run, there appears to be a direct effect between the rate of growth of money supply and

A) the rate of inflation.
B) the rate of unemployment.
C) the level of exports.
D) the level of imports.

Question 16

Keynesian theorists believe that monetary policy is effective because of the impact it has on

A) imports.
B) interest rates.
C) taxes.
D) the prices of publicly-traded stocks.

Question 17

According to Keynesian theory, an increase in the money supply will cause

A) interest rates to fall and the quantity of investment to rise, leading to a decrease in aggregate demand.
B) interest rates to rise and the quantity of investment to rise, leading to a decrease in aggregate demand.
C) interest rates to fall and the quantity of investment to rise, leading to an increase in aggregate demand.
D) interest rates to fall and the quantity of investment to fall, leading to a decrease in aggregate demand.

Question 18

According to Keynesian theory, an decrease in the money supply will cause

A) interest rates to fall and the quantity of investment to rise, leading to a decrease in aggregate demand.
B) interest rates to rise and the quantity of investment to rise, leading to a decrease in aggregate demand.
C) interest rates to fall and the quantity of investment to rise, leading to an increase in aggregate demand.
D) interest rates to rise and the quantity of investment to fall, leading to a decrease in aggregate demand.

Question 19

The effect of expansionary monetary policy is to

A) increase real output and increase the price level.
B) increase real output and decrease the price level.
C) decrease real output and increase the price level.
D) decrease real output and decrease the price level.

Question 20

The effect of contractionary monetary policy is to

A) increase real output and increase the price level.
B) increase real output and decrease the price level.
C) decrease real output and increase the price level.
D) decrease real output and decrease the price level.

Question 21

Keynesian economists believe that monetary policy works through its effect on

A) consumer confidence.
B) the federal budget deficit.
C) long-run aggregate supply.
D) the interest rate.

Question 22

Keynesian theory argues that

A) increases in the money supply lead to decreases in the interest rate which decreases investment which decreases the level of real GDP.
B) decreases in the money supply lead to increases in the interest rate which increases investment which increases the level of real GDP.
C) increases in the money supply cause consumers to spend more which reduces the unemployment rate and therefore increases real GDP.
D) increases in the money supply lead to decreases in the interest rate which increases investment which increases the level of real GDP.

Question 23

Monetarists argue that monetary policy should not be used as a stabilization tool to offset business fluctuations because they believe that

A) changes in the money supply do not affect spending.
B) the lag effects associated with monetary policy can make it destabilizing.
C) expansionary monetary policy will not increase aggregate demand.
D) contractionary monetary policy will not decrease aggregate demand.

Question 24

Believers of the monetary rule advocate that the

A) speculative demand for money should be reduced by government action.
B) money supply should grow at the same rate as the potential long-term growth rate of real GDP.
C) money supply should grow at the same rate as the rate of inflation.
D) money supply should be increased during periods of inflation and decreased during recessions.

Question 25

According to Keynesians, which of the following monetary policies would result in an increase in the level of planned investment?

A) Contractionary
B) Expansionary
C) Reactionary
D) Adopting the gold standard

Question 26

Monetarists believe that

A) the Fed should be constantly changing the growth of the money supply to counteract economic fluctuations.
B) the Fed should allow the money supply to grow at a constant rate to accommodate the natural rate of economic growth.
C) the Fed should alter the target growth rate of money periodically to counteract adverse economic activity.
D) the Open Market Committee should only sell government bonds, never buy them.

Question 27

According to the Keynesian model of monetary policy

A) the Fed should contract the money supply during recessions.
B) the Fed should allow the money supply to grow at a constant rate.
C) the Fed should expand the money supply during recessions.
D) the Fed should cut taxes during a recession.

Question 28

Economists who generally believe that any excessive growth in the money supply will do little more than cause inflation are called

A) Keynesians.
B) classicals.
C) supply siders.
D) monetarists.

Question 29

According to monetarists, the money supply should be allowed

A) to grow as fast as possible.
B) to grow at a minimal rate of 10% per year.
C) to grow at a rate commensurate with the rate of growth of our economy.
D) to remain stable.

Question 30

Economists who support a monetary rule

A) believe that the Fed should increase the money supply at a consistently smooth rate.
B) advocate having a high rate of inflation rather than a high rate of unemployment.
C) believe that the Fed should use discretionary monetary policy to fight unemployment.
D) believe that the Fed should use discretionary monetary policy to fight recessions.

Question 31

If the Fed chooses to keep the market interest rate at a target level, then it must

A) keep bank reserves at a constant level.
B) abandon open market operations.
C) allow the money supply to fluctuate.
D) ask its member banks to charge this target rate on all loans.

Question 32

An increase in bond prices is usually accompanied by

A) an increase in interest rates.
B) a decrease in the quantity of investment.
C) a decrease in interest rates.
D) an increase in the opportunity cost of holding money.

Question 33

If you buy a bond which pays 5 percent and subsequently the interest rate rises to 6 percent, then it is true that

A) the price of the bond is still $1,000.
B) the interest payment on the bond will fall.
C) the price of the bond will rise.
D) the price of the bond will fall.

Question 34

An excess supply of money will

A) decrease investment.
B) decrease income.
C) raise interest rates.
D) raise bond prices.

Question 35

Which of the following is FALSE?

A) The effectiveness of monetary policy is limited by lags in its implementation.
B) Contractionary monetary policy is designed to increase aggregate demand.
C) If the Fed follows a monetary rule, it will increase the money supply consistently at a smooth rate.
D) Interest rates and bond prices are inversely related.

Question 36

The direct effect of changes in the money supply is that

A) bond prices change.
B) firms change their investment plans.
C) state governments change their taxation plans.
D) consumers change their spending.

Question 37

For the Fed to attract buyers for new U.S. Treasury bonds, it must

A) offer them at a lower price than the current market rate.
B) offer them at a higher price than the current market rate.
C) tie their price to gold.
D) decrease the coupon rate.

Question 38

To increase aggregate demand, the Fed would

A) decrease the money supply.
B) increase interest rates.
C) sell bonds.
D) increase the money supply.

Question 39

In the short run, an increase in the discount rate usually

A) results in decreases in other interest rates.
B) leads banks to hold fewer excess reserves.
C) causes the equilibrium level of real GDP and the price level to fall.
D) leads to an increase in the price of existing bonds.

Question 40

Increases in the discount rate

A) are a tool of contractionary monetary policy.
B) do not affect bank behavior.
C) serve to expand the money supply.
D) encourage banks to hold less than the required amount of reserves.

Question 41

The Fed would be pursuing a contractionary monetary policy if it were

A) lowering the required reserve ratio.
B) raising the discount rate.
C) buying bonds.
D) raising bond prices.

Question 42

Suppose the economy is currently in equilibrium. The Fed changes its policy by raising the discount rate. This would have the effect of

A) increasing aggregate demand and lowering the price level.
B) increasing aggregate demand and raising the price level.
C) decreasing aggregate demand and raising the price level.
D) decreasing aggregate demand and lowering the price level.

Question 43

The Fed would be pursuing an expansionary monetary policy if it were

A) selling bonds.
B) raising the discount rate.
C) lowering the required reserve ratio.
D) lowering bond prices.

Question 44

If the economy is underutilizing its economic resources, the Fed can address the situation by

A) discouraging investment spending.
B) expanding the money supply to increase aggregate demand.
C) decreasing aggregate supply.
D) contracting the money supply.

Question 45

An expansionary monetary policy results in lower interest rates, which in turn

A) cause consumers to save more.
B) cause firms to invest more.
C) lead to higher rates of taxation.
D) lead to lower bond prices.

Question 46

A contractionary monetary policy

A) is brought about by lower interest rates.
B) is brought about by a lowering of the required reserve ratio.
C) will lead to an increase in aggregate demand.
D) will lead to a decrease in aggregate demand.

Question 47

If the Fed contracts the money supply,

A) the price level will rise.
B) interest rates will rise.
C) aggregate demand will increase.
D) firms will increase their levels of investment.

Question 48

If the Fed follows a monetary rule,

A) the growth rate of the money supply will be increased during recessions.
B) discretionary monetary policy will be used to combat unemployment.
C) the growth rate of the money supply will match the long-term growth rate of real output.
D) the money supply will equal the level of annual national income.

Question 49

When the Fed buys government securities on the open market,

A) bond prices will fall.
B) interest rates will increase.
C) the money supply will contract.
D) it is engaging in expansionary monetary policy.

Question 50

When the Fed sells government securities on the open market,

A) bond prices will fall.
B) interest rates will fall.
C) the level of reserves in the banking system will increase.
D) the money supply will expand.

Question 51

To alter the rate of growth of the money supply the Fed can do all EXCEPT

A) engage in open market operations.
B) change the discount rate.
C) require banks to issue more loans.
D) change the reserve requirement.

Question 52

Open market operations by the Fed

A) are aimed at affecting aggregate supply.
B) do not affect the money supply.
C) do not change interest rates.
D) cause a change in the level of reserves in the banking system.

Question 53

Suppose we observe bond prices decreasing. A probable cause of this is

A) the Fed increasing the discount rate, causing other interest rates to increase and a fall in bond prices.
B) the Fed decreasing the discount rate, causing other interest rates to decrease and a fall in bond prices.
C) the Fed selling bonds in the open market.
D) the Fed buying bonds in the open market.

Question 54

Which of the following is not an effect of an increase in the money supply?

A) People try to buy more goods and services
B) Banks have excess reserves
C) Aggregate supply increases
D) Price level increases

Question 55

Which of the following is FALSE?

A) When the Fed injects more reserves into the banking system, the money supply will increase.
B) If the Fed follows a monetary rule, the money supply will never increase.
C) One tool the Fed can use to change the money supply is to alter the reserve requirement.
D) If the Fed wants to maintain interest rates at a given level, it will have to allow the rate of money supply growth to vary.

Question 56

Which of the following is FALSE?

A) An expansionary monetary policy is used to combat inflation.
B) The Fed serves to regulate the money supply and also to provide a system for check clearing between banks.
C) In the long run, higher rates of money growth lead to higher rates of inflation.
D) An increase in interest rates will lead to lower bond prices.

Question 57

Which of the following is FALSE?

A) To the extent that there are lags in the implementation of monetary policy, its effectiveness is lessened.
B) An increase in the money supply will increase the purchasing power of a dollar.
C) An expansionary monetary policy will increase aggregate demand.
D) A contractionary monetary policy will decrease aggregate demand.

Question 58

A loose monetary policy is one that

A) seeks to combat inflation.
B) seeks to reduce aggregate demand.
C) encourages consumers to save more.
D) encourages firms to invest more.

Question 59

If Federal Reserve chairman Alan Greenspan announces a reduction in interest rates, this means that

A) the Fed will be following a contractionary monetary policy.
B) the Fed will be buying government securities on the open market.
C) the Fed will be selling government securities on the open market.
D) the Fed will be increasing the required reserve ratio.

Question 60

"Open market operations" is the term used to refer to

A) the purchase and sale of government bonds by the Federal Reserve.
B) actions taken by the Federal Reserve to intervene in stock market prices.
C) actions taken by consumers to spend money in the marketplace.
D) actions taken by firms to evaluate their product markets.

Question 61

Which of the following is FALSE?

A) The Fed signifies its current monetary policy by making announcements about its interest rate target.
B) If the Fed wishes to lower the interest rate, it can do so by buying bonds.
C) Following a monetary rule avoids the problems associated with the lags inherent in discretionary monetary policy.
D) Monetarists advocate using discretionary monetary policy to smooth out fluctuations in the level of business activity.

Question 62

Which of the following is FALSE?

A) Some monetarists believe that monetary policy can be a destabilizing influence on the economy.
B) The Federal Reserve followed a contractionary monetary policy during the Great Depression.
C) Following a monetary rule would mean that the level of business investment would be constant on a year-to-year basis.
D) In the long run, there appears to be a direct relationship between the rate of growth of the money supply and the rate of inflation.

Question 63

Expansionary monetary policy serves to _________ aggregate demand.

Question 64

Open market operations are conducted when the Federal Reserve buys and sells
government _________.

Question 65

Banks respond to changes in the _________ rate by changing the interest rate charged on loans to their customers.

Question 66

Monetarists believe that growth in the money supply directly increases aggregate _________ directly as consumers spend more.

Question 67

Keynesians believe that expansionary monetary policy increases aggregate demand indirectly as the resulting lower interest rates stimulate _________.

Question 68

A Federal Reserve purchase of Treasury bonds on the open market will _________ bond prices.

Question 69

Bond prices _________ when interest rates increase.

Question 70

If the Fed follows a _________ _________ , it will increase the money supply at a rate of growth equal to the rate of economic growth.

Question 71

Contractionary monetary policy is used to combat _________.

Question 72

If the Fed wishes to pursue a contractionary monetary policy, it will _________ bonds on the open market.

Question 73

If the Fed uses discretionary monetary policy to smooth out fluctuations in the level of business activity, it would _________ the money supply during periods of unemployment.

Question 74

During the Great Depression, the Fed followed a _________ monetary policy.

Question 75

An open market purchase of bonds by the Fed injects _________ into the banking system.

Question 76

The Fed currently announces an _________ _________ target when it announces monetary policy.

Question 77

Monetary policy is expansionary if it serves to _________ the supply of credit.

Question 78

Monetary policy is _________ if it serves to decrease the supply of credit.

Question 79

Expansionary monetary policy will _________ the price level.

Question 80

Contractionary monetary policy will _________ the price level.