Deck 26: Stabilizing the Economy: The Role of the Fed

Question 1

The decision about the forms in which to hold one's wealth is called the ________ decision.

A)Taylor
B)portfolio allocation
C)Fisher effect
D)life-cycle

Answer 1

portfolio allocation

Question 2

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be used to purchase government bonds earning 5 percent, then how much money should Jan's hold?

A)$10,000
B)$8,000
C)$6,000
D)$4,000

Answer 2

$8,000

Question 3

Jim has the following assets and liabilities: $\begin{array}{l|r|}\hline \text { Credit card balance } & \$ 1,000 \\\hline \text { Cash } & \$ 200 \\\hline \text { Government bonds } & \$ 3,000 \\\hline \text { Checking } & \$ 300 \\\hline \text { Car loan balance } & \$ 10,000 \\\hline \text { Car } & \$ 15,000 \\\hline\end{array}$
 
Which of the following actions would increase Jim's money demand by $200?

A)Jim writes a check for $200 to pay down his credit card balance.
B)Jim writes a check for $200 to pay down her car loan balance.
C)Jim pays $200 cash for a new lamp.
D)Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account.

Answer 3

Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account.

Question 4

The benefit of holding money is ________, while the opportunity cost of holding money is ________.

A)the nominal interest rate; the fees charged by banks
B)the nominal interest rate; its usefulness in carrying out transactions
C)increased income; lost purchasing power
D)its usefulness in carrying out transactions; the nominal interest rate

Question 5

The decision about how much money to hold is an application of the:

A)scarcity principle.
B)principle of comparative advantage.
C)principle of increasing opportunity cost.
D)cost-benefit principle.

Question 6

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 7 percent, then how much money should Jan's hold?

A)$10,000
B)$8,000
C)$6,000
D)$4,000

Question 7

The opportunity cost of money is:

A)the time spent going to the bank to withdraw funds.
B)the fees charged by banks to provide checking services.
C)the nominal interest rate.
D)the price level.

Question 8

Joan has the following assets and liabilities:  
$\begin{array}{l|r|}\hline \text { Credit card balance } & \$ 1,000 \\\hline \text { Cash } & \$ 200 \\\hline \text { Government bonds } & \$ 3,000 \\\hline \text { Checking } & \$ 300 \\\hline \text { Car loan balance } & \$ 10,000 \\\hline \text { Car } & \$ 15,000 \\\hline\end{array}$
 
Which of the following actions would increase Joan's money demand by $100?

A)Joan writes a check for $100 to pay down her credit card balance.
B)Joan writes a check for $100 to pay down her car loan balance.
C)Joan pays $100 cash for a new lamp.
D)Joan sells a $100 government bond and puts the proceeds in her checking account.

Question 9

The usefulness of money in carry out transactions is its ________ and the nominal interest rate is its ________.

A)supply; demand
B)demand; supply
C)cost; benefit
D)benefit; cost

Question 10

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:

A)increased the demand for money.
B)decreased the demand for money.
C)had no impact on the supply or demand for money.
D)increased the supply of money.

Question 11

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 3 percent, then how much money should Jan's hold?

A)$10,000
B)$8,000
C)$6,000
D)$4,000

Question 12

Joan has the following assets and liabilities: $$\begin{array} { | l | r | } \hline \text { Credit card balarice } & \$ 1,000 \\\hline \text { Cash } & \$ 200 \\\hline \text { Goverzunent bonds } & \$ 3,000 \\\hline \text { Stock } & \$ 4,000 \\\hline \text { Checking } & \$ 1,500 \\\hline \text { Car loar balarice } & \$ 10,000 \\\hline \text { Car } & \$ 15,000\end{array}$$  
Which of the following actions would decrease Joan's money demand by $200?

A)Joan writes a check for $200 to purchase additional shares of stock.
B)Joan gets a $200 cash advance on her credit card and puts the proceeds in her checking account.
C)Joan writes a $200 check for cash and holds the cash.
D)Joan sells $200 worth of stocks and puts the proceeds in her checking account.

Question 13

The decision about how much money to hold is an application of the:

A)scarcity principle.
B)principle of comparative advantage.
C)equilibrium principle.
D)cost-benefit principle.

Question 14

Jim has the following assets and liabilities: $$\begin{array} { | l | r | } \hline \text { Credit card balarice } & \$ 2,000 \\\hline \text { Cash } & \$ 500 \\\hline \text { Goverzunent bonds } & \$ 2,000 \\\hline \text { Stock } & \$ 5,000 \\\hline \text { Checking } & \$ 750 \\\hline \text { Car loar balarice } & \$ 5,000 \\\hline \text { Car } & \$ 15,000\end{array}$$  
Which of the following actions would decrease Jim's money demand by $200?

A)Jim writes a check for $200 to pay down his credit card balance.
B)Jim sells a $200 government bond and puts the proceeds in his checking account.
C)Jim writes a $200 check for cash and holds the cash.
D)Jim sells $200 worth of stocks and puts the proceeds in his checking account.

Question 15

Any value of the money supply chosen by the Federal Reserve implies a specific value for:

A)potential output.
B)the nominal interest rate.
C)government purchases.
D)the budget deficit.

Question 16

The amount of wealth an individual chooses to hold in the form of money is called:

A)the money reaction function.
B)the demand for money.
C)the supply of money.
D)expansionary monetary policy.

Question 17

Jim has the following assets and liabilities: $\begin{array}{l|r|}\hline \text { Credit card balance } & \$ 1,000 \\\hline \text { Cash } & \$ 200 \\\hline \text { Government bonds } & \$ 3,000 \\\hline \text { Checking } & \$ 300 \\\hline \text { Car loan balance } & \$ 10,000 \\\hline \text { Car } & \$ 15,000 \\\hline\end{array}$
 
What is Jim's money demand?

A)$500
B)$750
C)$1,250
D)$3,250

Question 18

The demand for money is:

A)unlimited, since people want to hold as much money as possible.
B)limited by the amount of currency printed by the government.
C)the amount of wealth an individual chooses to hold in the form of money.
D)the amount of income an individual chooses to hold in the form of money.

Question 19

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 10 percent, then how much money should Jan's hold?

A)$10,000
B)$8,000
C)$6,000
D)$4,000

Question 20

Joan has the following assets and liabilities: $\begin{array}{l|r|}\hline \text { Credit card balance } & \$ 1,000 \\\hline \text { Cash } & \$ 200 \\\hline \text { Government bonds } & \$ 3,000 \\\hline \text { Checking } & \$ 300 \\\hline \text { Car loan balance } & \$ 10,000 \\\hline \text { Car } & \$ 15,000 \\\hline\end{array}$  
What is Joan's money demand?

A)$200
B)$300
C)$500
D)$1,500

Question 21

Which of the following would be expected to increase the demand for money in the U.S.?

A)Financial investors become concerned about increasing riskiness of stocks.
B)The economy enters a recession.
C)Political instability decreases dramatically in developing nations.
D)On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

Question 22

Higher nominal interest rates ________ the amount of money demanded and higher real income ________ the amount of money demanded.

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

Question 23

The money demand curve will shift to the right if:

A)the nominal interest rate increases.
B)real income increases.
C)ATM machines are introduced.
D)the price level decreases.

Question 24

Higher nominal interest rates ________ the amount of money demanded and a higher price level ________ the amount of money demanded.

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

Question 25

The following table shows Jay's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}\hline{\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$  
How much money will Jay hold if the nominal interest rate is 4 percent? (Assume he wants his money holdings to be in multiples of $100.)

A)$100
B)$200
C)$300
D)$400

Question 26

The following table shows Alex's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}\hline{\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$  
How much money will Alex hold if the nominal interest rate is 4 percent? (Assume she wants her money holdings to be in multiples of $100.)

A)$700
B)$800
C)$900
D)$1,000

Question 27

The money demand curve will shift to the right if:

A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)the price level increases.
D)the price level decreases.

Question 28

Lower nominal interest rates ________ the amount of money demanded and a lower price level ________ the amount of money demanded.

A)increase; increases
B)increase; decreases
C)increase; does not change
D)decrease; decreases

Question 29

Three macroeconomic factors that affect the demand for money are:

A)the nominal interest rate, real income, and the price level.
B)the nominal interest rate, capital, and labor.
C)globalization, skill-biased technological change, and labor mobility.
D)capital, labor, and technology.

Question 30

Which of the following would be expected to decrease the demand for money in the U.S.?

A)Grocery stores begin to accept credit cards in payment.
B)The economy enters a boom period.
C)Political instability increases dramatically in developing nations.
D)Households fear increasing computer glitches will severely limit their ability to use ATMs.

Question 31

Higher real income ________ the demand for money and a higher price level ________ the demand for money.

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

Question 32

Which of the following would be expected to increase the demand for U.S. currency?

A)Competition among brokers forces down the commission charge for selling bonds or stocks.
B)The economy enters a recession.
C)Political instability rises dramatically in developing nations.
D)Online banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

Question 33

The following table shows Alex's estimated annual benefits of holding different amounts of money.  
$\begin{array}{|r|r|}\hline {\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$
How much money will Alex hold if the nominal interest rate is 8 percent? (Assume she wants her money holdings to be in multiples of $100.)

A)$700
B)$800
C)$900
D)$1,000

Question 34

Lower nominal interest rates ________ the amount of money demanded and lower real income ________ the amount of money demanded.

A)increase; increases
B)increase; decreases
C)increase; does not change
D)decrease; decreases

Question 35

The following table shows Jay's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}\hline {\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$  
How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he wants his money holdings to be in multiples of $100.)

A)$100
B)$200
C)$300
D)$400

Question 36

The following table shows Alex's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}\hline{\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$  
How much money will Alex hold if the nominal interest rate is 6 percent? (Assume she wants her money holdings to be in multiples of $100.)

A)$700
B)$800
C)$900
D)$1,000

Question 37

The following table shows Jay's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}\hline{\text { Average money holdings }} & \text { Total benefit } \\\hline \$ 700 &\$50 \\\hline \$ 800 & \$ 59 \\\hline \$ 900 & \$ 66 \\\hline \$ 1,000 & \$ 71 \\\hline \$ 1,100 & \$ 72 \\\hline\end{array}$  
How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he wants his money holdings to be in multiples of $100.)

A)$100
B)$200
C)$300
D)$400

Question 38

The money demand curve will shift to the left if:

A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)ATM machines are introduced.
D)the price level increases.

Question 39

The money demand curve relates ________ to the ________.

A)the aggregate quantity of money demanded; aggregate demand
B)aggregate demand; nominal interest rate
C)the aggregate quantity of money demanded; price level
D)the aggregate quantity of money demanded; nominal interest rate

Question 40

Lower real income ________ the demand for money and a lower price level ________ the demand for money.

A)increases; increases
B)increases; decreases
C)increases; does not change
D)decreases; decreases

Question 41

The money demand curve will shift to the left if:

A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)the price level increases.
D)the price level decreases.

Question 42

Any target value of the nominal interest rate chosen by the Federal Reserve implies a specific value for:

A)potential output.
B)the money supply.
C)government purchases.
D)the budget deficit.

Question 43

When the Fed engages in an open market sale, the money supply ________ and the nominal interest rate ________.

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

Question 44

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.

A)greater; fall; increase
B)less; rise; decrease
C)greater; rise; increase
D)less; fall; increase

Question 45

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ________ of bonds that ________ the money supply.

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

Question 46

If the quantity supplied of money is less than the quantity demanded of money, people will ________ bonds which will cause bond prices to ________ and the nominal interest rate to ________ until the quantity demanded and quantity supplied of money are equal.

A)sell; fall; rise
B)sell; fall; fall
C)sell; rise; fall
D)buy; fall; rise

Question 47

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ________ the money supply, which will put ________ pressure on nominal interest rates.

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

Question 48

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to raise the interest rate to 8 percent, it must ________ the money supply to ________.

A)increase; 800
B)decrease; 800
C)increase; 400
D)decrease; 400

Question 49

If the quantity supplied of money exceeds the quantity demanded of money, people will ________ bonds which will cause bond prices to ________ and the nominal interest rate to ________ until the quantity demanded and quantity supplied of money are equal.

A)buy; rise; fall
B)sell; fall; fall
C)sell; rise; fall
D)buy; fall; rise

Question 50

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will:

A)increase.
B)decrease.
C)remain constant.
D)equal the real interest rates.

Question 51

If the Fed wishes to increase nominal interest rates, it must engage in an open market ________ of bonds that ________ the money supply.

A)sale; increases
B)sale; decreases
C)sale; does not change
D)purchase; increases

Question 52

Because the Fed determines the money supply, the money supply curve is:

A)downward-sloping.
B)upward-sloping.
C)vertical.
D)horizontal.

Question 53

Because a decrease in the nominal interest rate reduces the opportunity costs of holding money, the money demand curve:

A)shifts to the right.
B)shifts to the left.
C)slopes upward.
D)slopes downward.

Question 54

The money demand curve will shift to the left if:

A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)the price level increases.
D)real income decreases.

Question 55

When Argentines increase their savings in U.S. dollars, the U.S. money:

A)supply curve shifts left.
B)supply curve shifts right.
C)demand curve shifts right.
D)demand curve shifts left.

Question 56

When the Fed engages in an open market purchase, the money supply ________ and the nominal interest rate ________.

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

Question 57

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to lower the interest rate to 4 percent, it must ________ the money supply to ________.

A)increase; 800
B)decrease; 800
C)increase; 1,000
D)decrease; 400

Question 58

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.

A)greater; fall; increase
B)greater; fall; decrease
C)greater; rise; increase
D)less; fall; increase

Question 59

Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:

A)shifts to the right.
B)shifts to the left.
C)slopes upward.
D)slopes downward.

Question 60

The equilibrium quantity of money in circulation is determined by the:

A)interaction of an upward-sloping money supply curve and a downward-sloping money demand curve.
B)nominal interest rate, real income, and the price level.
C)Federal Reserve.
D)decentralized interactions between households and businesses.

Question 61

The Federal Reserve can:

A)simultaneously set independent money supply and nominal interest rate targets.
B)only target the nominal interest rate, not the money supply.
C)only set a money supply target that is consistent with a nominal interest rate target, and vice versa.
D)only target the money supply, not the nominal interest rate.

Question 62

The interest rate that commercial banks charge each other for very short-term loans is called the:

A)prime rate.
B)bank loan rate.
C)federal funds rate.
D)Federal Reserve discount rate.

Question 63

Refer to the given figure. If the Federal Reserve wants to raise the interest rate to 7 percent, it must ________ the money supply to ________.

A)increase; 300
B)decrease; 300
C)increase; 900
D)increase; 700

Question 64

When the Federal Reserve lends reserves to commercial banks, this is an example of:

A)a change in reserve requirements.
B)an open-market sale.
C)an open-market purchase.
D)discount window lending.

Question 65

Refer to the given figure. Based on the diagram, the nominal interest rate equals ________ and the money supply equals ________.

A)7 percent; 300
B)1 percent; 500
C)5 percent; 500
D)3 percent; 700

Question 66

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 4 percent, it must conduct open market ________ to set the money supply at ________.

A)purchases; 200
B)sales; 200
C)purchases; 800
D)sales; 800

Question 67

If inflation does not adjust rapidly in the short run, then when the Federal Reserve decreases the nominal interest rate, the real interest rate in the short run will:

A)increase.
B)decrease.
C)not change.
D)be determined by saving and investment decisions.

Question 68

Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 1 percent, it must conduct open market ________ to set the money supply at ________.

A)purchases; 300
B)sales; 100
C)purchases; 900
D)sales; 900

Question 69

For the past half century, the Federal Reserve has expressed policy in terms of a target value for:

A)bank reserves.
B)open market operations.
C)the Federal Reserve discount rate.
D)the federal funds rate.

Question 70

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ________ rate.

A)Fed funds
B)prime
C)discount
D)Federal

Question 71

If inflation does not adjust rapidly in the short run, then when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will:

A)increase.
B)decrease.
C)not change.
D)be determined by saving and investment decisions.

Question 72

The discount rate is the rate of interest charged on loans from ________ to ________.

A)the Federal Reserve; commercial banks
B)the Federal Reserve; the U.S. Treasury
C)commercial banks; the Federal Reserve
D)the U.S. Treasury; commercial banks

Question 73

Financial markets pay close attention to changes in the federal funds rate because these changes:

A)directly affect a large volume of loans.
B)indicate the Fed's plans for monetary policy.
C)indicate commercial bank lending policies.
D)directly affect the interest payments on the national debt.

Question 74

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market ________ to set the money supply at ________.

A)purchases; 200
B)sales; 200
C)purchases; 800
D)sales; 800

Question 75

In the long run the real interest rate is determined by ________, and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts ________.

A)saving and investment; slowly
B)saving and investment; quickly
C)the Federal Reserve; to equal the increase in the money supply
D)the Federal Reserve; slowly

Question 76

The federal funds rate is the interest rate on short-term loans made by:

A)the Federal Reserve to commercial banks.
B)the federal government to commercial banks.
C)commercial banks to other commercial banks.
D)the Federal Reserve to the federal government.

Question 77

If the Federal Reserve sets a target nominal interest rate, it can:

A)independently set a target money supply.
B)only set a money supply target that is consistent with the nominal interest rate target.
C)achieve this target with any arbitrary supply of money.
D)shift the money demand curve to the right.

Question 78

Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market ________ to set the money supply at ________.

A)purchases; 100
B)sales; 100
C)purchases; 900
D)sales; 900

Question 79

When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system ________ and, ultimately, the money supply ________.

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

Question 80

Refer to the given figure. If the Federal Reserve wants to lower the interest rate to 3 percent, it must ________ the money supply to ________.

A)increase; 300
B)decrease; 300
C)increase; 900
D)increase; 700