Deck 26: The Federal Reserve System and Monetary Policy

Question 1

The interest rate that the Fed charges banks for borrowing funds is called the federal funds rate.

Answer 1

False

Question 2

The chief function of the Federal Reserve is to be the federal government's tax collection institution.

Answer 2

False

Question 3

In the United States,monetary policy is the responsibility of the Federal Reserve Board of Governors and the Federal Open Market Committee.

Answer 3

True

Question 4

Monetary policy can influence interest rates,which in turn can change spending.

Question 5

There are 12 Federal Reserve Banks in the Federal Reserve System.

Question 6

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.

Question 7

A one percentage point change in the required reserve ratio would change the money supply by less than one percent,other things being equal.

Question 8

The money supply is very sensitive to changes in the rate of interest.

Question 9

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period.

Question 10

There is a positive correlation between a nation's average annual inflation and the degree of independence of its central bank.

Question 11

Open market operations directly change the rate of interest at which banks can borrow funds from the Fed.

Question 12

The Open Market Committee oversees the money supply through the Fed's sale and purchase of government securities.

Question 13

In the long run,inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

Question 14

Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee.

Question 15

If money supply increases,P will rise as long as V and Q remain constant.

Question 16

The Fed is part of the executive branch of the federal government.

Question 17

When money demand increases,the Fed cannot keep both the money supply from rising and the interest rate from rising..

Question 18

All decisions of the Fed are subject to approval by:

A) the President of the United States.
B) the U.S. Congress.
C) the FDIC
D) none of the above

Question 19

Higher rates of interest increase the opportunity cost of holding money balances.

Question 20

Changing reserve requirements is the most important method the Federal Reserve uses to change the supply of money.

Question 21

In the equation of exchange,an increase in M of 8 percent could be accompanied by changes in velocity,the price level and real GDP of:

A) 0%, 4%, 4%.
B) 0%, 8%, 0%.
C) 0%, 0%, 8%.
D) all of the above

Question 22

Decisions regarding purchases and sales of securities by the Fed are made by:

A) FDIC.
B) Discount Committee.
C) Federal Open Market Committee.
D) Federal Funds Committee.

Question 23

In the equation of exchange,velocity will tend to rise when:

A) the price level rises, other things being equal.
B) real GDP rises, other things being equal.
C) the money supply declines, other things being equal.
D) all of the above.

Question 24

The Federal Reserve banks are owned by:

A) the citizens of each Federal Reserve district.
B) the American people as a whole.
C) the Federal Government.
D) commercial banks.

Question 25

If M increases and V decreases:

A) nominal GDP increases.
B) nominal GDP decreases.
C) nominal GDP stays the same.
D) there is an indeterminate effect on nominal GDP.

Question 26

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

A) limiting the national debt
B) setting the required reserve ratio for the deposit holdings of depository institutions
C) buying and selling government bonds to control the size and growth rate of the money supply
D) controlling inflation

Question 27

Which of the following is true?

A) Velocity is not constant over time.
B) The best way to study economic activity is to start with the equation and then integrate the money supply and the volume of international trade.
C) Control over the money supply implies that the Fed has precise control over real GDP.
D) All of the above are true.

Question 28

If V falls faster than M increases:

A) nominal GDP increases.
B) nominal GDP decreases.
C) nominal GDP stays the same.
D) there is an indeterminate effect on nominal GDP.

Question 29

An increase in the money supply and a decrease in real GDP at the same time is consistent with the equation of exchange if:

A) velocity rises rapidly enough.
B) velocity falls rapidly enough.
C) the nominal GDP rises rapidly enough.
D) the price level falls rapidly enough.

Question 30

If M increases faster than V decreases:

A) nominal GDP increases.
B) nominal GDP decreases.
C) nominal GDP stays the same.
D) there is an indeterminate effect on nominal GDP.

Question 31

In the equation of exchange,PQ represents:

A) the dollar value of all final goods and services sold in a country in a given year.
B) the price index times nominal GDP.
C) real GDP.
D) the price level times the velocity of money

Question 32

Velocity can be defined as:

A) the turnover rate of money
B) the speed at which economic activity takes place.
C) the speed at which multiplier effect takes place.
D) the speed at which tax cuts are spent.

Question 33

The equation of exchange states that:

A) government spending = taxes plus the federal budget deficit.
B) the reciprocal of the reserve requirement = the deposit expansion multiplier.
C) the money supply times the velocity of money = the price level times the quantity of goods and services produced.
D) the price level times the velocity of money = the money supply times the quantity of goods and services produced.

Question 34

Which of the following is a definition of velocity?

A) Velocity = value of final goods and services produced/money supply
B) Velocity = real GDP/M
C) Velocity = nominal GDP/real GDP
D) Velocity = (P ´ Q)/(M ´ V)

Question 35

Real GDP can rise at the same time money supply falls if:

A) velocity rises rapidly enough.
B) velocity falls rapidly enough.
C) the price level rises rapidly enough.
D) either b. or c. occurs.

Question 36

In the equation of exchange,an increase in M of 8 percent could be accompanied by changes in velocity,the price level and real GDP of:

A) -2%, 3%, 3%.
B) 4%, 0%, 4%.
C) 2%, 8%, 8%.
D) 8%, 8%, 4%.

Question 37

If inflation is the major problem in the economy,which of the following would be an appropriate monetary policy response?

A) decreasing government spending
B) decreasing the discount rate
C) decreasing reserve requirements
D) none of the above

Question 38

If policies of the Fed cause the money supply to increase,and velocity is held constant,the expected outcome would be:

A) P ´ Q would increase, and the general price level would increase if Q remained constant.
B) P ´ Q would decrease, and the general price level would decrease if Q remained constant.
C) P ´ Q would decrease, and the general price level would increase if Q increased.
D) insufficient information is available to arrive at a conclusion.

Question 39

If the velocity of money (V)and real output (Q)were increasing at approximately the same rate,then:

A) it would be impossible for monetary authorities to control inflation.
B) monetary acceleration would not lead to inflation.
C) inflation would be closely related to the long-run rate of monetary expansion.
D) none of the above

Question 40

If inflation is the major problem in the economy,which of the following would be an appropriate monetary policy response?

A) decreasing reserve requirements
B) increasing the discount rate
C) buying government bonds
D) none of the above

Question 41

Which of the following is most frequently used when the Fed is attempting to adjust the money supply?

A) Changing reserve requirements
B) Open market operations
C) Changing the discount rate
D) Moral suasion

Question 42

The major objective of the Federal Reserve System is to:

A) make substantial profits for its member banks.
B) help in generating stabilization policies for the economy.
C) distribute paper money and coins to banks and retail stores.
D) prevent closure (failure) of individual member banks.

Question 43

The supply-of-money curve is almost perfectly inelastic because:

A) as interest rates rise, people will want to be supplied with more loans.
B) the Fed makes more money available in response to higher interest rates.
C) banks generally find loans more profitable than keeping their assets as cash in their vaults or reserve deposits at the Fed, whether interest rates are 4% or 40%.
D) the Fed lowers the discount rate as interest rates rise.

Question 44

The Fed's purchases and sales of government securities are called:

A) margin operations.
B) open market operations.
C) small-dealer transactions.
D) intermediary transactions.

Question 45

If the Fed buys a U.S.government bond from a member of the public,

A) the banking system has more reserves and the money supply tends to grow.
B) the banking system has less reserves and the money supply tends to grow.
C) the banking system has more reserves and the money supply tends to fall.
D) the banking system has less reserves and the money supply tends to fall.

Question 46

If the Federal Open Market Committee (FOMC)decides to expand the money supply,then:

A) it will issue directions to sell U.S. government securities, thus increasing the velocity of circulation of the money supply.
B) it will issue directions to purchase U.S. government securities, thus putting more reserves in the hands of banks.
C) it will order new Federal Reserve notes delivered to member banks.
D) it will raise the discount rate to member banks.

Question 47

A combination of Fed purchases of government securities and an increase in reserve requirements would:

A) increase the money supply.
B) decrease the money supply.
C) leave the money supply unchanged.
D) have an indeterminate effect on the money supply.

Question 48

In its original role as lender of last resort,the Fed was supposed to:

A) provide mortgage money for the poor.
B) keep the money supply from drying up during economic panics.
C) lend money to people in localities not served by commercial banks.
D) lend money to developing nations whose own central banks had failed.

Question 49

When the Fed wants to expand the money supply through open market operations,it:

A) sells government securities.
B) purchases government securities.
C) increase the Fed Funds rate.
D) decrease reserve requirements.

Question 50

If the amount of money in circulation is $50 million and nominal GDP is $150 million,then the velocity of money is:

A) 0.33.
B) 2.
C) 3.
D) impossible to determine from the information provided.

Question 51

When the Fed buys a U.S.government security:

A) the volume of loans issued by the banking system increases and investment will tend to increase.
B) the volume of loans issued by the banking system increases and investment will tend to decrease.
C) the volume of loans issued by the banking system decreases and investment will tend to increase.
D) the volume of loans issued by the banking system decreases and investment will tend to decrease.

Question 52

Rising reserve requirements,other things being equal,would tend to:

A) increase the dollar volume of loans made by the banking system.
B) increase the money supply.
C) increase aggregate demand.
D) none of the above

Question 53

Which of the following actions of the Fed is likely to lead to a decrease in the money supply?

A) A decrease in the discount rate
B) An increase in reserve requirements
C) A decrease in reserve requirements
D) A purchase of government securities by the Fed in the open market

Question 54

Why does the Fed have imperfect control over the money supply over short periods?

A) Because of unpredictable changes in reserve requirements
B) Because the public responds to open market operations in unpredictable fashions
C) Because the Fed does not know how much reserves will change when it buys or sells securities
D) Because of unpredictable changes in public desire to hold cash and banks' desires to hold reserves

Question 55

The money supply contracts when the Fed:

A) replaces worn and ripped Federal Reserve notes.
B) sells government securities.
C) borrows from the U.S. Treasury.
D) purchases equities in major U.S. corporations.

Question 56

If the Fed sells a U.S.government bond to a bank,what is the effect on the money supply?

A) It will increase.
B) It will not change.
C) It will decrease.
D) It will be uncertain.

Question 57

When the Fed purchases government securities from a commercial bank,the bank:

A) automatically becomes poorer.
B) loses equity in the Fed.
C) receives reserves that can be used to make additional loans.
D) loses its ability to make loans.

Question 58

One uniquely American aspect of central banking is that:

A) the United States has 12 central banks rather than one.
B) the Federal Reserve is a private institution with no governmental supervision.
C) the dual banking system created two parallel central banks.
D) the U.S. Treasury runs the Federal Reserve as an extension of the Executive Branch.

Question 59

Which of the following would constitute contractionary monetary policy by the Fed?

A) An increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit
B) Open market sales of government securities, an increase in the discount rate, and an increase in reserve requirements
C) An increase in tariffs on imported goods and a decrease in foreign aid
D) Open market purchases of government securities, a cut in the discount rate, and an increase in reserve requirements

Question 60

Which of the following is the Fed's most common way to change the money supply?

A) Moral suasion
B) The discount rate
C) The required reserve rate
D) Open market operations

Question 61

Assume the Fed purchases $5,000 worth of U.S.Treasury bonds from Bill Gates,who promptly deposits the money in Microsoft Rules National Bank.Assuming that the required reserve ratio is 25 percent and banks keep zero excess reserves,then the money supply will ultimately:

A) increase by a maximum of $5,000.
B) increase by a maximum of $20,000.
C) decrease by a maximum of $5,000.
D) decrease by a maximum of $20,000.

Question 62

When the Fed unexpectedly increases the money supply,it will cause an increase in aggregate demand because:

A) real interest rates will fall, stimulating business investment and consumer purchases.
B) the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C) lower interest rates will tend to increase asset prices, which increases wealth and thereby stimulates current consumption.
D) of all the above reasons.

Question 63

Other things equal.an open market purchase of government securities by the Fed will not result in which of the following?

A) increased bond prices
B) a reduced volume of loans issued by the commercial banking system
C) decreased interest rates
D) an increase in the price level

Question 64

When the economy is initially at full employment:

A) contractionary monetary policy can result in increased real output, but only in the short run.
B) contractionary monetary policy can result in increased real output in both the short run and long run.
C) contractionary monetary policy can result in decreased real output, but only in the short run.
D) contractionary monetary policy can result in decreased real output in both the short run and long run.

Question 65

A combination of a decrease in the discount rate and an increase in reserve requirements would:

A) increase the money supply.
B) decrease the money supply.
C) leave the money supply unchanged.
D) have an indeterminate effect on the money supply.

Question 66

Other things equal,expansionary monetary policy will tend to have what effect?

A) Increase the money supply and lower interest rates
B) Increase the money supply and increase interest rates
C) Decrease the money supply and lower interest rates
D) Decrease the money supply and increase interest rates

Question 67

When the money supply decreases,other things being equal,

A) real interest rates fall and investment spending rises.
B) real interest rates fall and investment spending falls.
C) real interest rates rise and investment spending falls.
D) real interest rates rise and investment spending rises.

Question 68

When money demand decreases,the Fed can choose between:

A) increasing interest rates or increasing the supply of money.
B) increasing interest rates or decreasing the supply of money.
C) decreasing interest rates or increasing the supply of money.
D) decreasing interest rates or decreasing the supply of money.

Question 69

If nominal interest rates rise,what will happen to demand for money?

A) It will increase.
B) It will decrease.
C) Nothing; the economy will move to a new quantity demanded at a new interest rate.
D) It depends on what happens to other determinants of demand for money like prices or income.

Question 70

The quantity of money demanded varies ____ with the nominal interest rate,but the supply of money is almost perfectly ____ with respect to nominal interest rates.

A) inversely; elastic
B) directly; elastic
C) inversely; inelastic
D) directly; inelastic

Question 71

If money supply and money demand both increased:

A) nominal interest rates would increase and investment would increase.
B) niminal interest rates would increase and investment would decrease.
C) niminal interest rates would decrease and investment would increase.
D) the change in nominal interest rates and investment would be indeterminate.

Question 72

When the economy is in a recession,

A) expansionary monetary policy can potentially result in increased real output, but only in the short run.
B) expansionary monetary policy can potentially result in increased real output in both the short run and long run.
C) contractionary monetary policy can potentially result in increased real output, but only in the short run.
D) contractionary monetary policy can potentially result in increased real output in both the short run and long run.

Question 73

If commercial banks are increasing their borrowing from the Fed while the Fed is selling government securities,the borrowing of the commercial banks from the Fed will tend to:

A) reinforce the contractionary open market operations policy.
B) reinforce the expansionary open market operations policy.
C) counteract the contractionary open market operations policy.
D) counteract the expansionary open market operations policy.

Question 74

An increase in the money supply:

A) will definitely result in inflation if unemployment is high and there is much unused industrial capacity.
B) shifts the aggregate demand curve to the left.
C) will probably result in inflation if the economy is fully employed.
D) causes interest rates to rise.

Question 75

When the economy is initially at full employment:

A) expansionary monetary policy will tend to increase the price level in the short run and the long run.
B) expansionary monetary policy will tend to increase the price level in the short run but not the long run.
C) expansionary monetary policy will tend to increase the price level in the long run but not the short run.
D) expansionary monetary policy will not tend to increase the price level in the short run or the long run.

Question 76

An open market purchase of government securities by the Fed will tend to result in which of the following,other things being equal?

A) increased bond prices
B) an increase in real output
C) decreased interest rates
D) all of the above

Question 77

If the Fed was to use all of its three most common tools to increase the money supply,it would:

A) buy bonds, reduce the discount rate, and reduce reserve requirements.
B) sell bonds, reduce the discount rate, and reduce reserve requirements.
C) sell bonds, reduce the discount rate, and increase reserve requirements.
D) sell bonds, increase the discount rate, and increase reserve requirements.

Question 78

A combination of an increase in the discount rate and an open market sale of government securities by the Fed would:

A) increase the money supply.
B) decrease the money supply.
C) leave the money supply unchanged.
D) have an indeterminate effect on the money supply.

Question 79

If the Fed sells bonds,the short run impact of this policy will tend to include:

A) an increase in the inflation rate.
B) a reduction in unemployment.
C) an increase in real output.
D) an increase in real interest rates.

Question 80

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP,in the short run,an unanticipated decrease in the money supply will:

A) raise real interest rates, lower the price level, and reduce real GDP.
B) raise real interest rates, lower the price level, and leave real GDP unchanged.
C) raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D) lower real interest rates, raise the price level, and increase real GDP.