Question 1

When the Federal Reserve buys or sells foreign exchange to move exchange rates to targeted levels, it engages in foreign reserve coordination.

Accepted Answer

The correct term for when the Federal Reserve buys or sells foreign exchange to move exchange rates to targeted levels is foreign exchange intervention, not foreign reserve coordination.

Question 2

Increased demand for U.S. products by foreigners will lead to a depreciation of the U.S. dollar relative to foreign currencies.

Accepted Answer

Increased demand for U.S. products by foreigners leads to an appreciation of the U.S. dollar relative to foreign currencies, as more foreign currency is exchanged into dollars to purchase these products, increasing the value of the dollar.

Question 3

The Fed has set a uniform reserve requirement of 3 percent for all deposits in the U.S. banking system.

Accepted Answer

The Fed has various reserve requirements based on the type and size of deposits held by individual banks. The reserve requirement can range from 0 to 10 percent.

Question 4

Suppose the aggregate supply curve for the economy is upward sloping. Then, other things being equal, an open market purchase by the Federal Reserve will raise both the equilibrium price level and equilibrium national income.

Accepted Answer

An open market purchase by the Federal Reserve increases the money supply, which shifts the aggregate demand curve rightward. Since the aggregate supply curve is upward sloping, the increase in aggregate demand leads to higher equilibrium price level and output level (national income).

Question 5

Other things being equal, when the Fed raises the reserve requirement, the banking system's excess reserves fall, the deposit expansion multiplier declines, and the money supply decreases.

Accepted Answer

When the Fed raises the reserve requirement, banks are required to hold a higher percentage of deposits as reserves. This means they have less excess reserves to lend out, which decreases the deposit expansion multiplier. As a result, the money supply decreases.

Question 6

The monetary authorities in many nations no longer use intermediate targets; instead, they target real GDP growth.

Accepted Answer

While many central banks do incorporate real GDP growth into their decision-making process, most still rely on intermediate targets such as inflation or interest rates to guide their monetary policy. Real GDP growth is just one of several factors considered when making these policy decisions.

Question 7

The Fed's ultimate goal is to grow GDP and have a low, steady rate of inflation, but it also aims to control intermediate targets like the growth of the money supply.

Accepted Answer

The Fed's ultimate goal is to promote maximum employment, stable prices, and moderate long-term interest rates, but it also aims to control intermediate targets like the growth of the money supply through its monetary policy tools.

Question 8

Suppose that the nominal money supply equals $2 billion and nominal GDP is $16 billion. According to the equation of exchange, the velocity of money must equal 8.

Accepted Answer

According to the equation of exchange, MV = PQ, where M is the nominal money supply, V is the velocity of money, P is the price level, and Q is real GDP. Solving for V, we get V = PQ/M. In this case, we have M = $2 billion and PQ = $16 billion, so V = 8.

Question 9

The demand for money consists of transactions demand, speculative demand, and precautionary demand.

Accepted Answer

This is correct. The demand for money is generally divided into three components: transactions demand, speculative demand, and precautionary demand.

Question 10

When individuals travel away from home, they usually carry more money than they expect to spend. This illustrates the precautionary demand for money.

Accepted Answer

The precautionary demand for money is the demand for money to serve as a buffer against unforeseen contingencies, which includes unexpected expenses when traveling. Therefore, individuals tend to carry more money than they expect to spend.

Question 11

The current yield on a bond equals the annual interest payment it gives the holder.

Accepted Answer

The current yield on a bond is calculated by dividing the annual interest payment by the bond's current market price, not just the interest payment itself.

Question 12

There is an inverse relationship between the interest rate and the quantity of money demanded.

Accepted Answer

As the interest rate increases, the cost of borrowing money increases and the demand for money decreases. Conversely, as the interest rate decreases, the cost of borrowing money decreases and the demand for money increases. This is known as the demand for money curve or the liquidity preference curve.

Question 13

A central bank may find it politically attractive to keep inflation in check, so stimulating the economy takes a secondary position.

Accepted Answer

Central banks typically prioritize stimulating the economy over keeping inflation in check, as their main goal is to promote economic growth and stability. However, in some cases, there may be political pressure to keep inflation low, even if it means sacrificing short-term economic growth. Ultimately, the priorities of a central bank may be influenced by a range of factors, including economic conditions, political realities, and institutional mandates.

Question 14

Small banks hold a greater percentage of deposits in reserve than large banks do.

Accepted Answer

The answer of Small banks hold a greater percentage of...

Question 15

In the United States, the discount rate charged by the Fed differs from bank to bank.

Accepted Answer

The discount rate is set by the Federal Reserve and is uniform across all banks.

Question 16

When velocity is not constant, there can be problems with using money growth rates as an intermediate target.

Accepted Answer

When velocity is not constant, changes in the money supply may not have a predictable effect on output and prices. Therefore, targeting the growth rate of money may not be an effective intermediate target for policymakers.

Question 17

The Federal Reserve and the federal government are pursuing different policy goals with respect to aggregate demand if, as the government raises spending to promote economic growth, the Fed sells government bonds on the open market.

Accepted Answer

The government is increasing spending to boost aggregate demand, while the Fed's sale of government bonds reduces the money supply and could potentially decrease aggregate demand. Therefore, their goals are in conflict.

Question 18

For a bank to make further loans to the public, its excess reserves must be greater than its legal reserves.

Accepted Answer

A bank can make further loans as long as it has excess reserves; it does not need excess reserves to be greater than its legal reserves. Excess reserves are the amount by which actual reserves exceed the required legal reserves.

Question 19

One of the functions of the Fed is to watch the foreign exchange market and intervene if it considers exchange rates to be moving in undesirable ways.

Accepted Answer

The Fed does monitor the foreign exchange market and has the authority to intervene if necessary in order to stabilize exchange rates. This is one of its functions as a central bank.

Question 20

Suppose the Fed intervenes in the foreign exchange market by buying Euros with U.S. dollars. To offset the effect of the intervention on the domestic money supply, the Fed has to purchase U.S. government bonds on the domestic open market.

Accepted Answer

When the Fed buys Euros with U.S. dollars, it increases the supply of dollars in the foreign exchange market, potentially affecting the domestic money supply. To offset this effect and avoid increasing the money supply, the Fed would sell U.S. government bonds in the domestic open market, not purchase them. Selling bonds absorbs dollars from the economy, counteracting the increase in money supply caused by buying Euros.

Quiz 15: Monetary Policy