Question 1

Which of the following increases the quantity of money?

Accepted Answer

The Fed's purchase of a government security would increase the quantity of money because it involves the creation of new money. When the Fed purchases a government security, it pays for it by increasing the reserves of the bank that sold the security. This increased reserve balance allows the bank to make more loans, which in turn increases the money supply. A, B, and D all involve a transfer of money from one entity to another and do not result in the creation of new money.

Question 2

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following changes immediately?

Accepted Answer

Exchange rate changes relatively quickly in response to monetary policy changes because it affects the demand and supply of a country's currency in the foreign exchange market.

Question 3

To increase the quantity of money in the economy, the Federal Reserve is likely to

Accepted Answer

To increase the quantity of money in the economy, the Federal Reserve typically buys government securities in an open market operation. This increases the reserves that banks hold, which in turn allows them to make more loans and create more money in the economy. Printing more money and giving it to banks (option A) would also increase the money supply, but would risk causing inflation if done to excess. Lowering tax rates (option B) may lead to increased spending and economic activity, but would not directly increase the money supply. Selling government securities (option C) would actually decrease the quantity of money in the economy.

Question 4

If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied ________ and the ________ for Treasury bills increases.

Accepted Answer

When the interest rate on Treasury bills is higher than the federal funds rate, lenders (banks) are more likely to invest in those bills, and less likely to make overnight loans. As a result, the quantity of overnight loans supplied decreases. At the same time, demand for Treasury bills increases as more lenders seek to invest in them.

Question 5

At the end of 2013, the Fed was buying about $100 billion of securities per month, a much higher amount than normal. These purchases would ________ the value of the dollar on foreign exchange markets thereby ________ U.S. exports.

Accepted Answer

The Fed's purchases of securities increase the supply of dollars in the market, which lowers the value of the dollar on foreign exchange markets. A lower value of the dollar makes U.S. exports cheaper and more attractive, leading to an increase in U.S. exports.

Question 6

If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________.

Accepted Answer

When the Fed lowers the federal funds rate, the value of the domestic currency typically decreases (exchange rate falls), making imports more expensive (decrease) and exports cheaper for foreign buyers (increase).

Question 7

Monetary policy includes adjustments in ________ so as to change ________.

Accepted Answer

Monetary policy involves adjustments in the federal funds rate, which affects the cost of borrowing and ultimately influences consumption and investment spending. These changes in spending patterns, in turn, impact aggregate demand, making option D the correct answer. Choices A and B are incorrect because interest rates do not directly affect aggregate supply, while choice C is only partially correct as an increase in the quantity of money would affect both aggregate demand and supply.

Question 8

Open market purchases by the Fed

Accepted Answer

The answer of Open market purchases by the Fed
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Question 9

The ripple effects that occur when the Fed changes the federal funds rate do NOT include ________.

Accepted Answer

The change in federal funds rate is primarily related to the financial sector and does not directly affect government spending. However, changes in interest rates can indirectly affect government spending through changes in borrowing costs.

Question 10

If the Fed wants to increase the quantity of money, it can

Accepted Answer

When the Fed wants to increase the quantity of money in the economy, it engages in expansionary monetary policy by purchasing U.S. government securities. When the Fed purchases these bonds, it injects money into the economy, thereby increasing the supply of money. Lowering income tax rates, increasing government budget deficits, and raising the exchange rate are not direct tools of monetary policy and may have different economic effects.

Question 11

Long-term interest rates fluctuate ________ short-term interest rates

Accepted Answer

Long-term interest rates tend to fluctuate less than short-term interest rates because they reflect the average expected future short-term rates, plus a term premium. This makes them generally more stable over time compared to the more volatile short-term rates that can be influenced by immediate monetary policy changes and economic news.

Question 12

If the U.S. interest rate rises, the exchange rate ________ and net exports ________.

Accepted Answer

When U.S. interest rate rises, the demand for the dollar increases, causing its value to appreciate. As a result, the exchange rate also rises. However, with an appreciation of the dollar, U.S. goods and services become more expensive for foreign buyers, which reduces net exports (exports - imports). Therefore, net exports decrease.

Question 13

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change?

Accepted Answer

The inflation rate takes the longest to change because it is a lagging indicator that reflects the aggregate effect of all economic factors, including monetary policy. It takes time for changes in the federal funds rate or other monetary policy tools to affect the economy, and then additional time for those changes to show up in the inflation rate. As a result, it can take several quarters or even years for changes in monetary policy to have a noticeable effect on the inflation rate.

Question 14

If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________.

Accepted Answer

When the Fed raises the federal funds rate, it makes U.S. assets more attractive to foreign investors, which increases the demand for dollars and causes the exchange rate to rise. As a result, imports become relatively cheaper and exports become relatively more expensive, leading to an increase in imports and decrease in exports. Therefore, the correct answer is B.

Question 15

When the Fed raises the federal funds rate

Accepted Answer

When the Fed raises the federal funds rate, it makes it more attractive for foreign investors to hold U.S.-based assets, which increases the demand for dollars and causes the value of the dollar to rise on the foreign exchange market. This can make U.S. exports more expensive and less competitive, leading to potentially lower net exports. Consumption is not directly affected by the federal funds rate.

Question 16

Long-term interest rates are ________ than short-term interest rates because long-term loans are ________ than short-term loans.

Accepted Answer

Long-term loans are riskier for lenders than short-term loans because they carry more uncertainty over time. Therefore, lenders require a higher compensation (higher interest rate) to offset this risk.

Question 17

When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________.

Accepted Answer

When the Fed lowers the federal funds rate, it makes borrowing cheaper, which tends to stimulate economic activity by increasing spending and investment. This can lead to a depreciation of the U.S. dollar because lower interest rates make dollar-denominated assets less attractive to investors, leading to a decrease in demand for the dollar. The increase in economic activity boosts aggregate demand.

Question 18

If the Fed lowers the federal funds rate, then

Accepted Answer

Lowering the federal funds rate can lead to a multiplier process that affects aggregate demand because it can stimulate borrowing and spending in the economy, increasing investment and consumption expenditure. This can boost overall demand for goods and services and potentially improve economic growth. The price of the dollar may decrease on the foreign exchange market due to the lower interest rates, which can make exports relatively cheaper and more attractive to foreign buyers. Therefore, the net exports may increase rather than decrease. However, the correct answer for this question is C since it is the most directly related impact of lowering the federal funds rate.

Question 19

When the Fed lowers the federal funds rate, aggregate demand

Accepted Answer

When the Fed lowers the federal funds rate, it becomes easier and cheaper for commercial banks to borrow money from the Fed. As a result, banks will have more money to lend to consumers and businesses, which will increase spending and investment. This increased spending and investment will lead to an increase in aggregate demand, making choice A the correct answer.

Question 20

If the Fed wants to decrease the quantity of money, it can

Accepted Answer

If the Fed wants to decrease the quantity of money in circulation, it can sell U.S. government securities. When the Fed sells these securities, it is essentially taking money out of the economy, decreasing the amount of money in circulation. Decreasing the government budget deficit or raising income tax rates may also reduce the quantity of money over time, but these actions are not direct methods for decreasing the quantity of money. Purchasing U.S. government securities would actually increase the quantity of money in circulation.

Quiz 14: Monetary Policy

Which of the following increases the quantity of money?

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following changes immediately?

To increase the quantity of money in the economy, the Federal Reserve is likely to

If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied and the for Treasury bills increases.

At the end of 2013, the Fed was buying about $100 billion of securities per month, a much higher amount than normal. These purchases would the value of the dollar on foreign exchange markets thereby U.S. exports.

If the Fed lowers the federal funds rate so that the exchange rate falls, then imports and exports .

Monetary policy includes adjustments in so as to change .

Open market purchases by the Fed

The ripple effects that occur when the Fed changes the federal funds rate do NOT include ________.

If the Fed wants to increase the quantity of money, it can

Long-term interest rates fluctuate ________ short-term interest rates

If the U.S. interest rate rises, the exchange rate and net exports .

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change?

If the Fed raises the federal funds rate so that the exchange rate rises, then imports and exports .

When the Fed raises the federal funds rate

Long-term interest rates are than short-term interest rates because long-term loans are than short-term loans.

When the Fed lowers the federal funds rate, the U.S. dollar on the foreign exchange market and .

If the Fed lowers the federal funds rate, then

When the Fed lowers the federal funds rate, aggregate demand

If the Fed wants to decrease the quantity of money, it can