Question 1

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

Accepted Answer

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

Question 2

The Federal Reserve can:

Accepted Answer

The Federal Reserve can set a money supply target that is consistent with a nominal interest rate target, and vice versa. These targets are interdependent, meaning that changes in one will impact the other. The Fed uses a variety of tools to influence both the money supply and interest rates, but it cannot independently set both targets without considering their impact on each other.

Question 3

If the Federal Reserve is currently paying 1% interest on bank reserves, but then reduces that interest rate to 0.5%, banks may decide to hold ______ reserves, and the money supply may _____.

Accepted Answer

The answer of If the Federal Reserve is currently paying...

Question 4

Reserve requirements set by the Federal Reserve are the:

Accepted Answer

Reserve requirements set by the Federal Reserve are the minimum value of the ratio of reserves to bank deposits that commercial banks are allowed to maintain. This means that banks must hold a certain percentage of their deposits in reserve at the Federal Reserve, which helps to ensure the stability of the banking system and control the supply of money in the economy.

Question 5

If the Federal Reserve wants to increase the money supply, it should:

Accepted Answer

Conducting open-market purchases involves the Federal Reserve buying government securities from banks, which increases the amount of money that banks have available to lend. This leads to an increase in the money supply. A decrease in reserve requirements (not listed as a choice) would also increase the money supply, as it would require banks to hold less money in reserve and make more available for lending. Increasing the discount rate and interest paid on reserves would have the opposite effect, as they would encourage banks to hold onto more reserves and lend out less money.

Question 6

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

Accepted Answer

When the Fed engages in an open market sale of bonds, it reduces the demand for bonds, which lowers their price and increases their yield (inverse relationship between price and yield). This in turn raises interest rates, making borrowing more expensive and decreasing the money supply as individuals and businesses become less likely to take out loans.

Question 7

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ______ their loans and deposits, and the money supply will _____.

Accepted Answer

If the required reserve ratio is raised to 6 percent, banks will be required to hold more reserves, which will decrease the amount of money available for lending. This will lead to a decrease in both loans and deposits, which will result in a decrease in the money supply.

Question 8

The ______ is the interest rate commercial banks pay to the Fed; the ______ is the interest rate commercial banks charge each other for short-term loans.

Accepted Answer

The interest rate that the Fed charges commercial banks that borrow reserves is called the discount rate. The "federal funds rate" is the interest rate that commercial banks charge each other for very short-term (usually overnight)loans.

Question 9

The Federal Reserve discount rate is the rate of interest charged on loans from ______ to _____.

Accepted Answer

The answer of The Federal Reserve discount rate is the...

Question 10

If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fed lowers the required reserve ratio to 3 percent, then banks may ______ their loans and deposits, and the money supply may _____.

Accepted Answer

If the required reserve ratio is lowered, banks are required to hold fewer reserves against their deposits. This frees up more money to lend, so banks may increase their loans and deposits. The increase in lending and deposits will result in an increase in the money supply.

Question 11

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. To offset this increase in money demand, the Fed would have had to ______ the money supply, which would have put ______ pressure on nominal interest rates.

Accepted Answer

The answer of Prior to January 2000, the demand for...

Question 12

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

Accepted Answer

The Federal Reserve can only set a money supply target that is consistent with the target nominal interest rate target. This is because the money supply and interest rate are interdependent variables, and adjusting one will impact the other. Therefore, the Federal Reserve must ensure that the money supply is at a level that will achieve the desired target interest rate.

Question 13

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.

Accepted Answer

During the Christmas shopping season, there is a rightward shift in the money demand curve. To respond, the Fed must increase the money supply which will put downward pressure on nominal interest rates.

Question 14

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

Accepted Answer

When commercial banks borrow reserves from the Fed, it increases the quantity of reserves in the banking system. This in turn leads to an increase in the money supply as banks are able to create more loans and deposits.

Question 15

If the Federal Reserve is currently paying 0.75% interest on bank reserves, but then increases that interest rate to 1%, banks may decide to hold ______ reserves, and the money supply may _____.

Accepted Answer

The answer of If the Federal Reserve is currently paying...

Question 16

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ______ to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

Accepted Answer

The initial money supply is the sum of currency held by the public (2,000) and bank reserves (300), which is 2,300 econs. The desired reserve ratio is 15%, which means that banks hold reserves of 15% of deposits. Therefore, the initial deposits held by the public are (2,000/0.85) = 2,352.94 econs. With the additional 100 econs borrowed by commercial banks from the Central Bank, the total reserves become 400 econs, which allows banks to increase their deposits to (2,352.94 + 100) = 2,452.94 econs. Therefore, the total money supply will be (2,452.94 + 400) = 2,852.94 econs. However, since the answer choices are rounded, the closest option is C - Increase; 4,667.

Question 17

The Federal Reserve can increase the money supply by:

Accepted Answer

By reducing reserve requirements, the Federal Reserve is able to free up more funds for banks to lend out, increasing the money supply. The other options would either have no effect or actually decrease the money supply (increasing the discount rate and conducting open market sales both make it more expensive for banks to lend out money).

Question 18

The Federal Reserve can decrease the money supply by:

Accepted Answer

The Federal Reserve can decrease the money supply by increasing reserve requirements, which means commercial banks will have to hold more funds in reserve and will have less money to lend out. This reduces the amount of money available in the economy, leading to a decrease in the money supply. The other options, such as decreasing the discount rate or conducting open market purchases, would increase the money supply rather than decrease it. Introducing deposit insurance has no direct impact on the money supply.

Question 19

If the Federal Reserve wants to decrease the money supply, it should:

Accepted Answer

Conducting open-market sales involves selling government securities to banks and individuals, which decreases the amount of money available in the banking system and thus decreases the money supply. The other options would increase the money supply by making it easier for banks to lend and borrow money.

Question 20

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

Accepted Answer

Discount window lending refers to the process by which commercial banks borrow directly from the Federal Reserve, usually as a means of meeting reserve requirements or to address short-term liquidity needs. Therefore, when the Federal Reserve lends reserves to commercial banks, it is an example of discount window lending.

Quiz 12: Short-Term Economics Fluctuations: An Introduction

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

The Federal Reserve can:

If the Federal Reserve is currently paying 1% interest on bank reserves, but then reduces that interest rate to 0.5%, banks may decide to hold __ reserves, and the money supply may _.

Reserve requirements set by the Federal Reserve are the:

If the Federal Reserve wants to increase the money supply, it should:

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

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will __ their loans and deposits, and the money supply will _.

The is the interest rate commercial banks pay to the Fed; the is the interest rate commercial banks charge each other for short-term loans.

The Federal Reserve discount rate is the rate of interest charged on loans from __ to _.

If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fed lowers the required reserve ratio to 3 percent, then banks may __ their loans and deposits, and the money supply may _.

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. To offset this increase in money demand, the Fed would have had to the money supply, which would have put pressure on nominal interest rates.

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

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.

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

If the Federal Reserve is currently paying 0.75% interest on bank reserves, but then increases that interest rate to 1%, banks may decide to hold __ reserves, and the money supply may _.

The Federal Reserve can increase the money supply by:

The Federal Reserve can decrease the money supply by:

If the Federal Reserve wants to decrease the money supply, it should:

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