Deck 16: Interest Rates and Monetary Policy

Question 1

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be:

A) $200 billion
B) $400 billion
C) $800 billion
D) $3,200 billion

Answer 1

$200 billion

Question 2

A decrease in the interest rate will cause a(n):

A) Increase in the transactions demand for money
B) Decrease in the transactions demand for money
C) Decrease in the amount of money held as an asset
D) Increase in the amount of money held as an asset

Answer 2

Increase in the amount of money held as an asset

Question 3

A consumer holds money to meet spending needs. This would be an example of the:

A) Use of money as a measure of value
B) Use of money as legal tender
C) Transactions demand for money
D) Asset demand for money

Answer 3

Transactions demand for money

Question 4

The transactions demand for money will shift to the:

A) Left when nominal GDP increases
B) Left when nominal GDP decreases
C) Right when nominal GDP decreases
D) Right when the interest rate increases

Question 5

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by:

A) $175
B) $125
C) $75
D) $0

Question 6

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that:

A) The asset demand for money is $3,200 billion
B) The total demand for money is $4,800 billion
C) On average, each dollar will be spent five times a year
D) The supply of money needs to be increased to meet the demand

Question 7

Which line in the graph above would best illustrate the transactions demand for money curve?

A) Line 1
B) Line 2
C) Line 3
D) Line 4

Question 8

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

A) Four percent of nominal GDP
B) 25 percent of nominal GDP
C) Nominal GDP multiplied times 4
D) Nominal GDP divided by 25

Question 9

Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:

A) Rise to 7 percent
B) Rise to 6 percent
C) Fall to 4 percent
D) Fall to 5 percent

Question 10

Which of the following varies directly with the interest rate?

A) The opportunity cost of holding money
B) The transactions demand for money
C) The asset demand for money
D) The level of investment

Question 11

Which line in the graph above would best illustrate the supply of money curve?

A) Line 4
B) Line 3
C) Line 2
D) Line 1

Question 12

An increase in nominal GDP will:

A) Increase the transactions demand and the total demand for money
B) Decrease the transactions demand and the total demand for money
C) Increase the transactions demand for money but decrease the total demand for money
D) Decrease the transactions demand for money but increase the total demand for money

Question 13

Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

A) 4 percent
B) 5 percent
C) 6 percent
D) 7 percent

Question 14

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then S_m2 will shift to:

A) S_m3 and the interest rate will be 4 percent
B) S_m3 and the interest rate will be 8 percent
C) S_m1 and the interest rate will be 8 percent
D) S_m1 and the interest rate will be 4 percent

Question 15

The transactions demand for money is least likely to be a function of the:

A) Price level
B) Interest rate
C) Level of national income
D) Frequency of wage and salary payments

Question 16

Which line in the graph above would best illustrate the asset demand for money curve?

A) Line 1
B) Line 2
C) Line 3
D) Line 4

Question 17

There is an asset demand for money primarily because of which function of money?

A) Legal tender
B) Store of value
C) Measure of value
D) Medium of exchange

Question 18

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

A) $125
B) $175
C) $200
D) $225

Question 19

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown_, then the asset demand for money will increase by:

A) $75
B) $125
C) $200
D) $325

Question 20

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:

A) Transactions demand for money
B) Asset demand for money
C) Creation of fiat money
D) Use of money as a medium of exchange

Question 21

Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:

A) Decreased by $50 billion
B) Decreased by $100 billion
C) Decreased by $150 billion
D) Increased by $50 billion

Question 22

U.S. Treasury deposits at the Federal Reserve Banks are:

A) A liability of the Federal Reserve Banks and the U.S. Treasury
B) An asset of the Federal Reserve Banks and the U.S. Treasury
C) A liability of the Federal Reserve Banks and an asset for the U.S. Treasury
D) An asset of the Federal Reserve Banks and a liability for the U.S. Treasury

Question 23

Loans of the Federal Reserve Banks to commercial banks are:

A) A liability of the Federal Reserve Banks and of the commercial banks
B) An asset of the Federal Reserve Banks and of the commercial banks
C) A liability of the Federal Reserve Banks and an asset for commercial banks
D) An asset of the Federal Reserve Banks and a liability for commercial banks

Question 24

The interest rate will fall when the:

A) Quantity of money demanded exceeds the quantity of money supplied
B) Quantity of money supplied exceeds the quantity of money demanded
C) Demand for money increases
D) Supply of money decreases

Question 25

Refer to the graph above. If the equilibrium interest rate is 4 percent, the supply of money must be:

A) $250 billion
B) $200 billion
C) $150 billion
D) $100 billion

Question 26

An increase in the money supply is likely to reduce:

A) The general price level
B) Nominal income
C) Money demand
D) Interest rates

Question 27

Which of the following statements is true?

A) Bond prices and the interest rate are inversely related
B) A lower interest rate raises the opportunity cost of holding money
C) The supply of money is directly related to the interest rate
D) The total demand for money is directly related to the interest rate

Question 28

If bond prices decrease, then the:

A) Interest rate decreases
B) Interest rate increases
C) Transactions demand for money will decrease
D) Transactions demand for money will increase

Question 29

Refer to the graph above. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be:

A) 1 percent
B) 2 percent
C) 3 percent
D) 4 percent

Question 30

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:

A) $7,500
B) $8,000
C) $9,750
D) $12,500

Question 31

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, the interest rate in effect will:

A) Decrease by 1 percentage point
B) Decrease by 2 percentage points
C) Increase by 1 percentage point
D) Increase by 2 percentage points

Question 32

Refer to the graph above. If the supply of money was $200 billion, the interest rate would be:

A) 1 percent
B) 2 percent
C) 3 percent
D) 4 percent

Question 33

When the interest rate falls, the:

A) Asset demand for money decreases
B) Transactions demand for money increases
C) Total amount of money demanded increases
D) Total amount of money demanded decreases

Question 34

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

A) The interest rate increases and nominal GDP increases
B) The interest rate increases and nominal GDP decreases
C) The interest rate decreases and nominal GDP decreases
D) The interest rate decreases and nominal GDP increases

Question 35

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the:

A) Supply of money curve is vertical
B) Supply of money curve is horizontal
C) Demand for money curve is directly related to the interest rate
D) Supply of money curve is inversely related to the interest rate

Question 36

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are:

A) A liability of the Federal Reserve Banks and commercial banks
B) An asset of the Federal Reserve Banks and commercial banks
C) A liability of the Federal Reserve Banks and an asset for commercial banks
D) An asset of the Federal Reserve Banks and a liability for commercial banks

Question 37

Typically the largest asset item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

A) Loans to commercial banks
B) Federal Reserve Notes
C) Treasury deposits
D) Securities

Question 38

When the interest rate in the economy was 10%, the price of a bond with no expiration date and pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, the price of this bond will be about:

A) $4,700
B) $5,030
C) $7,128
D) $8,333

Question 39

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

A) 11 percent
B) 10 percent
C) 9 percent
D) 8 percent

Question 40

Disequilibrium in the money market is mainly corrected via a change in:

A) Bond prices
B) The price level
C) Saving levels
D) The money supply

Question 41

The interest rate that the Fed charges banks for loans to them through the traditional channel is called:

A) The discount rate
B) Interest on reserves
C) The federal funds rate
D) The prime rate

Question 42

The fundamental objective of monetary policy is to assist the economy in achieving:

A) A rapid pace of economic growth
B) A money supply which is based on the gold standard
C) A full-employment, noninflationary level of total output
D) A balanced-budget consistent with full-employment

Question 43

The Federal Reserve alters the amount of the nation's money supply by:

A) Reducing the liabilities of the banking system
B) Controlling the assets of the nation's largest banks
C) Minting coins and printing currency that is distributed to banks
D) Manipulating the size of excess reserves held by commercial banks

Question 44

The purchase and sale of government securities by the Fed is called:

A) Federal funds market
B) Open market operations
C) Money market transactions
D) Term auction facility

Question 45

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, the liabilities and net worth would be items 7 and:

A) 1, 3, and 5
B) 2, 4, and 5
C) 1, 2, and 3
D) 4, 5, and 6

Question 46

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, there would be assets of:

A) $246 billion
B) $313 billion
C) $320 billion
D) $387 billion

Question 47

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

A) $600 million, and also by $600 million if the securities are purchased directly from commercial banks
B) $800 million, and also by $800 million if the securities are purchased directly from commercial banks
C) $600 million, but by $800 million if the securities are purchased directly from commercial banks
D) $800 million, but only by $600 million if the securities are purchased directly from commercial banks

Question 48

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, the assets would be items 5 and:

A) 1 and 2
B) 2 and 3
C) 3 and 4
D) 4 and 6

Question 49

The lending ability of commercial banks increases when the:

A) Reserve ratio is raised
B) Treasury collects tax revenues
C) Fed sells securities in the open market
D) Fed buys securities in the open market

Question 50

The major purpose of the Federal Reserve buying government securities in open market operations is to:

A) Increase interest rates
B) Raise money for government spending
C) Reduce the excess reserves of banks
D) Allow banks to increase their lending

Question 51

Which of the following statements is correct?

A) Excess reserves may be found by subtracting actual from required reserves
B) The supply of money declines when the public purchases securities from commercial banks
C) Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks
D) Commercial banks reduce the supply of money when they purchase government bonds from the public

Question 52

If the Fed sells government securities to the general public in the open market:

A) The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed
B) The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed
C) The public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will increase their reserves at the Fed
D) The public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed

Question 53

The conduct of monetary policy in the United States is the main responsibility of the:

A) U.S. Treasury
B) Federal Reserve System
C) Office of Management and Budget
D) Bureau of Economic Analysis

Question 54

Which of the following Fed actions increases the excess reserves of commercial banks?

A) Selling bonds to the public
B) Selling bonds to commercial banks
C) Increasing the discount rate
D) Lower the reserve ratio

Question 55

The Federal Reserve could reduce the money supply by:

A) Lowering the required reserve ratio
B) Buying government bonds in the open market
C) Increasing the interest on reserves
D) Reducing the discount rate

Question 56

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the non-bank public, this action has the potential to increase money supply by a maximum of:

A) $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks
B) $14 billion, but by $16 billion if the securities are purchased directly from commercial banks
C) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks
D) $14 billion, and by $20 billion if the securities are purchased directly from commercial banks

Question 57

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:

A) Exchange rate
B) Discount rate
C) Interest on reserves
D) Open market operations

Question 58

The largest liability item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

A) Treasury deposits
B) Federal Reserve Notes
C) Reserves of commercial banks
D) Loans to commercial banks

Question 59

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

A) Issuing currency
B) Check collection
C) Open-market operations
D) Required reserve ratio

Question 60

If the Fed buys government securities from commercial banks in the open market:

A) The Fed gives the securities to the commercial banks and increases the banks' reserves
B) The Fed gives the securities to the commercial banks decreases the banks' reserves
C) Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
D) Commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves

Question 61

Lowering the reserve ratio:

A) Increases the total reserves in the banking system
B) Also reduces the discount rate
C) Turns required reserves into excess reserves
D) Reduces the amount of excess reserves the banks keep

Question 62

The interest rate that banks charge one another for the loan of excess reserves is the:

A) Prime interest rate
B) Federal funds rate
C) Discount rate
D) Interest on reserves

Question 63

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

A) Excess reserves by $8 million
B) Excess reserves by $200 million
C) The money supply by potentially $200 million
D) The money supply by potentially $400 million

Question 64

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the:

A) Prime rate
B) Federal funds rate
C) Discount rate
D) Consumer price index

Question 65

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:

A) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million
B) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million
C) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million
D) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million

Question 66

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in:

A) Money supply M1
B) Bank A's excess reserves
C) Bank A's liabilities
D) Bank A's required reserves

Question 67

The most recently-introduced tool of monetary policy is the:

A) Open-market operation
B) Discount rate
C) Interest on reserves
D) Reserve ratio

Question 68

In a supply-and-demand graph for the Federal funds market, the demand curve is downward-sloping because:

A) Higher rates give banks less incentive to lend to other banks
B) Higher rates give banks more incentive to borrow reserves
C) Lower rate give banks less incentive to borrow reserves
D) Lower rates give banks more incentive to borrow reserves

Question 69

Lowering the discount rate has the effect of:

A) Turning required into excess reserves
B) Turning excess into required reserves
C) Making it less expensive for commercial banks to borrow from central banks
D) Forcing commercial banks to call in outstanding loans from their best customers

Question 70

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:

A) $4.5 billion
B) $9 billion
C) $12 billion
D) $15 billion

Question 71

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately:

A) Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million
B) Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million
C) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million
D) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million

Question 72

Refer to the figure above. If the Federal funds market is at equilibrium at point C and the Federal Reserve decides to conduct an open-market sale, then it must be trying to set a:

A) Higher target federal funds rate by increasing the amount of reserves in the market
B) Higher target federal funds rate by reducing the amount of reserves in the market
C) Lower target federal funds rate by increasing the amount of reserves in the market
D) Lower target federal funds rate by reducing the amount of reserves in the market

Question 73

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately:

A) Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million
B) Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million
C) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million
D) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million

Question 74

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

A) Open-market operations
B) Check collection
C) The reserve ratio
D) The discount rate

Question 75

Raising the interest paid on reserves has the effect of making it:

A) More costly for banks to hold excess reserves
B) Less costly for banks to hold excess reserves
C) More attractive for banks to lend out their excess reserves
D) Less attractive for banks to hold required reserves

Question 76

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

A) Banking system now has excess reserves of $3 billion
B) Monetary multiplier has decreased
C) Maximum money-creating potential of the banking system has been increased by $7 billion
D) Fed has decided that money supply needed to be reduced

Question 77

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:

A) More excess reserves
B) Less excess reserves
C) More required reserves
D) Less required reserves

Question 78

The Fed can induce banks to increase their reserve holdings by:

A) Increasing the discount rate
B) Reducing the required reserve ratio
C) Increasing the interest on reserves
D) Selling securities in the open market

Question 79

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

A) Increase the excess reserves of member banks and thus increase the money supply
B) Increase the excess reserves of member banks and thus decrease the money supply
C) Decrease the excess reserves of member banks and thus decrease the money supply
D) Decrease the excess reserves of member banks and thus increase the money supply

Question 80

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

A) Reduce inflation
B) Save the banking industry
C) Stimulate the economy
D) Improve the savings rate