Deck 3: The Fed and Interest Rates

Question 1

The Federal Reserve decreases the monetary base whenever it sells government securities.

Answer 1

True

Question 2

Unexpected high levels of inflation aid debtors at the expense of lenders.

Answer 2

True

Question 3

A prolonged "tight" monetary policy can be associated with falling bond prices.

Answer 3

True

Question 4

The cash-holding behavior of the public affects the monetary base.

Question 5

Easy monetary policy strengthens the dollar.

Question 6

Restrictive monetary policy in the United States may slow down net exports and GNP.

Question 7

When the Fed sells an asset to the private sector, the monetary base declines.

Question 8

If cash drains increase, the Fed may offset their effects with open market sales.

Question 9

The Fed substantially controls M1 by controlling total reserves of depository institutions.

Question 10

Increasing interest rates increase wealth and encourage spending.

Question 11

A significant move by the Fed toward a "tight" money policy is likely to enhance exports.

Question 12

Housing investment is sensitive to changes in interest rates.

Question 13

When a bank orders currency from the Fed, the monetary base does not change.

Question 14

Decreasing interest rates increase financial wealth and encourage consumer spending.

Question 15

There is definitely a tradeoff between stable prices and full employment.

Question 16

When reserve requirements are increased, interest rates should increase.

Question 17

Monetarists think changing the money supply impacts economic units directly rather than just through interest rates.

Question 18

The monetary base exceeds the money supply.

Question 19

Stable employment is one of the objectives of monetary policy.

Question 20

An increase in the money supply should ultimately cause security prices to decrease.

Question 21

Interest rates and the money supply tend to vary inversely, at least in the short term.

Question 22

The primary policy tool used by the Fed to meet its monetary policy goals are to
change reserve requirements, to devaluing the US$, and to change bank regulations.

Question 23

The expected effect of quantitative easing (QE) in 2010 and 2011 is to lower long-term interest rates to boost the economy.

Question 24

Cash drains decrease the monetary base, but not the money supply.

Question 25

The monetary base will decrease when:

A) banks withdraw currency from the Fed.
B) the Fed makes loans at the discount window.
C) the Fed sells securities on the open market.
D) the Fed buys securities on the open market.

Question 26

If the Fed was instead targeting interest rates and money demand dropped the Fed would likely increase the money supply.

Question 27

Real investment is encouraged by rising interest rates.

Question 28

Transaction deposits, such as DDAs, expand when the Fed sells securities.

Question 29

The Federal Open Market Committee (FOMC) is the major monetary policy making body of the U.S. Federal Reserve System.

Question 30

Reserve requirements are not useful for "fine tuning."

Question 31

The Fed exclusively controls the money supply.

Question 32

When the Fed increases the Fed Funds Rate, financial institutions "go to the Window".

Question 33

An increase in Federal Reserve float increases the monetary base.

Question 34

The Fed is powerless against "technical factors".

Question 35

The goals of U.S. monetary policy were set by Congress.

Question 36

Monetary policy only works in the short term.

Question 37

"Cash drains" are an example of a "technical factor".

Question 38

High stock prices are a goal of monetary policy.

Question 39

Monetary policy first affects financial markets and institutions, then the real economy.

Question 40

Monetary policy only works in the long term.

Question 41

Ordinarily the money supply will decrease if:

A) the Fed makes fewer loans at its discount window.
B) the Fed sells securities on the open market.
C) the Fed raises reserve requirements.
D) all of the above.

Question 42

The velocity of money measures:

A) the rate of growth of the money supply.
B) the relationship between the monetary base and the money supply.
C) the relationship between the money supply and economic activity.
D) all of the above.

Question 43

Sustained open market buying by the Fed will cause

A) the Fed Funds rate to rise.
B) planned inventory investment to fall.
C) depository institutions to lend more freely.
D) foreign investors to buy more T-Bills.

Question 44

Monetary policy impacts the economy

A) by affecting real spending directly.
B) by affecting real spending through the financial sector.
C) by changing interest rates and the cost of housing.
D) all of the above

Question 45

A decrease in the monetary base is related to

A) decrease in credit availability.
B) increasing interest rates.
C) decreased investment.
D) all of the above

Question 46

Changes in spending caused by changing security values are called the

A) liquidity effect
B) wealth effect
C) income effect
D) reactionary effect

Question 47

Generally, plant and equipment investment spending will decrease if

A) interest rates rise while inflation remains unchanged.
B) inflation decreases while interest rates remain unchanged.
C) reserve requirements rise.
D) any of the above

Question 48

Deposits tend to expand whenever:

A) reserve requirements decrease.
B) the public holds more cash.
C) reserve requirements increase.
D) monetary policy "tightens".

Question 49

If the money supply increases too rapidly

A) inflationary expectations will rise.
B) government spending will decrease.
C) bank lending will decrease.
D) investment spending will fall.

Question 50

Which of the following tools of monetary policy has the greatest impact?

A) discount rate
B) Regulation Q
C) open market operations
D) bank examination

Question 51

An expansion in the U.S. money supply

A) will increase domestic interest rates
B) will cause the exchange value of the dollar to increase.
C) will cause U.S. exports to increase.
D) will cause U.S. imports to increase.

Question 52

The intended longer run impact of monetary policy is

A) to lower interest rates.
B) to raise security prices.
C) to influence change consumption and investment spending.
D) to reduce government spending.

Question 53

Restrictive monetary policy first impacts the market, security prices and interest rates.

A) money, increasing, decreasing
B) capital, increasing, decreasing
C) money, decreasing, increasing
D) mortgage, increasing, decreasing

Question 54

An increase in the assets of Federal Reserve banks

A) decreases the monetary base.
B) increases the monetary base.
C) has no effect on monetary base.
D) always decreases another Federal Reserve Bank asset.

Question 55

The money supply

A) is exclusively controlled by the Fed.
B) is smaller than the monetary base
C) excludes any interest-bearing deposits
D) none of the above.

Question 56

An contraction in the U.S. money supply should

A) increase domestic interest rates
B) cause the exchange value of the dollar to increase.
C) cause U.S. exports to decrease.
D) all of the above.

Question 57

A decrease in reserve requirements will definitely cause

A) expenditures to fall.
B) inflation expectations to fall.
C) an increase in the Fed Funds rate.
D) excess reserves to increase.

Question 58

An increase in excess reserves will cause

A) the Fed Funds rate to rise.
B) planned inventory investment to fall.
C) depository institutions to lend more freely.
D) foreign investors to buy more T-Bills.

Question 59

Unemployment should fall if

A) wages increase and people expect prices to rise, too.
B) wages increase and people expect prices to be stable.
C) interest rates rise more than prices are expected to rise.
D) the money supply decreases.

Question 60

Consumption spending should increase if

A) financial wealth decreases.
B) reserve requirements decrease.
C) interest rates increase.
D) credit availability decreases.

Question 61

What exactly is the Fed Funds Rate, and why isn't it considered a "tool of monetary policy?

Question 62

Monetarists believe that an increase in the money supply, all else equal, will cause:

A) consumption expenditures to rise.
B) investment spending to fall.
C) national income to fall.
D) government expenditures to rise.

Question 63

Which of the following was a responsibility of the early Federal Reserve System?

A) to control the money supply
B) to safeguard the national payment system
C) to establish a more rigorous bank supervisory system
D) all of the above

Question 64

Velocity of money
A) all of the above

A) varies inversely with the money supply
B) varies directly with GDP
C) is not under the Fed's exclusive control

Question 65

List and briefly describe the channels of transmission of monetary policy.

Question 66

Which of the following would most likely decrease the Federal Funds rate?

A) decrease in the discount rate.
B) sale of securities by the Fed.
C) decrease in reserve requirements.
D) none of the above

Question 67

Monetary policies directed toward increased economic growth may have what impact upon the value of the dollar in relation to other currencies?

A) increase
B) decrease
C) no effect
D) none of the preceding

Question 68

How does the Federal Reserve control the money supply by controlling the size of the monetary
base? Note the tools of monetary policy and how each can affect the monetary base and money
supply.

Question 69

Which of the following was not a responsibility of the early Federal Reserve System?

A) replace the National Banking system
B) improve the payments system
C) establish more rigorous bank supervision
D) act as "lender of last resort"

Question 70

The Federal Reserve System established

A) a system for federal chartering of banks.
B) a system for controlling bank note issuance.
C) a source of liquidity for the banking system.
D) the beginning of demand deposit accounts.

Question 71

Monetary policy probably affects all of the following except

A) housing investment.
B) consumer durable investment.
C) inventory investment.
D) federal government budget outlays.

Question 72

Explain how the Fed adjusts its balance sheet to increase or decrease the monetary base.

Question 73

The "tools" of monetary policy, whether "viable" or not, include all the following except

A) changing the discount rate.
B) open market operations.
C) changes in reserve requirements.
D) changes in the Federal Funds rate.

Question 74

Monetarists and Keynesians agree that

A) monetary policy influences the real sector
B) changes in the money supply drive changes in interest rates
C) changes in interest rates drive changes in the money supply
D) monetary policy does not influence the real sector

Question 75

Influence of monetary policy on the real sector is

A) negligible
B) decisive
C) significant
D) insignificant

Question 76

A decrease in reserve requirements could lead to a(n)

A) Increase in bank lending
B) Increase in the money supply
C) An decrease in the discount rate
D) All above
ESSAY QUESTIONS

Question 77

Influence of monetary policy on the financial sector is

A) negligible
B) inevitable
C) limited
D) insignificant

Question 78

What should happen to consumption if the monetary base increases? Explain.

Question 79

M2 includes

A) currency in circulation
B) demand deposits
C) both
D) neither

Question 80

Which of the following is not a channel of transmission of monetary policy?

A) Reg Q interest rate ceilings
B) consumer spending for durable goods and housing
C) net exports
D) business investment in real assets