Question 1

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.
A)greater; fall; increase
B)less; rise; decrease
C)greater; rise; increase
D)less; fall; increase

Accepted Answer

If the nominal interest rate is above the equilibrium value, it means that the actual interest rate is higher than the rate that balances the supply and demand for money. As a result, people will want to hold less money than is available in the market, which means the quantity demanded of money will be less than the quantity supplied. To get rid of excess money, people will try to buy bonds, which will increase the demand for them and drive up their prices. When bond prices rise, the interest rate falls, so the nominal interest rate will decrease until it reaches the equilibrium value.

Question 2

If the Fed wishes to increase nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.
A)sale; increases
B)sale; decreases
C)sale; does not change
D)purchase; increases

Accepted Answer

When the Fed sells bonds on the open market, it decreases the money supply because it is taking money out of circulation. With less money in circulation, the demand for money increases and nominal interest rates rise.

Question 3

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.
A)potential output
B)the nominal interest rate
C)government purchases
D)the budget deficit

Accepted Answer

The value of the money supply chosen by the Federal Reserve directly affects the nominal interest rate, as it is one of the tools used by the Fed to influence monetary policy. When the Fed increases the money supply, it typically leads to lower interest rates, and vice versa when the Fed decreases the money supply. Therefore, B is the best answer. The other options may indirectly be affected by the money supply, but not as directly as the nominal interest rate.

Question 4

The equilibrium quantity of money in circulation is determined by:
A)the interaction of an upward-sloping money supply curve and a downward-sloping money demand curve.
B)the nominal interest rate, real income, and the price level.
C)the Federal Reserve.
D)the decentralized interactions between households and businesses.

Accepted Answer

The answer of The equilibrium quantity of money in circulation...

Question 5

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.
A)increase; downward
B)increase; upward
C)decrease; downward
D)decrease; upward

Accepted Answer

To offset an increase in money demand, the Fed would increase the money supply, which would put downward pressure on nominal interest rates.

Question 6

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 9%, it must conduct open market ______ to set the money supply at _____. 
A)purchases; 100
B)sales; 100
C)purchases; 900
D)sales; 900

Accepted Answer

The answer of Refer to the figure below.If the Federal...

Question 7

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.
A)sale; increases
B)sale; decreases
C)purchase; decreases
D)purchase; increases

Accepted Answer

The Fed can reduce nominal interest rates by purchasing bonds in open market operations, which increases the money supply in the economy. This increased supply of money leads to a lower demand for money, which lowers the interest rate as lenders compete for borrowers. Therefore, the correct choice is purchasing bonds that increase the money supply (choice D).

Question 8

During the Christmas shopping season, the demand for money increases significantly.If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will:
A)increase.
B)decrease.
C)remain constant.
D)equal the real interest rates.

Accepted Answer

If the Fed takes no actions to offset the increase in money demand, the supply of money will remain constant while demand increases, leading to an excess demand for money. This will cause lenders to raise nominal interest rates to entice borrowers to borrow less and save more, thus reducing the demand for money.

Question 9

Refer to the figure below.If the Federal Reserve wants to raise the interest rate to 7%, it must ______ the money supply to _____. 
A)increase; 300
B)decrease; 300
C)increase; 900
D)increase; 700

Accepted Answer

The answer of Refer to the figure below.If the Federal...

Question 10

Because the Fed determines the money supply, the:
A)money supply curve is downward sloping.
B)money supply curve is upward sloping.
C)money supply curve is vertical.
D)money supply curve is horizontal.

Accepted Answer

The money supply curve is vertical because the Federal Reserve controls the money supply, making it independent of the interest rate.

Question 11

Refer to the figure below.If the Federal Reserve wants to lower the interest rate to 3%, it must ______ the money supply to _____. 
A)increase; 300
B)decrease; 300
C)increase; 900
D)increase; 700

Accepted Answer

The answer of Refer to the figure below.If the Federal...

Question 12

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.
A)sell; fall; rise
B)sell; fall; fall
C)sell; rise; fall
D)buy; fall; rise

Accepted Answer

If the quantity supplied of money is less than the quantity demanded of money, people will try to sell bonds in order to increase their money holdings, leading to a decrease in bond prices. As the price of bonds falls, the nominal interest rate (which moves inversely to bond prices) will rise in order to attract buyers until the quantity demanded and supplied of money are equal.

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.
A)increase; downward
B)increase; upward
C)decrease; downward
D)decrease; upward

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

Any target value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.
A)potential output
B)the money supply
C)government purchases
D)the budget deficit

Accepted Answer

The nominal interest rate is an important tool for the Federal Reserve to affect the money supply in the economy. When the central bank increases interest rates, it makes borrowing more expensive and reduces the amount of money in circulation. Conversely, when it decreases interest rates, it makes borrowing cheaper and increases the amount of money in circulation. Therefore, any target value of the nominal interest rate chosen by the Fed will imply a specific value for the money supply.

Question 15

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 1%, it must conduct open market ______ to set the money supply at _____. 
A)purchases; 300
B)sales; 100
C)purchases; 900
D)sales; 900

Accepted Answer

The answer of Refer to the figure below.If the Federal...

Question 16

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.
A)greater; fall; increase
B)greater; fall; decrease
C)greater; rise; increase
D)less; fall; increase

Accepted Answer

When the nominal interest rate is below the equilibrium, the quantity demanded of money is greater than the quantity supplied by the Fed. In this case, bond prices fall as bonds are sold to raise cash, which drives the nominal interest rate up.

Question 17

The Federal Reserve can:
A)simultaneously set independent money supply and nominal interest rate targets.
B)only target the nominal interest rate, not the money supply.
C)only set a money supply target that is consistent with a nominal interest rate target, and vice versa.
D)only target the money supply, not the nominal interest rate.

Accepted Answer

The Federal Reserve sets a target for the federal funds rate (which is the nominal interest rate at which banks lend and borrow) through open market operations. By buying and selling government securities, the Fed can influence the money supply and thereby move the federal funds rate toward its target. Therefore, the Fed cannot independently set targets for both the money supply and nominal interest rate; rather, it must set a target for one that is consistent with a target for the other.

Question 18

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to
______ until the quantity demanded and quantity supplied of money are equal.
A)buy; rise; fall
B)sell; fall; fall
C)sell; rise; fall
D)buy; fall; rise

Accepted Answer

When the quantity supplied of money exceeds the quantity demanded, people buy bonds to shed cash. This raises bond prices and causes nominal interest rates to fall.

Question 19

Refer to the figure below.Based on the diagram, the nominal interest rate equals ______ and the money supply equals ____. 
A)7%; 300
B)1%; 500
C)5%; 500
D)3%; 700

Accepted Answer

The answer of Refer to the figure below.Based on the...

Question 20

Prior to January 2000, the demand for money increased as people anticipated Y2K problems.If the Fed had taken no action to offset this increase in money demand, then nominal interest rates would have:
A)increased.
B)decreased.
C)remained constant.
D)fallen below real interest rates.

Accepted Answer

If the Fed took no action to offset the increase in money demand, the higher demand for money would lead to higher nominal interest rates as people competed to hold more money.

Quiz 12: Monetary Policy and the Federal Reserve

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

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

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

The equilibrium quantity of money in circulation is determined by:

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.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 9%, it must conduct open market __ to set the money supply at _.

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

During the Christmas shopping season, the demand for money increases significantly.If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will:

Refer to the figure below.If the Federal Reserve wants to raise the interest rate to 7%, it must __ the money supply to _.

Because the Fed determines the money supply, the:

Refer to the figure below.If the Federal Reserve wants to lower the interest rate to 3%, it must __ the money supply to _.

If the quantity supplied of money is less than the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

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.

Any target value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 1%, it must conduct open market __ to set the money supply at _.

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

The Federal Reserve can:

If the quantity supplied of money exceeds the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

Refer to the figure below.Based on the diagram, the nominal interest rate equals __ and the money supply equals .

Prior to January 2000, the demand for money increased as people anticipated Y2K problems.If the Fed had taken no action to offset this increase in money demand, then nominal interest rates would have:

Quiz 12: Monetary Policy and the Federal Reserve

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

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

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

The equilibrium quantity of money in circulation is determined by:

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.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 9%, it must conduct open market ______ to set the money supply at _____.

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

During the Christmas shopping season, the demand for money increases significantly.If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will:

Refer to the figure below.If the Federal Reserve wants to raise the interest rate to 7%, it must ______ the money supply to _____.

Because the Fed determines the money supply, the:

Refer to the figure below.If the Federal Reserve wants to lower the interest rate to 3%, it must ______ the money supply to _____.

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

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.

Any target value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 1%, it must conduct open market ______ to set the money supply at _____.

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

The Federal Reserve can:

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

Refer to the figure below.Based on the diagram, the nominal interest rate equals ______ and the money supply equals ____.

Prior to January 2000, the demand for money increased as people anticipated Y2K problems.If the Fed had taken no action to offset this increase in money demand, then nominal interest rates would have:

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

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

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.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 9%, it must conduct open market __ to set the money supply at _.

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

Refer to the figure below.If the Federal Reserve wants to raise the interest rate to 7%, it must __ the money supply to _.

Refer to the figure below.If the Federal Reserve wants to lower the interest rate to 3%, it must __ the money supply to _.

If the quantity supplied of money is less than the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

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.

Refer to the figure below.If the Federal Reserve wants to set the nominal interest rate at 1%, it must conduct open market __ to set the money supply at _.

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

If the quantity supplied of money exceeds the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

Refer to the figure below.Based on the diagram, the nominal interest rate equals __ and the money supply equals .