Question 1

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

Accepted Answer

To reduce nominal interest rates, the Fed needs to increase the money supply. A purchase of bonds injects money into the economy, therefore increasing the money supply.

Question 2

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

Accepted Answer

Conducting open-market purchases is a common way for the Federal Reserve to increase the money supply. This involves buying government bonds from banks, which gives the banks more money to lend out, increasing the overall money supply in the economy. Increasing reserve requirements (A) and increasing the discount rate (B) have the opposite effect, as they decrease the amount of money banks have available to lend. Increasing the interest on reserves (D) may encourage banks to hold onto their reserves rather than lending them out, which can also decrease the money supply.

Question 3

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 (i.e., deposits held in reserve by the bank) to bank deposits (i.e., the total amount of deposits held in the bank) that commercial banks are required to maintain. This is done to ensure that banks have enough money on hand to cover withdrawals and prevent bank runs.

Question 4

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 means that they are selling bonds from their portfolio to the public. This reduces the amount of reserves that banks have, which in turn reduces the money supply. When the money supply decreases, the demand for money increases, which causes interest rates to increase. Therefore, to increase nominal interest rates, the Fed must engage in an open market sale of bonds that decreases the money supply.

Question 5

The Federal Reserve can:

Accepted Answer

The Federal Reserve can set a target interest rate or a target money supply, but not both. The money supply is within the Fed's control but money demand is not.

Question 6

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, the quantity of reserves in the banking system increases. This increase in reserves allows banks to increase their lending, which ultimately increases the money supply. Therefore, option A is the correct answer.

Question 7

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 current money supply in Macroland is calculated as currency held by the public plus bank reserves which is 2,000 + 300 = 2,300 econs. The desired reserve/deposit ratio is 15%, meaning that banks want to hold reserves of 15% of their deposits. If banks borrow 100 econs in reserves from the central bank, then they will be able to create new deposits of 100/0.15 = 667 econs. Therefore, the new money supply will be the sum of currency held by the public, bank reserves, and new deposits which is 2,000 + 400 (300 - 100) + 667 = 4,667 econs. Therefore, the money supply will increase to 4,667 econs.

Question 8

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 9

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 keep less money on hand and can therefore lend out more money. This means that loans and deposits will increase, leading to an increase in the money supply.

Question 10

The Federal Reserve can increase the money supply by:

Accepted Answer

When the Federal Reserve reduces reserve requirements, commercial banks are required to hold less money in reserves, which allows them to lend out more money and increase the money supply. Increasing the discount rate, eliminating deposit insurance, and conducting open market sales all have the opposite effect of reducing the money supply.

Question 11

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

Accepted Answer

The Federal Reserve can only set a target money supply that is consistent with the target nominal interest rate target. This is because the demand for money is determined by factors beyond the control of the Fed, such as the level of economic activity and consumer preferences. Therefore, the Fed must adjust the money supply to meet the demand at the target interest rate.

Question 12

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 13

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 money...

Question 14

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

Accepted Answer

Open-market sales involve the Fed selling government securities to banks and individuals, which decreases the amount of money in circulation and ultimately decreases the money supply. Decreasing reserve requirements, decreasing the discount rate, and decreasing the interest paid on reserves, on the other hand, would all encourage banks to lend more, which would increase the money supply.

Question 15

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

Accepted Answer

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

Question 16

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, then banks will have to hold a larger portion of their deposits as reserves and will have less to lend out. This will decrease their loans and deposits, leading to a decrease in the money supply.

Question 17

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

To offset the increase in money demand during the Christmas shopping season, the Fed must increase the money supply. This will put downward pressure on nominal interest rates as an increase in money supply leads to a decrease in interest rates.

Question 18

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

Accepted Answer

Discount window lending is when the Federal Reserve directly lends reserves to commercial banks. This is different from open-market operations, where the Federal Reserve buys or sells government securities in order to affect the supply of reserves in the banking system. It is also different from changes in reserve requirements, which mandate that banks hold a certain percentage of their deposits as reserves.

Question 19

The Federal Reserve can decrease the money supply by:

Accepted Answer

The Federal Reserve can decrease the money supply by increasing reserve requirements, meaning banks have to hold more money in their reserves and can't lend out as much. This reduces the amount of money in circulation and is a way for the Fed to combat inflation. The other options either have no effect on the money supply (deposit insurance) or increase it (decreasing the discount rate or conducting open market purchases).

Question 20

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...

Quiz 23: Monetary Policy and the Federal Reserve

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

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

Reserve requirements set by the Federal Reserve are the:

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

The Federal Reserve can:

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 _.

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 _.

The Federal Reserve can increase the money supply by:

If the Federal Reserve sets a target nominal interest rate,it 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 _.

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 wants to decrease the money supply,it should:

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

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 _.

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

The Federal Reserve can decrease the money supply by:

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