Question 1

To lower the short-term interest rate, the Federal Reserve can:
A)buy Treasury bills.
B)sell Treasury bills.
C)tell the banks to make more loans.
D)tell the banks to make fewer loans.

Accepted Answer

Buying Treasury bills injects money into the banking system, increasing the supply of reserves and lowering the short-term interest rate. Selling Treasury bills, on the other hand, drains money from the banking system, reducing reserves and increasing the short-term interest rate. Telling banks to make more or fewer loans can have an impact on the overall level of interest rates, but does not directly affect the short-term interest rate targeted by the Federal Reserve.

Question 2

When the Federal Reserve buys Treasury bills, this leads to:
A)a decrease in the money supply.
B)an increase in the money supply.
C)an increase in short-term interest rates.
D)an increase in the Federal Reserve funds rate.

Accepted Answer

When the Federal Reserve buys Treasury bills, it injects money into the economy, leading to an increase in the money supply. This is because the seller of the Treasury bill receives payment from the Federal Reserve, which they can then deposit in their bank account, adding to the overall money supply.

Question 3

According to the liquidity preference model, a _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate.
A)decrease; right
B)increase; left
C)decrease; left
D)increase; right

Accepted Answer

According to the liquidity preference model, a decrease in the money supply shifts the money supply curve to the left and increases the equilibrium interest rate.

Question 4

To expand the money supply, the Federal Reserve would have to:
A)make an open purchase of Treasury bills.
B)have an open sale of Treasury bills.
C)raise interest rates.
D)get approval from Congress.

Accepted Answer

To expand the money supply, the Federal Reserve would need to make an open purchase of Treasury bills. When the Federal Reserve buys Treasury bills, it injects money into the economy, which increases the money supply. This is known as expansionary monetary policy. A sale of Treasury bills would have the opposite effect and reduce the money supply. Raising interest rates is a tool used to contract the money supply, so it would not be used to expand it. The Federal Reserve does not need approval from Congress to conduct monetary policy.

Question 5

In September 2007, reversing its course, the Federal Reserve began a series of:
A)interest rate increases, reversing its previous policy of lowering interest rates to fight the financial crisis.
B)interest rate increases to combat inflation.
C)cuts in the reserve requirements, reversing its previous policy of increasing the reserve requirement, to stop bank failures.
D)cuts in the federal funds target rate to lower the interest rate, reversing its previous policy of raising interest rates, to fight the financial crisis.

Accepted Answer

The question specifically mentions the Federal Reserve "reversing its course" in September 2007. This implies that the previous policy was different from the new policy. The Federal Reserve's previous policy was to raise interest rates to fight the financial crisis. Therefore, the new policy must be to lower interest rates. The only option that reflects this is D, which states that the Federal Reserve began cutting the federal funds target rate to lower the interest rate.

Question 6

The Federal Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ money _____.
A)sell; decrease; demand
B)sell; decrease; supply
C)buy; decrease; supply
D)buy; increase; demand

Accepted Answer

Selling Treasury bills is a tool used by the Federal Open Market Committee to decrease the money supply, as it takes money out of circulation in exchange for the bills.

Question 7

If long-term interest rates are 8% and short-term rates are 3%, the market expects:
A)short-term rates to fall.
B)short-term rates to rise.
C)short-term rates to remain the same.
D)there is no relationship between long-term and short-term rates.

Accepted Answer

The market expects short-term rates to rise to eventually meet the 8% long-term rate. The difference between the two rates is also known as the yield curve, and when it is upward sloping (as is the case in this scenario), it typically signals expected economic growth and inflation.

Question 8

The federal funds rate is:
A)determined by the supply of and demand for money.
B)set by Congress.
C)determined in the real market by the aggregate supply and aggregate demand curves.
D)the interest rate that banks pay when they borrow directly from the Fed.

Accepted Answer

The federal funds rate is influenced by the supply of and demand for reserves held at the Federal Reserve. It is not directly set by Congress, does not directly correlate with the aggregate supply and demand curves in the broader economy, and is distinct from the discount rate, which is the interest rate charged to banks when they borrow directly from the Federal Reserve.

Question 9

Suppose the Federal Reserve has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Federal Reserve should _____ Treasury bills in the open market, _____ the money supply, shift the supply of money curve to the _____, and _____ the interest rate to the target rate.
A)sell; decrease; left; raise
B)purchase; decrease; left; lower
C)purchase; increase; right; lower
D)sell; increase; left; raise

Accepted Answer

If the equilibrium interest rate is higher than the target interest rate, the Federal Reserve needs to lower the interest rate. To do this, it needs to increase the supply of money. This can be done by purchasing Treasury bills on the open market, which injects money into the economy. This will shift the supply of money curve to the right, resulting in a lower interest rate. Therefore, option C fits the logic.

Question 10

The Federal Open Market Committee sets the target interest rate for the next:
A)three months.
B)six months.
C)three weeks.
D)six weeks.

Accepted Answer

The Federal Open Market Committee (FOMC) sets the target interest rate for the next six weeks, until its next meeting, where it can adjust the rate based on economic conditions.

Question 11

Long-term interest rates are higher than short-term rates. This reflects a belief that:
A)short-term rates will fall.
B)short-term rates will rise.
C)short-term rates will remain the same.
D)the Federal Reserve is undergoing a change in policy.

Accepted Answer

Long-term interest rates being higher than short-term rates is known as a positive yield curve, which typically indicates that the market expects short-term rates to rise in the future. This is because investors demand a higher return for tying up their money for a longer period of time, and higher short-term rates would make the return on short-term investments more attractive.

Question 12

When long-term interest rates are higher than short-term rates, as they were in 2010:
A)it implies that short-term interest rates are expected to fall.
B)it has no implication for short-term interest rates.
C)it implies that inflation will fall.
D)it implies that short-term interest rates are expected to rise.

Accepted Answer

When long-term interest rates are higher than short-term rates, it typically implies that the market expects short-term rates to rise in the future. This is because long-term rates tend to reflect market expectations for future economic growth and inflation, while short-term rates are more influenced by current monetary policy decisions by central banks. Therefore, if long-term rates are higher, it suggests that the market is anticipating a future where monetary policy will need to tighten, leading to higher short-term rates.

Question 13

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____.
A)fall; supply curve; outward
B)fall; supply curve; inward
C)fall; demand curve; inward
D)rise; demand curve; outward

Accepted Answer

When the Federal Reserve Bank purchases Treasury bills in an open market operation, it injects money into the economy. This increases the supply of money in the money market, which shifts the supply curve outward. As a result, the equilibrium interest rate falls.

Question 14

If the Federal Reserve wants to lower the interest rate, it will:
A)decrease the money supply.
B)increase the money supply.
C)keep the money supply unchanged.
D)mandate a lower interest rate.

Accepted Answer

When the Federal Reserve wants to lower the interest rate, it typically increases the money supply by buying government securities in the open market. This injection of money into the economy pushes interest rates down as the money supply increases.

Question 15

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.
A)sell; increase; lower
B)buy; increase; lower
C)sell; decrease; raise
D)buy; decrease; raise

Accepted Answer

When the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve sells Treasury bills in the open market. This action decreases the supply of money, which in turn raises the interest rate towards the target rate.

Question 16

The Federal Open Market Committee does NOT directly control the _____ with monetary policy.
A)discount rate
B)reserve ratio
C)prime rate
D)federal funds rate

Accepted Answer

The prime rate is set by banks and is influenced by the federal funds rate, but it is not directly controlled by the Federal Open Market Committee.

Question 17

If the Federal Reserve wants to lower interest rates, it can _____ the money supply by _____ Treasury bills.
A)decrease; selling
B)decrease; buying
C)increase; selling
D)increase; buying

Accepted Answer

If the Federal Reserve wants to lower interest rates, they need to increase the money supply. One way to do this is by buying Treasury bills from banks, which injects new money into the banking system and increases the banks' reserves. As banks have more funds to lend, they can offer lower interest rates to borrowers, resulting in lower overall interest rates in the economy.

Question 18

The Federal Reserve affects interest rates by:
A)setting them with regulations.
B)open market operations that shift the money demand curve.
C)open market operations that shift the money supply curve.
D)changing tax rates.

Accepted Answer

The Federal Reserve affects interest rates by using open market operations to shift the money supply curve. By buying or selling government securities in the open market, the Fed can increase or decrease the money supply, which in turn affects the interest rates. Higher money supply leads to lower interest rates, while lower money supply leads to higher interest rates. The other options (setting interest rates with regulations and changing tax rates) are not the primary ways the Fed affects interest rates.

Question 19

Long-term interest rates and short-term interest rates:
A)usually move in lockstep.
B)always move closely together.
C)don't always move closely together.
D)are independent of one another.

Accepted Answer

Long-term interest rates and short-term interest rates don't always move closely together. While there may be some correlation between the two, there are various factors that can cause them to move in different directions. For example, changes in inflation expectations, economic growth, and monetary policies can impact long-term rates more significantly than short-term rates.

Question 20

The Federal Open Market Committee has decided that the federal funds rate should be 0.5% rather than the current rate of 1.25%. The appropriate open market action is to _____ Treasury bills to _____ money _____.
A)buy; decrease; demand
B)buy; decrease; supply
C)sell; decrease; demand
D)buy; increase; supply

Accepted Answer

To lower the federal funds rate, the Federal Open Market Committee would buy Treasury bills, which increases the money supply by injecting more money into the banking system.

Quiz 15: Monetary Policy

To lower the short-term interest rate, the Federal Reserve can:

When the Federal Reserve buys Treasury bills, this leads to:

According to the liquidity preference model, a _ in the money supply shifts the money supply curve to the _ and increases the equilibrium interest rate.

To expand the money supply, the Federal Reserve would have to:

In September 2007, reversing its course, the Federal Reserve began a series of:

The Federal Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to ___ Treasury bills to _ money ___.

If long-term interest rates are 8% and short-term rates are 3%, the market expects:

The federal funds rate is:

The Federal Open Market Committee sets the target interest rate for the next:

Long-term interest rates are higher than short-term rates. This reflects a belief that:

When long-term interest rates are higher than short-term rates, as they were in 2010:

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a ___ in the interest rate as the money _ shifts ___.

If the Federal Reserve wants to lower the interest rate, it will:

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will ___ Treasury bills in the open market, _ the supply of money, and ___ the interest rate to the target rate.

The Federal Open Market Committee does NOT directly control the _____ with monetary policy.

If the Federal Reserve wants to lower interest rates, it can _ the money supply by _ Treasury bills.

The Federal Reserve affects interest rates by:

Long-term interest rates and short-term interest rates:

The Federal Open Market Committee has decided that the federal funds rate should be 0.5% rather than the current rate of 1.25%. The appropriate open market action is to ___ Treasury bills to _ money ___.