Question 1

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

Accepted Answer

Long-term and short-term interest rates do not always move closely together. While they may be influenced by similar economic factors, such as inflation and monetary policy, their movements can diverge based on various factors. For example, long-term rates may be influenced by expectations for future economic growth, while short-term rates may be more affected by current market conditions and monetary policy decisions.

Question 2

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.

Accepted Answer

If the equilibrium interest rate is higher than the target interest rate, then this indicates a shortage of money in the market. To decrease the interest rate to the target rate, the Federal Reserve should purchase Treasury bills in the open market. This will increase the money supply and shift the supply of money curve to the right, lowering the interest rate to the target rate. Therefore, option C is the correct choice.

Question 3

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 _____.

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.

Question 4

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 _____.

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 5

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.

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 6

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

Accepted Answer

When the Federal Reserve buys Treasury bills, it increases the money supply in the economy by injecting new money into the banking system. This is because banks receive payment for the Treasury bills they sell to the Federal Reserve, which increases their reserves and enables them to lend more money. Thus, an increase in the money supply is the most likely outcome of this policy.

Question 7

The Federal Reserve affects interest rates by:

Accepted Answer

The Federal Reserve affects interest rates by conducting open market operations that shift the money supply curve. When the Fed conducts expansionary monetary policy by buying government securities, it increases the supply of money in the economy, which lowers interest rates. Conversely, when the Fed conducts contractionary monetary policy by selling government securities, it reduces the supply of money in the economy, which raises interest rates. The Fed does not set interest rates with regulations, and it does not change tax rates (which is the domain of fiscal policy).

Question 8

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

Accepted Answer

When long-term interest rates are higher than short-term rates, it indicates that investors are expecting short-term rates to rise in the future. Therefore, the market expects short-term rates to rise in this scenario.

Question 9

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

Accepted Answer

When the Federal Reserve buys Treasury bills from banks, it injects money into the banking system and increases the banks' reserves. This allows banks to lend out more money, which in turn lowers the interest rates for borrowers. Therefore, buying Treasury bills is the best way to lower short-term interest rates.

Question 10

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

Accepted Answer

To lower interest rates, the Federal Reserve will typically increase the money supply by buying Treasury bonds on the open market. This increases the amount of money in circulation and decreases the demand for loans, leading to lower interest rates.

Question 11

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

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 12

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 _____.

Accepted Answer

When the Federal Reserve purchases Treasury bills in an open market operation, it increases the supply of money in the market. This increase in supply leads to a fall in the interest rate. Therefore, the correct choice is A – a fall in the interest rate as the money supply curve shifts outward.

Question 13

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

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 14

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

Accepted Answer

The Federal Reserve began a series of cuts in the federal funds target rate in September 2007, which was a reversal of its previous policy of raising interest rates to fight the financial crisis. This was done to stimulate the economy and prevent a recession.

Question 15

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

Accepted Answer

The fact that long-term interest rates are higher than short-term rates suggests that investors believe that short-term rates will rise in the future. This is because long-term rates incorporate expectations about future short-term rates. Investors demand a higher return for tying up their money for a longer period of time, so they expect to be compensated for the risk that short-term rates will increase before the investment matures.

Question 16

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

Accepted Answer

If the Federal Reserve wants to lower interest rates, it can increase the money supply by buying Treasury bills. When the Fed buys Treasury bills, it injects money into the economy. This increased money supply can lead to a decrease in interest rates as banks have more money to lend and borrowers have more money to spend, which can stimulate economic growth.

Question 17

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

Accepted Answer

To expand the money supply, the Federal Reserve would have to make an open purchase of Treasury bills. This means that the Fed would buy Treasury bills from banks and other financial institutions, injecting new money into the economy and increasing the money supply. This is a common tool used by the Fed to stimulate economic growth and combat deflationary pressures. Having an open sale of Treasury bills would have the opposite effect, reducing the money supply and potentially causing economic contraction. Raising interest rates can have a similar effect of contracting the money supply, so it would not be the best choice to expand it. The Federal Reserve does not need approval from Congress to conduct open market operations.

Question 18

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

Accepted Answer

When long-term interest rates are higher than short-term rates, it is referred to as an upward-sloping yield curve. This typically implies that the market expects short-term interest rates to rise in the future, causing the difference between long-term and short-term rates to narrow. Therefore, the best choice is D.

Question 19

The federal funds rate is:

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 20

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

Accepted Answer

The answer of The Federal Open Market Committee does NOT...

Quiz 27: Monetary Policy

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 ___.

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 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.