Question 1

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank.The interest rate on the loan is called the

Accepted Answer

A)  prime rate.
B)  federal funds rate.
C)  Treasury bill rate.
D)  discount rate.E) A) and B)
F) A) and C)

Question 2

An increase in the money supply is likely to reduce

Accepted Answer

A)  the general price level.
B)  nominal income.
C)  money demand.
D)  interest rates.E) C) and D)
F) A) and D)

Question 3

Quantitative easing (QE) differs from open-market purchases in that QE shrinks the assets of the Fed, whereas open market purchases expand the
Fed's assets.

Accepted Answer

A) True 
 B)False

Question 4

The fundamental objective of monetary policy is to assist the economy in achieving

Accepted Answer

A)  a rapid pace of economic growth.
B)  a money supply that is based on the gold standard.
C)  a full-employment, noninflationary level of total output.
D)  a balanced-budget consistent with full employment.E) B) and C)
F) None of the above

Question 5

The Federal Reserve could reduce the money supply by

Accepted Answer

A)  lowering the required reserve ratio.
B)  buying government bonds in the open market.
C)  increasing the interest on reserves.
D)  reducing the discount rate.E) C) and D)
F) All of the above

Question 6

The possible asymmetry of monetary policy is the central idea of the

Accepted Answer

A)  invisible hand concept.
B)  ratchet analogy.
C)  pushing-on-a-string analogy.
D)  bandwagon effect.E) C) and D)
F) B) and D)

Question 7

Other things equal, an improvement in the expected rate of net profit would

Accepted Answer

A)  reduce the price level and unemployment.
B)  decrease the interest rate and cause aggregate demand to increase.
C)  increase consumption and net exports, causing aggregate demand to shift rightward.
D)  increase investment spending, real GDP, and the price level.E) A) and B)
F) A) and C)

Question 8

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Accepted Answer

A)  the asset demand for money is $3,200 billion.
B)  the total demand for money is $4,800 billion.
C)  on average, each dollar will be spent five times a year.
D)  the supply of money needs to be increased to meet the demand.E) B) and C)
F) A) and B)

Question 9

If real GDP is 2 percent below potential GDP and the inflation rate is 1 percent, then according to the Taylor rule, the Fed should make the real federal funds rate

Accepted Answer

A)  decrease by 1.5 percent.
B)  decrease by 3 percent.
C)  increase by 3 percent.
D)  decrease by 1 percent.E) B) and C)
F) A) and D)

Question 10

Monetary policy, unlike fiscal policy, does not have any time lags.

Accepted Answer

A) True 
 B)False

Question 11

Suppose the economy is at full employment with a high inflation rate.Which combination of government policies is most likely to reduce the inflation rate?

Accepted Answer

A)  buy government securities in the open market, do bond reverse-repos, and increase taxes
B)  buy government securities in the open market, do bond repos, and decrease taxes
C)  sell government securities in the open market, do bond repos, and increase government spending
D)  sell government securities in the open market, do bond reverse-repos, and cut government spendingE) A) and B)
F) B) and C)

Question 12

Which of the following is a tool of monetary policy?

Accepted Answer

A)  open-market operations
B)  changes in banking laws
C)  changes in tax rates
D)  changes in government spendingE) B) and D)
F) None of the above

Question 13

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold

Accepted Answer

A)  more excess reserves.
B)  less excess reserves.
C)  more required reserves.
D)  less required reserves.E) A) and C)
F) All of the above

Question 14

In recent years, the Federal Reserve has

Accepted Answer

A)  paid closer attention to M1 than M2 in setting monetary targets.
B)  relied more on changes in the discount rate than open-market operations in establishing monetary policy.
C)  increased M2 at a fixed annual rate, regardless of the health of the economy.
D)  taken an activist, pragmatic approach to monetary policy, paying close attention to interest rates.E) A) and B)
F) A) and C)

Question 15

Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to

Accepted Answer

A)  increase by $6 billion.
B)  increase by $8 billion.
C)  increase by $32 billion.
D)  decrease by $8 billion.E) None of the above
F) A) and D)

Question 16

The pushing-on-a-string analogy makes the point that monetary policy may be better at

Accepted Answer

A)  controlling demand-pull inflation than cost-push inflation.
B)  pulling the aggregate demand curve leftward than pushing it rightward.
C)  pulling the unemployment rate downward than pushing the economic growth rate upward.
D)  keeping rapid inflation from occurring than reducing it once it has begun.E) A) and C)
F) None of the above

Question 17

The Fed's attempt to normalize monetary policy by increasing the interest on excess reserves rate

Accepted Answer

A)  has been frustrated by nonbank financial firms lending to banks.
B)  has been hindered by the zero lower bound problem.
C)  has succeeded in raising the federal funds rate to historically normal levels.
D)  has been slowed by offsetting reverse repo transactions.E) C) and D)
F) A) and B)

Question 18

Lowering the reserve ratio

Accepted Answer

A)  increases the total reserves in the banking system.
B)  also reduces the discount rate.
C)  turns required reserves into excess reserves.
D)  reduces the amount of excess reserves the banks keep.E) B) and C)
F) A) and D)

Question 19

One reason why Europeans continued to leave money in their bank deposits, despite negative interest rates was

Accepted Answer

A)  to support the survival of their banks.
B)  because it was required by law.
C)  to continue using electronic payments.
D)  the huge withdrawal fees that they had to pay.E) None of the above
F) A) and B)

Question 20

Since the financial crisis that began in 2007, the Federal Reserve has added a significant amount of which of the following securities?

Accepted Answer

A)  corporate bonds
B)  mortgage-backed securities
C)  common stock of financial institutions
D)  certificates of depositE) B) and D)
F) None of the above

Exam 36: Interest Rates and Monetary Policy

Other things equal, an improvement in the expected rate of net profit would

Correct AnswerverifiedShow Answer

Quantitative easing (QE) differs from open-market purchases in that QE shrinks the assets of the Fed, whereas open market purchases expand the Fed's assets.

Correct AnswerverifiedShow Answer

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold

Correct AnswerverifiedShow Answer

The Fed's attempt to normalize monetary policy by increasing the interest on excess reserves rate

Correct AnswerverifiedShow Answer

The fundamental objective of monetary policy is to assist the economy in achieving

Correct AnswerverifiedShow Answer

The Federal Reserve could reduce the money supply by

Correct AnswerverifiedShow Answer

One reason why Europeans continued to leave money in their bank deposits, despite negative interest rates was

Correct AnswerverifiedShow Answer

The pushing-on-a-string analogy makes the point that monetary policy may be better at

Correct AnswerverifiedShow Answer

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Correct AnswerverifiedShow Answer

Which of the following is a tool of monetary policy?

Correct AnswerverifiedShow Answer

If real GDP is 2 percent below potential GDP and the inflation rate is 1 percent, then according to the Taylor rule, the Fed should make the real federal funds rate

Correct AnswerverifiedShow Answer

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank.The interest rate on the loan is called the

Correct AnswerverifiedShow Answer

The possible asymmetry of monetary policy is the central idea of the

Correct AnswerverifiedShow Answer

Lowering the reserve ratio

Correct AnswerverifiedShow Answer

In recent years, the Federal Reserve has

Correct AnswerverifiedShow Answer

Since the financial crisis that began in 2007, the Federal Reserve has added a significant amount of which of the following securities?

Correct AnswerverifiedShow Answer

Suppose the economy is at full employment with a high inflation rate.Which combination of government policies is most likely to reduce the inflation rate?

Correct AnswerverifiedShow Answer

Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to

Correct AnswerverifiedShow Answer

An increase in the money supply is likely to reduce

Correct AnswerverifiedShow Answer

Monetary policy, unlike fiscal policy, does not have any time lags.

Correct AnswerverifiedShow Answer

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