Question 1

Before the ﬁnancial crisis of 2008, if the Fed bought government securities in the open market, it

Accepted Answer

A)   decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.
B)   increased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.
C)   decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus increasing the Federal funds rate.
D)   increased the excess reserves of the banking system, raising excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.E) A) and B)
F) None of the above

Question 2

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

Accepted Answer

A)   a line parallel to the horizontal axis.
B)   a vertical line.
C)   a downsloping line or curve from left to right.
D)   an upsloping line or curve from left to right.E) A) and D)
F) B) and C)

Question 3

Open-market operations change

Accepted Answer

A)   the size of the monetary multiplier but not commercial bank reserves.
B)   commercial bank reserves but not the size of the monetary multiplier.
C)   neither commercial bank reserves nor the size of the monetary multiplier.
D)   both commercial bank reserves and the size of the monetary multiplier.E) C) and D)
F) B) and D)

Question 4

If severe demand-pull inﬂation was occurring in the economy, proper government policies would involve a government

Accepted Answer

A)   budget deﬁcit, the purchase of securities in the open market, a higher discount rate, and higher reserve requirements.
B)   budget deﬁcit, the sale of securities in the open market, a higher discount rate, and lower reserve requirements.
C)   budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
D)   budget surplus, the purchase of securities in the open market, a lower discount rate, and lower reserve requirements.E) B) and D)
F) A) and C)

Question 5

It is costly to hold money because

Accepted Answer

A)   deﬂation may reduce its purchasing power.
B)   in doing so, one sacriﬁces interest income.
C)   bond prices are highly variable.
D)   the rate at which money is spent may decline.E) B) and D)
F) A) and B)

Question 6

The purchase of government securities from the public by the Fed will cause

Accepted Answer

A)   commercial bank reserves to decrease.
B)   the money supply to increase.
C)   demand deposits to decrease.
D)   the interest rate to increase.E) A) and C)
F) A) and D)

Question 7

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money

Accepted Answer

A)   will decrease by $2, but the money-creating potential of the commercial banking system will not be affected.
B)   is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8.
C)   will directly increase by $2, and the money-creating potential of the commercial banking system will decrease by an additional $8.
D)   will directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $8.E) B) and C)
F) A) and B)

Question 8

Ben Bernanke is the current (2019) chair of the Board of Governors.

Accepted Answer

A) True 
 B)False

Question 9

Before the ﬁnancial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

Accepted Answer

A)   increased and the Federal funds rate decreased.
B)   increased and the Federal funds rate increased.
C)   decreased and the Federal funds rate decreased.
D)   decreased and the Federal funds rate increased.E) A) and B)
F) A) and C)

Question 10

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Accepted Answer

A)   the purchase of government securities in the open market and an increase in taxes
B)   the sale of government securities in the open market and a decrease in taxes
C)   the sale of government securities in the open market and a decrease in government spending
D)   the purchase of government securities in the open market and an increase in government spendingE) None of the above
F) All of the above

Question 11

Monetary policy is thought to be

Accepted Answer

A)   equally effective in moving the economy out of a depression as in controlling demand-pull inﬂation.
B)   more effective in moving the economy out of a depression than in controlling demand-pull inﬂation.
C)   more effective in controlling demand-pull inﬂation than in moving the economy out of a recession.
D)   only effective in moving the economy out of a depression.E) A) and B)
F) All of the above

Question 12

Refer to the diagram of the market for money. The vertical money supply curve  SmS _ { m }Sm​  re?ects the fact that

Accepted Answer

A)   bond prices and interest rates are inversely related.
B)   the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
C)   the rate at which money is spent is zero.
D)   lower interest rates result in lower opportunity costs of supplying money. E) C) and D)
F) A) and B)

Question 13

A bond with no expiration date has a face value of $10,000 and pays a ﬁxed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals

Accepted Answer

A)   11 percent.
B)   10 percent.
C)   9 percent.
D)   8 percent.E) B) and D)
F) C) and D)

Question 14

The equilibrium rate of interest in the market for money is determined by the intersection of the

Accepted Answer

A)   supply-of-money curve and the asset-demand-for-money curve.
B)   supply-of-money curve and the transactions-demand-for-money curve.
C)   supply-of-money curve and the total-demand-for-money curve.
D)   investment-demand curve and the total-demand-for-money curve.E) All of the above
F) B) and D)

Question 15

When the Fed raises the interest rate paid on reserves, it discourages bank lending.

Accepted Answer

A) True 
 B)False

Question 16

The higher the interest rate, the larger will be the amount of money demanded for transaction purposes.

Accepted Answer

A) True 
 B)False

Question 17

Suppose the demand for money and the supply of money increase simultaneously. We can

Accepted Answer

A)   expect the interest rate to rise and bond prices to fall.
B)   expect the interest rate to fall and bond prices to rise.
C)   expect the nominal GDP to expand.
D)   not accurately predict what will happen to interest rates or bond prices.E) B) and D)
F) A) and D)

Question 18

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 D)
F) C) and D)

Question 19

As a result of policy actions taken by the Fed since 2008, it (the Fed)  can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system. This is because

Accepted Answer

A)   Congress has taken this power away from the Fed.
B)   there is a massive amount of excess reserves already in the banking system.
C)   the federal funds rate has become rigidly ﬁxed by law.
D)   banks are no longer holding any excess reserves.E) B) and D)
F) A) and C)

Question 20

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Accepted Answer

A) True 
 B)False

Exam 16: Interest Rates and Monetary Policy

If severe demand-pull inﬂation was occurring in the economy, proper government policies would involve a government

Correct Answer
verified

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system. This is because

Correct Answer
verified

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Correct Answer
verified

When the Fed raises the interest rate paid on reserves, it discourages bank lending.

Correct Answer
verified

The purchase of government securities from the public by the Fed will cause

Correct Answer
verified

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Correct Answer
verified

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money

Correct Answer
verified

A bond with no expiration date has a face value of $10,000 and pays a ﬁxed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals

Correct Answer
verified

Correct Answer
verified

Suppose the demand for money and the supply of money increase simultaneously. We can

Correct Answer
verified

Before the ﬁnancial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

Correct Answer
verified

The equilibrium rate of interest in the market for money is determined by the intersection of the

Correct Answer
verified

Open-market operations change

Correct Answer
verified

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

Correct Answer
verified

Monetary policy is thought to be

Correct Answer
verified

Before the ﬁnancial crisis of 2008, if the Fed bought government securities in the open market, it

Correct Answer
verified

Ben Bernanke is the current (2019) chair of the Board of Governors.

Correct Answer
verified

It is costly to hold money because

Correct Answer
verified

The higher the interest rate, the larger will be the amount of money demanded for transaction purposes.

Correct Answer
verified

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

If severe demand-pull inﬂation was occurring in the economy, proper government policies would involve a government

Correct AnswerverifiedShow Answer

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system. This is because

Correct AnswerverifiedShow Answer

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Correct AnswerverifiedShow Answer

When the Fed raises the interest rate paid on reserves, it discourages bank lending.

Correct AnswerverifiedShow Answer

The purchase of government securities from the public by the Fed will cause

Correct AnswerverifiedShow Answer

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

Correct AnswerverifiedShow Answer

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money

Correct AnswerverifiedShow Answer

A bond with no expiration date has a face value of $10,000 and pays a ﬁxed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals

Correct AnswerverifiedShow Answer

Refer to the diagram of the market for money. The vertical money supply curve SmS _ { m }Sm​ re?ects the fact that

Correct AnswerverifiedShow Answer

Suppose the demand for money and the supply of money increase simultaneously. We can

Correct AnswerverifiedShow Answer

Before the ﬁnancial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

Correct AnswerverifiedShow Answer

The equilibrium rate of interest in the market for money is determined by the intersection of the

Correct AnswerverifiedShow Answer

Open-market operations change

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Monetary policy is thought to be

Correct AnswerverifiedShow Answer

Before the ﬁnancial crisis of 2008, if the Fed bought government securities in the open market, it

Correct AnswerverifiedShow Answer

Ben Bernanke is the current (2019) chair of the Board of Governors.

Correct AnswerverifiedShow Answer

It is costly to hold money because

Correct AnswerverifiedShow Answer

The higher the interest rate, the larger will be the amount of money demanded for transaction purposes.

Correct AnswerverifiedShow Answer

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

Correct AnswerverifiedShow Answer

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