Question 1

The Federal Reserve will use an inﬂation rate target of 2 percent to

Accepted Answer

A)   compensate for upward measurement bias in how the inﬂation rate is calculated.
B)   allow for downward wage ﬂexibility.
C)   avoid the zero lower bound problem.
D)   All of these choices are correct.E) All of the above
F) A) and D)

Question 2

The level of GDP, ceteris paribus, will tend to increase when

Accepted Answer

A)   reserve requirements are increased.
B)   there is an increase in the discount rate.
C)   the Federal Reserve buys government securities in the open market.
D)   the Federal Reserve sells government securities in the open market.E) None of the above
F) All of the above

Question 3

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) All of the above
F) A) and B)

Question 4

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Accepted Answer

A)   $200 billion.
B)   $400 billion.
C)   $800 billion.
D)   $3,200 billion.E) A) and D)
F) B) and C)

Question 5

Other things equal, if the supply of money is reduced,

Accepted Answer

A)   the demand for money will increase.
B)   the interest rate will fall.
C)   bond prices will fall.
D)   investment spending will increase.E) A) and B)
F) A) and C)

Question 6

The Fed increases interest rates mainly by selling government securities.

Accepted Answer

A) True 
 B)False

Question 7

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

Accepted Answer

A)   Negative nominal interest rates would stimulate borrowing and spending, increasing aggregate demand.
B)   Negative interest rates would stimulate so much lending that it would unfairly increase banks' power in the market.
C)   Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses.
D)   The Fed would lose the ability to raise the interest rates above zero in the future.E) A) and B)
F) None of the above

Question 8

Interest Rate  Transactions Demand for  Money  Asset Demand for Money  Money Supply 2%$220$300$46042202804606220260460822024046010220220460\begin{array} { | c | c | c | c | } \hline 	ext { Interest Rate } & \begin{array} { c } 	ext { Transactions Demand for } \	ext { Money }\end{array} & 	ext { Asset Demand for Money } & 	ext { Money Supply } \\hline 2 \% & \$ 220 & \$ 300 & \$ 460 \\hline 4 & 220 & 280 & 460 \\hline 6 & 220 & 260 & 460 \\hline 8 & 220 & 240 & 460 \\hline 10 & 220 & 220 & 460 \\hline\end{array} Interest Rate 2%46810​ Transactions Demand for  Money ​$220220220220220​ Asset Demand for Money $300280260240220​ Money Supply $460460460460460​​  Based on the given table, the equilibrium interest rate is

Accepted Answer

A)   2 percent.
B)   4 percent.
C)   6 percent.
D)   8 percent. E) B) and D)
F) B) and C)

Question 9

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Accepted Answer

A)   has dropped signiﬁcantly because the rate has increased.
B)   has replaced open-market operations as the most frequently used tool of monetary policy.
C)   virtually never happens, as most banks have suﬃcient excess reserves.
D)   has increased signiﬁcantly, as banks struggle to maintain enough reserves.E) None of the above
F) A) and B)

Question 10

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Accepted Answer

A) True 
 B)False

Question 11

The securities held as assets by the Federal Reserve Banks consist mainly of

Accepted Answer

A)   corporate bonds.
B)   Treasury bills, Treasury notes, and Treasury bonds.
C)   common stock.
D)   certiﬁcates of deposit.E) A) and B)
F) A) and C)

Question 12

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Accepted Answer

A)   decrease by 1 percentage point.
B)   decrease by 2 percentage points.
C)   increase by 1 percentage point.
D)   increase by 2 percentage points.E) B) and D)
F) B) and C)

Question 13

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Accepted Answer

A)   Its effectiveness was limited by the zero lower bound problem.
B)   It created a surge in inﬂation.
C)   It forced nominal interest rates to below zero.
D)   It had the desired effect, promoting full recovery by 2010.E) A) and B)
F) All of the above

Question 14

If the amount of money demanded exceeds the amount supplied, the

Accepted Answer

A)   demand-for-money curve will shift to the left.
B)   money-supply curve will shift to the right.
C)   interest rate will rise.
D)   interest rate will fall.E) None of the above
F) A) and D)

Question 15

In terms of the mechanics of quantitative easing,

Accepted Answer

A)   quantitative easing formally changes interest rates; open-market operations only inﬂuence rates.
B)   it works the same as open-market operations.
C)   it differs from open-market operations in that the securities purchases occur directly from households.
D)   it only changes the interest rate; it doesn't inﬂuence bank reserves.E) A) and C)
F) B) and D)

Question 16

Accepted Answer

A)   decrease aggregate demand from AD  AD1 to AD2A D _ { 1 } 	ext { to } A D _ { 2 }AD1​ to AD2​ 
B)   increase the money supply from $75 to $150 billion
C)   increase interest rates from 4 to 8 percent
D)   make no change in monetary policy E) A) and D)
F) A) and C)

Question 17

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Accepted Answer

A)   A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B)   A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C)   An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D)   An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.E) B) and C)
F) A) and C)

Question 18

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

Accepted Answer

A)   sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.
B)   buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed banks.
C)   sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.
D)   sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.E) C) and D)
F) A) and C)

Question 19

Which line in the graph would best illustrate the asset demand for money curve?

Accepted Answer

A)   Line 1
B)   Line 2
C)   Line 3
D)   Line 4E) B) and D)
F) B) and C)

Question 20

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Accepted Answer

A)   7.5 percent.
B)   3 percent.
C)   2 percent.
D)   1 percent.E) A) and B)
F) B) and C)

Exam 16: Interest Rates and Monetary Policy

Other things equal, if the supply of money is reduced,

Correct Answer
verified

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Correct Answer
verified

The Federal Reserve will use an inﬂation rate target of 2 percent to

Correct Answer
verified

Which line in the graph would best illustrate the asset demand for money curve?

Correct Answer
verified

$A) decrease aggregate demand from AD A D _ { 1 } \text { to } A D _ { 2 } B) increase the money supply from $75 to $150 billion C) increase interest rates from 4 to 8 percent D) make no change in monetary policy$

Correct Answer
verified

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

Correct Answer
verified

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Correct Answer
verified

The securities held as assets by the Federal Reserve Banks consist mainly of

Correct Answer
verified

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Correct Answer
verified

Correct Answer
verified

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Correct Answer
verified

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Correct Answer
verified

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

Correct Answer
verified

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Correct Answer
verified

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Correct Answer
verified

The Fed increases interest rates mainly by selling government securities.

Correct Answer
verified

The level of GDP, ceteris paribus, will tend to increase when

Correct Answer
verified

If the amount of money demanded exceeds the amount supplied, the

Correct Answer
verified

In terms of the mechanics of quantitative easing,

Correct Answer
verified

Lowering the reserve ratio

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

Other things equal, if the supply of money is reduced,

Correct AnswerverifiedShow Answer

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Correct AnswerverifiedShow Answer

The Federal Reserve will use an inﬂation rate target of 2 percent to

Correct AnswerverifiedShow Answer

Which line in the graph would best illustrate the asset demand for money curve?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?

Correct AnswerverifiedShow Answer

Since the 2008 ﬁnancial crisis, borrowing at the federal funds rate

Correct AnswerverifiedShow Answer

The securities held as assets by the Federal Reserve Banks consist mainly of

Correct AnswerverifiedShow Answer

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Correct AnswerverifiedShow Answer

According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be

Correct AnswerverifiedShow Answer

If the Federal Reserve authorities were attempting to reduce demand-pull inﬂation, the proper policies would be to

Correct AnswerverifiedShow Answer

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Correct AnswerverifiedShow Answer

A bond with no expiration has an original price of $10,000 and a ﬁxed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

Correct AnswerverifiedShow Answer

The Fed increases interest rates mainly by selling government securities.

Correct AnswerverifiedShow Answer

The level of GDP, ceteris paribus, will tend to increase when

Correct AnswerverifiedShow Answer

If the amount of money demanded exceeds the amount supplied, the

Correct AnswerverifiedShow Answer

In terms of the mechanics of quantitative easing,

Correct AnswerverifiedShow Answer

Lowering the reserve ratio

Correct AnswerverifiedShow Answer

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