Question 1

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

Accepted Answer

A)   Increase the excess reserves of member banks and thus increase the money supply
B)   Increase the excess reserves of member banks and thus decrease the money supply
C)   Decrease the excess reserves of member banks and thus decrease the money supply
D)   Decrease the excess reserves of member banks and thus increase the money supplyE) A) and B)
F) All of the above

Question 2

A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Accepted Answer

A)   Reduce inflation in the economy
B)   Raise interest rates
C)   Ease monetary policy
D)   Tighten monetary policyE) B) and C)
F) None of the above

Question 3

Which of the following statements is correct?

Accepted Answer

A)   Excess reserves may be found by subtracting actual from required reserves
B)   The supply of money declines when the public purchases securities from commercial banks
C)   Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks
D)   Commercial banks reduce the supply of money when they purchase government bonds from the publicE) B) and D)
F) B) and C)

Question 4

Which of the following is considered a limitation of monetary policy?

Accepted Answer

A)   The cause-effect chain
B)   Its cyclical asymmetry
C)   Its isolation from political pressure
D)   The speed with which it can be implementedE) None of the above
F) B) and D)

Question 5

Which of the following statements is true?

Accepted Answer

A)   Bond prices and the interest rate are inversely related
B)   A lower interest rate raises the opportunity cost of holding money
C)   The supply of money is directly related to the interest rate
D)   The total demand for money is directly related to the interest rateE) B) and C)
F) A) and D)

Question 6

If bond prices decrease, then the:

Accepted Answer

A)   Interest rate decreases
B)   Interest rate increases
C)   Transactions demand for money will decrease
D)   Transactions demand for money will increaseE) None of the above
F) B) and D)

Question 7

Which of the following varies directly with the interest rate?

Accepted Answer

A)   The opportunity cost of holding money
B)   The transactions demand for money
C)   The asset demand for money
D)   The level of investmentE) None of the above
F) All of the above

Question 8

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, 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 pointsE) B) and D)
F) A) and B)

Question 9

According to the Taylor rule, when real GDP is equal to potential GDP, and the inflation rate is equal to its target rate of two percent, the Federal funds rate should be:

Accepted Answer

A)   2 percent and this implies a real interest rate of 0 percent
B)   2 percent and this implies a real interest rate of 4 percent
C)   4 percent and this implies a real interest rate of 2 percent
D)   4 percent and this implies a real interest rate of 4 percentE) A) and D)
F) C) and D)

Question 10

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

Accepted Answer

A) True 
 B)False

Question 11

The most frequently used instrument of the Federal Reserve System to control the money supply is the required reserve ratio.

Accepted Answer

A) True 
 B)False

Question 12

When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Accepted Answer

A) True 
 B)False

Question 13

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

Accepted Answer

A)   Four percent of nominal GDP
B)   25 percent of nominal GDP
C)   Nominal GDP multiplied times 4
D)   Nominal GDP divided by 25E) B) and C)
F) All of the above

Question 14

Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) All of the above
F) A) and D)

Question 15

The conduct of monetary policy in the United States is the main responsibility of the:

Accepted Answer

A)   U.S. Treasury
B)   Federal Reserve System
C)   Office of Management and Budget
D)   Bureau of Economic AnalysisE) C) and D)
F) B) and D)

Question 16

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

Accepted Answer

A)   Reduce inflation
B)   Save the banking industry
C)   Stimulate the economy
D)   Improve the savings rateE) A) and C)
F) All of the above

Question 17

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 keepE) None of the above
F) A) and B)

Question 18

The major advantages of monetary policy include its flexibility, speed, and political palatability.

Accepted Answer

A) True 
 B)False

Question 19

Loans of the Federal Reserve Banks to commercial banks are:

Accepted Answer

A)   A liability of the Federal Reserve Banks and of the commercial banks
B)   An asset of the Federal Reserve Banks and of the commercial banks
C)   A liability of the Federal Reserve Banks and an asset for commercial banks
D)   An asset of the Federal Reserve Banks and a liability for commercial banksE) C) and D)
F) A) and D)

Question 20

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

Accepted Answer

A)   "Putting all your eggs in one basket"
B)   "Not in my own back yard"
C)   "There ain't no such thing as a free lunch"
D)   "You can lead a horse to water, but you can't make it drink"E) A) and D)
F) None of the above

Exam 16: Interest Rates and Monetary Policy

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

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The major advantages of monetary policy include its flexibility, speed, and political palatability.

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Lowering the reserve ratio:

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Which of the following varies directly with the interest rate?

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A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

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If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

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If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

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Loans of the Federal Reserve Banks to commercial banks are:

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The conduct of monetary policy in the United States is the main responsibility of the:

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Which of the following statements is true?

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Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

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If bond prices decrease, then the:

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When commercial banks borrow from the Federal Reserve Banks, they decrease their excess reserves and their money-creating potential.

Correct AnswerverifiedShow Answer

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

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Which of the following statements is correct?

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A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond increases by $2500, the interest rate in effect will:

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The most frequently used instrument of the Federal Reserve System to control the money supply is the required reserve ratio.

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Which of the following is considered a limitation of monetary policy?

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According to the Taylor rule, when real GDP is equal to potential GDP, and the inflation rate is equal to its target rate of two percent, the Federal funds rate should be:

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Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

Correct AnswerverifiedShow Answer

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