Question 1

When the reserve requirement is increased,

Accepted Answer

A)  required reserves are changed into excess reserves.
B)  the excess reserves of member banks are increased.
C)  a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D)  the excess reserves of member banks are reduceD.Topic: Tools of Monetary PolicyE) A) and D)
F) B) and D)

Question 2

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 increase.E) A) and B)
F) B) and D)

Question 3

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) C) and D)
F) None of the above

Question 4

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

Accepted Answer

A)  contracts and commercial bank reserves increase.
B)  expands and commercial bank reserves decrease.
C)  contracts and commercial bank reserves decrease.
D)  expands and commercial bank reserves increase.E) A) and B)
F) A) and C)

Question 5

A contraction of the money supply

Accepted Answer

A)  increases the interest rate and decreases aggregate demand.
B)  increases both the interest rate and aggregate demand.
C)  lowers the interest rate and increases aggregate demand.
D)  lowers both the interest rate and aggregate demand.E) C) and D)
F) B) and D)

Question 6

In recent years, the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the

Accepted Answer

A)  growth of the money supply.
B)  federal funds rate.
C)  prime interest rate.
D)  U.S.dollar-foreign currency exchange rate.E) B) and C)
F) A) and D)

Question 7

The liquidity trap refers to the situation where

Accepted Answer

A)  the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.
B)  excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession.
C)  the public debt is so large that federal borrowing drives up interest rates and discourages private sector spending.
D)  a financial crisis causes a run on banks and the elimination of billions in excess reserves.E) B) and C)
F) B) and D)

Question 8

When the Fed lends money to a commercial bank, the bank

Accepted Answer

A)  increases its reserves and enhances its ability to extend credit to bank customers.
B)  decreases its reserves and reduces its ability to extend credit to bank customers.
C)  pays the federal funds interest rate on the loan.
D)  pays the prime interest rate on the loan.E) B) and C)
F) None of the above

Question 9

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a fixed annual interest of $500 was $5,000.If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Accepted Answer

A)  $4,700.
B)  $5,030.
C)  $7,128.
D)  $8,333.E) All of the above
F) A) and B)

Question 10

What are two conflicting issues that the European central banks that experimented with negative interest rates found that they eventually had to balance?

Accepted Answer

A)  a desire to increase lending, but a smaller pool of excess reserve
B)  reducing unemployment, while also reducing inflation
C)  lower level of spending and more savings
D)  domestic products versus imported goodsE) None of the above
F) A) and B)

Question 11

An interesting development that happened in late 2008, relating to the Fed and bank reserves, was that the Fed

Accepted Answer

A)  reduced the reserve ratio drastically.
B)  required banks to hold more excess reserves.
C)  started paying interest on the banks' reserves.
D)  gave back all the reserves to the banks to hold as vault cash.E) B) and C)
F) A) and D)

Question 12

The prime interest rate and the federal funds rate normally change in opposite directions.

Accepted Answer

A) True 
 B)False

Question 13

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

Accepted Answer

A)  $1,800 billion.
B)  $600 billion.
C)  $200 billion.
D)  $1,200 billion.E) A) and B)
F) B) and D)

Question 14

In a repo (or repurchase agreement), if the Fed buys securities from Firm A with an agreement that Firm A will buy back the securities from the
Fed on the following day, then the Fed is acting as the lender and Firm A the borrower.

Accepted Answer

A) True 
 B)False

Question 15

In a reverse repo transaction,

Accepted Answer

A)  banks return foreclosed property to the previous owner.
B)  banks sell foreclosed property to new owners.
C)  the Fed borrows money from financial institutions.
D)  the Fed loans money to financial institutions.E) B) and C)
F) A) and C)

Question 16

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) None of the above
F) A) and C)

Question 17

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 18

The opportunity cost of holding money

Accepted Answer

A)  is zero because money is not an economic resource.
B)  varies inversely with the interest rate.
C)  varies directly with the interest rate.
D)  varies inversely with the level of economic activity.E) All of the above
F) A) and B)

Question 19

If the Fed is trying to make interest rates go down, it wants

Accepted Answer

A)  the money supply to decrease.
B)  the price level to decrease.
C)  unemployment to decrease.
D)  investment to decrease.E) A) and C)
F) A) and B)

Question 20

Assume that the required reserve ratio is 20 percent.If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately

Accepted Answer

A)  increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
B)  increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million.
C)  increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will decrease by another
D)  increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by anotherE) B) and C)
F) All of the above

Exam 36: Interest Rates and Monetary Policy

When the Fed lends money to a commercial bank, the bank

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If the Fed is trying to make interest rates go down, it wants

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When the reserve requirement is increased,

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In a reverse repo transaction,

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Assume that the required reserve ratio is 20 percent.If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately

Correct AnswerverifiedShow Answer

When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a fixed annual interest of $500 was $5,000.If the interest rate in the economy falls to 6 percent, the price of this bond will be about

Correct AnswerverifiedShow Answer

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

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The opportunity cost of holding money

Correct AnswerverifiedShow Answer

If bond prices decrease, then the

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The prime interest rate and the federal funds rate normally change in opposite directions.

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

Correct AnswerverifiedShow Answer

A contraction of the money supply

Correct AnswerverifiedShow Answer

An interesting development that happened in late 2008, relating to the Fed and bank reserves, was that the Fed

Correct AnswerverifiedShow Answer

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

Correct AnswerverifiedShow Answer

In recent years, the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the

Correct AnswerverifiedShow Answer

In a repo (or repurchase agreement), if the Fed buys securities from Firm A with an agreement that Firm A will buy back the securities from the Fed on the following day, then the Fed is acting as the lender and Firm A the borrower.

Correct AnswerverifiedShow Answer

The liquidity trap refers to the situation where

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Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

Correct AnswerverifiedShow Answer

Which of the following varies directly with the interest rate?

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What are two conflicting issues that the European central banks that experimented with negative interest rates found that they eventually had to balance?

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