Question 1

Which of the following statements about quantitative easing (or "QE")  and open market purchase is true?

Accepted Answer

A)   QE is similar to open market purchase in that both are aimed at reducing short-term interest rates in the economy
B)   QE is different from open market purchase in that QE involves not just T-bonds but also bonds issued by other government agencies and government-backed corporations
C)   QE is done by the U.S. Treasury, whereas open market purchase is done by the Federal Reserve System
D)   QE has to have Congressional approval, whereas open market purchase does notE) None of the above
F) A) and D)

Question 2

The lending ability of commercial banks increases when the:

Accepted Answer

A)   Reserve ratio is raised
B)   Treasury collects tax revenues
C)   Fed sells securities in the open market
D)   Fed buys securities in the open marketE) All of the above
F) B) and C)

Question 3

t is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by: A)  $175 B)  $125 C)  $75 D)  $0" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by:

Accepted Answer

A)   $175
B)   $125
C)   $75
D)   $0E) A) and D)
F) C) and D)

Question 4

Typically the largest asset item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013)  is:

Accepted Answer

A)   Loans to commercial banks
B)   Federal Reserve Notes
C)   Treasury deposits
D)   SecuritiesE) All of the above
F) A) and C)

Question 5

Changes in interest rates, ceteris paribus, cause a shift in:

Accepted Answer

A)   Neither the investment demand curve nor the aggregate demand curve
B)   The investment demand curve, but not the aggregate demand curve
C)   The aggregate demand curve, but not the investment demand curve
D)   The investment demand curve and the aggregate demand curveE) All of the above
F) B) and D)

Question 6

A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.

Accepted Answer

A) True 
 B)False

Question 7

The interest rate will fall when the:

Accepted Answer

A)   Quantity of money demanded exceeds the quantity of money supplied
B)   Quantity of money supplied exceeds the quantity of money demanded
C)   Demand for money increases
D)   Supply of money decreasesE) B) and D)
F) A) and B) B

Question 8

Lowering the discount rate has the effect of:

Accepted Answer

A)   Turning required into excess reserves
B)   Turning excess into required reserves
C)   Making it less expensive for commercial banks to borrow from central banks
D)   Forcing commercial banks to call in outstanding loans from their best customersE) B) and D)
F) A) and B)

Question 9

If the Fed sells government securities to the general public in the open market:

Accepted Answer

A)   The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed
B)   The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed
C)   The public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will increase their reserves at the Fed
D)   The public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the FedE) B) and C)
F) A) and D)

Question 10

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

Accepted Answer

A)   It is blunter and more politically obvious than fiscal policy
B)   It does not have any of the time lags of fiscal policy
C)   Its relative isolation from political pressure
D)   Its cyclical asymmetryE) None of the above
F) A) and B)

Question 11

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Accepted Answer

A)   Issuing currency
B)   Check collection
C)   Open-market operations
D)   Required reserve ratioE) B) and D)
F) A) and D)

Question 12

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:

Accepted Answer

A)   $7,500
B)   $8,000
C)   $9,750
D)   $12,500E) None of the above
F) B) and C)

Question 13

1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to: A)  Decrease aggregate demand by increasing the interest rate from 2 to 4 percent B)  Decrease aggregate demand by increasing the interest rate from 4 to 6 percent C)  Increase aggregate demand by decreasing the interest rate from 4 to 2 percent D)  Increase the level of investment spending from $120 billion to $150 billion" class="answers-bank-image d-inline" rel="preload" > Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to:

Accepted Answer

A)   Decrease aggregate demand by increasing the interest rate from 2 to 4 percent
B)   Decrease aggregate demand by increasing the interest rate from 4 to 6 percent
C)   Increase aggregate demand by decreasing the interest rate from 4 to 2 percent
D)   Increase the level of investment spending from $120 billion to $150 billionE) C) and D)
F) B) and D) B

Question 14

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

A)   There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP
B)   There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP
C)   There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP
D)   There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDPE) B) and D)
F) B) and C)

Question 15

Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:

Accepted Answer

A)   Rise to 7 percent
B)   Rise to 6 percent
C)   Fall to 4 percent
D)   Fall to 5 percentE) A) and B)
F) B) and C)

Question 16

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the:

Accepted Answer

A)   Prime rate
B)   Federal funds rate
C)   Discount rate
D)   Consumer price indexE) A) and B)
F) B) and C)

Question 17

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times a year.

Accepted Answer

A) True 
 B)False  True

Question 18

The interest rate that the Fed charges banks for loans to them through the traditional channel is called:

Accepted Answer

A)   The discount rate
B)   Interest on reserves
C)   The federal funds rate
D)   The prime rateE) B) and C)
F) All of the above

Question 19

Other things equal, an appreciation of the U.S. dollar would:

Accepted Answer

A)   Increase productivity and increase aggregate supply
B)   Decrease net exports and decrease aggregate demand
C)   Increase the prices of imported resources and decrease aggregate supply
D)   Decrease the supply of money and decrease aggregate demandE) C) and D)
F) B) and D)

Question 20

Which of the following statements is true?

Accepted Answer

A)   The Federal funds rate is higher than the prime interest rate
B)   The prime interest rate is higher than the Federal funds rate
C)   The Federal funds rate and the prime interest rate are often the same
D)   The prime interest rate is often the same as the discount rateE) A) and B)
F) A) and C)

Exam 16: Interest Rates and Monetary Policy

Which of the following statements about quantitative easing (or "QE") and open market purchase is true?

Correct Answer
verified

The lending ability of commercial banks increases when the:

Correct Answer
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Correct Answer
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Typically the largest asset item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

Correct Answer
verified

Changes in interest rates, ceteris paribus, cause a shift in:

Correct Answer
verified

A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.

Correct Answer
verified

The interest rate will fall when the:

Correct Answer
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B

Lowering the discount rate has the effect of:

Correct Answer
verified

If the Fed sells government securities to the general public in the open market:

Correct Answer
verified

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

Correct Answer
verified

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Correct Answer
verified

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:

Correct Answer
verified

Correct Answer
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B

Which of the following best describes what occurs when monetary authorities sell government securities?

Correct Answer
verified

Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:

Correct Answer
verified

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the:

Correct Answer
verified

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times a year.

Correct Answer
verified
True

The interest rate that the Fed charges banks for loans to them through the traditional channel is called:

Correct Answer
verified

Other things equal, an appreciation of the U.S. dollar would:

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

Which of the following statements about quantitative easing (or "QE") and open market purchase is true?

Correct AnswerverifiedShow Answer

The lending ability of commercial banks increases when the:

Correct AnswerverifiedShow Answer

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by:

Correct AnswerverifiedShow Answer

Typically the largest asset item in the Federal Reserve Banks' consolidated balance sheet (as illustrated in the book, for April 2013) is:

Correct AnswerverifiedShow Answer

Changes in interest rates, ceteris paribus, cause a shift in:

Correct AnswerverifiedShow Answer

A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.

Correct AnswerverifiedShow Answer

The interest rate will fall when the:

Correct AnswerverifiedB

Lowering the discount rate has the effect of:

Correct AnswerverifiedShow Answer

If the Fed sells government securities to the general public in the open market:

Correct AnswerverifiedShow Answer

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

Correct AnswerverifiedShow Answer

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Correct AnswerverifiedShow Answer

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Which of the following best describes what occurs when monetary authorities sell government securities?

Correct AnswerverifiedShow Answer

Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:

Correct AnswerverifiedShow Answer

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the:

Correct AnswerverifiedShow Answer

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times a year.

Correct AnswerverifiedTrue

The interest rate that the Fed charges banks for loans to them through the traditional channel is called:

Correct AnswerverifiedShow Answer

Other things equal, an appreciation of the U.S. dollar would:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

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B

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B

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True

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