Deck 36: Interest Rates and Monetary Policy

Question 1

Which of the following statements is correct? Other things equal,

A)a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B)a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged.
C)deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D)inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.

Answer 1

deflation will shift both the transactions demand curve for money and the total money demand curve to the left.

Question 2

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

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

Answer 2

$200 billion.

Question 3

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

A)horizontally adding the transactions and the asset demand for money.
B)vertically subtracting the transactions demand from the asset demand for money.
C)horizontally subtracting the asset demand from the transactions demand for money.
D)vertically adding the transactions and the asset demand for money.

Answer 3

horizontally adding the transactions and the asset demand for money.

Question 4

The opportunity cost of holding money

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.

Question 5

(Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold?

A)$200
B)$120
C)$320
D)$160

Question 6

The total demand for money will shift to the left as a result of

A)a decline in nominal GDP.
B)an increase in the price level.
C)a change in the interest rate.
D)an increase in nominal GDP.

Question 7

If the quantity of money demanded exceeds the quantity supplied,

A)the supply-of-money curve will shift to the left.
B)the demand-for-money curve will shift to the right.
C)the interest rate will rise.
D)the interest rate will fall.

Question 8

It is costly to hold money because

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.

Question 9

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

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.

Question 10

The asset demand for money is downsloping because

A)the opportunity cost of holding money increases as the interest rate rises.
B)it is more attractive to hold money at high interest rates than at low interest rates.
C)bond prices rise as interest rates rise.
D)the opportunity cost of holding money declines as the interest rate rises.

Question 11

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

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.

Question 12

The asset demand for money is most closely related to money functioning as a

A)unit of account.
B)medium of exchange.
C)store of value.
D)measure of value.

Question 13

The asset demand for money

A)is unrelated to both the interest rate and the level of GDP.
B)varies inversely with the rate of interest.
C)varies inversely with the level of real GDP.
D)varies directly with the level of nominal GDP.

Question 14

The desire to hold money for transactions purposes arises because

A)receipts of income and expenditures are not perfectly synchronized.
B)people fear that prices will rise.
C)households want money on hand in case a good financial investment opportunity arises.
D)low interest rates reduce the opportunity cost of holding money.

Question 15

In which of the following situations is it certain that the quantity of money demanded by the public will decrease?

A)nominal GDP decreases and the interest rate decreases
B)nominal GDP increases and the interest rate decreases
C)nominal GDP decreases and the interest rate increases
D)nominal GDP increases and the interest rate increases

Question 16

An increase in nominal GDP increases the demand for money because

A)interest rates will rise.
B)more money is needed to finance a larger volume of transactions.
C)bond prices will fall.
D)the opportunity cost of holding money will decline.

Question 17

Which of the following is correct?

A)The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises.
B)The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
C)The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate.
D)The asset demand for money is downsloping because bond prices and the interest rate are directly related.

Question 18

The total demand for money curve will shift to the right as a result of

A)an increase in nominal GDP.
B)an increase in the interest rate.
C)a decline in the interest rate.
D)a decline in nominal GDP.

Question 19

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

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.

Question 20

The transactions demand for money is most closely related to money functioning as a

A)unit of account.
B)medium of exchange.
C)store of value.
D)measure of value.

Question 21

The Federal Reserve Banks sell government securities to the public.As a result, the checkable deposits

A)of commercial banks are unchanged, but their reserves increase.
B)and reserves of commercial banks both decrease.
C)of commercial banks are unchanged, but their reserves decrease.
D)and reserves of commercial banks are both unchanged.

Question 22

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

A)fall, causing households and businesses to hold less money.
B)rise, causing households and businesses to hold less money.
C)rise, causing households and businesses to hold more money.
D)fall, causing households and businesses to hold more money.

Question 23

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

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

Question 24

The commercial banking system borrows from the Federal Reserve Banks.As a result, the checkable deposits

A)of commercial banks are unchanged, but their reserves increase.
B)and reserves of commercial banks both decrease.
C)of commercial banks are unchanged, but their reserves decrease.
D)and reserves of commercial banks are both unchanged.

Question 25

Which of the following is a tool of monetary policy?

A)open-market operations
B)changes in banking laws
C)changes in tax rates
D)changes in government spending

Question 26

When a commercial bank borrows from a Federal Reserve Bank,

A)the supply of money automatically increases.
B)it indicates that the commercial bank is unsound financially.
C)the commercial bank's lending ability is increased.
D)the commercial bank's reserves are reduced.

Question 27

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

A)loans to commercial banks
B)Federal Reserve Notes in circulation
C)Treasury deposits
D)reserves of commercial banks

Question 28

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.If the price of this bond falls by $200, the interest rate will

A)rise by 2.5 percentage points.
B)rise by 5 percentage points.
C)fall by 2.5 percentage points.
D)fall by 5 percentage points.

Question 29

Which of the following will increase commercial bank reserves?

A)the purchase of government bonds in the open market by the Federal Reserve Banks
B)a decrease in the reserve ratio
C)an increase in the discount rate
D)the sale of government bonds in the open market by the Federal Reserve Banks

Question 30

If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will

A)fall, causing households and businesses to hold less money.
B)rise, causing households and businesses to hold less money.
C)rise, causing households and businesses to hold more money.
D)fall, causing households and businesses to hold more money.

Question 31

Other things equal, if there is an increase in nominal GDP,

A)the demand for money will decrease.
B)the interest rate will rise.
C)bond prices will rise.
D)consumption spending will fall.

Question 32

If the demand for money and the supply of money both decrease, the equilibrium

A)interest rate will decline, but we cannot predict the change in the equilibrium quantity of money.
B)quantity of money and the equilibrium interest rate will both increase.
C)quantity of money will increase, but we cannot predict the change in the equilibrium interest rate.
D)quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

Question 33

Reserves must be deposited in the Federal Reserve Banks by

A)only commercial banks that are members of the Federal Reserve System.
B)all depository institutions, that is, all commercial banks and thrift institutions.
C)state-chartered commercial banks only.
D)federally chartered commercial banks only.

Question 34

Federal Reserve Notes in circulation are

A)an asset as viewed by the Federal Reserve Banks.
B)a liability as viewed by the Federal Reserve Banks.
C)neither an asset nor a liability as viewed by the Federal Reserve Banks.
D)part of M1 but not of M2.

Question 35

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.If the price of this bond increases to $1,250, the interest rate will

A)fall to 9 percent.
B)fall to 8 percent.
C)rise to 11 percent.
D)rise to 12 percent.Accessibility: Keyboard Navigation

Question 36

Which of the following statements is correct? Blooms: Understand

A)Interest rates and bond prices vary directly.
B)Interest rates and bond prices vary inversely.
C)Interest rates and bond prices are unrelated.
D)Interest rates and bond prices vary directly during inflations and inversely during recessions.

Question 37

The Federal Reserve Banks buy government securities from commercial banks.As a result, the checkable deposits

A)of commercial banks are unchanged, but their reserves increase.
B)and reserves of commercial banks both decrease.
C)of commercial banks are unchanged, but their reserves decrease.
D)and reserves of commercial banks are both unchanged.

Question 38

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

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.Accessibility: Keyboard Navigation

Question 39

Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to

A)fall by 4 percentage points.
B)fall by 2 percentage points.
C)rise by 4 percentage points.
D)rise by 2 percentage points.

Question 40

Since the financial crisis that began in 2007, the Federal Reserve has added a significant amount of which of the following securities?

A)corporate bonds
B)mortgage-backed securities
C)common stock of financial institutions
D)certificates of deposit

Question 41

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent.If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

A)$1,000.
B)$2,000.
C)$800.
D)$5,000.

Question 42

The four main tools of monetary policy are

A)tax-rate changes, the discount rate, open-market operations, and the federal funds rate.
B)tax-rate changes, changes in government expenditures, open-market operations, and interest on excess reserves.
C)the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.
D)changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.

Question 43

Which of the following Fed actions will decrease the money supply?

A)reverse repos
B)repos
C)open-market purchases of bonds
D)raising taxes

Question 44

Which of the following is not a tool of monetary policy?

A)open-market operations
B)changes in banking laws
C)changes in the rate of interest paid on reserves held at Federal Reserve Banks
D)Fed lending or borrowing with repos or reverse repos

Question 45

Open-market operations include

A)changes in the reserve ratio.
B)repos and reverse repos.
C)paying interest on excess reserves held at Federal Reserve Banks.
D)changes in the discount rate.

Question 46

The collateral used for repos and reverse repos is (are)

A)corporate securities.
B)autos.
C)homes.
D)government bonds.

Question 47

The Federal Reserve System regulates the money supply primarily by

A)controlling the production of coins at the U.S.mint.
B)altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
C)altering the reserves of commercial banks, largely through sales and purchases of government bonds.
D)restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

Question 48

In a repo transaction, the Fed money; in a reverse repo transaction, the Fed money.

A)borrows; loans.
B)loans; borrows.
C)prints new; destroys.
D)destroys; prints new.

Question 49

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district.As a result,

A)commercial bank reserves are increased by $10,000.
B)the supply of money automatically declines by $7,500.
C)commercial bank reserves are increased by $7,500.
D)the supply of money is automatically increased by $10,000.

Question 50

In a reverse repo transaction,

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.

Question 51

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to

A)decrease the money supply.
B)increase the money supply.
C)foreclose on a failed bank.
D)raise interest rates.

Question 52

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S.securities from the public, which deposits this amount into checking accounts.As a result of these transactions, the supply of money is

A)not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million.
B)directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million.
C)directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million.
D)directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Question 53

In the United States, monetary policy is the responsibility of the

A)U.S.Treasury.
B)Department of Commerce.
C)Board of Governors of the Federal Reserve System.
D)U.S.Congress.

Question 54

Collateralized loans

A)are only made by Federal Reserve banks.
B)are less secure than uncollateralized loans.
C)have higher interest rates than uncollateralized loans.
D)have lower interest rates than uncollateralized loans.

Question 55

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks.As a result, commercial bank reserves will

A)increase by $10 billion.
B)remain unchanged.
C)decrease by $2 billion.
D)increase by $2 billion.

Question 56

When the Fed loans money in exchange for government bonds being posted as collateral, this is known as a

A)mortgage-backed security.
B)Federal Reserve note.
C)repo.
D)credit default swap.

Question 57

Assume that U.S.National Bank has no excess reserves and that the reserve ratio is 20 percent.If U.S.National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of

A)$5 million.
B)$1 million.
C)$25 million.

Question 58

Open-market operations refer to

A)purchases of stocks in the New York Stock Exchange.
B)the purchase or sale of government securities, as well as collateralized money loans, by the Fed.
C)central bank lending to commercial banks.
D)the specifying of loan maximums on stock purchases.

Question 59

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

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

Question 60

If the Federal Reserve System buys government securities from commercial banks and the public,

A)commercial bank reserves will decline.
B)commercial bank reserves will be unaffected.
C)it will be easier to obtain loans at commercial banks.
D)the money supply will contract.

Question 61

When the required reserve ratio is decreased, the excess reserves of member banks are

A)reduced, but the multiple by which the commercial banking system can lend is unaffected.
B)reduced and the multiple by which the commercial banking system can lend is increased.
C)increased and the multiple by which the commercial banking system can lend is increased.
D)increased and the multiple by which the commercial banking system can lend is reduced.

Question 62

A commercial bank can add to its actual reserves by

A)lending money to bank customers.
B)buying government securities from the public.
C)buying government securities from a Federal Reserve Bank.
D)borrowing from a Federal Reserve Bank.

Question 63

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, excess reserves in the banking system will

A)remain unchanged.
B)rise by $100.
C)fall by $100.
D)rise by $1,000.

Question 64

When the reserve requirement is increased,

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 Policy

Question 65

When the required reserve ratio is increased, the excess reserves of member banks are

A)reduced, but the multiple by which the commercial banking system can lend is unaffected.
B)reduced and the multiple by which the commercial banking system can lend is increased.
C)increased and the multiple by which the commercial banking system can lend is increased.
D)reduced and the multiple by which the commercial banking system can lend is reduced.

Question 66

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent.If the reserve requirement is now raised to 30 percent, the banking system then has

A)excess reserves of $2 billion.
B)neither an excess nor a deficiency of reserves.
C)a deficiency of reserves of $.5 billion.
D)excess reserves of only $.5 billion.

Question 67

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank.The interest rate on the loan is called the

A)prime rate.
B)federal funds rate.
C)Treasury bill rate.
D)discount rate.

Question 68

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

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.

Question 69

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, reserves in the banking system will

A)remain unchanged.
B)rise by $100.
C)fall by $100.
D)rise by $1,000.

Question 70

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, the supply of money in the economy will

A)remain unchanged.
B)rise by $500.
C)fall by $100.
D)fall by $500.

Question 71

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

A)prime rate.
B)short-term rate.
C)discount rate.
D)federal funds rate.

Question 72

An increase in the legal reserve ratio

A)increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B)decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C)increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D)decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

Question 73

The discount rate is the rate of interest at which

A)Federal Reserve Banks lend to commercial banks.
B)savings and loan associations lend to some builders.
C)Federal Reserve Banks lend to large corporations.
D)commercial banks lend to large corporations.

Question 74

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

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.

Question 75

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

A)The required reserve ratio will increase.
B)The money supply will decrease.
C)The deposits of commercial banks will decline.
D)Commercial bank reserves will increase.

Question 76

The discount rate is the interest

A)rate at which the central banks lend to the U.S.Treasury.
B)rate at which the Federal Reserve Banks lend to commercial banks.
C)yield on long-term government bonds.
D)rate at which commercial banks lend to the public.

Question 77

A decrease in the reserve ratio increases the

A)amount of actual reserves in the banking system.
B)amount of excess reserves in the banking system.
C)number of government securities held by the Federal Reserve Banks.
D)ratio of coins to paper currency in the economy.

Question 78

Open-market operations change

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.

Question 79

If the Fed were to reduce the legal reserve ratio, we would expect

A)lower interest rates, an expanded GDP, and a higher rate of inflation.
B)lower interest rates, an expanded GDP, and a lower rate of inflation.
C)higher interest rates, a contracted GDP, and a higher rate of inflation.
D)higher interest rates, a contracted GDP, and a lower rate of inflation.

Question 80

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

A)open-market operations
B)the reserve ratio
C)the discount rate
D)the federal funds rate