Deck 15: Monetary Policy

Question 1

Which of the following is not a correct statement about the Federal Reserve banks?

A) They provide the economy with paper currency.
B) They act as a fiscal agent to the federal government.
C) They control the banking policies of commercial banks.
D) They set interest rates on commercial banks' loans.
E) They hold reserve deposits of member banks.

Answer 1

They set interest rates on commercial banks' loans.

Question 2

The Federal Reserve system is divided into how many districts?

A) 50
B) 12
C) 7
D) 6
E) 2

Answer 2

12

Question 3

Under normal conditions, which of the following economic variables is not affected by changes in the amount of money circulating in an economy?

A) Potential real GDP
B) The nominal interest rate
C) The inflation rate
D) The aggregate price level
E) None of these

Answer 3

Potential real GDP

Question 4

The chairperson of the Federal Reserve Board of Governors

A) is the secretary of the Treasury.
B) is often called the second most powerful person in the United States.
C) must be a member of the U.S. Senate.
D) is a member of the president's cabinet.
E) is elected by the Senate.

Question 5

The equation of exchange shows that

A) national income is equal to gross domestic product.
B) the supply of money creates a demand for money.
C) a decrease in the money supply causes an increase in gross domestic product.
D) total money spent by buyers is equal to nominal gross domestic product.
E) barter is worse than using money.

Question 6

The ultimate goal of monetary policy is

A) interest-rate stability.
B) economic growth with low inflation.
C) zero unemployment.
D) a favorable exchange rate of the dollar.
E) a stable money supply.

Question 7

During the Christmas holiday season, the Fed increases the supply of currency to

A) ensure that checks are cleared quickly.
B) meet the demand for cash withdrawals from banks.
C) stabilize the value of the dollar against other currencies.
D) decrease the value of bonds.
E) control inflation.

Question 8

The central bank of the United States consists of

A) one Federal Reserve bank for each state.
B) seven state banks and one Federal Reserve bank for 12 major cities.
C) twelve Federal Reserve district banks.
D) one centralized Federal Reserve bank in New York.
E) the ten largest national banks in the United States.

Question 9

To reduce political pressures on the Federal Reserve Board of Governors, legislation provided that

A) a given president may elect the entire board.
B) the Federal Reserve district banks may elect the board.
C) Congress may elect a board member every five years.
D) one board member's term expires every second year.
E) only bankers are allowed to be appointed as board members.

Question 10

The Federal Open Market Committee consists of

A) the 12-member Board of Governors.
B) seven members of the Board of Governors and five district bank presidents.
C) the president of the New York district bank and the Council of Economic Advisers.
D) the chairperson of the Board of Governors and five district presidents.
E) seven members of the Board of Governors and a nine-member board of directors of the district banks.

Question 11

The Fed controls GDP

A) directly through government spending.
B) indirectly through the foreign exchange market.
C) indirectly through the money supply.
D) directly through price indexing.
E) indirectly through tax collections.

Question 12

A "central bank" performs all of the following functions except:

A) accepting deposits from commercial banks
B) making loans to commercial banks
C) acting as a banker for the federal government
D) controlling the money supply
E) None - all of these are performed by a nation's central bank.

Question 13

The Fed's most important monetary function is to

A) supervise member banks.
B) aid in the check-clearing process.
C) hold reserve deposits of commercial banks.
D) regulate the money supply.
E) serve as the banker for the U.S. government.

Question 14

The amount of money available for spending by individuals or businesses affects all of the following except:

A) prices
B) interest rates
C) foreign exchange rates
D) level of income in the economy
E) None - all of these are affected by the money supply.

Question 15

In terms of the Federal Reserve system, which of the following statements is true?

A) The 12 Federal Reserve banks in the United States are owned by private member banks.
B) The primary reason the Federal Reserve was created was to establish a new U.S. currency.
C) The Federal Open Market Committee is responsible for determining the growth of the U.S. money supply.
D) The Board of Governors consists of 12 members, each appointed for a 14-year term.
E) The monetary actions by the Federal Reserve require congressional approval.

Question 16

How long are the terms for each member of the Federal Reserve Board of Governors?

A) 2 years
B) 4 years
C) 6 years
D) 10 years
E) 14 years

Question 17

Which of the following is not a function of the Fed?

A) Lending funds to private businesses
B) Making loans to banks
C) Regulating the money supply
D) Providing currency
E) Acting as a banker for the federal government

Question 18

"The second most powerful person in the United States" refers to

A) the vice president of the United States.
B) the Speaker of the House of Representatives.
C) the chairperson of the Federal Reserve Board.
D) the chairperson of the Ways and Means Committee.
E) the president of the New York Federal Reserve Bank.

Question 19

Which of the following is not a service the Fed provides to the banking community?

A) supply currency to banks
B) hold bank reserves
C) clears checks
D) supply U.S. currency
E) prints U.S. currency

Question 20

The official policymaking body of the Federal Reserve System is known as FOMC, which stands for

A) Federal Organization Mechanism Commission.
B) Federal Open Mechanism Commission.
C) Federal Organization of Market Capitals.
D) Federal Open Market Committee.
E) Federal Organization of Market Cases.

Question 21

Over time, the Fed has used ____ in the late 1950s to mid-1970s, then ____ then ____ as its intermediate target.

A) M1 growth rate; M2 growth rate; none
B) No money growth target; M1 growth rate; M2 growth rate
C) M2 growth rate; M1 growth rate; none
D) No money growth target; M2 growth rate; M1 growth rate
E) federal funds rate; M1 growth rate; M2 growth rate

Question 22

Suppose that the nominal money supply equals $2 billion and nominal GDP is $16 billion. According to the equation of exchange, the velocity of money must equal

A) 64
B) 32
C) 8
D) 2
E) 1/8

Question 23

Refer to Table 15.1. If the reserve requirement is 25 percent, what is the maximum loan that can be made by the bank?

A) $225
B) $375
C) $425
D) $475
E) $750

Question 24

Refer to Table 15.1. If the Fed increased the reserve requirement from 25 percent to 40 percent, the money supply in the whole banking system could

A) decrease by $255.
B) increase by $2,550.
C) decrease by $600.
D) increase by $550.
E) decrease by $1,350.

Question 25

The quantity theory of money assumes which of the following is constant?

A) The quantity of money
B) Real GDP
C) The price level
D) The velocity of money
E) Nominal GDP

Question 26

The federal funds market is

A) where federal bonds are bought and sold.
B) where one commercial bank's excess reserves on deposit with the Federal Reserve are loaned to another commercial bank's deposit account at the Fed.
C) where a commercial bank can get a loan from the Fed.
D) where government exchanges foreign currency.
E) located in New York.

Question 27

The average number of times each dollar is spent on final goods and services in a given year is a concept known as the

A) equation of exchange.
B) velocity of money.
C) weight of liquidity.
D) liquidity of the economy.
E) liquidity of financial assets.

Question 28

The interest rate charged by a bank that loans excess reserves to another bank is called the

A) margin rate.
B) prime rate.
C) discount rate.
D) bank rate.
E) federal funds rate.

Question 29

Refer to Table 15.1. If the reserve requirement is 25 percent, how much can the whole banking system expand the money supply?

A) $1,125
B) $1,700
C) $1,900
D) $2,400
E) $3,600

Question 30

Central banks in some countries now target ____, instead of money growth rates.

A) interest rates
B) inflation rates
C) bond prices
D) foreign exchange rates
E) unemployment rates

Question 31

Suppose that M increases by 5 percent while the velocity of money is constant. The quantity theory of money predicts that

A) nominal GDP will rise by 5 percent.
B) the price level will fall by 5 percent.
C) the quantity of output will fall by 5 percent.
D) nominal GDP will remain unchanged.
E) nominal GDP will fall by 5 percent.

Question 32

The quantity theory of money asserts that changes in

A) nominal GDP are inversely related to changes in the velocity of money.
B) the quantity of money are positively related to changes in the velocity of money.
C) the quantity of money are unrelated to changes in the price level.
D) the output level are unrelated to changes in the price level.
E) the quantity of money are directly related to changes in nominal GDP.

Question 33

Suppose the reserve requirement is 10%. If First National Bank has $100,000 in vault cash, $200,000 in deposit at the Fed, and the required reserves are $100,000, it has excess reserves of:

A) 0
B) $10,000
C) $20,000
D) $100,000
E) $200,000

Question 34

Which of the following direct actions could the Fed take to attempt to decrease the money supply?

A) Purchase U.S. government bonds
B) Decrease the federal funds rate
C) Decrease the reserve requirement
D) Coordinated intervention
E) Increase the discount rate

Question 35

For a bank to have lending power, its required reserves must

A) be smaller than legal reserves.
B) exceed legal reserves.
C) be smaller than excess reserves.
D) exceed excess reserves.
E) exceed vault cash.

Question 36

Which of the following make up a bank's legal reserves?

A) Its transaction deposits plus its nonpersonal time deposits
B) Its vault cash plus its transaction deposits
C) Its nonpersonal time deposits plus its deposit in the Fed
D) Its transaction deposits plus its deposit in the Fed
E) Its vault cash plus its deposit in the Fed

Question 37

The Fed has no direct control over which of the following factors that affect the money supply?

A) The discount rate
B) Open market operations
C) The deposit expansion multiplier
D) Required reserves
E) The federal funds rate

Question 38

Raising the reserve requirement

A) reduces the deposit expansion multiplier.
B) lowers the discount rate.
C) reduces interest-rate ceilings.
D) increases excess reserves.
E) increases the money supply.

Question 39

What is the amount of legal reserves in Table 15.1?

A) $300
B) $600
C) $900
D) $1,100
E) $1,700

Question 40

The instructions issued by the Federal Open Market Committee to implement monetary policy are called the

A) Federal Reserve code.
B) FOMC directive.
C) federal funds code.
D) GDP initiative.
E) Board of Governors memorandum.

Question 41

In terms of FOMC directives, the federal funds rate is

A) a short-run operating target.
B) a monetary tool.
C) an intermediate target.
D) a long-term target.
E) part of open market operations.

Question 42

When the Federal Reserve buys or sells foreign exchange to move exchange rates to targeted levels, it engages in

A) foreign exchange market intervention.
B) foreign trade.
C) foreign reserve coordination.
D) sterilization.
E) exchange rate swaps.

Question 43

Other things being equal, the purchase of government bonds by the Federal Reserve will cause a(n)

A) increase in the reserve holdings of banks.
B) increase in interest rates.
C) decrease in the money supply.
D) decrease in commercial bank loans.
E) reduction in nominal GDP.

Question 44

In foreign exchange markets, a U.S. resident who imports Swiss watches is a

A) demander and supplier of U.S. dollars.
B) demander and supplier of Swiss francs.
C) supplier of Swiss francs and a demander of U.S. dollars.
D) demander of Swiss francs and a supplier of U.S. dollars.
E) supplier of Swiss watches and a demander of U.S. dollars.

Question 45

When the foreign exchange value of the dollar is below its equilibrium rate, the U.S. dollar tends to

A) be revalued.
B) be devalued.
C) depreciate.
D) appreciate.
E) be deflated.

Question 46

Which of the following would most likely be a supplier of U.S. dollars in the foreign exchange market?

A) A Swedish resident who is traveling to the United States
B) A French investor who intends to buy U.S. government bonds
C) A resident of Belgium who is traveling to Australia
D) A U.S. company that is importing oranges from Israel
E) A French importer of U.S. beef

Question 47

The buying and selling of government bonds by the Fed to control bank reserves and the money supply are known as

A) government bond operations.
B) open market operations.
C) offer rate operations.
D) bond yield operations.
E) interest-bearing operations.

Question 48

When the foreign exchange value of the dollar is above its equilibrium rate, the U.S. dollar has a tendency to

A) appreciate.
B) depreciate.
C) be revalued.
D) be devalued.
E) be inflated.

Question 49

Figure 15.1: Mexican Pesos per Dollar

Refer to Figure 15.1. If the market is illustrated by curves S and D₁, and the exchange rate is 9 Mexican pesos per U.S. dollar, the Mexican central bank, acting alone, could intervene in the foreign exchange market by

A) selling $3 million.
B) buying $4 million.
C) selling $2 million.
D) selling $4 million.
E) buying $3 million.

Question 50

Figure 15.1: Mexican Pesos per Dollar

Refer to Figure 15.1. If the market is illustrated by curves S and D₂, the equilibrium exchange rate is

A) 11 pesos per dollar.
B) $11 per peso.
C) $10 per peso.
D) 10 pesos per dollar.
E) 9 pesos per dollar.

Question 51

To fix the exchange rate (foreign currency price of domestic currency) above the free market equilibrium exchange value, a government must

A) sell its own currency and buy foreign currency.
B) buy its own currency and sell foreign currency.
C) buy both its own currency and foreign currency.
D) sell both its own currency and foreign currency.
E) devalue its own currency relative to other monies.

Question 52

In foreign exchange markets, a Japanese investor who buys U.S. government securities is a

A) supplier of yen and a demander of U.S. dollars.
B) demander of yen and a supplier of U.S. dollars.
C) supplier and demander of yen.
D) supplier and demander of U.S. dollars.
E) supplier of U.S. bonds and a demander of U.S. dollars.

Question 53

When the Federal Open Market Committee buys government securities, the

A) reserve requirement of banks decreases.
B) reserve deposits of banks decrease.
C) excess reserves of banks increase.
D) federal funds rate increases.
E) legal reserves of banks decrease.

Question 54

The use of domestic open market operations to offset the effects of a foreign exchange market intervention on the domestic money supply is known as

A) normalization.
B) actualization of objectives.
C) sterilization.
D) volatilization.
E) accommodation.

Question 55

An increase in the discount rate

A) increases reserve holdings.
B) reduces the amount of lending by commercial banks.
C) lowers the cost of borrowing from the Fed.
D) causes a decrease in the federal funds rate.
E) increases the money supply.

Question 56

Figure 15.1: Mexican Pesos per Dollar

Refer to Figure 15.1. The market is initially reflected by S and D₁, but a change in demand moves D₁ to D₂. If the Fed wants the exchange rate to return to where it was initially, it could

A) buy $7 million.
B) increase the money supply by $4 million and buy the surplus..
C) use its pesos to buy $4 million.
D) use its pesos to buy $3 million.
E) selling U.S. dollars equal to $4 million.

Question 57

Restrictive monetary policy is associated with which of the following actions?

A) A decrease in the discount rate
B) An increase in excess reserves
C) A decrease in the federal funds rate
D) The purchase of government securities
E) An increase in the reserve requirement

Question 58

An unexpected increase occurs in the demand for U.S. dollars in Italy. If the Fed wants the foreign currency price of the U.S. dollar to not change, it must intervene in the foreign exchange market so that

A) the supply of U.S. dollars decreases.
B) the U.S. demand for Euros falls.
C) the supply of U.S. dollars increases.
D) Italian imports are reduced.
E) the Italian currency is devalued.

Question 59

To increase equilibrium national income, the Fed could

A) increase the discount rate.
B) purchase government bonds.
C) increase government spending.
D) increase the reserve requirement.
E) increase the federal funds rate.

Question 60

Which of the following monetary tools is the Fed most likely to use for carrying out its day-to-day management of the money supply?

A) Changes in the discount rate
B) Changes in tax rates
C) Changes in the reserve requirement
D) Open market operations
E) Changes in policy directives to its member banks

Question 61

The money demand function is negatively sloped because the

A) quantity of money demanded rises as the transactions demand falls.
B) quantity of money demanded rises as nominal income falls.
C) quantity of money demanded rises as the interest rate falls.
D) the speculative demand for money rises as the interest rate rises.
E) interest rate rises as the general price level falls.

Question 62

If interest rates increase, the

A) quantity of money demanded will increase.
B) quantity of money demanded will not change.
C) money demand function will shift to the right.
D) quantity of money demanded will decrease.
E) money demand function will shift to the left.

Question 63

Suppose the Fed intervenes in the foreign exchange market by creating dollars to purchase Euros. The Fed could sterilize the effect of this intervention on the domestic money supply by

A) selling dollars in the foreign exchange market.
B) selling U.S. government bonds on the domestic open market.
C) buying Euros in the foreign exchange market.
D) buying U.S. government bonds on the domestic open market.
E) selling Euros in the foreign exchange market.

Question 64

The transactions demand for money is most closely related to the function of money as a

A) unit of account.
B) medium of exchange.
C) store of purchasing power.
D) hedge against inflation.
E) standard of deferred payment.

Question 65

Suppose an economic boom occurs in your hometown because the price of its main manufacturing product has risen in the national market, and the incomes of many people have gone up. Other things being equal, what is the boom's likely effect on money demand in your hometown?

A) The speculative demand for money will rise, causing a downward movement along the money demand curve.
B) People will hold less money for any purpose, resulting in a decline in money demand.
C) The transactions demand for money will rise so that the quantity of money demanded will be higher at any given interest-rate level.
D) Local M1 money demand will decline.
E) The precautionary demand for money will decrease, causing a downward shift in the money demand curve.

Question 66

If people want to hold money that is convenient for the day-to-day buying and selling of products, then there is a(n)

A) rise in the money supply.
B) speculative demand for money.
C) transactions demand for money.
D) asset demand for money.
E) precautionary demand for money.

Question 67

Federal Reserve policy changes the

A) money demand curve.
B) transactions demand for money.
C) precautionary demand for money.
D) money supply curve.
E) aggregate demand curve.

Question 68

Sterilization occurs when the Fed

A) offsets the effects of international currency flows with a protectionist trade policy.
B) directs a permanent increase of the money supply.
C) offsets the effects of a foreign exchange market intervention with domestic open market operations.
D) implements a fixed exchange rate system.
E) changes the domestic prime lending rate in response to foreign exchange market intervention.

Question 69

Recently, Americans have been enjoying many products from China, as evidenced by China being the primary source of American imports. American exports to China have not grown as rapidly. If the U.S. dollar - Chinese yuan exchange rate was free to fluctuate, we would expect that the American dollar would ____ relative to the Chinese yuan. To maintain the target exchange rate, the Chinese have ____ dollars.

A) appreciate; bought
B) appreciate; sold
C) depreciate; bought
D) depreciate; sold
E) not change; not bought or sold

Question 70

The demand for money is based on a

A) necessity demand and a luxury demand.
B) demand for liquidity and a demand for wealth.
C) speculative demand, a transactions demand, and a precautionary demand.
D) demand for cash, a demand for securities, and a demand for real estate.
E) consumption demand, an investment demand, and a government demand.

Question 71

The desire to keep assets in cash to take advantage of favorable changes in the value of noncash assets is called the

A) speculative demand for money.
B) wealth demand for money.
C) risk interest in money.
D) precautionary demand for money.
E) transactions demand for money.

Question 72

The interest rate represents the

A) opportunity cost of holding money.
B) market demand for bonds.
C) index of creditworthiness for investors.
D) transactions demand for money.
E) opportunity cost of holding bonds.

Question 73

The yield on a bond is:

A) the annual interest payment on the bond
B) tied to the federal funds rate
C) the bond price divided by the annual interest payment
D) the current interest rate divided by the bond price
E) the annual interest payment divided by the bond price

Question 74

If the U.S. dollar depreciates against the yen below the targeted exchange rate, the U.S. Federal Reserve must intervene in the foreign exchange market so that

A) the U.S. demand for yen rises.
B) the supply of U.S. dollars rises.
C) U.S. exports to Japan increase.
D) the U.S. dollar is devalued.
E) the supply of U.S. dollars falls.

Question 75

Which of the following does not shift the money demand curve?

A) A change in the price level
B) A change in real income
C) A change in wealth
D) A change in national output
E) A change in the interest rate

Question 76

If investors believe that stock prices will rise in the next few days, they are most likely to

A) increase their transactions demand for money.
B) decrease their transactions demand for money.
C) decrease their speculative demand for money.
D) decrease their precautionary demand for money.
E) increase their speculative demand for money.

Question 77

The transactions demand for money

A) rises when nominal income falls.
B) rises when nominal income rises.
C) falls when the price level rises.
D) falls when real GDP rises.
E) falls when the money supply increases.

Question 78

The money supply function is

A) downward sloping.
B) upward sloping.
C) vertical.
D) horizontal.
E) horizontal at first and then upward sloping.

Question 79

Money demand is

A) the same as income demand.
B) equal to the sum of currency and demand deposits.
C) determined solely by the Fed.
D) equal to the sum of the quantity of money demanded by each individual.
E) equivalent to the demand for goods and services.

Question 80

A situation when more than one central bank attempts to shift the equilibrium exchange rate to support a targeted exchange rate is called

A) sterilization.
B) a currency crisis.
C) coordinated intervention.
D) an application of special drawing rights.
E) a floating exchange rate system.