Deck 12: Monetary Policy

Question 1

The Federal Reserve has the power to issue money,but does not influence interest rates.

Answer 1

False
Explanation: The Federal Reserve influences interest rates through open market operations and other tools.

Question 2

One of the goals of monetary policy is to make sure that the inflation rate and the overall rate of growth in the economy are the same.

Answer 2

False
Explanation: There is no need to ensure that the inflation rate and the economic growth rate are the same.

Question 3

Which of the following is not one of the three purposes served by money?

A) Serving as a medium of exchange.
B) Serving as a store of value.
C) Providing a means for regulators to track economic activity.
D) Providing a standard of value.

Answer 3

C
Explanation: Money serves three purposes-a medium of exchange, a store of value, and a standard of value.

Question 4

The Fed's control over interest rates,direct lending to financial institutions,and other policy tools is called

A) fiscal policy.
B) monetary policy.
C) discount policy.
D) margin controls.

Question 5

Generally,if the inflation rate is too high,the Federal Reserve will want to raise the federal funds rate.

Question 6

When the Federal Reserve makes more money available for banks to lend,the demand curve for loans shifts to the right.

Question 7

One of the advantages of monetary policy over fiscal policy is that

A) monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect.
B) monetary policy does not produce inflation, whereas fiscal policy does.
C) the Fed can react more quickly than the legislature can.
D) monetary policy allows the Fed to limit government spending so that government budget deficits are reduced.

Question 8

Which one of the following is among the Federal Reserve's tools to control short-term interest rates?

A) Open market operations.
B) Raising or lowering taxes on financial institutions.
C) Limits on credit card interest rates.
D) Controlling the demand for money.

Question 9

The Fed's response to the housing crisis of 2007 and 2008 was to

A) encourage discount window borrowing.
B) reduce taxes on financial institutions.
C) raise the federal funds rate.
D) raise the reserve requirement.

Question 10

Lowering the federal funds rate will tend to reduce the overall price level in the economy.

Question 11

Inflation targeting is a policy in which the Fed

A) announces an inflation target and then runs monetary policy to hit that target.
B) tries to reduce inflation by setting a low federal funds rate target.
C) tries to reduce inflation by setting a high federal funds rate target.
D) uses open market operations as a method of discretionary intervention, increasing the money supply when there is a recession, and decreasing it when there is an unsustainable economic expansion.

Question 12

The discount window allows the Fed to lend money to financial institutions that are running short of funds.

Question 13

The Federal Reserve's most-used policy tool is open market operations,which control short-term interest rates.

Question 14

The Fed's margin requirements control

A) how much people can borrow when they buy stock.
B) the amount of reserves banks must keep in cash or in their accounts with the Federal Reserve.
C) the federal funds rate.
D) the interest rate banks are allowed to pay on demand deposit accounts.

Question 15

When financial institutions borrow from the Federal Reserve,this is called

A) borrowing on margin.
B) fiscal policy.
C) open market operations.
D) going to the discount window.

Question 16

The current chairman of the Federal Reserve Board is

A) Alan Greenspan.
B) Paul Volcker.
C) Ben Bernanke.
D) Morgan Stanley.

Question 17

When the Federal Reserve acts as a lender of last resort,it is making sure that banks have the money they need to continue to operate.

Question 18

The Federal Reserve is under the ultimate direction of the Congress of the United States because Congress can cut the budget of the Federal Reserve if the Federal Reserve Board of Governors does not follow the instructions of Congress.

Question 19

Which of the following would be the result of increasing the money available for banks to lend?

A) An increase in the reserve requirement.
B) An increase in the discount rate.
C) A decrease in the federal funds rate.
D) A decrease in the Fed's holdings of U.S. Treasury securities.

Question 20

The current chairman of the Federal Reserve is Alan Greenspan.

Question 21

The Federal Reserve Act establishing the Federal Reserve System was passed by Congress in

A) 1788.
B) 1863.
C) 1913.
D)1934.

Question 22

Money serves as a medium of exchange.This means that you can

A) use money to buy goods and services, and accept it as payment for the goods and services you sell.
B) hold on to money to use at a later time.
C) compare values across several items by looking at the prices in terms of money.
D) increase the economic growth rate in the long run by printing more money.

Question 23

If the inflation rate is rising,which one of the following would the Fed need to do to reduce the inflation rate?

A) Lower margin requirements.
B) Lower reserve requirements.
C) Encourage more discount borrowing.
D) Increase the federal funds rate.

Question 24

Which of the following is one of the main goals of monetary policy?

A) Rescuing bankrupt private businesses.
B) Transferring wealth from lenders to borrowers.
C) Producing deflation (falling prices).
D) Smoothing out the business cycle.

Question 25

People who have bought a house using an adjustable-rate mortgage are most likely to be hurt by

A) an increase in the inflation rate.
B) an increase in the amount of the Fed's discount lending.
C) a decrease in the reserve requirement.
D) an increase in the federal funds rate.

Question 26

If the economy has been experiencing high inflation,as it was in the late 1970s,sharply reducing that inflation rate through monetary policy (as Paul Volcker did)is likely to

A) increase short-run economic growth, triggering an economic expansion.
B) produce a recession in the short run.
C) increase demand for expensive items like cars and houses.
D) reduce the unemployment rate in the short run.

Question 27

To produce financial stability,the Federal Reserve would want to

A) increase the money supply during an economic boom and reduce the money supply during a recession.
B) raise the interest rate during a recession to prevent excessive borrowing and increase income for struggling banks.
C) sell bonds during a recession and buy bonds during an economic boom.
D) raise the money supply and cut interest rates during a recession to stimulate spending.

Question 28

The target federal funds rate is set by the

A) chairman of the Federal Reserve Board.
B) president of the United States.
C) secretary of the Treasury.
D) Fed's Open Market Committee.

Question 29

If the Federal Reserve raises the federal funds rate,which one of the following will tend to happen as a result?

A) The inflation rate will increase.
B) The demand curve for goods and services bought with a credit card will shift to the left.
C) The demand curve for cars will shift to the right.
D) Home mortgage rates will decline.

Question 30

Which of the following would shift the demand curve for cars to the right?

A) An increase in the federal funds rate.
B) An increase in discount lending by the Fed to banks.
C) An increase in home mortgage interest rates.
D) An increase in the unemployment rate over the NAIRU.

Question 31

If the Federal Reserve increases the federal funds rate dramatically,which of the following would we expect to happen?

A) The price of houses would increase.
B) The amount of credit card borrowing would increase.
C) The price of cars would decrease.
D) People with adjustable-rate mortgages would be better off.

Question 32

The Federal Reserve's response to the 2001 recession was to

A) cut the federal funds rate over a three-year period.
B) lower the reserve requirement.
C) raise the margin requirement and lower the reserve requirement.
D) lower the money supply by 7% in order to reduce overinflated stock prices.

Question 33

When Fed Chairman Paul Volcker raised interest rates shortly after he became chairman in 1979,the effect was

A) a pair of severe recessions in 1980 and 1981-1982.
B) a rapid increase in the inflation rate.
C) a decade of economic decline for the United States.
D) an immediate and sharp decline in the value of the dollar.

Question 34

If the Federal Reserve raises the federal funds rate,which one of the following will not tend to happen as a result?

A) Economic activity will decrease.
B) Car loan and home mortgage rates will rise.
C) Businesses will find it easier to obtain funds to expand.
D) Inflation will decline.

Question 35

Which of the following statements about monetary policy is true?

A) Unlike fiscal policy, there is no delay between the Fed's enacting a policy and the policy's effects.
B) The Fed's policies tend to take effect more quickly and with less political influence than fiscal policy.
C) Monetary policy has an equal impact on short-term and long-term interest rates.
D) The Fed controls most interest rates directly by telling banks and other financial institutions what interest rate they must charge for common loans.

Question 36

Which of the following would shift the supply curve for loans to the right,reducing short-term interest rates?

A) An increase in the amount of money the Fed makes available to banks.
B) An increase in margin requirements.
C) A reduction in discount lending by the Fed to banks.
D) An increase in the desire of consumers to borrow money.

Question 37

Members of the Board of Governors of the Federal Reserve are

A) appointed by the outgoing chairman of the Board of Governors and confirmed by Congress.
B) appointed by the president of the United States.
C) elected by the stockholders of the eight largest banks in the United States.
D) appointed by the Treasury Secretary.

Question 38

Money can be used to buy goods and services,and is accepted in turn as payment.This is the ________ use of money.

A) medium of exchange
B) store of value
C) standard of value
D) inflationary

Question 39

Which of the following is NOT one of the main goals of monetary policy?

A) Controlling inflation.
B) Smoothing out the business cycle.
C) Ensuring financial stability.
D) Balancing the federal budget.

Question 40

If the Federal Reserve reduces the federal funds rate,

A) The quantity of funds borrowed and lent will decrease.
B) Other interest rates, such as home mortgage rates, will rise to compensate.
C) Inflation is more likely to appear.
D) Long-term interest rates will react more than short-term rates.

Question 41

The Federal Reserve was founded by Congress in 1913 in response to

A) the Great Depression.
B) the first World War.
C) a financial panic in 1907.
D) a request by President Franklin
D) Roosevelt. See the section on the "History of the Federal Reserve" in the textbook.

Question 42

Cutting the interest rate paid on reserves should make banks

A) less willing to use their funds for lending.
B) more willing to use their funds for lending.
C) less willing to meet the margin requirement.
D) more willing to meet the margin requirement.

Question 43

Money enables us to make comparisons of value among goods and services.This is the ________ use of money.

A) medium of exchange
B) store of value
C) standard of value
D) inflationary

Question 44

Reducing the fed funds rate can increase GDP in the short term because at lower interest rates

A) individuals and businesses will want to borrow and spend more.
B) households will attempt to save more.
C) banks will earn greater profits on loans.
D) taxes are lower, which increases disposable income.

Question 45

Show,using a supply-and-demand diagram,what would happen to the short-term interest rate (that is,the federal funds rate)if the Federal Reserve increases the amount of money available to banks to lend.

Question 46

In the United States and in virtually every other country,the printing of money is

A) Strictly a government monopoly.
B) Open to the free market so that different monies can compete for acceptance with one another.
C) Limited by the supplies of gold and silver the central bank holds in reserve.
D) A privilege that is allowed only to banks that are members of the Federal Reserve System.

Question 47

Alan Greenspan argued that a low,stable inflation rate was the best way to achieve

A) low unemployment.
B) low interest rates.
C) strong economic growth.
D) low, stable oil prices.

Question 48

An element of trust is built into money because

A) the government maintains a monopoly over the money supply, and people tend to trust monopolies.
B) one must expect that it will still have value when the holder of money wants to spend it in the future.
C) people must trust that the government can always print more of it if necessary.
D) people must trust the Federal Reserve to prevent banks from failing.

Question 49

Monetary stimulus requires about __________ for its full effect.

A) 3 to 6 months
B) 6 to 12 months
C) 12 to 18 months
D) 18 to 24 months

Question 50

When Paul Volcker became Federal Reserve chairman in 1979,

A) the rate of inflation was relatively low, and he managed to raise it to 12 percent.
B) the rate of inflation was 12 percent, and he managed to reduce it, but doing so caused a recession.
C) the rate of inflation was already low and stable, but his policies made it lower and more stable.
D) the rate of inflation was 12 percent, and he was not able to bring it down during his time as chairman.

Question 51

Why is it important that the central bank be independent,or insulated from changes in political power?

Question 52

One potential problem with having private currencies-such as "Bank of Sam" dollars and "Bank of Fred" dollars-is that it will be difficult for individuals to

A) compare Sam dollars to Fred dollars.
B) trade Sam dollars for Fred dollars.
C) discourage both Sam and Fred from inflating their currencies.
D) keep both Sam dollars and Fred dollars in their wallets.

Question 53

If a major crash of the financial system began,the Federal Reserve would

A) provide money to banks in order to reassure investors and prevent banks from going bankrupt.
B) immediately reduce the money supply to stop people from withdrawing cash from their banks.
C) raise interest rates in order to provide banks with a more secure stream of income.
D) prop up stock prices by buying stocks in the 500 largest corporations.

Question 54

Having government-issued money makes it easier for policy makers to

A) completely prevent inflation.
B) keep wages high in certain key industries.
C) guide and control the economy.
D) keep oil prices stable.

Question 55

Which of the following is a tool of the Federal Reserve System?

A) Buying or selling stocks of publicly traded corporations in order to stabilize the stock market
B) Performing open market operations in order to stimulate the economy during recessions and prevent inflation.
C) Reducing the burden of household debt by capping credit card and other loan interest rates at reasonable levels.
D) Encouraging employment by lending money at a low ("discount") rate to firms that are in danger of having to make layoffs.

Question 56

The discount rate is generally set __________ the fed funds rate.

A) 1/4 to 1/2 percentage point lower than
B) equal to
C) 3/4 to 1 percentage point higher than
D) 1 to 2 percentage points higher than

Question 57

Cutting the fed funds rate

A) puts downward pressure on inflation.
B) puts upward pressure on prices.
C) can cause interest rates to increase.
D) can cause deflation to occur.

Question 58

In the aftermath of the terrorist attacks of September 11,2001,__________ banks failed because of the disruption to business on Wall Street.

A) no
B) only 2
C) 50 percent of all
D) 1 in 10

Question 59

Alan Greenspan,who preceded Ben Bernanke as Fed chairman,was a proponent of

A) discretionary intervention.
B) a rules-based approach to monetary policy.
C) inflation targeting.
D) fiscal policy.

Question 60

In response to the financial crisis of 2007-2009,the Federal Reserve

A) cut the fed funds rate from 5.25 percent to 2.0 percent.
B) cut the discount rate from 5.25 percent to 2.0 percent.
C) raised the fed funds rate from 2.0 percent to 5.25 percent.
D) raised the discount rate from 2.0 percent to 5.25 percent.

Question 61

How does a "rules-based" approach to monetary policy differ from "discretionary intervention"?

Question 62

What advantages does monetary policy have over fiscal policy?

Question 63

What is the role of the "discount window" in preventing financial crises? How was it used during the financial crisis of 2007-2009?