Deck 16: The Federal Reserve and Monetary Policy

Question 1

A contractionary monetary policy would be an appropriate policy response to an inflationary gap

Answer 1

True

Question 2

Open market operations directly change the rate of interest at which banks can borrow funds from the Fed​

Answer 2

False

Question 3

There are 50 Reserve Banks in the Federal Reserve System, one for each state.

Answer 3

False

Question 4

The Fed is a part of the executive branch of the federal government.

Question 5

A one percentage point change in the required reserve ratio would change the money supply by less than one percent, other things being equal.

Question 6

Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee

Question 7

Expansionary monetary policy would be an appropriate policy response to an inflationary gap.

Question 8

The chief function of the Federal Reserve is to be the federal government's tax collection institution

Question 9

There is a positive correlation between a nation's average annual inflation and the degree of independence of its central bank

Question 10

The interest rate that the Fed charges banks for borrowing funds is called the federal funds rate.

Question 11

When money demand increases, the Fed cannot keep both the money supply and the interest rate from rising.

Question 12

Expansionary and contractionary monetary policy can cause the exchange value of the dollar to change in response

Question 13

Higher rates of interest increase the opportunity cost of holding money balances

Question 14

In the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services

Question 15

The Open Market Committee oversees the money supply through the Fed's sale and purchase of government securities

Question 16

When money demand increases, the Fed cannot keep both the money supply and the interest rate from rising

Question 17

The money supply is very sensitive to changes in the rate of interest.​

Question 18

In the United States, fiscal policy is the responsibility of the Federal Reserve Board of Governors and the Federal Open Market Committee

Question 19

Monetary policy can influence interest rates, which in turn can change spending

Question 20

Changing reserve requirements is the most important method the Federal Reserve uses to change the supply of money

Question 21

Which of the following actions of the Fed is likely to lead to a decrease in money supply?

A)A decrease in the discount rate
B)An increase in the interest rate it pays on reserves
C)An increase in the interest rate it pays on reserves.
D)A purchase of government securities by the Fed in the open market
E)An increase in the federal funds rate​.

Question 22

In its original role as the lender of last resort, the Fed was supposed to:

A)provide mortgage money for the poor.
B)keep the money supply from drying up during periods of economic panic.
C)lend money to people in localities not served by commercial banks.
D)lend money to developing nations whose own central banks had failed.
E)lend money to businesses that promise high return on loans

Question 23

One uniquely American aspect of central banking is that

A)the United States has 12 central banks rather than one.
B)the Federal Reserve is a private institution with no governmental supervision
C)the dual banking system created two parallel central banks.
D)the U.S. Treasury runs the Federal Reserve as an extension of the Executive Branch.
E)the United States has 50 central banks, one for each state

Question 24

Which of the following policies is most frequently adopted when the Fed is attempting to adjust the money supply?

A)Changing reserve requirements
B)Open market operations
C)Changing the discount rate
D)Changing the interest rate it pays on reserves
E)Changing the federal funds rate

Question 25

The Federal Reserve banks are owned by:

A)the citizens of each Federal Reserve district.
B)the American people as a whole.
C)the Federal Government.
D)commercial banks.
E)the chairman of the Federal Reserve Board of Governors.

Question 26

Which of the following monetary policies will have an indeterminate effect on the money supply of an economy?

A)A combination of an increase in the discount rate and an open market sale of government securities
B)A combination of a decrease in the discount rate and an increase in reserve requirements
C)A combination of an increase in both the discount rate and reserve requirements
D)A combination of purchases of government securities and a decrease in reserve requirements
E)A combination of sales of government securities and an increase in reserve requirements

Question 27

When the Fed wants to expand the money supply through open market operations, it:

A)sells government securities
B)purchases government securities.
C)increases the federal funds rate.
D)decreases reserve requirements
E)purchases private properties.

Question 28

Assume that the central bank of a country purchases $5,000 worth of government treasury bonds from a firm, which promptly deposits the money in a national Bank. Assuming that the required reserve ratio is 25 percent and banks keep zero excess reserves, the money supply will ultimately:

A)increase by a maximum of $5,000
B)increase by a maximum of $20,000.
C)decrease by a maximum of $5,000.
D)decrease by a maximum of $20,000.
E)increase by a maximum of $25,000.

Question 29

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period

Question 30

If the money supply increases in an economy, the price level will rise as long as the velocity of money and real GDP remain constant

Question 31

The Fed has imperfect control over the money supply:

A)because of unpredictable changes in reserve requirements.
B)because the public responds to open market operations in an unpredictable fashion.
C)because the Fed does not know how much reserves will change when it buys or sells securities.
D)because of unpredictable changes in public desire to hold cash and banks' desires to hold excess reserves.
E)because money supply is also determined by demand-side factors.

Question 32

Which of the following will be a direct impact of the sale of a U.S. government bond to a bank by the Fed?

A)The supply of money will increase.
B)The supply of money will remain unchanged.
C)The supply of money will decrease.
D)The demand for money will increase
E)The demand for money will decrease

Question 33

In the United States, decisions regarding purchases and sales of government securities are made by:

A)the President of the United States.
B)the Discount Committee
C)the Federal Open Market Committee
D)the Federal Funds Committee
E)the largest commercial bank of the country

Question 34

A combination of an increase in the discount rate and reserve requirements would:

A)increase the money supply.
B)decrease the money supply
C)leave the money supply unchanged
D)increase the level of investment
E)help the economy to recover from a recessionary gap

Question 35

Which of the following statements is true of the Fed?

A)All decisions of the Fed are subject to approval by the President of the United States.
B)All decisions of the Fed are subject to approval by Congress.
C)All decisions of the Fed are subject to approval by the Federal Deposit Insurance Corporation.
D)All decisions of the Fed are subject to approval by the chairperson of the Fed.
E)All decisions of the Fed are subject to approval by the legislative branches of the government.

Question 36

A combination of the Fed's purchases of government securities and a decrease in reserve requirements would:

A)increase the money supply.
B)decrease the money supply.
C)leave the money supply unchanged
D)decrease the level of investment
E)help the economy recover from an inflationary gap.

Question 37

If the Fed buys a U.S. government bond from a member, the:

A)banking system has more reserves and the money supply tends to grow.
B)banking system has less reserves and the money supply tends to grow.
C)banking system has more reserves and the money supply tends to fall.
D)banking system has less reserves and the money supply tends to fall.
E)banking system has more reserves and the rates of interest will increase

Question 38

Rising reserve requirements, other things being equal, would tend to:

A)increase the dollar volume of loans made by the banking system
B)increase the money supply.
C)increase aggregate demand
D)decrease the money supply
E)depreciate the value of the currency.

Question 39

The major objective of the Federal Reserve System is to:

A)make substantial profits for its member banks.
B)help in generating stabilization policies for the economy.
C)distribute paper money and coins to banks and retail stores
D)prevent the closure of individual member banks
E)frame sustainable public distribution schemes.

Question 40

Investment in the U.S. economy would increase if:

A)the Fed purchases a government bond.
B)the Fed sells a government bond.
C)the Fed raises the reserve requirement
D)the Fed increases the interest paid on reserves.
E)the Fed raises the reserve requirement.

Question 41

Which of the following statements is true?

A)The quantity of money demanded varies inversely with the nominal interest rate, and the supply of money varies directly with the nominal interest rate.
B)The quantity of money demanded varies directly with the nominal interest rate, and the supply of money varies inversely with the nominal interest rate.
C)The quantity of money demanded varies inversely with the nominal interest rate, while the supply of money remains unaffected by the nominal interest rate
D)The quantity of money supplied varies inversely with the nominal interest rate, while the supply of money remains unaffected by the nominal interest rate
E)The supply of money varies inversely with the nominal interest rate, while the quantity of money demanded remains unaffected by the nominal interest rate

Question 42

Which of the following statements is true?

A)If nominal interest rates rise in an economy, the demand for money will increase at the same rate.
B)If nominal interest rates rise in an economy, the demand for money will decrease at the same rate.
C)If nominal interest rates rise in an economy, the quantity of money demanded will decrease
D)If nominal interest rates rise in an economy, the quantity of money demanded will increase.
E)If nominal interest rates rise in an economy, the demand for money will decrease at an exponential rate

Question 43

When the money supply decreases, other things being equal, _____.

A)real interest rates fall and investment spending rises.
B)real interest rates and investment spending fall.
C)real interest rates rise and investment spending falls
D)real interest rates and investment spending fall
E)nominal interest rates and investment spending fall

Question 44

Which of the following statements is true of an expansionary monetary policy?

A)An expansionary monetary policy will definitely result in inflation in an economy with a high rate of unemployment
B)An expansionary monetary policy shifts the aggregate demand curve to the left
C)An expansionary monetary policy will result in inflation if there is full employment in an economy.
D)An expansionary monetary policy causes interest rates to rise in an economy.
E)An expansionary monetary policy causes investment in an economy to decrease.

Question 45

Which of the following would constitute contractionary monetary policy by the Fed?

A)A decrease in the interest rate it pays on reserves
B)Open market sales of government securities and an increase in the discount rate
C)An increase in tariffs on imported goods and a decrease in foreign aid
D)Open market purchases of government securities and a cut in the discount rate
E)An increase in the reserve ratio and a cut in the discount rate

Question 46

If the Fed wanted to reduce the federal funds interest rate, it might:

A)increase the discount rate.
B)increase the required reserve ratio
C)buy government securities
D)sell government securities.
E)pay higher interest on banks' reserves

Question 47

The federal funds market rate is:

A)the rate at which the central bank provides funds to commercial banks.
B)the rate charged by banks on loans to the public
C)the rate charged on loans provided by one bank to another to meet the reserve requirement.
D)always set higher than the discount rate.
E)the rate of interest that the Fed pays the commercial banks on their reserves.

Question 48

The most likely short-run impact of an unanticipated increase in the money supply is a(n):

A)increase in the real interest rate, which in turn stimulates investment and GDP.
B)decrease in the real interest rate, which in turn stimulates investment and GDP.
C)decrease in real output, which causes the real interest rate to decline stimulating investment and GDP
D)increase in real output, which causes the real interest rate to decline.
E)increase in cost of borrowing finds from the banks, leading to a decrease in the level of investment.

Question 49

When the Fed unexpectedly increases the money supply, it will cause:​

A)an increase in aggregate demand because real interest rates will rise, stimulating business investment and consumer purchases
B)an increase in aggregate demand because the dollar will appreciate on the foreign exchange market, leading to an increase in net exports
C)an increase in aggregate demand because higher interest rates will tend to increase asset prices, which increases wealth and thereby stimulates current consumption.
D)an increase in aggregate demand because the dollar will depreciate on the foreign exchange market, leading to a decrease in net exports.
E)an increase in aggregate demand because lower interest rates will tend to increase asset prices, stimulating current consumption.

Question 50

The money supply is almost perfectly inelastic because:

A)people will want to be supplied with more loans as interest rates rise.
B)the Fed makes more money available in response to higher interest rates.
C)banks generally find loans more profitable than keeping their assets as cash
D)the Fed lowers the discount rate as interest rates rise.
E)commercial banks can face losses at lower rates of interest.

Question 51

If money supply and money demand both increased by the same amount, then:

A)the nominal interest rate would increase to twice its original value​
B)the nominal interest rate would increase by half of its original value
C)the nominal interest rate would decrease by half of its original value.
D)there would be no change in the nominal interest rate.
E)the nominal interest rate would decrease by one-third of its original value.

Question 52

When money demand decreases, the Fed can choose between:

A)increasing interest rates or increasing the supply of money to restore equilibrium in the money market
B)increasing interest rates or decreasing the supply of money to restore equilibrium in the money market
C)decreasing interest rates or increasing the supply of money to restore equilibrium in the money market
D)decreasing interest rates or decreasing the supply of money to restore equilibrium in the money market
E)increasing the interest rate or increasing deficit in the federal budget to restore equilibrium in the money market

Question 53

An unexpected change in the nominal interest rate will:

A)change the real interest rate by a smaller amount than the change in the nominal interest rate in the short run​
B)change the real interest rate by a greater amount than change in the nominal interest rate in the short run.
C)change the real interest rate by the same amount as the change in the nominal interest rate in the short run.
D)change the real interest rate by a smaller amount than the change in the nominal interest rate in the long run.
E)change the real interest rate by a greater amount than the change in the nominal interest rate in the long run.

Question 54

If the demand for money decreases, but the Fed keeps the money supply the same, then:

A)nominal interest rates will rise and aggregate supply will fall.
B)both nominal interest rates and aggregate demand will increase.
C)both nominal interest rates and aggregate demand will decrease
D)nominal interest rates will fall and aggregate demand will increase.
E)both nominal interest rates and aggregate supply will increase.

Question 55

Which is potentially the most powerful tool available to the Fed to control the supply of money?

A)Open market operations
B)Moral suasion
C)Changes in reserve requirements
D)Discount rate changes
E)Changes in the federal funds rate

Question 56

Other things equal, the level of real GDP will tend to increase in the short run:

A)if reserve requirements are increased
B)if there is an increase in the discount rate.
C)if there is an open market sale by the Fed
D)if the Fed pays higher interest on reserves
E)if there is a reduction in the discount rate

Question 57

Which of the following statements is true?​

A)The quantity of money demanded varies directly with the nominal rate of interest.
B)Money market equilibrium occurs at the nominal interest rate where the aggregate demand equals the quantity of money supplied
C)Rising national income will decrease the demand for money, leading to a new higher equilibrium nominal interest rate in the short run
D)Rising national income will increase the demand for money, leading to a new lower equilibrium real interest rate in the short run.
E)Rising national income will shift the money demand curve to the right, leading to a new higher equilibrium nominal interest rate in the short run.

Question 58

When nominal interest rates are higher, _____.

A)the opportunity cost of holding monetary assets is higher and the quantity of money demanded, but not the demand for money, is lower
B)both the opportunity cost of holding monetary assets and the quantity of money demanded are higher
C)the opportunity cost of holding monetary assets is lower and the quantity of money demanded, but not the demand for money, is greater
D)the opportunity cost of holding monetary assets is lower and the demand for money is higher
E)the opportunity cost of holding monetary assets is higher and therefore the quantity of money demanded is higher

Question 59

Which of the following would tend to increase unemployment in an economy in the short run?

A)Commercial banks providing more loans
B)A decrease in reserve requirements
C)An increase in the discount rate
D)An increase in the sale of government bonds by the central bank
E)A decrease in the purchase of government bonds by the central bank

Question 60

If unemployment is a major problem in an economy, which of the following would be an appropriate monetary policy response?

A)A decrease in income taxes
B)A decrease the discount rate
C)The sale of government bonds
D)An increase in public investments
E)An increase in the reserve ratio

Question 61

In the long run, an expansionary monetary policy will:

A)increase real output when actual output is currently beyond the economy's long-run capacity
B)increase real output when the economy is currently at full employment​
C)increase real output when the economy currently operates below its capacity.
D)decrease real output at virtually any output level
E)decrease real output if the economy is protected from foreign interventions

Question 62

If monetary authorities persistently expand the money supply at a rapid rate, the probable result will be:

A)inflation
B)low nominal interest rates
C)the rapid growth of real GDP
D)deflation
E)a high rate of unemployment

Question 63

If the Fed was trying to reduce demand-pull inflation, it might:

A)sell government securities, lower reserve requirements, and lower the discount rate
B)sell government securities, raise reserve requirements, and raise the discount rate.
C)sell government securities, lower reserve requirements, and raise the discount rate.
D)buy government securities, lower reserve requirements, and raise the discount rate.
E)increase the rate of interest on reserves.

Question 64

The velocity of money can be defined as:

A)the turnover rate of money in an economy
B)the speed at which economic activity takes place in an economy.
C)the speed at which the multiplier effect takes place in an economy.
D)the speed at which tax cuts are spent in an economy
E)the rate at which the currency of a country appreciates during an inflationary gap in an economy.

Question 65

The Fed would engage in a(n) _____ if it wanted to close an inflationary gap.

A)expansionary monetary policy
B)contractionary monetary policy
C)contractionary fiscal policy
D)expansionary fiscal policy
E)associated borrowing policy

Question 66

If the Fed sells bonds, the short-run impact of this policy will tend to include:

A)an increase in the inflation rate.
B)a reduction in unemployment
C)an increase in real output
D)an increase in real interest rates.
E)a decrease in real interest rates

Question 67

In an economy, if the velocity of money falls faster than the supply of money, _____.

A)nominal GDP will increase
B)nominal GDP will decrease
C)nominal GDP will stay the same
D)the price level will increase rapidly
E)commercial banks will decrease the creation of money

Question 68

Other things equal, an expansionary monetary policy will tend to _____ in the short run.

A)increase money supply and decrease interest rates
B)increase money supply and interest rates
C)decrease money supply and interest rates
D)decrease money supply and increase interest rates
E)decrease the quantity of money demanded and increase interest rates

Question 69

When an economy is initially at full employment, a(n):

A)contractionary monetary policy can result in increased real output, but only in the short run
B)contractionary monetary policy can result in increased real output in both the short run and the long run.
C)contractionary monetary policy can result in decreased real output, but only in the short run
D)contractionary monetary policy can result in decreased real output in both the short run and the long run.
E)expansionary monetary policy can result in a recessionary gap in the short run.

Question 70

Which of the following statements is true?

A)In an economy, the velocity of money is not constant over time.
B)The price level in an economy is negatively related to the quantity of money in the economy.
C)Control over the money supply implies that the Fed has precise control over real GDP
D)A high velocity of money represents a low level of inflation in an economy.
E)In an economy, the velocity of money is constant over time.

Question 71

Figure 16-1 shows the short-run macroeconomic equilibrium of an economy. Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response?Figure 16-1

A)An increase in reserve requirements
B)An increase in the discount rate
C)The sale of government bonds
D)An increase in the interest rate on reserves
E)The purchase of government bonds

Question 72

If the amount of money in circulation is $50 million and nominal GDP is $150 million, then the velocity of money is

A)0.33.
B)2.
C)3
D)3.33
E)2.33

Question 73

According to the equation of exchange, velocity will tend to rise when:

A)the price level falls, other things being equal
B)real GDP decreases, other things being equal.
C)the money supply increases, other things being equal
D). the price level rises, other things being equal
E)the level of investment decreases, other things being equal

Question 74

Figure 16-2 shows the short-run macroeconomic equilibrium of an economy. Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response?​Figure 16-2 ​

A)A decrease in reserve requirements
B)A decrease in the discount rate
C)The purchase of government bonds
D)A decrease in the interest rate paid on reserves
E)An increase in the discount rate

Question 75

In an economy, if the velocity of money is equal to 2, the value of real GDP is equal to $300 million, and the price level is 10, then the value of nominal GDP will be equal to:

A)$3 billion
B)$1.5 billion
C)$6 billion.
D)$600 million
E)$150 million

Question 76

According to the equation of exchange, money supply can increase and real GDP can decrease at the same time if:

A)the velocity of money rises rapidly enough
B)the velocity of money falls rapidly enough.
C)nominal GDP rises rapidly enough
D)the price level falls rapidly enough
E)commercial banks fail to create enough money.

Question 77

Which of the following is an impact of a contractionary policy?

A)A decrease in the money supply
B)An increase in the money supply
C)A decrease in the interest rate
D)An increase in aggregate demand
E)A decrease in the unemployment rate

Question 78

When the economy is initially at full employment, an:

A)expansionary monetary policy will tend to increase the price level in the short run and the long run.
B)expansionary monetary policy will tend to increase the price level in the short run but not in the long run
C)expansionary monetary policy will tend to increase the price level in the long run but not in the short run
D)expansionary monetary policy will not tend to decrease the price level in the short run and the long run
E)expansionary monetary policy will not tend to decrease the price level in the short run but not in the long run.

Question 79

When the economy is in a recession, a(n):

A)expansionary monetary policy can potentially result in increased real output, but only in the short run
B)expansionary monetary policy can potentially result in increased real output in both the short run and the long run.
C)contractionary monetary policy can potentially result in increased real output, but only in the short run
D)contractionary monetary policy can potentially result in increased real output in both the short run and the long run
E)expansionary monetary policy can further increase the recessionary gap due to the impact of the negative sentiments in the market.

Question 80

The equation of exchange states that:

A)government spending equals taxes plus the federal budget deficit
B)the reciprocal of the reserve requirement equals the deposit expansion multiplier
C)the money supply times the velocity of money equals the price level times the quantity of goods and services produced
D)the price level times the velocity of money equals the money supply times the quantity of goods and services produced
E)the price level times the money supply equals the velocity of money times the quantity of goods and services produced