Deck 16: The Federal Reserve System and Monetary Policy

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

The equation of exchange is most useful when we try to assess the impact of change in the stock markets on the aggregate economy.

Answer 3

False

Question 4

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

Question 5

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

Question 6

If money supply increases, P will rise as long as V and Q remain constant.

Question 7

A one percentage point change in the required reserve ratio would change the money supply by roughly 1 percent, other things being equal.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.

Question 14

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

Question 15

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

Question 16

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

Question 17

Other things being constant, an increase in nominal GDP will generally increase the demand for money.

Question 18

There are 12 Federal Reserve Banks in the Federal Reserve System.

Question 19

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

Question 20

Countries with independent central banks tend to have lower inflation rates as well as lower economic growth rates.

Question 21

All decisions of the Fed are subject to approval by:

A)the President of the United States.
B)the U.S. Congress.
C)the FDIC
D)none of the above

Question 22

If you sell your economics professor a U.S.government bond, the effect will be to ____ banking reserves and ____ the money supply.

A)not change; not change
B)not change; increase
C)increase; not change
D)increase; increase

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)all of the above are correct.

Question 24

If your economics professor buys a U.S.government bond from you, the effect will be to ____ banking reserves and ____ the money supply.

A)increase, increase
B)increase, not change
C)not change, increase
D)not change, not change

Question 25

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 closure (failure) of individual member banks.

Question 26

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

A)A decrease in the discount rate
B)An increase in reserve requirements
C)A decrease in reserve requirements
D)A purchase of government securities by the Fed in the open market

Question 27

When the Fed purchases government securities from a commercial bank, the bank:

A)automatically becomes poorer.
B)loses equity in the Fed.
C)receives reserves that can be used to make additional loans.
D)loses its ability to make loans.

Question 28

When the Fed buys a U.S.government security:

A)the volume of loans issued by the banking system increases and investment will tend to increase.
B)the volume of loans issued by the banking system increases and investment will tend to decrease.
C)the volume of loans issued by the banking system decreases and investment will tend to increase.
D)the volume of loans issued by the banking system decreases and investment will tend to decrease.

Question 29

Decisions regarding purchases and sales of securities by the Fed are made by:

A)FDIC.
B)Discount Committee.
C)Federal Open Market Committee.
D)Federal Funds Committee.

Question 30

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.

Question 31

The Fed's purchases and sales of government securities are called:

A)margin operations.
B)open market operations.
C)small-dealer transactions.
D)intermediary transactions.

Question 32

Which of the following is the Fed's most common way to change the money supply?

A)Moral suasion
B)The discount rate
C)The required reserve rate
D)Open market operations

Question 33

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

A)Changing reserve requirements
B)Open market operations
C)Changing the discount rate
D)Moral suasion
E)all of the above

Question 34

If the Federal Open Market Committee (FOMC) decides to expand the money supply, then:

A)it will issue directions to sell U.S. government securities, thus increasing the velocity of circulation of the money supply.
B)it will issue directions to purchase U.S. government securities, thus putting more reserves in the hands of banks.
C)it will order new Federal Reserve notes delivered to member banks.
D)it will raise the discount rate to member banks.

Question 35

Considering open market operations, which of the following observations is incorrect?

A)it can be implemented quickly and cheaply.
B)it can be done quietly without a lot of political debate
C)it is potentially the most powerful tool to control the supply of money.
D)it is the most important method to control the supply of money.

Question 36

Which of the following is not a function of the Federal Reserve System?

A)limiting the national debt
B)setting the required reserve ratio for the deposit holdings of depository institutions
C)buying and selling government bonds to control the size and growth rate of the money supply
D)controlling inflation

Question 37

The money supply contracts when the Fed:

A)gathers up worn and ripped Federal Reserve notes.
B)sells government securities.
C)borrows from the U.S. Treasury.
D)purchases equities in major U.S. corporations.

Question 38

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

A)the banking system has more reserves and the money supply tends to grow.
B)the banking system has less reserves and the money supply tends to grow.
C)the banking system has more reserves and the money supply tends to fall.
D)the banking system has less reserves and the money supply tends to fall.

Question 39

If the Fed sells a U.S.government bond to a bank, what is the effect on the money supply?

A)It will increase.
B)It will not change.
C)It will shrink only if the Fed takes no reserves as payment.
D)It will shrink only if the Fed takes reserves as payment.
E)It will shrink.

Question 40

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

A)sells government securities to banks.
B)purchases government securities from member banks.
C)purchases government securities from the Treasury.
D)sells government securities to the Treasury.

Question 41

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

A)increase the money supply.
B)decrease the money supply.
C)leave the money supply unchanged.
D)have an indeterminate effect on the money supply.

Question 42

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

A)An increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit
B)Open market sales of government securities, an increase in the discount rate, and an increase in reserve requirements
C)An increase in tariffs on imported goods and a decrease in foreign aid
D)Open market purchases of government securities, a cut in the discount rate, and an increase in reserve requirements

Question 43

The discount rate's main significance is that:

A)changes in the rate are commonly viewed as a signal of the Fed's intentions with respect to monetary policy.
B)changes in the rate are a sign that monetary policy has swung strongly in a new direction.
C)it can be done quietly, without a lot of political debate or a public announcement.
D)a small change in the rate can make a huge change in the number of dollars that are in excess reserves in banks all over the country.

Question 44

A combination of an increase in the discount rate and an open market sale of government securities by the Fed would:

A)increase the money supply.
B)decrease the money supply.
C)leave the money supply unchanged.
D)have an indeterminate effect on the money supply.

Question 45

Assume the Fed purchases $5,000 worth of U.S.Treasury bonds from Bill Gates, who promptly deposits the money in Microsoft Rules National Bank.Assuming that the required reserve ratio is 25 percent and banks keep zero excess reserves, then the money supply will:

A)increase by $5,000.
B)increase by $20,000.
C)decrease by $5,000.
D)decrease by $20,000.

Question 46

Why does the Fed have imperfect control over the money supply over short periods?

A)Because of unpredictable changes in reserve requirements
B)Because the public responds to open market operations in unpredictable fashions
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 reserves
E)Because of secrecy of FOMC meetings, which lead to policy surprises

Question 47

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

A)if reserve requirements are decreased.
B)if there is a reduction in the discount rate.
C)if there is an open market purchase by the Fed.
D)in all of the above cases.
E)in none of the above cases.

Question 48

If the Fed raises the discount rate, it:

A)forces commercial banks to call in existing loans.
B)changes excess reserves into required reserves.
C)changes required reserves into excess reserves.
D)raises the money multiplier.
E)does none of the above.

Question 49

Doubling the required reserve ratio would, other things being equal,

A)double the money supply.
B)halve the money supply.
C)increase the money supply, but by less than double.
D)decrease the money supply, but by more than double.

Question 50

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)do all of the above.
E)do none of the above.

Question 51

What can the Fed increase to increase the supply of money?

A)Open market purchases of government bonds.
B)Reserve requirements.
C)The discount rate.
D)All of these answers are true.

Question 52

Federal funds market rate is:

A)the rate at which 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 to meet reserve requirement.
D)lower than the discount rate.

Question 53

An increase in the required reserve ratio, say from 10 to 12 percent would:

A)decrease the money supply by a substantial amount.
B)decrease the money supply by a small amount.
C)increase the money supply by a substantial amount.
D)increase the money supply by a small amount.

Question 54

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

Question 55

Which of the following would cause the U.S.money supply to expand?

A)a commercial bank calling in a loan to build up more excess reserves
B)a commercial bank purchasing U.S. securities from the Fed as an investment
C)a decrease in reserve requirements
D)an increase in the discount rate

Question 56

Which of the following is false?

A)If the Fed wants to expand the money supply, it could lower the discount rate.
B)The discount rate is a relatively unimportant monetary policy tool, mainly because member banks do not rely heavily on the Fed for borrowed funds.
C)Changes in required reserve ratios are such a potent monetary policy tool that they are frequently used.
D)If the Federal Reserve wanted to induce monetary expansion, it could reduce reserve requirements, but it cannot force the banks to make loans, thereby creating new money.

Question 57

If the Fed was to use all of its major domestic monetary control tools to increase the money supply, it would:

A)buy bonds, reduce the discount rate, and reduce reserve requirements.
B)sell bonds, reduce the discount rate, and reduce reserve requirements.
C)sell bonds, reduce the discount rate, and increase reserve requirements.
D)sell bonds, increase the discount rate, and increase reserve requirements.

Question 58

A combination of Fed purchases of government securities and an increase in reserve requirements would:

A)increase the money supply.
B)decrease the money supply.
C)leave the money supply unchanged.
D)have an indeterminate effect on the money supply.

Question 59

In its original role as 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 economic panics.
C)lend money to people in localities not served by commercial banks.
D)lend money to developing nations whose own central banks had failed.

Question 60

Halving the required reserve ratio would, other things being equal,

A)double the money supply.
B)halve the money supply.
C)increase the money supply, but by less than double.
D)decrease the money supply, but by more than double.

Question 61

The supply-of-money curve is almost perfectly inelastic because:

A)as interest rates rise, people will want to be supplied with more loans.
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 in their vaults or reserve deposits at the Fed, whether interest rates are 4% or 40%.
D)the Fed lowers the discount rate as interest rates rise.

Question 62

When the money supply decreases, other things being equal,

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

Question 63

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

A)interest rates will rise and aggregate demand will fall.
B)interest rates will rise and aggregate demand will rise.
C)interest rates will fall and aggregate demand will fall.
D)interest rates will fall and aggregate demand will rise.

Question 64

Which of the following is true?

A)The quantity of money demanded varies inversely with the rate of interest.
B)Money market equilibrium occurs at that nominal interest rate where the quantity of money demanded equals the quantity of money supplied.
C)Rising national income will shift the demand for money to the right, leading to a new higher equilibrium nominal interest rate.
D)An increase in the money supply will lead to lower interest rates and an increase in aggregate demand.
E)All of the above are true.

Question 65

Which of the following would tend to increase AD?

A)a commercial bank using excess reserves to extend a loan to a customer
B)a commercial bank purchasing U.S. securities from the Fed as an investment
C)an increase in reserve requirements
D)an increase in the discount rate
E)a purchase of U.S. government securities by the Fed

Question 66

If the Fed conducted an open market sale of government bonds and raised the discount rate:

A)the money supply would increase.
B)the money supply would decrease.
C)the money supply would not change.
D)the money supply could either increase or decrease.

Question 67

If money supply and money demand both increased:

A)interest rates would increase and investment would increase.
B)interest rates would increase and investment would decrease.
C)interest rates would decrease and investment would increase.
D)interest rates would decrease and investment would decrease.
E)the change in interest rates and investment would be indeterminate.

Question 68

If money supply and money demand both increased, but money supply increased more than money demand:

A)interest rates would increase and investment would increase.
B)interest rates would increase and investment would decrease.
C)interest rates would decrease and investment would increase.
D)interest rates would decrease and investment would decrease.
E)the change in interest rates and investment would be indeterminate.

Question 69

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.

Question 70

The quantity of money demanded varies inversely with the ____ rate, but the supply of money is almost perfectly ____ with respect to interest rates.

A)prime; elastic
B)interest; elastic
C)interest; inelastic
D)prime; inelastic

Question 71

When the Fed buys bonds, it:

A)lowers the price of bonds
B)raises interest rates
C)reduces aggregate demand
D)reduces real GDP in the short run.
E)does none of the above.

Question 72

The primary reason that money is demanded is for:

A)transaction purposes.
B)asset purposes.
C)precautionary reasons.
D)investment purposes.

Question 73

If interest rates rise, what will happen to demand for money?

A)It will increase.
B)It will decrease.
C)Nothing; the economy will move to a new quantity demanded at a new interest rate.
D)It depends on what happens to other determinants of demand for money like prices or income.

Question 74

When 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)the opportunity cost of holding monetary assets is higher, and the demand for money increases.
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 increases.

Question 75

Which of the following pairs of policies shift aggregate demand in the same direction?

A)A tax increase and an increase in the money supply.
B)A transfer payment decrease and an increase in the money supply.
C)A reduction in government purchases and decline in the money supply.
D)An increase in government purchases and a decline in the money supply.
E)None of the above pairs of policies shift aggregate demand in the same direction.

Question 76

Ceteris paribus, which of the following situations would result in the largest quantity of money demanded?

A)When nominal GDP = $1.4 trillion and the interest rate is 3 percent.
B)When nominal GDP = $1.4 trillion and the interest rate is 6 percent.
C)When nominal GDP = $1.2 trillion and the interest rate is 5 percent.
D)When nominal GDP = $800 billion and the interest rate is 4 percent.

Question 77

When money demand decreases, the Fed can choose between:

A)increasing interest rates or increasing the supply of money.
B)increasing interest rates or decreasing the supply of money.
C)decreasing interest rates or increasing the supply of money.
D)decreasing interest rates or decreasing the supply of money.

Question 78

When would the quantity of money demanded by the public tend to increase by the greatest amount?

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

Question 79

If money supply and money demand both fell, but money supply fell more than money demand:

A)interest rates would increase and investment would increase.
B)interest rates would increase and investment would decrease.
C)interest rates would decrease and investment would increase.
D)interest rates would decrease and investment would decrease.
E)the change in interest rates and investment would be indeterminate.

Question 80

Which of the following would cause the U.S.money supply to expand?

A)a commercial bank using excess reserves to extend a loan to a customer
B)a commercial bank purchasing U.S. securities from the Fed as an investment
C)an increase in reserve requirements
D)an increase in the discount rate
E)a purchase of U.S. government securities by the Fed