Deck 22: Monetary Policy

Question 1

The quantity theory of money asserts that:

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

Answer 1

changes in the money supply are directly related to changes in nominal GDP.

Question 2

Which of the following is a function of the Fed?

A)Printing foreign currency
B)Determining the level of government spending
C)Distributing welfare benefits
D)Administrating the Social Security fund
E)Ensuring that banks operate in a sound and prudent manner

Answer 2

Ensuring that banks operate in a sound and prudent manner

Question 3

The President of which of the following district banks of the Fed is perpetually present on the Federal Open Market Committee?

A)The New York Fed
B)The Seattle Fed
C)The Boston Fed
D)The Chicago Fed
E)The Atlanta Fed

Answer 3

The New York Fed

Question 4

Which of following policies of the Congress was aimed to place the Fed above politics and maintain continuity in the policymaking process?

A)The President elects the entire Board of Governors.
B)The Federal Reserve district banks elects the Board of Governors.
C)The Congress elects 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 5

Each district bank of the Fed comprises of nine board of directors of which three are appointed by the:

A)Federal Reserve System member banks.
B)President.
C)Attorney General.
D)Board of Governors of the Fed.
E)Congress.

Question 6

If M = quantity of money, V = velocity of money, P = price level, and Q = the quantity of output, then the equation of exchange will be defined as:

A)MV = PQ
B)MQ = PV
C)MP = VQ
D)MV = P/Q
E)MQ = V/P

Question 7

Which of the following statements is incorrect?

A)The Federal Reserve Open Market Committee determines fiscal policy actions for the Congress.
B)The Board of Governors of the Federal Reserve is appointed, not elected.
C)The Federal Reserve System was designed to be independent of the executive branch of the government.
D)The chairman of the Board of Governors serves a four-year term.
E)The Federal Reserve districts are distributed geographically to serve the particular interests of each region.

Question 8

Which of the following government agencies oversees monetary policy in the U.S.?

A)The Federal Reserve System
B)Congress
C)The Treasury Department
D)The Federal Trade Commission
E)The Department of Commerce

Question 9

According to the equation of exchange, if the money supply is $800 million, real GDP is $3, 000 million, and nominal GDP is $4, 000 million, then the velocity of money is equal to:

A)3.5.
B)1.7.
C)10.3.
D)5.
E)2.

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 presidents.
C)the president of the New York district bank and the members of the Council of Economic Advisers.
D)the chairman 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

Identify the correct statement.

A)District banks of the Fed hold reserves in the form of deposits at the Fed.
B)Commercial banks in each district make loans to the Fed.
C)The Fed sells U.S.government securities for the U.S.Treasury.
D)The district banks of the Fed print money and supply currency to the Fed.
E)The Fed holds the reserves of the commercial banks but it does not issues checks.

Question 12

Which of the following is an intermediate target of the Fed's policies?

A)Exchange rate
B)Unemployment
C)Money supply
D)Interest rate
E)Inflation

Question 13

For how long is the chairman of the board of governors of the Fed appointed and by whom?

A)Appointed for two years by all the other governors
B)Appointed for two years by the governor of the New York district branch
C)Appointed for two years by the president of the United States
D)Appointed for four years by all the other governors
E)Appointed for four years by the president of the United States

Question 14

Which of the following is the ultimate goal of monetary policy?

A)Complete removal of income inequality
B)Economic growth with price stability
C)Free trade
D)Balanced budget
E)Economic welfare

Question 15

The Board of Governors of the Federal Reserve is:

A)appointed by the president, and each governor serves a 7-year term.
B)appointed by the president, and each governor serves a 14-year term.
C)elected by Congress, and each governor serves a 10-year term.
D)elected by Congress, and each governor serves a 4-year term.
E)elected by Congress, and each governor serves a 7-year term

Question 16

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 17

Which of the following is the official policy-making body of the Federal Reserve System?

A)Federal Advisory Council
B)The U.S.Treasury
C)The Federal Open Market Committee
D)The Board of Governors
E)The Federal Reserve district banks

Question 18

The Federal Reserve System divides the U.S.into _____ districts.

A)5
B)21
C)6
D)12
E)17

Question 19

The Federal Reserve System was created in 1913, through the Federal Reserve Act, by the:

A)U.S.President.
B)Judiciary.
C)Congress.
D)International Monetary Fund.
E)State governments.

Question 20

Who is the second most powerful person in the U.S.?

A)The Fed chairman
B)The Vice President
C)The Secretary of State
D)The speaker of the House of Representatives
E)The Attorney General

Question 21

After the year 2000, the FOMC changed some of its operating procedures.In particular, it stopped setting:

A)explicit interest rates for commercial banks to charge.
B)explicit ranges for money growth targets.
C)explicit number of government bonds to be bought and sold.
D)standardized real GDP targets.
E)explicit numbers for the targeted natural rates of unemployment.

Question 22

The sum of the coins and currencies in the bank's vault and its deposit in the Fed is called:

A)vault cash.
B)transaction deposits.
C)legal reserves.
D)required reserves.
E)loanable funds.

Question 23

Assume that the Fed increases the money supply when there is substantial unemployment in the economy.According to the quantity theory of money, if velocity is constant, then:

A)the price level will decrease.
B)real GDP will decrease.
C)nominal GDP will increase.
D)nominal GDP will decrease.
E)real GDP will remain constant while price level will decrease.

Question 24

The rate of interest that the Federal Reserve charges on loans to member banks is the:

A)open market rate.
B)federal funds rate.
C)discount rate.
D)prime interest rate.
E)reserve lending rate.

Question 25

Assume that banks lend out all their excess reserves.Currently, the legal reserves that banks must hold equal $11.5 billion.If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for the whole banking system to raise the money supply by:

A)$11.5 billion.
B)$230 billion.
C)$115 billion.
D)$57.5 billion.
E)$575 billion.

Question 26

When a bank's excess reserves are zero:

A)its required reserves exceed its legal reserves.
B)its liabilities exceed its assets.
C)its liabilities must be lower than its assets.
D)its required reserves equal its legal reserves.
E)it cannot meet its reserve requirement.

Question 27

Which of the following is true of the federal funds rate?

A)It is the interest rate that one bank charges another for overnight lending.
B)It is the interest rate that the Federal Reserve Bank charges commercial banks for borrowing money.
C)It is the interest rate you earn in your saving account.
D)It is the interest rate the bank charges business firms for borrowing money.
E)It is the interest rate that a domestic bank charges a foreign bank for borrowing money.

Question 28

The velocity of money is:

A)the purchasing power of money.
B)the value of a dollar in relation to foreign currency.
C)the average number of times each dollar is spent on final goods and services in a given year.
D)the average length of time it takes for a dollar of income to be spent.
E)the total amount of money that is in circulation for consumption spending.

Question 29

If funds are being loaned from one commercial bank's excess reserves on deposit with the Federal Reserve to another commercial bank's deposit account at the Fed, the transaction is taking place in:

A)the discount market.
B)the currency exchange market.
C)the federal funds market.
D)the open market.
E)the reserves market

Question 30

Which of the following actions of the Fed will increase money supply in the U.S.directly?

A)Purchase U.S.government bonds
B)Increase the federal funds rate
C)Increase the reserve requirement
D)Increase the discount rate
E)Ban sales of private mutual funds

Question 31

Which of the following is assumed to be constant in the quantity theory of money?

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

Question 32

In order to use inflation targeting, a central bank must:

A)be independent of fiscal policy.
B)be dependent on fiscal policy.
C)focus on money supply.
D)focus on unemployment.
E)focus on stable exchange rates.

Question 33

If the money supply is $80 billion, the velocity of money is 5, and real GDP is $320 billion, then the price level equals:

A)51.20.
B)20.
C)4.
D)2.75.
E)1.25.

Question 34

Which of the following will be observed if the Fed raises the reserve requirement?

A)The deposit expansion multiplier will fall
B)The discount rate will decline
C)The interest rate ceilings will fall
D)Excess reserves will increase
E)Money supply will increase

Question 35

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

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

Question 36

The interest rate that banks pay for borrowing overnight from other banks is called:

A)bank rate.
B)target rate.
C)federal funds rate.
D)real interest rate.
E)prime lending rate.

Question 37

Suppose a bank has $850 million in vault cash and a deposit in the Fed of $100 million.If the bank's required reserves equal $500 million, then the bank has excess reserves of:

A)$100 million.
B)$350 million.
C)$400 million.
D)$450 million.
E)$500 million.

Question 38

Which of the following statements about inflation targeting is true?

A)Inflation targeting allows the central bank to achieve multiple goals like low unemployment and economic growth.
B)Inflation targeting has not been adopted by the Fed.
C)A central bank that adopts inflation targeting is intrinsically dependent on fiscal policy.
D)Inflation targeting decreases the perceived uncertainty derived from the central bank's course of action.
E)Inflation targeting increases the uncertainty associated with the central bank's course of action.

Question 39

Suppose that the Fed decides to decrease the money supply by 0.87 percent.If the velocity of money is constant, then the quantity theory of money predicts that:

A)nominal GDP will remain unchanged.
B)the quantity of output will rise by 0.87 percent.
C)nominal GDP will fall by 0.87 percent.
D)the price level will fall by 0.87 percent.
E)real GDP will fall by 0.87 percent.

Question 40

If a percentage decrease in money supply is followed by a proportional percentage decrease in prices and output, this means that:

A)the velocity of money is constant.
B)the economy is in a recession.
C)the velocity of money has fallen.
D)real GDP is constant.
E)the economy is not at maximum capacity

Question 41

The table given below shows the assets and liabilities of the National Bank.Assume that this is the only bank in the economy. Table 13.2
Refer to Table 13.2.Calculate the change in the bank's excess reserves if the reserve requirement is decreased from 10% to 5%.

A)+$272.5
B)+$236
C)-$2, 360
D)-$1877.5
E)-$3, 210

Question 42

All the following affect short-run operating targets of the FOMC, except:

A)the federal funds rate.
B)the rate of inflation.
C)the budget deficit.
D)the foreign exchange rate.
E)the growth of real GDP.

Question 43

The table given below shows the assets and liabilities of the National Bank.Assume that this is the only bank in the economy. Table 13.2
Refer to Table 13.2.If the reserve requirement is 10 percent, calculate the maximum amount of loanable funds available with the bank.

A)$1, 605
B)$1, 180
C)$545
D)$5, 450
E)$2, 150

Question 44

Table 13.1 Refer to Table 13.1.Given a reserve requirement of 8 percent, what is the amount of excess reserves?

A)$2, 800
B)$224
C)$936
D)$1, 640
E)-$256

Question 45

Assume that a bank holds legal reserves of $800, the required reserves are $400 and total deposit is $4, 000.If the government purchases bonds worth $200, excess reserves will increase by _____.

A)$420
B)$180
C)$100
D)$80
E)$40

Question 46

Suppose Fed's purchase of government bonds results in a $120, 000 increase in the excess reserves of a particular bank.What would be the applicable reserve requirement for the whole banking system to be able to expand the money supply by $600, 000?

A)10 percent
B)12 percent
C)16 percent
D)20 percent
E)25 percent

Question 47

The process of buying financial assets to stimulate the economy when the central bank target interest rate is near or at zero and the interest rate cannot be lowered further is called:

A)bond-trading.
B)quantitative bidding.
C)open market purchase.
D)quantitative easing.
E)open market sale.

Question 48

The table given below shows the assets and liabilities of the National Bank.Assume that this is the only bank in the economy. Table 13.2
Refer to Table 13.2.If the reserve requirement is 10 percent, how much can the whole banking system expand the money supply?

A)$21, 500
B)$54, 500
C)$11, 800
D)$16, 050
E)$5, 450

Question 49

A decrease in the discount rate:

A)increases reserve holdings of the commercial banks.
B)leads to an increase in the interbank rate charged by commercial banks.
C)lowers the cost of borrowing from the Fed.
D)causes an increase in the federal funds rate.
E)decreases the money supply.

Question 50

Table 13.1 Refer to Table 13.1.Given a reserve requirement of 8 percent, what is the maximum potential increase in the money supply?

A)$20, 500
B)$2, 800
C)$224
D)$11, 700
E)$35, 000

Question 51

The buying and selling of government bonds by the FOMC constitutes:

A)an open market operation.
B)a federal funds adjustment.
C)a discount rate adjustment.
D)a change in the reserve requirement.
E)sterilization of the money supply

Question 52

When the Federal Open Market Committee buys government securities:

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

Question 53

The aggregate demand curve will shift outward and to the right when the Federal Reserve undertakes which of the following monetary policies?

A)Open market purchases of government securities
B)An increase in the discount rate
C)An increase in the reserve requirement
D)A reduction in loans to the U.S.Treasury
E)A more lenient supervision of savings and loan institutions

Question 54

Table 13.1 Refer to Table 13.1.Assume a reserve requirement of 8 percent.What is the maximum potential increase in the money supply from the Fed's purchase of $400 worth of government securities?

A)$62, 500
B)$2, 800
C)$3, 200
D)$4, 600
E)$400

Question 55

The table given below shows the assets and liabilities of the National Bank.Assume that this is the only bank in the economy. Table 13.2
Refer to Table 13.2 and calculate the legal reserves of the bank.

A)$425
B)$5, 450
C)$1, 725
D)$2, 150
E)$1, 500

Question 56

Which of the following monetary policies will increase money supply?

A)An increase in the discount rate
B)An increase in the reserve requirement
C)Open market purchases by the Fed
D)The Fed selling government bonds
E)An increase in the federal funds rate

Question 57

The table given below shows the assets and liabilities of the National Bank.Assume that this is the only bank in the economy. Table 13.2
Refer to Table 13.2.If the Fed increased the reserve requirement from 10 percent to 25 percent, the money supply in the whole banking system could now potentially:

A)decrease by $12, 900.
B)decrease by $1, 272.50.
C)increase by $7, 875.
D)decrease by $7, 875.
E)increase by $3, 150.

Question 58

Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?

A)The federal funds rate
B)The primary lending rate
C)Quantitative easing
D)Legal reserves
E)The bank rate

Question 59

If the FOMC purchases government bonds priced at $5, 000 from a bond dealer who banks at National Bank, and if the reserve requirement is 20 percent, then the required reserves of National Bank:

A)increase by $5, 000.
B)increase by $4, 000.
C)increase by $1, 000.
D)decrease by $5, 000.
E)decrease by $1, 000.

Question 60

Table 13.1 Refer to Table 13.1.Given a reserve requirement of 8 percent, what is the increase in required reserves when the government purchases $400 worth of government securities?

A)$400
B)$224
C)$32
D)$256
E)$5, 000

Question 61

In foreign exchange markets, a U.S.resident who imports New Zealand apples is:

A)a demander and supplier of New Zealand dollars.
B)a demander and supplier of U.S.dollars.
C)a demander of New Zealand dollars and a supplier of U.S.dollars.
D)a supplier of both New Zealand dollars and U.S.dollars.
E)a supplier of New Zealand dollars and a demander of U.S.dollars.

Question 62

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 Refer to Figure 13.2.Given a target exchange rate of MXP 11 = $1 with S₁ the relevant supply curve and a decline in Mexican demand for U.S.dollars from D₁ to D₂ the Fed intervenes in the foreign exchange market by:

A)selling Q₃ amount of pesos.
B)selling Q₃ amount of U.S.dollars.
C)buying (Q₂ - Q₁)amount of pesos.
D)buying (Q₁ - Q₃)amount of U.S.dollars.
E)buying (Q₂ - Q₃)amount of U.S dollars.

Question 63

The FOMC carries out its policies through directives to the bond-trading desk at the:

A)Federal Reserve Bank of Dallas.
B)Chicago Fed.
C)Federal Reserve of Philadelphia.
D)Los Angeles Fed.
E)Federal Reserve Bank of New York.

Question 64

Assume that the yen price of one U.S.dollar rises to 80 yen and that the Bank of Japan has a target exchange rate of 75 yen per dollar.As a result, the Bank of Japan will intervene in the foreign exchange market by:

A)selling U.S.dollars and buying yen.
B)selling both U.S.dollars and yen.
C)buying U.S.dollars and selling yen.
D)buying both U.S.dollars and yen.
E)buying U.S.Treasury securities.

Question 65

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

A)normalization.
B)quantitative easing.
C)sterilization.
D)volatilization.
E)depreciation.

Question 66

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 Refer to Figure 13.2.Assume that the exchange rate is fixed at MXP 11 = $1 and the free market equilibrium rate is MXP 10 = $1.This means that at MXP 11 = $1,

A)there will be a permanent shortage of U.S.dollars.
B)there will be a surplus of Mexican pesos.
C)there will be a permanent surplus of U.S.dollars.
D)U.S.net exports to Mexico will be positive.
E)the U.S.budget deficit will fall.

Question 67

Which of the following is most likely to lead to an increase in the demand for U.S.dollars in the foreign exchange market?

A)U.S.firms purchasing raw materials from Japan
B)U.S.speculators expecting the value of the German mark to rise
C)The Fed intervening in the foreign exchange market and devaluing the dollar
D)Speculative outflows of money from the United States to Britain because of higher interest rates in Britain
E)Japanese cars becoming more popular in the United States

Question 68

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso. Figure 13.2 Refer to Figure 13.2.When the Mexican demand for U.S.dollars rises from D₂ to D₁ and the relevant supply curve is S₁:

A)the U.S.dollar depreciates in value relative to the peso.
B)the Mexican peso depreciates in value relative to the U.S.dollar.
C)the Mexican peso appreciates in value relative to the U.S.dollar
D)U.S.imports from Mexico decreases.
E)Mexican net exports to the United States becomes positive.

Question 69

To keep the U.S.dollar from depreciating against the euro, the U.S.Federal Reserve must:

A)buy euros and sell U.S.dollars.
B)buy both euros and U.S.dollars.
C)sell euros and buy U.S.dollars.
D)sell both euros and U.S.dollars.
E)buy U.S.government bonds

Question 70

Assume that there is an unexpected increase in the demand for U.S.dollars in Switzerland.If the foreign currency price of the U.S.dollar is fixed, the U.S.Federal Reserve must intervene in the foreign exchange market such that:

A)the supply of U.S.dollars increases.
B)the U.S.demand for the Swiss franc falls.
C)the supply of U.S.dollars decreases.
D)Swiss imports from the United States are reduced.
E)the Swiss currency is devalued.

Question 71

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:

A)tend to be revalued.
B)tend to increase in value over other currencies.
C)be high demand in the foreign exchange market.
D)tend to depreciate.
E)tend to appreciate.

Question 72

The supply of the U.S.dollar on the foreign exchange market is generated by:

A)demand for U.S.exports.
B)the U.S.demand for the products and financial assets of other countries.
C)the U.S.demand for domestic goods and services.
D)foreign demand for U.S.products.
E)foreign demand for U.S.financial assets.

Question 73

Which of the following people is most likely to demand U.S.dollars in the foreign exchange market?

A)A United States resident who is traveling to the Greek Islands
B)An American investor who intends to buy Japanese government bonds
C)A resident of Australia who is traveling to Belgium
D)A British importer of U.S.beef
E)A U.S.company that is importing avocados from Mexico

Question 74

When more than one central bank attempts to shift the equilibrium exchange rate, we refer to this as:

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

Question 75

The supply curve of U.S.dollars in the foreign exchange market is:

A)downward-sloping because it is negatively related to U.S.exports.
B)downward-sloping because it is negatively related to U.S.imports.
C)upward-sloping because it is positively related to U.S.exports.
D)upward-sloping because it is positively related to U.S.imports.
E)horizontal because it is unrelated to foreign demand for U.S.goods and services

Question 76

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.If the exchange rate is fixed at E₂ but the free market equilibrium rate is E₁ then:

A)there is a shortage of British pounds at E₁.
B)no intervention is necessary to achieve the exchange rate E₁.
C)there is a permanent surplus of U.S.dollars at E₁.
D)there is a permanent surplus of U.S.dollars at E₂.
E)there is a permanent shortage of U.S.dollars at E₃.

Question 77

If the U.S.dollar depreciates against the yen below the targeted exchange rate, the U.S.Federal Reserve has to intervene in the foreign exchange market such that:

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

Question 78

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must:

A)sell both its own currency and foreign exchange.
B)buy its own currency and sell foreign exchange.
C)buy both its own currency and foreign exchange.
D)sell its own currency and buy foreign exchange.
E)revalue its own currency.

Question 79

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.Which of the following is most likely to cause equilibrium to change from point A to point D?

A)A decrease in U.S.demand for British goods and services
B)An increase in U.S.demand for British goods and services
C)An increase in the supply of dollars on the foreign exchange market
D)A decrease in the supply of British pounds on the foreign exchange market
E)An increase in British demand for U.S.exports

Question 80

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.If the current equilibrium exchange rate is E₁ what action would the Fed have to take to achieve a target exchange rate of E₂?

A)Sell (Q₂ - Q₁)amount of U.S.dollars.
B)Buy (Q₁ - Q₃)amount of U.S.dollars.
C)Buy (Q₂ - Q₃)amount of U.S.dollars.
D)Buy (Q₂ - Q₁)amount of U.S.dollars.
E)Sell (Q₁ - Q₃)amount of U.S.dollars.