Ch 15 HW

If the Board of Governors of the Federal Reserve System decreases the interest paid on excess reserves, the primary effect of this change is to:

Encourage commercial bank lending of excess reserves and increase the money supply

If the board of governors of the federal reserve system decreases the legal reserve ratio, this change will:

Increase the excess reserves of member banks and thus increase the money supply

Lowering the discount rate has the effect of:

Making it less expensive for commercial banks to borrow from central banks

In which case with the quantity of money demanded by the public tend to increase by the greatest amount?

The interest rate decreases and nominal GDP increases

Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks excess reserves?

The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

Assuming that the federal reserve bank sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

The potential money supply by $200 million

What is one of the advantages of monetary policy over fiscal policy?

The quickness with which it can be used

Generally, the prime interest rate:

moves in the same direction as the federal funds rate

The tools of monetary policy for altering the reserves of commercial banks are the:

the discount rate, the reserve ratio, and open-market operations, and interest on excess reserves

Refer to the above graph. The interest rate was 1% and the money supply decrease by $100 billion, the new interest rate would be:

3%

Refer to the above graph. If the interest rate is 2 percent, the supply of money would be:

$200 billion

The federal funds rate is the interest rate that______ charge(s)________

Banks/other banks

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the federal reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

Buying government securities and lowering the interest rate paid on excess observes

If the Fed buys government securities from commercial banks in the open market:

Commercial banks give the securities to the Fed, and it pays for them by increasing the reserves of commercial banks at the Fed

A federal reserve notes: "A tight monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an expansion of the economy." The official has described the problem of the:

Cyclical asymmetry of the monetary policy

Refer to the above graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and level of investment spending in the economy are at point D on the investment demand curve. To achieve the long run goal of a noninflationary full employment output QF in the economy, the Fed should:

Decrease aggregate demand by increasing the interest rate from 4 to 6%

If the Federal Reserve raises the interest rate on excess reserves, this will:

Discourage commercial banks from lending excess reserves

Which is considered a strength of monetary policy compared to fiscal policy?

Its protection from political pressure

Which line in the above graph would best reflect the slope of the asset demand for money curve?

Line 1

The federal reserve implemented a series of new policies and tools in response to the 2007-2008 financial crisis and recession. Many economists believe these policies helped avert another great depression, but exacerbated what problem in the financial system?

Moral hazard

A newspaper headline reads: "Fed raises discount rate for the third time this year." This headline indicates that the federal reserve is most likely trying to:

Reduce inflationary pressures in the economy

Inflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?

Selling government securities and raising the interest rate paid on excess reserves

Which of the following statements is true? The Federal Reserve sets the federal funds rate. The federal reserve says the target for the federal funds rate, and then uses the reserve ratio to push banks toward that target. The federal reserve was at a higher target for the federal funds rate if pursuing an expansionary monetary policy. The federal reserve does not set the federal funds rate, but it influences it through the use of open market operations.

The federal reserve does not set the federal funds rate but influences it through use of open market operations

A consumer holds money to meet spending needs. This would be an example of the:

Transactions demand for money

Refer to the above graph, which shows the supply and demand of money where DM1, DM2, and DM3 represent different demand for money & SM1, SM2, and SM3 represent different levels of the money supply. The initial equilibrium point is a. What will be the new equilibrium point following a decrease in the money supply?

Point B

The term "liquidity trap" describes a situation where:

Potential borrowers and lenders do not respond to expansionary monetary policy is implemented during a recession

The level of GDP will tend to increase when:

The Federal Reserve buys government securities in the open market

Which varies directly with interest rate?

opportunity cost of holding money

Changes in the rate of interest will most likely affect:

investment spending