ECON CH. 13 QUIZ

In the short run if the Fed undertakes expansionary monetary policy, the effect will be to shift the:

AD curve out to the right. Expansionary monetary policy reduces interest rates and investment increases. Hence, AD shifts out to the right by a multiple of the increase in investment.

Which of the following monetary policies reduces aggregate demand and output?

An open market sale of government securities An open market sale of bonds increases the supply of bonds, driving down bond prices and pushing up interest rates. Higher interest rates in turn reduce investment, aggregate demand, and output.

All of the following are components of the Federal Reserve system except the:

Federal Deposit Insurance Corporation. The FDIC is a separate agency.

Which is not a function of the Fed?

Financing U.S. budget deficits Financing U.S. budget deficits is the job of the Treasury department

Which of the following is the path through which contractionary monetary policy works?

Money down implies interest rate up implies investment down implies income down. Contractionary monetary policy increases interest rates which decreases investment, thereby decreasing income by a multiple of that amount.

Which of the following Fed policies would help the economy out of a recession?

Open market purchases of government securities An open market purchase of government securities increases banks reserves. Banks tend to lend out these new funds, thereby expanding money supply, reducing interest rate, and shifting to the right aggregate demand. This will increase output.

What tool of monetary policy will the Fed use to increase the federal funds rate from 1 percent to 1.25 percent?

Open-market operations The federal funds target is used to guide the trading desk in whether to add or subtract reserves from the banking system.

Who determines U.S. monetary policy?

The Federal Reserve. The Fed controls monetary policy through its ability to influence the banking system, credit, and the money supply.

Which of the following is not directly affected by monetary policy?

The budget deficit The budget deficit is determined directly by fiscal policy. Monetary policy does affect the budget deficit through its effects on interest rates, but this is an indirect effect.

Suppose the federal funds rate is above the Fed's target range. The Fed will:

buy bonds The federal funds rate being above the Fed's target would mean that monetary policy is too tight, so the Fed should follow an expansionary monetary policy like buying bonds

Which is not something the Fed can do to conduct monetary policy?

change the exchange rate Changing the exchange rate is not a tool of the Fed's monetary policy though occasionally it does try to influence the exchange rate.

Explicit functions of the Fed include all the following except:

conducting fiscal policy.

When the Fed increases the reserve requirement, it:

contracts the money supply because banks have less to lend. An increase in the reserve requirement forces banks to hold more of their deposits in the form of reserves, and this reduces the supply of credit.

Federal Reserve sales of government securities:

decrease bank reserves and decrease the money supply. Open market sales of government securities reduce the reserves of the banking system. As reserves fall, banks must replenish them by either issuing fewer loans or calling in old loans, both of which reduce the money supply.

In 2008, the Fed followed an expansionary monetary policy, which was evident by the:

decrease in the federal funds rate from 4 percent in January to 0.25 percent in December. In 2008 the Fed followed an expansionary monetary policy that can be observed in the severe reduction of the federal funds rate.

When the Fed sells bonds, the:

federal funds rate increases. An open market sale of government securities reduces the excess reserves in the banking system, which should decrease the supply of funds in the federal funds market and increase the federal funds rate.

Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate economy, the other being:

fiscal policy. Fiscal policy affects the aggregate economy through changes in taxes and government outlays

If real income increases by 4 percent and the price level increases by 3 percent, nominal income must:

increase by 7 percent Since the percentage change in real income equals the percentage change in nominal income minus the percentage change in the price level, it follows that nominal income must rise by 7 percent.

When the Fed lowered the discount rate in late 2008 the action was ultimately designed to:

increase the money supply. The discount rate is the interest rate the Fed charges commercial banks when it lends to them. The lower this rate, the more likely banks are to borrow and the less likely they are to hold excess reserves to meet reserve shortfalls. This tends to increase the money supply.

In general, the yield curve:

is upward sloping. The yield curve is generally upward sloping. Interest rates for short-term bonds are generally lower than interest rates for long-term bonds because of the risk premium for long-term bonds.

A monetary policy that reduces both real and nominal income:

must be contractionary. Contractionary monetary policy decreases aggregate demand. The decrease in aggregate demand leads to a decrease in real output, a decrease in the price level, or both. In all three cases, nominal income falls.

The primary tool of monetary policy is:

open market operations. Open market operations are conducted on a day-to-day basis by the Fed in order to meet its objectives for monetary policy. The federal funds rate is an operating target for monetary policy.

When the Fed targets a higher interest rate, this change in policy involves open market:

sales of government securities that reduced reserves. The federal funds rate increases when excess reserves within the commercial banking system contract. Such a contraction can be brought on by Fed open market sales of government securities because these sales reduce commercial bank reserves.

If the Fed wants a tighter monetary policy, it might:

sell government securities to increase the federal funds rate. A sale of government securities reduces the reserves in the banking system and forces up the federal funds rate.

Most decisions about monetary policy are made by:

the Federal Open Market Committee. The FOMC is the Fed's chief policy-making body.