Chapter 16

A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves?

$0

The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then rises by $200, what will be the interest rate yield to a new buyer of the bond?

18.8 percent

In the United States, monetary policy is the responsibility of the

In the United States, monetary policy is the responsibility of the

Which of the following statements is correct? -Interest rates and bond prices are unrelated. -Interest rates and bond prices vary directly during inflation and inversely during recessions. -Interest rates and bond prices vary inversely. -Interest rates and bond prices vary directly.

Interest rates and bond prices vary inversely.

In 2009, the inflation rate reached negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed's target interest rate back then? Would that rate have been possible given the zero lower bound problem?

Negative 4.6 percent; not possible.

True or False. A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

True

True or False. In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

True

Federal Reserve Notes in circulation are

a liability as viewed by the Federal Reserve Banks.

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

a tax increase and an increase in the money supply

The Federal Reserve System regulates the money supply primarily by

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

A decrease in the reserve ratio increases the

amount of excess reserves in the banking system.

The basic objective of monetary policy is

assist the economy in achieving a full-employment, noninflationary level of total output

The equilibrium interest rate in the money market is determined

at the intersection of the total demand for money curve and the supply of money curve.

A commercial bank can add to its actual reserves by

buying government securities from a Federal Reserve Bank.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

When bond prices go up, interest rates go __________.

down

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

expands and commercial bank reserves increase.

When economists say that monetary policy can exhibit cyclical asymmetry, it means that

expansionary monetary policy and restrictive monetary policy do not have the same potential for economic expansion and contraction. Correct

If there is an increase in the nation's money supply, the interest rate will

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

The interest rate that banks charge one another on overnight loans is called the

federal funds rate.

Total money demand is the

horizontal sum of the transactions demand for money and the asset demand for money.

It is costly to hold money because

in doing so, one sacrifices interest income.

A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The potential money supply:

increases

If the economy is experiencing a sharp rise in inflation, as a member of the Board of Governors, you would recommend

increasing the federal funds rate. Correct

To lower the inflation rate to 4 percent, you recommend contracting the money supply,

increasing the reserve ratio, the IOER rate, or the discount rate, or selling bonds.

The basic determinant of the asset demand for money is the

interest rate.

The basic determinant of the transactions demand for money is the

level of nominal GDP.

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

loans to commercial banks

If the Fed were to reduce the legal reserve ratio, we would expect

lower interest rates, an expanded GDP, and a higher rate of inflation.

Monetary policy is easier to conduct than fiscal policy because

monetary policy has a much shorter administrative lag than fiscal policy.

Cyclical asymmetry is important to policymakers because

monetary policy is more effective in fighting inflation than a recession. Correct

An increase in nominal GDP increases the demand for money because

more money is needed to finance a larger volume of transactions.

. If the current point lies to the ________ of the center of the bullseye, the state of the economy will suggest opposite monetary policy stances.

northeast or southwest

If the current point lies to the ________ of the center of the bullseye, the Fed's stance on monetary policy will be clear.

northwest or southeast

Which of the following is a tool of monetary policy?

open-market operations

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

The discount rate is the interest

rate at which the Federal Reserve Banks lend to commercial banks

A major strength of monetary policy is

speed and flexibility

The asset demand for money is most closely related to money functioning as a

store of value.

The transactions demand for money is most closely related to money functioning as a

store of value.

The equilibrium rate of interest in the market for money is determined by the intersection of the

supply-of-money curve and the asset-demand-for-money curve.

When a commercial bank borrows from a Federal Reserve Bank,

the commercial bank's lending ability is increased.

The four main tools of monetary policy are

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

Complete the following statement: If there is an increase in the total demand for money,

the equilibrium interest rate will rise.

The purchase of government securities from the public by the Fed will cause

the money supply to increase.

Which of the following will increase commercial bank reserves?

the purchase of government bonds in the open market by the Federal Reserve Banks

Open-market operations refer to

the purchase or sale of government securities, as well as collateralized money loans, by the Fed.

The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.

twice

The asset demand for money

varies inversely with the rate of interest

A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ________ in money-creating potential. If the reserve ratio is 14 percent, the bank has ________ in money-creating potential.

−$5,000; $1,000