Chapter 16: Interest Rates and Monetary Policy

The prime interest rate is higher than the:

federal funds rate.

in the united states, monetary policy is the responsibility of the:

Board of Governors of the Federal Reserve System

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? Answer Selling government securities and raising the discount rate Selling government securities and lowering the discount rate Buying government securities and lowering the discount rate Buying government securities and raising the reserve ratio

Buying government securities and lowering the discount rate

Which one is considered a problem with monetary policy? Answer Dollar depreciation Cyclical asymmetry Isolation from political pressure A change in the discount rate

Cyclical asymmetry

the paper money used in the United States us

Federal Reserve Notes

The Fed has four main tools of monetary control it can use to alter the reserves of commercial banks:

Open-market operations; the reserve ratio; the discount rate; the term auction facility.

The fundamental objective of monetary policy is to assist the economy in achieving: Answer a rapid pace of economic growth. a money supply that is based on the gold standard. a full-employment, noninflationary level of total output. a balanced budget consistent with full employment.

a full-employment, noninflationary level of total output.

For those who want to hold money as an asset, there is:

an asset demand for money.

The Federal funds rate is the interest rate that _______ charge(s) ______. Answer banks; other banks the Fed; commercial banks banks; their best corporate customers banks; on federal student loans

banks; other banks

Open-market operations consist of:

buying government bonds from or selling government bonds to commercial banks and the general public.

the money supply is backed

by the governments ability to control the supply of money and therefore to keep its value relatively stable

The interest rate is the rate the Fed charges interest on loans granted to:

commercial banks.

In the Employment Act of 1946, the Federal government:

committed itself to accept some degree of responsibility for the general levels of employment and prices.

the consumption schedule relates:

consumption to the level of disposable income

the determinants of aggregate demand:

explain shifts in the aggregate demand curve

the aggregate demand curve is:

downsloping because of the interest-rate, real balances, and foreign purchases effects

Lowering the reserve ratio:

enhances the ability of banks to create new money by lending. It changes the amount of excess reserves and the size of the monetary multiplier.

Restrictive monetary policy:

increases the Federal funds rates, reduces the money supply, and increases other interest rates.

discretionary fiscal policy is so named because it:

involves specific changes is T and G undertaken expressly for stabilization at the option of Congress

Expansionary monetary policy:

lowers the Federal funds rates, increases the money supply, and lowers other interest rates.

Lowering the discount rate has the effect of: Answer changing required into excess reserves. changing excess into required reserves. making it less expensive for commercial banks to borrow from the central banks. forcing commercial banks to call in outstanding loans from their best customers.

making it less expensive for commercial banks to borrow from the central banks.

fiscal policy refers to the

manipulation of government spending and taxes to stabilize to domestic output, employment and the price level

The most frequently used monetary device for achieving price stability is: Answer open-market operations. the discount rate. the reserve ratio. the prime interest rate.

open-market operations

Raising the reserve ratio:

reduces the supply of money.

There are three main liabilities of the Fed:

reserves of commercial banks, treasury deposits, and federal reserve notes outstanding.

The two main assets of the Fed are:

securities and loans.

aggregate demand curve:

shows the amount of real output that will be purchased at each possible level

Monetary policy has two key advantages over fiscal policy:

speed and flexibility, and isolation from political pressure.

money functions as:

store of value, unit of account, and medium of exchange

Term auction facility:

the Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day and 84-day periods.

consumption schedule shows:

the amounts households intend to consume at various possible levels of aggregate income

The prime interest rate is:

the benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.

4 tools of monetary policy is:

the discount rate, the reserve ratio, the federal funds rate, and the discount rate

Interest is:

the price paid for the use of money.

The Federal Funds Rate:

the rate of interest that banks charge one another on overnight loans made from temporary excess reserves.

When the Fed sells government bonds:

the reserves of the commercial banks decrease.

When the Fed decides to purchase government bonds:

the reserves of the commercial banks increase.

The total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate, is called:

the total demand for money.

The demand for money as a medium of exchange is called:

the transactions demand for money.

Monetary policy has certain limitations:

time lags and potential ineffectiveness during severe recession.

to say money is socially defined means that

whatever performs the functions of money extremely well is considered to be money