Monetary policy (ECO 205)

21. The Federal Reserve System was created in: A) 1913. B) 1971. C) 1857. D) 1873.

A) 1913.

4. Which of the following is NOT one of the reasons that the Japanese tend to keep large amount of cash? A) Banks have invested heavily in credit card technology. B) Japan has a low crime rate. C) Interest rates in Japan have been below 1% since the 1990s. D) Japan's retail sector is dominated by small, mom-and-pop stores that don't use credit card technology.

A) Banks have invested heavily in credit card technology.

14. In the income-expenditure model, expansionary monetary policy causes: A) a decrease in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. B) a decrease in interest rates, a decrease in planned investment spending, and an increase in equilibrium GDP. C) an increase in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. D) an increase in interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP.

A) a decrease in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP.

12. Expansionary monetary policy causes _______ in interest rates in the short run and ______ in interest rates in the long run. A) a decrease; no change B) a decrease; a decrease C) no change; a decrease D) no change; no change

A) a decrease; no change

25. The tools of conducting monetary policy include: A) changes in the required reserve requirement. B) changes in the prime rate. C) open market purchases of corporate stock. D) changing tax rates.

A) changes in the required reserve requirement.

7. The federal funds rate is: A) determined in the money market by the supply and demand for money. B) set by Congress. C) determined in the real market by the aggregate supply and aggregate demand curves. D) the interest rate that banks pay when they borrow directly from the Fed.

A) determined in the money market by the supply and demand for money.

(REFER TO MONEY MARKET FIGURE)16. (Figure: A Money Market) The accompanying graph shows the money market. In this market, if the current interest rate is r3, we would expect to see the interest rate _____ because there is a ______ of money in the market. A) fall; surplus B) fall; shortage C) rise; surplus D) rise; shortage

A) fall; surplus

36. If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the monetary base, the Fed would likely: A) increase the discount rate. B) increase the federal funds rate. C) increase the reserve requirement. D) sell U.S. Treasury bills in an open market operation.

A) increase the discount rate.

31. To _______ the money supply, the Fed could ________. A) increase; lower the reserve requirements B) decrease; lower the discount rate C) increase; raise the federal funds rate D) decrease; conduct open-market purchases

A) increase; lower the reserve requirements

27. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: A) other member banks and borrow at the federal funds rate. B) Fed and borrow at the discount rate. C) open market and borrow money there. D) Congress to borrow funds.

A) other member banks and borrow at the federal funds rate.

13. In a graph of a money demand curve, which of the following variables is plotted on the vertical axis? A) the interest rate on liquid assets, like short-term CDs B) the interest rate on 30-year Treasury bills C) the rate of price inflation D) the rate of return in the stock market

A) the interest rate on liquid assets, like short-term CDs

26. If the Fed increases the discount rate: A) the money supply is likely to decrease. B) the money supply is likely to increase. C) the money supply is not likely to change. D) the federal funds rate must decrease.

A) the money supply is likely to decrease.

28. Which of the following actions would allow banks to lend out more money? A) an increase in the required reserve ratio B) a decrease in the discount rate C) an increase in the federal funds rate D) an increase in the required reserve ratio coupled with an increase in the federal funds rate

B) a decrease in the discount rate

2. If the economy is suffering from a recessionary gap, the Fed should conduct _______ monetary policy by _________ the money supply. A) expansionary; decreasing B) expansionary; increasing C) contractionary; decreasing D) contractionary; increasing

B) expansionary; increasing

18. When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____. A) falls; falls; falls B) falls; falls; rises C) rises; falls; falls D) rises; falls; rises

B) falls; falls; rises

22. All of the following are responsibilities of the Fed EXCEPT: A) control the monetary base. B) mint bills and coins. C) oversee and regulate the banking system. D) set the discount rate.

B) mint bills and coins.

23. The major tools of monetary policy available to the Federal Reserve System include: A) reserve requirements, margin regulations, and moral suasion. B) reserve requirements, open-market operations, and the discount rate. C) open-market operations, margin regulations, and moral suasion. D) the discount rate, margin regulations, and moral suasion.

B) reserve requirements, open-market operations, and the discount rate.

6. Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: A) the money demand curve to shift outward. B) the money demand curve to shift inward. C) a downward movement along a fixed money demand curve. D) an upward movement along a fixed money demand curve.

B) the money demand curve to shift inward.

1. The money supply curve is: A) downward sloping. B) vertical. C) upward rising. D) horizontal.

B) Verical.

39. Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is: A) 0.1. B) 0.5. C) 0.33. D) 0.2.

C) 0.33.

33. Open-market operations occur when the Fed: A) buys U.S. Treasury bills from the federal government. B) buys or sells U.S. Treasury bills. C) buys or sells existing U.S. Treasury bills. D) sells U.S. Treasury bills to the federal government.

C) buys or sells existing U.S. Treasury bills.

34. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will: A) increase by $10 million. B) increase by $8 million. C) decrease by $10 million. D) decrease by $50 million.

C) decrease by $10 million.

11. Given a recessionary gap, the Fed will use monetary policy to _______ interest rates and _______ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

C) decrease; increase

32. To _______ the money supply, the Fed could ________. A) increase; decrease the money multiplier B) decrease; lower the reserve requirements C) increase; conduct open-market purchases D) decrease; lower the discount rate

C) increase; conduct open-market purchases

40. To close a recessionary gap using monetary policy, the Fed should ________ the money supply to ________ investment and consumer spending, and shift the aggregate demand curve to the ________. A) increase; increase; left B) decrease; decrease; left C) increase; increase; right D) decrease; decrease; right

C) increase; increase; right

8. The amount of money that people demand is: A) positively related to the interest rate. B) independent the interest rate. C) negatively related to the interest rate. D) positively related or negatively related to the interest rate depending on the state of the economy.

C) negatively related to the interest rate.

10. The FOMC does NOT control the: A) discount rate. B) reserve ratio. C) prime rate. D) federal funds rate

C) prime rate.

If Banks decide to do away with fees charged to noncustomers when they use another bank's ATM. ; 17. (Scenario: Money and Interest Rates) If the Fed wants to maintain the same federal funds rate, it should: A) increase taxes. B) decrease government spending. C) sell Treasury bills. D) buy Treasury bills.

C) sell Treasury bills.

5. An increase in interest rates causes the demand for money to: A) increase. B) decrease. C) stay the same. D) shift to the right.

C) stay the same.

19. Decisions about monetary policy are made by: A) the President and Congress. B) the President's Council of Economic Advisors. C) the Federal Open Market Committee. D) representatives of banks that are members of the Federal Reserve System.

C) the Federal Open Market Committee.

15. Contractionary monetary policy: A) increases aggregate demand. B) increases aggregate supply. C) works by discouraging investment spending. D) decreases interest rates.

C) works by discouraging investment spending.

38. If the reserve ratio is 25%, and the money supply increases by $100,000. The initial reserve injection by Federal Reserve was: A) $2500. B) $10,000. C) $4000. D) $25,000.

D) $25,000.

35. Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action? A) The money supply would stay the same. B) The money supply would decrease by $100 million. C) The money supply would increase by $100 million. D) The money supply would increase by more than $100 million.

D) The money supply would increase by more than $100 million.

29. The discount rate is the interest rate the Fed charges on loans to: A) consumers. B) the federal government. C) state governments. D) banks.

D) banks.

3. The money demand curve is _________ because a lower interest rate ___________. A) upward-slopping; increases the opportunity cost of holding money B) downward-slopping; increases the opportunity cost of holding money C) upward-slopping; decreases the opportunity cost of holding money D) downward-slopping; decreases the opportunity cost of holding money

D) downward-slopping; decreases the opportunity cost of holding money

37. When banks borrow and lend reserves from each other, they are participating in the ______ market. A) subprime mortgage B) long-term capital C) money D) federal funds

D) federal funds

20. The Federal Reserve Bank of the United States is: A) a purely private central bank. B) a purely public central bank. C) is part of the U.S. government. D) is not exactly part of the U.S. government but not really a private institution either.

D) is not exactly part of the U.S. government but not really a private institution either.

24. The tool of monetary policy that involves the Fed's buying and selling of government bonds is: A) moral suasion. B) reserve requirements. C) the discount rate. D) open-market operations.

D) open-market operations.

30. The three main monetary policy tools are: A) interest rates, taxes, government purchases, and transfers. B) currency, near-moneys, and reserve ratio. C) deposit insurance, discount rate, and money multiplier. D) reserve requirements, the discount rate, and open-market purchases.

D) reserve requirements, the discount rate, and open-market purchases.

9. According to the loanable funds model, contractionary monetary policy: A) shifts the demand curve for loanable funds to the right. B) shifts the supply curve for loanable funds to the right. C) shifts the demand curve for loanable funds to the left. D) shifts the supply curve for loanable funds to the left.

D) shifts the supply curve for loanable funds to the left.