BMF15: Interest rate and monetary policy

A money loan is said to be collateralized when A) an asset is pledged by the borrower to the lender in case of default. B) the borrower pays periodic repayments of principal plus interest to the lender. C) the loan is used to purchase a capital asset. D) interest on the loan is compounded on an annual basis.

A

When the Fed does repos and reverse repos (or repurchase agreements) with financial institutions, the collateral used in these transactions is A) corporate stock. B) municipal bonds. C) government bonds. D) certificates of deposits.

C

Which of the following actions by the Fed most likely increase commercial bank lending? A) raising the reserve ratio B) increasing the federal funds rate target C) reducing the interest paid on excess reserves held at the Fed D) selling bonds to commercial banks and the public

C

The lending ability of commercial banks increases when the A) reserve ratio is raised. B) Treasury collects tax revenues. C) Fed sells securities in the open market. D) Fed buys securities in the open market.

D

When the reserve requirement is increased, A) required reserves are changed into excess reserves. B) the excess reserves of banks are increased. C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves. D) the excess reserves of banks are reduced.

D

When the Fed loans money in exchange for government bonds being posted as collateral, this is known as a A) mortgage-backed security. B) Federal Reserve note. C) repo. D) credit default swap.

C

The Federal Reserve alters the amount of the nation's money supply by A) reducing the liabilities of the banking system. B) controlling the assets of the nation's largest banks. C) minting coins and printing currency that is distributed to banks. D) manipulating the size of excess reserves held by commercial banks.

D

An increase in nominal GDP will A) increase the transactions demand and the total demand for money. B) decrease the transactions demand and the total demand for money. C) increase the transactions demand for money but decrease the total demand for money. D) decrease the transactions demand for money but increase the total demand for money.

A

When the Fed lends money to a commercial bank, the bank A) increases its reserves and enhances its ability to extend credit to bank customers. B) decreases its reserves and reduces its ability to extend credit to bank customers. C) pays the federal funds interest rate on the loan. D) pays the prime interest rate on the loan.

A

When the Fed undertakes a "repo" transaction with a financial institution, the Fed in essence A) grants a collateralized loan to the financial institution. B) provides an insurance coverage to the financial institution. C) buys shares of stock of the financial institution. D) reduces the reserves of the financial institution.

A

Which of the following Fed actions will decrease the money supply? A) reverse repos B) repos C) open-market purchases of bonds D) raising taxes

A

Open-market operations refer to A) purchases of stocks in the New York Stock Exchange. B) the purchase or sale of government securities, as well as collateralized money loans, by the Fed. C) central bank lending to commercial banks. D) the specifying of loan maximums on stock purchases.

B

Other things equal, if there is an increase in nominal GDP, A) the demand for money will decrease. B) the interest rate will rise. C) bond prices will rise. D) consumption spending will fall.

B

A decrease in the reserve ratio increases the A) amount of actual reserves in the banking system. B) amount of excess reserves in the banking system. C) number of government securities held by the Federal Reserve Banks. D) ratio of coins to paper currency in the economy.

B

The asset demand for money A) is unrelated to both the interest rate and the level of GDP. B) varies inversely with the rate of interest. C) varies inversely with the level of real GDP. D) varies directly with the level of nominal GDP.

B

The conduct of monetary policy in the United States is the main responsibility of the A) U.S. Treasury. B) Federal Reserve System. C) Office of Management and Budget. D) Bureau of Economic Analysis.

B

The discount rate is the interest A) rate at which the central banks lend to the U.S. Treasury. B) rate at which the Federal Reserve Banks lend to commercial banks. C) yield on long-term government bonds. D) rate at which commercial banks lend to the public.

B

The interest rate will fall when the A) quantity of money demanded exceeds the quantity of money supplied. B) quantity of money supplied exceeds the quantity of money demanded. C) demand for money increases. D) supply of money decreases.

B

The purchase and sale of government securities by the Fed is called A) the federal funds market. B) open-market operations. C) money market transactions. D) term auction facility.

B

Which of the following statements is correct? A) Excess reserves may be found by subtracting actual from required reserves. B) The supply of money declines when the public purchases securities from commercial banks. C) Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks. D) Commercial banks reduce the supply of money when they purchase government bonds from the public.

B

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier? A) open-market operations B) the reserve ratio C) the discount rate D) the federal funds rate

B

A consumer holds money to meet spending needs. This would be an example of the A) use of money as a measure of value. B) use of money as legal tender. C) transactions demand for money. D) asset demand for money.

C

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

C

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the A) prime rate. B) short-term rate. C) discount rate. D) federal funds rate.

C

A commercial bank can add to its actual reserves by A) lending money to bank customers. B) buying government securities from the public. C) buying government securities from a Federal Reserve Bank. D) borrowing from a Federal Reserve Bank.

D

A decrease in the interest rate will cause a(n) A) increase in the transactions demand for money. B) decrease in the transactions demand for money. C) decrease in the amount of money held as an asset. D) increase in the amount of money held as an asset.

D

An increase in the money supply is likely to reduce A) the general price level. B) nominal income. C) money demand. D) interest rates.

D

If nominal GDP is $900 billion and, on average, each dollar is spent three times in the economy over a year, then the quantity of money demanded annually for transactions purposes will be A) 900 billion B) 600 billion C) 450 billion D) 300 billion E) 2,700 billion

D

If the demand for money and the supply of money both decrease, the equilibrium A) interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. B) quantity of money and the equilibrium interest rate will both increase. C) quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

D

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money.

D

In which case would the quantity of money demanded by the public tend to increase by the greatest amount? A) The interest rate increases and nominal GDP increases. B) The interest rate increases and nominal GDP decreases. C) The interest rate decreases and nominal GDP decreases. D) The interest rate decreases and nominal GDP increases.

D

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from the Federal Reserve Bank in its district. The interest rate on the loan is called the A) prime rate. B) federal funds rate. C) Treasury bill rate. D) discount rate.

D

The collateral used for repos and reverse repos is (are) A) corporate securities. B) autos. C) homes. D) government bonds.

D

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change? A) The required-reserve ratio will increase. B) The money supply will decrease. C) The deposits of commercial banks will decline. D) Commercial bank reserves will increase.

D

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by A) horizontally adding the transactions and the asset demand for money. B) vertically subtracting the transactions demand from the asset demand for money. C) horizontally subtracting the asset demand from the transactions demand for money. D) vertically adding the transactions and the asset demand for money.

A

The asset demand for money is downsloping because A) the opportunity cost of holding money increases as the interest rate rises. B) it is more attractive to hold money at high interest rates than at low interest rates. C) bond prices rise as interest rates rise. D) the opportunity cost of holding money declines as the interest rate rises.

A

The desire to hold money for transactions purposes arises because A) receipts of income and expenditures are not perfectly synchronized. B) people fear that prices will rise. C) households want money on hand in case a good financial investment opportunity arises. D) low interest rates reduce the opportunity cost of holding money.

A

The discount rate is the rate of interest at which A) Federal Reserve Banks lend to commercial banks. B) savings and loan associations lend to some builders. C) Federal Reserve Banks lend to large corporations. D) commercial banks lend to large corporations.

A

The interest rate that the Fed charges banks for loans to them through the traditional channel is called A) the discount rate. B) interest on reserves. C) the federal funds rate. D) the prime rate.

A

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and all of the following, except A) exchange rates. B) the discount rate. C) interest on reserves. D) open-market operations.

A

The total demand for money will shift to the left as a result of A) a decline in nominal GDP. B) an increase in the price level. C) a change in the interest rate. D) an increase in nominal GDP.

A

The total-demand-for-money curve will shift to the right as a result of A) an increase in nominal GDP. B) an increase in the interest rate. C) a decline in the interest rate. D) a decline in nominal GDP.

A

Which of the following is a tool of monetary policy? A) open-market operations B) changes in banking laws C) changes in tax rates D) changes in government spending

A

Which of the following varies directly with the interest rate? A) the opportunity cost of holding money B) the transactions demand for money C) the asset demand for money D) the level of investment

A

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the A) transactions demand for money. B) asset demand for money. C) creation of fiat money. D) use of money as a medium of exchange.

B

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to A) decrease the money supply. B) increase the money supply. C) foreclose on a failed bank. D) raise interest rates.

B

An increase in nominal GDP increases the demand for money because A) interest rates will rise. B) more money is needed to finance a larger volume of transactions. C) bond prices will fall. D) the opportunity cost of holding money will decline.

B

An increase in the legal reserve ratio A) increases the money supply by increasing excess reserves and increasing the monetary multiplier. B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

B

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has A) excess reserves of $2 billion. B) neither an excess nor a deficiency of reserves. C) a deficiency of reserves of $.5 billion. D) excess reserves of only $.5 billion.

B

Open-market operations include A) changes in the reserve ratio. B) repos and reverse repos. C) paying interest on excess reserves held at Federal Reserve Banks. D) changes in the discount rate.

B

The purchase of government securities from the public by the Fed will cause A) commercial bank reserves to decrease. B) the money supply to increase. C) demand deposits to decrease. D) the interest rate to increase.

B

The transactions demand for money is least likely to be a function of the A) price level. B) interest rate. C) level of national income. D) frequency of wage and salary payments.

B

The transactions demand for money is most closely related to money functioning as a A) unit of account. B) medium of exchange. C) store of value. D) measure of value.

B

The transactions demand for money will shift to the A) left when nominal GDP increases. B) left when nominal GDP decreases. C) right when nominal GDP decreases. D) right when the interest rate increases.

B

When the Fed undertakes reverse repo transactions with financial institutions, it is trying to A) increase the money supply. B) reduce the money supply. C) increase the federal budget deficit. D) reduce the federal budget deficit.

B

Which of the following is correct? A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. D) The asset demand for money is downsloping because bond prices and the interest rate are directly related.

B

Which of the following is not a tool of monetary policy? A) open-market operations B) changes in banking laws C) changes in the rate of interest paid on reserves held at Federal Reserve Banks D) Fed lending or borrowing with repos or reverse repos

B

When the interest rate falls, the A) asset demand for money decreases. B) transactions demand for money increases. C) total amount of money demanded increases. D) total amount of money demanded decreases.

C

Beginning in 2008, the Fed was allowed to A) lend directly to consumers. B) alter tax rates. C) pay interest on excess reserves deposited at Fed banks. D) require commercial banks to loan a certain percentage of their excess reserves.

C

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that A) the asset demand for money is $3,200 billion. B) the total demand for money is $4,800 billion. C) on average, each dollar will be spent five times a year. D) the supply of money needs to be increased to meet the demand.

C

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be A) $1,800 billion. B) $600 billion. C) $200 billion. D) $1,200 billion.

C

If the Federal Reserve System buys government securities from commercial banks and the public, A) commercial bank reserves will decline. B) commercial bank reserves will be unaffected. C) it will be easier to obtain loans at commercial banks. D) the money supply will contract.

C

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will A) increase by $10 billion. B) remain unchanged. C) decrease by $2 billion. D) increase by $2 billion.

C

The Federal Reserve System regulates the money supply primarily by A) controlling the production of coins at the U.S. mint. B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

C

The Federal Reserve could reduce the money supply by A) lowering the required-reserve ratio. B) buying government bonds in the open market. C) increasing the interest on excess reserves. D) reducing the discount rate.

C

The asset demand for money is most closely related to money functioning as a A) unit of account. B) medium of exchange. C) store of value. D) measure of value.

C

The equilibrium rate of interest in the market for money is determined by the intersection of the A) supply-of-money curve and the asset-demand-for-money curve. B) supply-of-money curve and the transactions-demand-for-money curve. C) supply-of-money curve and the total-demand-for-money curve. D) investment-demand curve and the total-demand-for-money curve.

C

The four main tools of monetary policy are A) tax-rate changes, the discount rate, open-market operations, and the federal funds rate. B) tax-rate changes, changes in government expenditures, open-market operations, and interest on excess reserves. C) the discount rate, the reserve ratio, interest on excess reserves, and open-market operations. D) changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.

C

The opportunity cost of holding money A) is zero because money is not an economic resource. B) varies inversely with the interest rate. C) varies directly with the interest rate. D) varies inversely with the level of economic activity.

C

When the required-reserve ratio is decreased, the excess reserves of banks are A) reduced, but the multiple by which the commercial banking system can lend is unaffected. B) reduced and the multiple by which the commercial banking system can lend is increased. C) increased and the multiple by which the commercial banking system can lend is increased. D) increased and the multiple by which the commercial banking system can lend is reduced.

C

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply A) contracts and commercial bank reserves increase. B) expands and commercial bank reserves decrease. C) contracts and commercial bank reserves decrease. D) expands and commercial bank reserves increase.

D

Assume that U.S. National Bank has no excess reserves and that the reserve ratio is 20 percent. If U.S. National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of A) $5 million. B) $1 million. C) $25 million. D) $0.

A

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of A) $1,000. B) $2,000. C) $800. D) $5,000.

A

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the A) supply-of-money curve is vertical. B) supply-of-money curve is horizontal. C) demand for money curve is directly related to the interest rate. D) supply-of-money curve is inversely related to the interest rate.

A

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result, A) commercial bank reserves are increased by $10,000. B) the supply of money automatically declines by $7,500. C) commercial bank reserves are increased by $7,500. D) the supply of money is automatically increased by $10,000.

A

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be A) $200 billion. B) $400 billion. C) $800 billion. D) $3,200 billion.

A

If the Fed wants to discourage commercial bank lending, it will A) increase the interest paid on excess reserves held at the Fed. B) decrease the interest paid on excess reserves held at the Fed. C) buy government securities from commercial banks. D) lower the federal funds rate target.

A

In a repo transaction (or repurchase agreement), the one "buying" the collateral asset (with the promise of selling it back soon) is the A) lender. B) borrower. C) broker. D) speculator.

A

If the Fed sells government securities to the general public in the open market, A) the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will increase commercial bank reserves at the Fed. B) the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed. C) the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will increase their reserves at the Fed. D) the public gives the securities to the Fed in exchange for a Fed check, which, when deposited at commercial banks, will decrease their reserves at the Fed.

B

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to A) 4 percent of nominal GDP. B) 25 percent of nominal GDP. C) nominal GDP multiplied times 4. D) nominal GDP divided by 25.

B

If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money.

B

In a repo transaction, the Fed_________ money; in a reverse repo transaction, the Fed_________ money. A) borrows; loans B) loans; borrows C) prints new; destroys D) destroys; prints new

B

In recent years (after the financial crisis of 2008), the Fed has added a new element to its open-market operations, which is A) buying and selling foreign-government securities. B) taking government bonds as collateral on loans to banks and other financial institutions. C) the trading of state- and local-government bonds. D) accepting corporate stocks and bonds as bank reserves.

B

Interest paid on excess reserves held at the Fed A) is available to the general public, but not to commercial banks. B) will incentivize financial institutions to hold more reserves and reduce risky lending. C) is determined by the federal funds rate. D) totaled over $1 trillion in 2018.

B

It is costly to hold money because A) deflation may reduce its purchasing power. B) in doing so, one sacrifices interest income. C) bond prices are highly variable. D) the rate at which money is spent may decline.

B

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by A) a line parallel to the horizontal axis. B) a vertical line. C) a downsloping line or curve from left to right. D) an upsloping line or curve from left to right.

B

Open-market operations change A) the size of the monetary multiplier but not commercial bank reserves. B) commercial bank reserves but not the size of the monetary multiplier. C) neither commercial bank reserves nor the size of the monetary multiplier. D) both commercial bank reserves and the size of the monetary multiplier.

B

There is an asset demand for money primarily because of which function of money? A) legal tender B) store of value C) measure of value D) medium of exchange

B

If the Fed buys government securities from commercial banks in the open market, A) the Fed gives the securities to the commercial banks and increases the banks' reserves. B) the Fed gives the securities to the commercial banks and decreases the banks' reserves. C) commercial banks give the securities to the Fed, and the Fed increases the banks' reserves. D) commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves.

C

If the quantity of money demanded exceeds the quantity supplied, A) the supply-of-money curve will shift to the left. B) the demand-for-money curve will shift to the right. C) the interest rate will rise. D) the interest rate will fall.

C

In a reverse repo transaction, A) banks return foreclosed property to the previous owner. B) banks sell foreclosed property to new owners. C) the Fed borrows money from financial institutions. D) the Fed loans money to financial institutions.

C

In the United States, monetary policy is the responsibility of the A) U.S. Treasury. B) Department of Commerce. C) Board of Governors of the Federal Reserve System. D) U.S. Congress.

C

In which of the following situations is it certain that the quantity of money demanded by the public will decrease? A) nominal GDP decreases and the interest rate decreases B) nominal GDP increases and the interest rate decreases C) nominal GDP decreases and the interest rate increases D) nominal GDP increases and the interest rate increases

C

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by A) a line parallel to the horizontal axis. B) a vertical line. C) a downsloping line or curve from left to right. D) an upsloping line or curve from left to right.

C

Which of the following statements is correct? Other things equal, A) a decline in real output will shift both the transactions demand curve for money and the total money-demand curve to the right. B) a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money-demand curve unchanged. C) deflation will shift both the transactions demand curve for money and the total money-demand curve to the left. D) inflation will shift the transactions demand curve for money to the right but leave the total money-demand curve unchanged.

C

Which of the following tools of monetary policy is considered the most important on a day-to-day basis? A) the discount rate B) the reserve ratio C) open-market operations D) paying interest on excess reserves

C

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts? A) the discount rate B) the reserve ratio C) open-market operations D) the federal funds rate

C

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks? A) issuing currency B) check collection C) open-market operations D) the required-reserve ratio

C

When the required-reserve ratio is increased, the excess reserves of banks are A) reduced, but the multiple by which the commercial banking system can lend is unaffected. B) reduced and the multiple by which the commercial banking system can lend is increased. C) increased and the multiple by which the commercial banking system can lend is increased. D) reduced and the multiple by which the commercial banking system can lend is reduced.

D

Which of the following Fed actions increases the excess reserves of commercial banks? A) selling bonds to the public B) selling bonds to commercial banks C) increasing the discount rate D) lowering the reserve ratio

D