Ch. 14 MGH: Monetary Policy

An increase in the reserve requirement causes a(n) ______ in excess reserves and a(n) ______ in the money multiplier. decrease; decrease increase; decrease increase; increase decrease; increase

decrease; decrease

The Fed has the power to set the: Multiple choice question. opportunity cost commercial rate discount rate price level

discount rate

The interest rate that Federal Reserve Banks charge on loans they grant to private banks is called the banker's rate investment rate discount rate securities rate

discount rate

To reduce instability that comes from positive and negative shocks, the Fed can take an active monetary policy role through unemployment targeting inflation targeting discretionary monetary policy fixed-rules monetary policy

discretionary monetary policy

Active monetary policy intervention that focuses on continual adjustments to the money supply in response to ups and downs in the economy is known as discretionary monetary policy. unemployment targeting. fixed-rules monetary policy. inflation targeting.

discretionary monetary policy.

When the reserve requirement is changed, which of the following will also change? excess reserves the money multiplier the discount rate tax rates

excess reserves the money multiplier

Interbank borrowing is referred to as the federal _________ market.

fund

A(n) ____________ (increase/decrease) in the money supply will lower the interest rate, increasing borrowing, spending, aggregate demand, and equilibrium GDP.

increase

The federal funds rate is the rate of ________ that banks charge one another on overnight loans.

interest

The purpose of open market operations is to control the nation's money supply and influence _________ rates. (Enter one word.)

interest

The purpose of open market operations is to control the nation's money supply and influence __________ rates.

interest

Lending money by banks is made possible through increasing the reserve ratio, which transforms excess reserves into required reserves. lowering the reserve ratio, which transforms excess reserves into required reserves. lowering the reserve ratio, which transforms required reserves into excess reserves. raising the reserve ratio, which transforms required reserves into excess reserves.

lowering the reserve ratio, which transforms required reserves into excess reserves.

The principal mechanism for directly altering the reserves of the banking system is: open market operations the discount rate the reserve requirement the federal funds rate

open market operations

Aggregate supply is represented as a schedule or curve showing the relationship between the _______ level and the amount of output produced in the economy.

price

The effects of an aggregate demand shift on ______ and ______ depend on the shape of the aggregate supply curve. interest rates; output inflation; interest rates prices; output prices; inflation

prices; output

Excess reserves and the money multiplier are altered by changes in the: tax rates medium of exchange of money standard of value of money reserve requirement

reserve requirement

Banks can sell government bonds to meet multiplier effects reserve requirements lending capacity interbank loan agreements

reserve requirements

The Federal Reserve Bank sets ______, which are the fractions of deposit account balances that banks must maintain as currency reserves. excess requirements federal funds rates discount rates reserve requirements

reserve requirements

The funds being lent and borrowed overnight are called "federal funds" because they are reserves that are required by the Federal Reserve to meet what? excess reserves investment costs reserve requirements interest payments

reserve requirements

Federal Reserve banks hold ______ deposited by banks. These accounts not only provide greater security and convenience for banks but also enable the Fed to monitor these levels. reserves checks loans assets

reserves

The role of the Federal Reserve banks known as "discounting" occurs when reserve loans are forgiven by the Federal Reserve. reserves are lent to private banks. reserves are lent to other Federal Reserve banks. reserves are deposited at the Federal Reserve banks.

reserves are lent to private banks.

Monetary __________ seeks to decrease aggregate demand by decreasing the money supply and increasing interest rates.

restraint

When the Federal Reserve banks purchase bonds in the open market from the public, which of the following are elements of the transaction? Assume the bond seller banks at Alpha Bank. The seller gets a payment check to deposit in its account at Alpha Bank. The seller gives up securities to the Federal Reserve banks. Alpha Bank experiences a decrease in its reserves. Alpha Bank sends the check for collection.

The seller gets a payment check to deposit in its account at Alpha Bank. The seller gives up securities to the Federal Reserve banks. Alpha Bank sends the check for collection.

True or false: The effects of an aggregate demand shift on prices and output depend on the shape of the aggregate supply curve.

True; an increase in aggregate demand affects not only output but prices as well. How fast prices rise depends on aggregate supply. Specifically, the effects of an aggregate demand shift on prices and output depend on the shape of the aggregate supply curve.

True or false: Open market operations are the principal mechanism for directly altering the reserves of the banking system and, therefore, the money supply.

True; the Fed can buy or sell bonds from day to day, thus affecting the money supply almost immediately.

If the aggregate supply curve is horizontal, an increase in the money supply leads to an increase in output (real GDP) and an increase in the price level. no change in output (real GDP) and an increase in the price level. an increase in output (real GDP) and no change in the price level. a decrease in output (real GDP) and no change in the price level.

an increase in output (real GDP) and no change in the price level.

Government _________ are certificates acknowledging a debt and the amount of interest to be paid each year until repayment (i.e., an IOU) that are issued by governments.

bonds

Suppose there are $7 billion in excess reserves in the banking system and the reserve requirement is 20%. The available lending capacity of the banking system is ______. $35 billion $6.3 billion $140 billion $5.7 billion

$35 billion MATH Available lending capacity = excess reserves × money multiplier =$7 billion × 1/0.2 = $7 billion × 5 = $35 billion

If a bank has total reserves of $50,000, transactions deposits of $100,000, and a reserve ratio of 10%, its excess reserves are $50,000 $40,000 $60,000 $10,000

$40,000

Suppose there are $5 billion in excess reserves in the banking system and the reserve requirement is 10%. The available lending capacity of the banking system is ______. $5.5 billion $4.5 billion $50 billion $10 billion

$50 billion BECAUSE Available lending capacity = excess reserves × money multiplier = $5 billion × 1/0.1 = $5 billion × 10 = $50 billion

If a bank has total reserves of $100,000, transactions deposits of $100,000, and a reserve ratio of 50%, its excess reserves are $150,000 $50,000 $75,000 $100,000

$50,000

How would expansionary policy affect a vertical AS?

It will not increase output and will only cause inflation.

Nearly all bank reserves are held in accounts at the regional ______ ________ banks.

1. Federal 2. Reserve

How many Federal Reserve banks are there in the United States? 5 2 12 1

12

The key decision-makers of the U.S. money and banking system are the ______ of the Federal Reserve System. private banks Board of Governors Federal Reserve banks U.S. Treasury

Board of Governors

Which of the following are actions that the Fed may take to increase the money supply and therefore increase aggregate demand in order to fight unemployment? Raise the discount rate. Buy government bonds in the open market. Lower the reserve requirement. Raise the reserve requirement.

Buy government bonds in the open market. Lower the reserve requirement.

Which of the following are the results of a restrictive monetary policy? Curtailed expansion of aggregate demand. Increased price levels. Increased borrowing and spending. Increased interest rates.

Curtailed expansion of aggregate demand. Increased interest rates.

How would expansionary policy affect a horizontal AS?

It will increase output without inflationary pressures.

To restrict the money supply, the Fed may raise what? Discount rate Checkable deposits Price level

Discount rate

During a recession, with substantial unemployment, the Fed should institute what type of monetary policy? Contractionary Investment Restrictive Expansionary

Expansionary

Which of the following is NOT a benefit of the long-term appointments of Board members? Continuity Experienced membership Independence from political pressures Fed may be unresponsive to the majority will

Fed may be unresponsive to the majority will

Which of the following are functions that the Federal Reserve Banks perform? Holding reserves Government spending Providing for check clearing Lending money to private banks Issuing currency Setting taxation levels

Holding reserves Providing for check clearing Lending money to private banks Issuing currency

An increase in the money supply will do which of the following? Increase borrowing. Lower aggregate demand. Lower equilibrium GDP. Lower the interest rate.

Increase borrowing. Lower the interest rate.

Which of the following actions are undertaken by the Federal Reserve in a restrictive monetary policy? Increase the discount rate Buy government securities in the open market Sell government bonds in the open market. Increase taxes to reduce disposable income Increase the reserve requirement

Increase the discount rate Sell government bonds in the open market. Increase the reserve requirement

There are three possible sources of last-minute reserves. Which of the following is not a source? Selling government bonds (securities) Borrowing reserves from the Fed through discounting Increasing the amount of loans made to the public Interbank borrowing using the federal funds market

Increasing the amount of loans made to the public

Which of the following are benefits of the long-term appointments of Board members? Independence from political pressures Stability of working with the same people for 14 years Experienced membership Continuity

Independence from political pressures Experienced membership Continuity

Which of the following changes occur when the Federal Reserve implements a monetary stimulus? Interest rates fall. Aggregate demand increases. Money supply decreases. Aggregate demand decreases. Money supply increases. Interest rates increase.

Interest rates fall. Aggregate demand increases. Money supply increases.

How would expansionary policy affect a sloped AS?

It will increase output with some inflationary pressures.

The Fed can directly manipulate the reserve ratio in order to influence the ability of banks to do what? Raise interest rates Borrow from the Fed Purchase bonds Make loans

Make loans

What type of operations serve to control the nation's money supply and influence interest rates? Open market Limited market Free market Public market

Open market

Blank______ is/are Federal Reserve purchases or sales of government bonds for the purpose of altering bank reserves. Portfolio decisions Open market operations Federal funds marketing Discounting

Open market operations

List the three levers of monetary policy. Changing taxes. Gov't spending. Reserve requirements. Discount rates. Open market operations.

Reserve requirements. Discount rates. Open market operations.

During times of rising inflation, the Fed will undertake which of the following monetary policies? Increased taxes Expansionary Restrictive Investment

Restrictive

When a public company sells government bonds to the Federal Reserve, the public company receives a payment check drawn by: stockholders the public company the Federal Reserve the U.S. Treasury

The Federal Reserve

______ is the key link between changes in the money supply and shifts of aggregate demand. Selling bonds The interest rate The inflation rate Buying bonds

The interest rate

The volume of trading in the government bond market exceeds $1 trillion a year a month an hour a day

a day

Generally, a decrease in the money supply leads to a decrease in aggregate supply. a decrease in aggregate demand. an increase in aggregate supply. an increase in aggregate demand.

a decrease in aggregate demand.

Because banks continually seek to keep excess reserves at ______, they run the risk of falling below reserve requirements. a maximum a minimum a moderate amount

a minimum

Which of the following discourages private banks from obtaining additional reserves through borrowing from the Federal Reserve banks? Multiple choice question. A decrease in interest rates An increase in discount rates An increase in price levels An increase in excess reserves

an increase in discount rates

Generally, aggregate demand is responsive to monetary policy. It will increase with ______ policy and decrease with ______ policy. Multiple choice question. restrictive; expansionary expansionary; restrictive short-term; long-term long-term; short-term

expansionary; restrictive

A monetary policy intervention that emphasizes the vertical shape of the aggregate supply curve and policy that increases money supply at a constant rate is best is known as Multiple choice question. unemployment targeting discretionary monetary policy inflation targeting fixed-rules monetary policy

fixed-rules monetary policy

If the Fed thinks the AS curve is less vertical than it really is, then expansionary policy might cause too much inflation. Instead, the Fed would advocate for unemployment targeting. fixed-rules monetary policy. inflation targeting. discretionary monetary policy.

fixed-rules monetary policy.

The chair of the Board of Governors serves a ________-year term and may be reappointed.

four DISTINCT FROM Members of the Board of Governors serve 14-year terms. The chair is appointed for a 4-year term.

The use of money and credit controls to influence macroeconomic outcomes is monetary policy. Federal Reserve policy. government policy. fiscal policy.

monetary policy.

The Fed has the ultimate responsibility for the supply of __________.

money

With __________ monetary policy, the Federal Reserve Board will direct the Federal Reserve banks to sell government securities, increase the reserve ratio, and/or increase the discount rate.

restrictive

If the Federal Reserve decreases the money supply, increases interest rates, and decreases aggregate demand, the Fed is using: restrictive policy fiscal stimulus monetary stimulus fiscal restraint

restrictive policy

To combat inflationary pressures and to decrease aggregate demand, the Fed will push up interest rates by doing which of the following? decreasing the discount rate decreasing the reserve requirement buying bonds selling bonds increasing the discount rate increasing the reserve requirement

selling bonds increasing the discount rate increasing the reserve requirement

Increasing the money supply, reducing interest rates, and increasing aggregated demand are all steps in the Fed's goal to ______ the economy. stimulate restrain

stimulate

Aggregate _________ can be represented as a schedule or curve showing the relationship between the price level and the amount of real output that is produced in a given time period. demand equilibrium supply

supply

Because banks hold little cash in their vaults and sometimes customers have an increased demand for cash, the banks turn to ______ to meet currency demands. the Board of Governors Congress the Federal Reserve banks Janet Yellen

the Federal Reserve banks

The Federal Reserve Banks also serve as the central bank credit banks international banks state banks

the central bank

Interbank borrowing is referred to as: discounting the federal funds market security sales

the federal funds market

Who has the ultimate responsibility for the supply of money? Banks The Fed Congress The Treasury Department

The Fed

Which of the following serve as central banks or banker's banks? The U.S. Treasury The Federal Reserve Banks, collectively known as the Board of Governors. The Board of Governors of the Federal Reserve. The Federal Reserve Banks, collectively known as the Federal Reserve System. The Mint.

The Federal Reserve Banks, collectively known as the Federal Reserve System BECAUSE the Board of Governors is simply the central authority within the Federal Reserve. The Federal Reserve is the Central Bank of the United States, made up of 12 reserve banks, and managed by the Board of Governors.

In the United States, the monetary authorities are members of the Board of Governors of the: United States Mint Private banks Federal Reserve System U.S. Treasury

Federal Reserve System

The supply of money is increased by the Federal Reserve banks' purchase of what? Government bonds Public stocks Investments Checkable deposits

Government bonds

The current chair of the Federal Reserve is: Ben Bernanke Janet Yellen Jerome Powell Alan Greenspan

Jerome Powell