Chapter 16 macro
D
(1) (2) (3) Interest Rate Dt Da 12% $100 $0 10 100 20 8 100 40 6 100 60 4 100 80 2 100 100 Answer the question on the basis of the table, in which columns (1) and (2) indicate the transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money. If the money supply is $160, the equilibrium interest rate will be A) 4 percent. B) 8 percent. C) 10 percent. D) 6 percent.
D
(Consider This) In reverse repurchase agreements (reverse repos), A) Banks sell bonds to the Fed with the promise to buy them back the next day. B) The Fed buys bonds from banks with the promise to sell them back the next day. C) Banks borrow from nonbanks. D) The Fed sells bonds to the bank with the promise to buy them back the next day.
True
Repos are a tool used by the Fed to increase bank reserves and encourage lending. t/f
C
Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will A) Increase by $10 billion and the money supply will increase by $100 billion. B) Decline by $1 billion and the money supply will decline by $10 billion. C) Increase by $1 billion and the money supply will increase by $10 billion. D) Increase by $1 billion and the money supply will increase by $5 billion.
D
Suppose the demand for money and the supply of money increase simultaneously. We can A) Expect the nominal GDP to expand. B) Expect the interest rate to fall and bond prices to rise. C) Expect the interest rate to rise and bond prices to fall. D) Not accurately predict what will happen to interest rates or bond prices.
B
The Fed's response to the zero lower bound problem was quantitative easing (or "QE"), where the Fed buys large amounts of bonds in order to A) Lower the interest rates. B) Increase banks' reserves. C) Reduce money supply. D) Lower bond prices.
B
The Federal Reserve System regulates the money supply primarily by A) Restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. B) Altering the reserves of commercial banks, largely through sales and purchases of government bonds. C) Controlling the production of coins at the U.S. mint. D) Altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
False
The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy. T/F
A
The Federal Reserve can increase aggregate demand by A) Reducing the discount rate. B) Selling government securities in the open market. C) Reducing the money supply. D) Raising the reserve requirement.
C
The liquidity trap refers to the situation where A) A financial crisis causes a run on banks and the elimination of billions in excess reserves. B) The public debt is so large that federal borrowing drives up interest rates and discourages private sector spending. C) The Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand. D) Excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession.
B
The problem of cyclical asymmetry refers to the idea that A) The monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy. B) A restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply. C) An expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary policy may not achieve a contraction of the money supply. D) Cyclical downswings are typically of longer duration than cyclical upswings.
B
The purpose of a restrictive monetary policy is to A) Alleviate recessions. B) Raise interest rates and restrict the availability of bank credit. C) Increase aggregate demand and GDP. D) Increase investment spending.
C
There is an asset demand for money primarily because of which function of money? A) Legal tender B) Medium of exchange C) Store of value D) Measure of value
A
Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the A) Federal funds rate. B) Discount rate. C) Prime rate. D) Consumer price index.
A
When a commercial bank borrows from a Federal Reserve Bank, A) The commercial bank's lending ability is increased. B) The supply of money automatically increases. C) The commercial bank's reserves are reduced. D) It indicates that the commercial bank is unsound financially.
C
Which of the following best describes the cause-effect chain of an expansionary monetary policy? A) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. B) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. C) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. D) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
A
Which of the following is a difference between "quantitative easing" and ordinary open-market operations? A) Open-market operations are focused exclusively on U.S. government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities B) There is no difference between the two policy tools. C) Quantitative easing is done in order to lower interest rates; open-market operations are merely intended to increase bank reserves. D) Open-market operations involve forward commitment; quantitative easing is intentionally vague to maintain flexibility
C
Which of the following statements is correct? Other things equal, A) Inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged. B) A decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. C) Deflation will shift both the transactions demand curve for money and the total money demand curve to the left. D) 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.
A
Which of the following statements is most accurate about the Fed's attempt to normalize monetary policy after the Great Recession? A) Nonbank lending to banks limits the potential of raising the IOER alone, but reverse repos are a way to soak up excess nonbank cash. B) Normalization through raising the IOER and using reverse repos has occurred as planned. C) Normalization has been hindered by the zero lower bound problem. D) Increasing the IOER has been frustrated by nonbank use of reverse repos.
B
Which of the following statements is true? A) The Federal Reserve sets the target for the federal funds rate, and then uses the reserve ratio to push banks toward that target. B) The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations. C) The Federal Reserve sets the federal funds rate. D) The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.
B
Which of the following statements is true? A) The Federal funds rate is higher than the prime interest rate. B) The prime interest rate is higher than the Federal funds rate. C) The prime interest rate is often the same as the discount rate. D) The Federal funds rate and the prime interest rate are often the same.
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 federal funds rate B) The discount rate C) Open-market operations D) The reserve ratio
A
An increase in nominal GDP increases the demand for money because A) More money is needed to finance a larger volume of transactions. B) Bond prices will fall. C) Interest rates will rise. D) The opportunity cost of holding money will decline.
C
An increase in the legal reserve ratio A) Increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. B) Increases the money supply by increasing excess reserves and increasing the monetary multiplier. C) Decreases 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 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) $0. B) $5 million. C) $1 million D) $25 million.
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) $1 million. B) $0. C) $25 million. D) $5 million.
A
Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately A) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million. B) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million. C) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million. D) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million.
D
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 inversely related to the interest rate. B) Demand for money curve is directly related to the interest rate. C) Supply of money curve is horizontal. D) Supply of money curve is vertical
D
Generally, the prime interest rate A) Moves in the opposite direction as the federal funds rate. B) Remains constant over long periods of time. C) Is highly inflexible downward. D) Moves in the same direction as the federal funds rate.
D
If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in A) Bank A's liabilities. B) Bank A's required reserves. C) money supply M1. D) Bank A's excess reserves.
D
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) Commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves. C) The Fed gives the securities to the commercial banks and decreases the banks' reserves. D) Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves.
D
If the demand for money and the supply of money both decrease, the equilibrium A) Quantity of money and the equilibrium interest rate will both increase. B) Interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. 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
In recent years (after the financial crisis of 2008), the Fed has added a new element to its open-market operations, which is A) Accepting corporate stocks and bonds as bank reserves. B) The trading of state- and local-government bonds. C) Buying and selling foreign-government securities. D) Taking government bonds as collateral on loans to banks and other financial institutions.
D
In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy, A) A decrease in aggregate demand will increase output. B) A decrease in the rate of interest will decrease aggregate demand. C) A decrease in excess reserves will increase the money supply. D) An increase in the money supply will decrease the rate of interest.
A
Open-market operations change A) Commercial bank reserves but not the size of the monetary multiplier. B) The size of the monetary multiplier but not commercial bank reserves. C) Both commercial bank reserves and the size of the monetary multiplier. D) Neither commercial bank reserves nor the size of the monetary multiplier.