ECON 1115 chapter 15 homework

Which of the following best describes the cause-effect chain of contractionary monetary policy? A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

The Federal Reserve could reduce the money supply by (multiple answers) A. selling government bonds in the open market B. buying government bonds in the open market C. operating the term auction facility D. reducing the discount rate E. increase quantitative easing. F. raising the discount rate. G. lowering the required reserve ratio.

A. selling government bonds in the open market F. raising the discount rate.

Compare two situations: Year 1. Real GDP increases, and at the same time, interest rates increase. Year 2. Real GDP increases, and at the same time, interest rates decrease. What is a possible explanation of the difference? A. An increase in the money supply may have caused the increase in GDP in year 1; a decrease in spending may have caused the increase in GDP in year 2. B. An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2. C. An increase in spending may have caused the increase in GDP in year 1; a decrease in spending caused the increase in GDP in year 2. D. An increase in the money supply may have caused the increase in GDP in year 1 and the increase in GDP in year 2.

B. An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2. A rise in interest rates and GDP must have been caused by something that increased income without increasing the money supply. This would result in higher interest rates. An increase in planned spending might have caused this. In the year 2 scenario, expansionary monetary policy reduces interest rates and can increase real GDP.

What monetary policy would intend to hold down inflation? A. Reduce interest rates to increase investment spending B. Decrease the money supply to shift the aggregate demand curve leftward C. decrease the money supply to shift the aggregate supply curve leftward D. Reduce the interest paid on banks' reserves.

B. Decrease the money supply to shift the aggregate demand curve leftward

When the Federal Reserve announces that it is increasing the federal funds rate, we would expect to see banks do which of the following? A. Increase the amount of loans they make since interest rates are higher B. Reduce their loans because they have fewer reserves due to the Fed's open market sales C. Reduce interest rates for depositors. D. Complain about the situation

B. Reduce their loans because they have fewer reserves due to the Fed's open market sales When the Fed increases the federal funds rate, it sells bonds. Banks and the nonbank public buy these bonds by sending the Fed a check. This reduces the amount of reserves banks have and so banks need to reduce their lending to achieve the required reserve ratio.

A newspaper report that the Federal Reserve will lower the discount rate again this year says that the Fed is trying to A. rescue the banking industry. B. stimulate the economy C. fight off inflation D. Increase the savings rate

B. stimulate the economy

A given amount of Fed bond purchases will be less effective if which of the following is true? A. The greater the change in interest rates in response to changes in the money supply B. The less the amount of our incomes spent on imports C. If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts. D. The greater the change in investment spending in response to changes in interest rates E. The less the income tax rate

C. If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts. Monetary policy is less effective if aggregate demand does not respond much to changes in the money supply. If individuals decide they want to hold more money in response to expansionary monetary policy, then interest rates won't change by as much, and the effect on spending will be small.

If the Federal Reserve wishes to minimize the fluctuations of interest rates, what will be the resulting effects on business cycles? A. Real GDP will grow steadily B. Business cycles will not exist C. In response to an increase in spending, the money supply will be increased D. Interest rates will actually become more volatile

C. In response to an increase in spending, the money supply will be increased When spending and income rise, the demand for money rises. If the Fed did nothing in response, interest rates would rise. However, since the Fed's objective in this question is to keep interest rates steady, it would increase the money supply. Incidentally, this would tend to amplify aggregate demand shocks.

The most commonly used monetary policy instrument is _________. A. The required reserve ratio B. The discount rate C. The federal funds rate and open market operations D. The interest rate on excess reserves

C. The federal funds rate and open market operations The FOM considers open market operations and changes in the federal funds rate to be the most important and routinely makes changes to these, but rarely changes the required reserve ratio. The discount rate tends to move along with the federal funds rate but discount loans are rarely used except during financial crises.

Which is the most accurate sequence of events when the Fed buys T-Bills? A. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease B. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment C. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase D. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment

C. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

Assume that the economy is currently producing a level of real GDP above the full employment level of real GDP, and the government lowers taxes as part of a new economic policy. Which of the following monetary policies should the Federal Reserve undertake if it wants to encourage the economy to go to a full employment level of output? A. Buy bonds B. Lower government spending C. Lower the discount rate D. Raise the federal funds rate target

D. Raise the federal funds rate target If the economy is already producing above the full employment level of real GDP, there is already upward pressure on prices. A tax decrease will shift aggregate demand out putting further upward pressure on prices. To offset this pressure, the federal reserve needs to reduce aggregate demand. One way to do so is to raise the federal funds rate target.

In our model of aggregate supply and aggregate demand, expansionary monetary policy work to increase real GDP and the inflation rate. Sort the following in the order in which they occur. (order) A. Firms begin to increase production and some raise prices B. The federal fund rate falls C. Inventories begin to fall D. The federal reserve buys funds E. Aggregate Demand increases F. Planned Investment spending rises as interest rates fall G. A new equilibrium is reached, GDP is higher and Price is higher H. Banks have excess reserves and lend more, causing the money supply to increase I. The aggregate quantity demanded exceeds the aggregate quantity supplied

D. The federal reserve buys funds B. The federal fund rate falls H. Banks have excess reserves and lend more, causing the money supply to increase F. Planned Investment spending rises as interest rates fall E. Aggregate Demand increases I. The aggregate quantity demanded exceeds the aggregate quantity supplied C. Inventories begin to fall A. Firms begin to increase production and some raise prices G. A new equilibrium is reached, GDP is higher and Price is higher

Which of the following occurs when monetary authorities raise the excess reserves of commercial banks? A. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment B. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment C. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease D. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

D. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

A bank temporarily short of required reserves will most likely A. borrow funds in the federal funds market. B. grant a few more new loans. C. buy bonds from the public. D. borrow money from the Fed.

A. borrow funds in the federal funds market.

The interest rate that the Fed charges banks for loans to them through the traditional channel is called A. the discount rate. B. the term auction rate C. the Federal Funds rate. D. the T-Bill rate.

A. the discount rate.

If the Fed wants to reduce the monetary multiplier, it should A. lower the required reserve ratio. B. raise the required reserve ratio. C. increase bank reserves. D. lower interest rates.

B. raise the required reserve ratio.

If the Fed is trying to make the interest rates go down, its objective is to A. decrease investment. B. decrease the inflation rate. C. decrease the money supply. D. decrease unemployment.

D. decrease unemployment.

The newspaper headline this November 9th that the Fed took no action on the federal funds rate indicates that A. there appears to be no or little risk of inflation. B. the risk of inflation is high. C. the unemployment rate has fallen even farther. D. the unemployment rate has risen.

A. there appears to be no or little risk of inflation.

When the federal reserve announces that it is increasing the federal funds rate, it is actually going to ___________. A. Require that banks pay higher interest rates to each other B. Change the law on the federal funds rate C. Buy bonds on the open market until the federal funds rate rises to the new target D. Sell bonds on the open market until the federal funds rate rises the new target

D. Sell bonds on the open market until the federal funds rate rises the new target The Fed announces a new federal funds rate and then makes it happen by buying or selling bonds to influence interest rates. When the fed sells bonds, bond prices fall and interest rates rise.

According to the Taylor rule, if the inflation gap is zero and real GDP rises by one percent above potential GDP, then the Fed should A. raise the federal funds rate by one percentage point B. lower the federal funds rate by one percentage point C. raise the federal funds rate by half of a percentage point D. lower the federal funds rate by half of a percentage point

C. raise the federal funds rate by half of a percentage point

"The more responsive investment spending is to changes in interest rates, the more effective monetary policy will be." Is this statement true or false? (word answer)

True Under the assumption that investment is inversely related to interest rate higher the interest rate lower the investment in the economy.The monetary policy is effective such situation in case of the deflation or inflation central banks manipulating the interest rate can effectively correct the fluctuation in the economy.

Which can lead to a lower money multiplier? A. More restrictions or more conditions for borrowing money from a bank B. A decrease in people holding currency. C. A higher required reserve ratio. D. A lower required reserve ratio. E. A decrease in borrowing and spending. F. Keeping more money in our mattress. G. An increase in spending.

A. More restrictions or more conditions for borrowing money from a bank C. A higher required reserve ratio. E. A decrease in borrowing and spending. F. Keeping more money in our mattress.

Which of the following make(s) the conduct of discretionary policy difficult? (multiple answers) A. The Fed implements policy now that will affect the economy in the future B. The Fed has to make forecasts about the future based on current data C. The Fed is uncertain about how large the effect of a policy change will be

A. The Fed implements policy now that will affect the economy in the future B. The Fed has to make forecasts about the future based on current data C. The Fed is uncertain about how large the effect of a policy change will be Monetary policy affects the future, which requires forecasting. The effect of monetary policy on the future is not always easy to predict.

If banks wish to hold 20 percent of deposits in reserve and the Fed buys $100 billion in bonds, the M2 money supply could increase by as much as $______________ billion. (numeric answer)

500. With $100 billion in new reserves, the banking system has excess reserves, which they lend to businesses and individuals. This increases deposits in the banking system until reserves = deposits reserve ratio. In terms of changes, this means the change in reserves = the change in deposits reserve ratio. Thus, we solve $100 billion = change in deposits * 0.20.

A bank is in the position to make loans when A. excess reserves equal actual reserves B. free reserves equal excess reserves C. required reserves are less than actual reserves D. required reserves are greater than actual reserves

C. required reserves are less than actual reserves

Which of the following groups serve on the Federal Open Market Committee (select all that apply)? A. All members of the Board of Governors B. Selected members of congress C. Members of the Senate Banking Committee D. Five of the regional Federal Reserve Bank presidents

A. All members of the Board of Governors D. Five of the regional Federal Reserve Bank presidents The FOMC consists of all 7 members of the board of governors, the New York Fed president, and 4 of the regional bank presidents on a rotating basis.

The most frequently used monetary device for affecting the interest rate is A. open market operations. B. the discount rate. C. the required reserve ratio. D. quantitative easing.

A. open market operations.

The Federal Reserve System was set up to be a ______________ and politically ______________ institution. A. Large; well connected B. All powerful; neutral C. Decentralized; independent D. Wealthy; adversarial

C. Decentralized; independent In order to pass the Federal Reserve Act, Congress structured the reserve system so that it was dispersed across the country and so that leadership would not be easily controlled by one location or group. Board members are appointed for 14-year terms to reduce the political pressure to make politically popular but unwise decisions.

To maintain current interest rates, the Fed would buy government bonds in the open market when A. Investment demand decreases B. The demand for money decreases C. The discount rate increases D. The demand for money increases

D. The demand for money increases

The Federal Reserve Banks are quasi-public banks which means that A. they are privately owned but managed in the public interest. B. they deal only with banks of foreign nations. C. they deal only with commercial banks, and not the public. D. they are publicly owned but privately operated.

A. they are privately owned but managed in the public interest.