Homework 8

The shortest time lag for monetary policy is the implementation lag. A. True B. False

A. True

In general, an increase in the Fed's assets will, other things equal, increase A.Bank Reserves B.Currency C.Bonds D.Interest Rates

A.Bank Reserves

Studies in the 1980s and early 1990s showed that, in general, greater central bank independence A.was associated with lower average inflation. B.was associated with lower average inflation and higher average real GDP growth. C.was associated with lower average inflation and higher unemployment. D.was associated with higher average inflation and higher average real GDP growth.

A.was associated with lower average inflation.

The seven members of the Board of Governors serve 14-year terms to A.provide steady employment. B.reduce political influence. C.prevent illegal appointments. D.inhibit independent decisions.

B.reduce political influence.

Gresham's Law is the tendency for low-quality money to drive high-quality money out of circulation. A. True B. False

A. True

At the end of 2008, the federal funds rate in the United States was close to zero. Which of the following is a major concern associated with such a low rate? A.That traditional monetary policy will have no impact on the economy. B.Such a low rate spurs excessive consumption and investment spending which may lead to inflation. C.Such a low rate spurs excessive consumption and investment spending which may lead to deflation. D.Economic agents might be unwilling to borrow in anticipation of even lower interest rates.

A.That traditional monetary policy will have no impact on the economy

If the Fed increases the discount rate, it is pursuing A.a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy. B.a contractionary policy because it reduces banks' profit margins by raising the cost of borrowing and lowering the return on lending. C.an expansionary policy because it raises the cost of holding excess reserves in the banking system. D.an expansionary policy because it increases bank profits by putting upward pressure on the interest rates that banks can charge on its loans.

A.a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy.

When the Fed lowers the target rate of interest for federal funds, it A.buys government bonds. B.lowers the discount rate. C.sells government bonds. D.lowers the required reserve ratio.

A.buys government bonds.

The Federal Reserve System is made up of twelve regional banks owned by A.commercial banks in the respective districts that have chosen to be members of the Fed. B.Wall Street investors. C.the Board of Governors appointed by the President. D.the U.S. Treasury.

A.commercial banks in the respective districts that have chosen to be members of the Fed.

Which of the following was NOT one of the Fed's original functions A.control interest rates B.act as lender of last resort C.control the money supply D.provide banking regulation

A.control interest rates

The rate of interest banks charge one another for overnight reserve loans is A.federal funds rate. B.open market rate. C.required reserve rate. D.discount rate.

A.federal funds rate

The Federal Reserve does all of the following except A.make loans to individuals B.influence the supply of money C.influence the value of money D.regulate the banking system

A.make loans to individuals

The Federal Reserve System was created in order to provide a constant money supply for the economy. A. True B. False

B. False

The discount rate is the rate of interest charged when banks lend excess reserves to one another. A. True B. False

B. False

The federal funds rate is the interest rate the Fed charges to banks when it lends reserves to them. A. True B. False

B. False

When the Fed sells government bonds in the open market, the money supply will increase. A. True B. False

B. False

When you hear talk of the government 'printing money' they are referring to the possibility of A.Treasury printing currency without Fed authorization B.Fed purchases of newly issued government debt C.Fed literally printing new bills D.None of the above

B.Fed purchases of newly issued government debt

The Federal Reserve System was established in 1913 in response to the A.First World War. B.bank panic of 1907. C.depression of 1883. D.prosperity of the 1920s.

B.bank panic of 1907

The federal funds rate is determined A.by the Board of Governors. B.by the supply and demand for bank reserves. C.directly by households' and firms' demands for funds. D.by the federal government.

B.by the supply and demand for bank reserves.

If inflation is a threat, then the Fed will be expected to engage in A.expansionary monetary policy. B.contractionary monetary policy. C.policies to increase the money supply. D.policies to lower the rate of interest.

B.contractionary monetary policy.

For a given level of reserves, an increase in the reserve requirement ratio will A.decrease legal reserves and decrease the money supply. B.increase legal reserves and decrease excess reserves. C.increase legal reserves and increase excess reserves. D.increase excess reserves and increase the money supply.

B.increase legal reserves and decrease excess reserves.

The three main monetary policy instruments are A.the money supply, the market interest rate, deposit insurance B.open market operations, reserve requirement ratio, the discount rate C.open market operations, deposit insurance, the money supply D.open market operations, reserve requirement ratio, the market interest rate

B.open market operations, reserve requirement ratio, the discount rate

The major tools of monetary policy available to the Federal Reserve System are 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.

The problem of lags suggests that monetary policy should A.respond swiftly to statistical reports of economic conditions in the recent past. B.respond to conditions expected to exist in the future. C.stagger its implementation of policies so that there will be an ongoing effect on the economy. D.not respond to changing economic conditions in the economy but instead rely on the economy's self correcting mechanism.

B.respond to conditions expected to exist in the future.

Toward the end of 2008, the U.S. economy was characterized by all of the following except A.credit tightening by banks. B.rising inflation. C.falling real GDP. D.an unprecedented federal funds rate below 1%.

B.rising inflation.

The shortest of the three lags for monetary policy is A.the impact lag. B.the implementation lag. C.the government lag. D.the recognition lag.

B.the implementation lag.

Which of the following is not a function of the Federal Reserve System? A.It acts as a central bank to the central government. B.It acts as a banker to banks. C.It determines tax levels in conjunction with the U.S. Treasury. D.It sets monetary policy.

C.It determines tax levels in conjunction with the U.S. Treasury.

Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy? A.The Fed works closely with Congress in formulating monetary policy B.The policy is decided solely by the Board of Governors C.The FOMC gets input from Federal Reserve banks throughout the country D.Each of the Federal reserve banks is able to act independently of the Board of Governors

C.The FOMC gets input from Federal Reserve banks throughout the country

Which organization is responsible for managing the nation's money supply? A.The Federal Reserve Bank of New York B.The United States Treasury C.The Federal Open Market Committee D.The American Association of Bankers

C.The Federal Open Market Committee

In the short-run, Monetary policy can affect ____ while in the long-run, it affects ______ A.aggregate supply, aggregate demand B.aggregate demand and output, aggregate supply C.aggregate demand and output, inflation D.inflation, level of prices

C.aggregate demand and output, inflation

The Fed's most important and most frequently used tool of monetary policy is A.moral suasion. B.open-market operations. C.changes in the discount rate. D.changes in required reserve ratios.

C.changes in the discount rate.

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the A.impact lag. B.recognition lag. C.implementation lag. D.theory lag.

C.implementation lag.

If the Fed purchases federal government bonds on the open market, bank reserves will ____, leading to a(n) _______ in the money supply. A.decrease; decrease B.increase; decrease C.increase; increase D.decrease; increase

C.increase; increase

Which of the following result from a change in the money supply brought about by an open market purchase? A.lower interest rate, higher exchange rate, decreased demand for investment and net exports B.higher interest rate, higher exchange rate, increased demand for investment and decreased demand for net exports C.lower interest rate, lower exchange rate, increased demand for investment and net exports D.higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

C.lower interest rate, lower exchange rate, increased demand for investment and net exports

During an economic slump, policies that lower interest rates may not actually boost investment because A.lower interest rates tend to discourage investment, all other things unchanged. B.investment is never affected by interest rate changes. C.of pessimistic expectations by businesses about the future of the economy. D.taxes may have been decreased during a recessionary period.

C.of pessimistic expectations by businesses about the future of the economy.

The Fed's dual mandate is A.price stability and full employment B.zero inflation and zero unemployment C.price stability and maximum employment D.low interest rates and low inflation

C.price stability and maximum employment

When the Fed buys bonds in the open market, in the product market (the aggregate demand-aggregate supply model), A.real GDP will fall and the price level will rise. B.real GDP and the price level will rise. C.real GDP and the price level will fall. D.real GDP will rise and the price level will fall

C.real GDP and the price level will fall.

A primary function of a central bank is to A.regulate dividend payments by corporations. B.control the bond market. C.set monetary policy. D.publish statistics on banking and related financial matters.

C.set monetary policy.

What is monetary policy? A.The actions a central bank takes to control the money supply. B.The actions a central bank takes to influence consumption and inflation. C.The actions a central bank takes to maintain the value of money. D.The actions a central bank takes to influence the availability and cost of money and credit and expectations.

D.The actions a central bank takes to influence the availability and cost of money and credit and expectations.

In addition to its traditional policy actions, in the financial crisis and its aftermath, which of the following has the Fed has done? A.come up with no ways for injecting reserves, credit and liquidity into the banking system B.lent to firms that are not banks C.expanded its balance sheet (Quantitative easing) and increased its transparency D.all of the above

D.all of the above

When the Federal Reserve conducts open market transactions, it A.buys or sells corporate bonds in the bond market. B.issues government bonds to raise funds for the government. C.makes credit available to financial institutions in crises. D.buys or sells previously issued government bonds.

D.buys or sells previously issued government bonds.

The _______ rate is the interest rate at which the Fed lends ______ to commercial banks. A.federal funds rate; deposits B.federal funds rate; reserves C.discount rate; deposits D.discount rate; reserves

D.discount rate; reserves

When the Fed purchases government bonds it _____ reserves and ____ the money supply and ______ the fed finds rate. A.decreases; increases; increases B.increases; decreases; decreases C.decreases; decreases; decreases D.increases; increases;decreases

D.increases; increases;decreases

A liquidity trap is said to exist when a change in monetary policy has no effect on A.the money supply. B.the natural level of employment. C.aggregate supply. D.interest rates.

D.interest rates.

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the except A.buying mortgage-backed securities. B.buying long-term Treasury bills. C.creating other new credit facilities to make credit more easily available to households and small businesses. D.lowering the reserve requirement to encourage banks to create loans.

D.lowering the reserve requirement to encourage banks to create loans.

Contractionary monetary policy by the Fed could include A.lowering the discount rate. B.decreasing government transfer payments. C.decreasing reserve requirements. D.selling government securities in the open market.

D.selling government securities in the open market.

The Fed's exit strategy refers to how they will exit from political discussion True False

False

Quantitative easing refers to expansionary monetary policy when the economy is in a liquidity trap True False

True

The Fed provides forward guidance about future short-run interest rates in order to influence current long-run interest rates True False

True