Monetary Policy and Bank Regulation
Which of the following is likely to increase the money supply in an economy?
A decrease in reserve requirements
In which of the following situations will an inflationary pressure arise in an economy?
If the central bank lowers the reserve requirement for commercial banks
Identify an example of a contractionary monetary policy.
Increase in the sale of government bonds by the central bank
A rule that central banks should focus on keeping the rate of increase in the aggregate price level low
Inflation targeting
Identify the correct statement about the structure of the Fed.
It is semi-decentralized, mixing government appointees with representation from private-sector banks
What should the central bank of a country do if it wants to raise interest rates?
It should raise the reserve requirement.
Identify an important function of the Federal Reserve.
Lending to commercial banks
Basic Quantity Equation of Money
Money supply × velocity = Nominal GDP
The most commonly used tool of monetary policy in the U.S.
Open Market Operations
The specific interest rate the Fed targets is the federal funds rate
The federal funds rate
What happens when the central bank of an economy purchases bonds from a commercial bank?
The money supply in the economy increases.
What will happen if the central bank of an economy lowers the discount rate?
The money supply will increase.
What will be the effect of a monetary stimulus of $50 billion on the real GDP of a country if the initial money supply is $250 billion, the velocity of money is 2, and the change in the aggregate price level due to the stimulus is 10?
The real GDP will increase by $0.45 billion
Which of the following happens when the central bank implements a contractionary monetary policy?
The supply curve of loanable funds shifts to the left.
Which of the following will happen if the central bank of an economy sells government bonds to a commercial bank?
There will be a decline in the commercial banks' reserves.
The speed with which money circulates through the economy
Velocity of money
The monetary policy should be ______; that is, it should act to restore the macroeconomic equilibrium in an economy after periods of economic downturns or upswings.
countercyclical
The ______ rate is the interest rate charged by commercial banks making overnight loans to other banks.
federal funds
To prevent solvent banks from failing and a financial crisis from spreading, the Fed stands ready to lend to banks and other financial institutions when they cannot obtain funds from anywhere else. This is known as the ______ role of the Fed.
lender of last resort
What will be the impact of an expansionary monetary policy?
An increase in investment expenditure
Which of the following is likely to raise interest rates in an economy?
An increase in the discount rate
Identify a function of the Federal Reserve.
Assuring that commercial banks act in compliance with consumer protection laws
The organization responsible for conducting monetary policy and ensuring that a nation's financial system operates smoothly is called the ______.
Central bank
Which of the following is a function of the Federal Reserve?
Conducting monetary policy
______ is a system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt.
Deposit insurance
An innovative and nontraditional policy that involves the purchase of long-term government and private mortgage-backed securities by central banks to make credit available
Quantitative easing
The central bank of the United States
The Federal Reserve
What should the central bank of an economy do when the economy produces a quantity of output below its potential GDP?
The central bank should purchase government bonds from commercial banks.
Depositors racing to the bank to withdraw their deposits for fear that otherwise they would be lost is called a ______.
bank run
Regulation requires that banks maintain a minimum ______, usually expressed as a percent of their assets, to protect their depositors and other creditors.
net worth