Chapter 11 LearnSmart

True or false: The FDIC conducts monetary policy in the United States

False Reason: The Federal Reserve Bank conducts monetary policy.

If the money supply has increased by 3 percent, nominal income has risen 5 percent and the price level has risen by 1 percent, what is the percent change in real income? a) 4 percent b) 2 percent c) 3 percent d) 6 percent

a Reason: %∆ real income = %∆ nominal income - %∆ price level. 5% - 1% = 4%

If the real interest rate is 4% and inflation is 3%, what is the nominal interest rate? a) 7% b) 1% c) 4% d) 3%

a Reason: Real interest rate = Nominal interest rate - Expected inflation rate. 4% = X% -3%, so X = 7%

If the nominal interest rate is 4% and inflation is 3%, what is the real interest rate? a) 1% b) 2% c) 3% d) 4%

a Reason: Real interest rate = Nominal interest rate - Expected inflation rate. X% = 4% - 3%, so X = 1%

True or false: A monetary regime requires the Fed to demonstrate a commitment to that regime if it is to be effective.

True

True or false: In the standard AS/AD model once long-run equilibrium is reached, expansionary monetary policy affects only nominal income and the price level.

True

Select all that apply Which of the following is an advantage of contractionary monetary policy? a) Trade deficit may decrease b) Risks recession c) Helps fight inflation d) Inflation may worsen

a & c

Fed funds are best described as a) loans of excess reserves banks make to one another. b) the currency in circulation in an economy. c) deposits that the Fed makes at commercial banks. d) the reserves the Fed holds at its accounts at banks.

a

In contrast to Fed actions that account for changes in inflation and the economy on a case by case basis, deciding to follow the Taylor rule in setting the Fed Funds rate would be best characterized as a _____. a) regime b) policy

a

In the standard AS/AD model once long-run equilibrium is reached, expansionary monetary policy leads to an increase in: a) the price level. b) bank failures. c) interest rates. d) government spending.

a

Monetary policy influences the economy through a) the banking system's reserves. b) commercial banking investments. c) Federal Deposit Insurance. d) banking regulations.

a

Which of the following correctly distinguishes a monetary regime from a monetary policy? a) Regimes are predetermined frameworks that spell out policy responses while policies are responses to events without a pre-determined framework. b) Policies are predetermined frameworks that spell out policy responses while regimes are responses to events without a pre-determined framework. c) Regimes are policies made during the tenure of a single FOMC group while policies are made over a series of FOMC groups. d) Policies are made during the tenure of a single FOMC group while regimes are policies are made over a series of FOMC groups.

a

If the interest rate is 3 percent, nominal income has risen 2 percent and the price level has risen by 1 percent, what is the percent change in real income? a) 1 b) 3 c) 5 d) -1

a Reason: %∆ real income = %∆ nominal income - %∆ price level, or 2% - 1% = 1%

Select all that apply Which of the following is included in the monetary base? a) Vault cash b) Currency in circulation c) Deposits at the Fed d) Foreign currency e) Treasury securities

a, b, & c

Which of the following is a disadvantage of contractionary monetary policy? a) Interest rates may rise b) Increases unemployment c) Trade deficit may decrease d) Risks recession e) Decreases unemployment f) Inflation may rise g) Slows growth

a, b, d, & g

Select all that apply Which of the following are explicit functions of the Fed? a) Conduct monetary policy b) Provide banking services to the U.S. government c) Provide banking securities d) Issue coin and currency e) Determine exchange rates f) Serve as lender of last resort g) Set inflation h) Supervise and regulate financial institutions

a, b, d, f, & h

Select all that apply Which of the following are used in the Taylor rule? a) Deviation of aggregate output from potential b) Percent change in potential output c) Unemployment rate d) Desired inflation e) Current inflation

a, d, & e

Since long-term interest rates are usually higher than short-term interest rates, the standard yield curve is _____. a) downward-sloping b) upward-sloping c) flat d) vertical

b

The Fed's buying and selling of Treasury bills and Treasury bonds are called _____. a) aggregate reserve actions b) open market operations c) interest rate communications d) federal funds transactions

b

The interest rate banks charge one another for lending excess bank reserves is called the _____. a) Bank lending rate b) Federal funds rate c) Federal discount rate d) LIBOR rate

b

The percent change in real output equals the a) percent change in nominal output plus percent change in price level. b) percent change in nominal output less percent change in price level. c) nominal interest rate less inflation. d) nominal interest rate plus inflation.

b

The yield curve shows the relationship between short-term interest rates and a) growth in output. b) long-term interest rates. c) inflation. d) the money supply.

b

Which of the following correctly expresses the relationship between the percent change in real income, nominal income and the price level? a) Percent change in real income = percent change in nominal income + percent change in price level. b) Percent change in real income = percent change in nominal income - percent change in price level. c) Percent change in real income = percent change in nominal income / percent change in price level. d) Percent change in real income = percent change in nominal income × percent change in price level.

b

Select all that apply Which of the following are disadvantages of expansionary monetary policy? a) Interest rates may fall b) Inflation may worsen c) Trade deficit may increase d) Slows growth e) Interest rates may rise

b & c

Select all that apply Which of the following are NOT explicit functions of the Fed? a) Conduct monetary policy b) Determine exchange rates c) Supervise and regulate financial institutions d) Set inflation e) Issue coin and currency f) Provide banking securities g) Provide banking services to the U.S. government h) Serve as lender of last resort

b, d, & f

A policy that decreases the money supply and increases the interest rate is an example of _____. a) expansionary monetary policy b) contractionary fiscal policy c) contractionary monetary policy d) expansionary fiscal policy

c

Expansionary monetary policy is a policy that a) decreases foreign direct investment and decreases the interest rate. b) decreases the money supply and raises the interest rate. c) increases the money supply and decreases the interest rate. d) increases foreign direct investment and decreases the interest rate.

c

In the short run, expansionary monetary policy normally shifts the aggregate demand curve, which changes nominal income, which is split between real output and a) the interest rate. b) GDP. c) the price level. d) potential output.

c

The Fed's chief body that decides monetary policy is called the _____. a) Federal Deposit Insurance Committee b) Regional Fed President Board c) Federal Open Market Committee e) Regional Fed Principal Economist Board

c

The discount rate is the a) the discount at which the Fed will sell Treasury bonds. b) the rate of interest banks charge one another for borrowing and lending overnight reserves. d) the rate of interest the Fed charges for loans it makes to banks. e) the discount banks give one another on banking services to joint customers.

c

The function of the Federal Open Market Committee is to _____. a) determine the flow of funds b) set exchange rates c) decide monetary policy d) regulate consumer credit

c

The policy of influencing the economy through changes in the banking system's reserves is called _____. a) credit policy b) reserve policy c) monetary policy d) interest policy

c

The policy of influencing the economy through changes in the banking system's reserves is called _____. a) reserve policy b) interest policy c) monetary policy d) credit policy

c

The reserve requirement is best defined as a) the minimum level of loans a bank must make based on their balance sheet. b) the percentage of Treasuries banks must hold as a percent of their assets. c) the percentage the Federal Reserve sets as the minimum amount of reserves a bank must have. d) the minimum amount of cash banks must have at branch banks.

c

Which of the following correctly expresses the avenue through which contractionary monetary policy affects output in the standard model? a) Contractionary monetary policy leads to lower interest rates, which lower investment, which leads to lower output. b) Contractionary monetary policy leads to higher interest rates, which increases investment and leads to lower output. c) Contractionary monetary policy leads to higher interest rates, which lowers investment and leads to lower output. d) Contractionary monetary policy leads to lower interest rates, which raises investment, which leads to higher output.

c

Which of the following correctly states the Taylor rule? a) Fed funds rate = 2 percent - current inflation - 0.5 × (actual inflation less desired inflation) - 0.5 × (percent increase in potential output) b) Fed funds rate = 2 percent + expected inflation - 0.5 x (actual inflation less desired inflation) - 0.5 x (percent deviation of aggregate output from potential) c) Fed funds rate = 2 percent + current inflation + 0.5 × (actual inflation less desired inflation) + 0.5 × (percent deviation of aggregate output from potential) d) Fed funds rate = 2 percent + current inflation - 0.5 × (actual inflation less desired inflation) - 0.5 × (percent deviation of aggregate output from potential)

c

Who conducts monetary policy in the United States? a) The FDIC b) Bank of America c) The Federal Reserve Bank d) Congress

c

Which of the following are advantages of expansionary monetary policy? a) Trade deficit may decrease b) Inflation may worsen c) Economy may grow d) Decreases unemployment e) Interest rates may rise f) Interest rates may fall g) Helps fight inflation

c, d, & f

A policy that increases the money supply and decreases the interest rate is _____. a) expansionary fiscal policy b) contractionary monetary policy c) contractionary fiscal policy d) expansionary monetary policy

d

Contractionary monetary policy is a policy that a) is intended to increase investment and decrease output. b) increases the money supply and decreases the interest rate. c) is intended to increase investment and increase output. d) decreases the money supply and increases the interest rate.

d

Loans of excess reserves banks make to one another are called _____. a) reserve loans b) flow of funds c) required reserves d) Fed funds

d

Open market operations are the Fed's a) review of bank balance sheets according to market conditions. b) setting short-term interest rates through regulation. c) facilitation of Treasury market purchases by banks. d) buying and selling of Treasury bills and Treasury bonds.

d

The Federal funds rate is the interest rate a) that commercial banks charge corporations for overnight borrowing. b) at which Fed IOUs decline in value due to inflation. c) that the Fed charges banks for borrowing from the Fed. d) that banks charge one another for lending excess bank reserves.

d

The rate of interest the Fed charges for loans it makes to banks is called the ________ rate.

discount

The percentage the Federal Reserve sets as the minimum amount of reserves a bank must have is known as the _________ requirement.

reserve

A curve that shows the relationship between interest rates and bonds' time to maturity is known as the _______ curve.

yield