Chapter 16 Homework

Suppose there is an increase in the total demand for money. In this case, the: A. money supply will rise B. equilibrium interest rate will fall C. money supply will fall D. equilibrium interest rate will rise

D

The equilibrium interest rate is determined: A. at the intersection of the aggregate demand and aggregate supply curve B. by the Fed C. to fluctuate over time D. at the intersection of the total demand for money curve and the supply of money curve

D

The Federal funds rate is: A. lower than the prime interest rate because federal funds are loaned overnight B. not comparable to the prime interest rate since the lenders are different. C. nearly the same as the prime interest rate because they are both short term loans D. higher than the prime interest rate because it is more risky to lend overnight.

A

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. In this case the Federal funds rate should be: A. increased. B. set at zero. C. decreased. D. set equal to the discount rate.

A

Cyclical asymmetry is important to policymakers because: A. recessions are shorter than inflations. B. monetary policy is more effective in fighting inflation than recession. C. monetary policy is more effective in fighting recession than inflation. D. fiscal policy is more effective in fighting inflation than recession.

B

The basic objective of monetary policy is to: A. increase employment and stabilize exchange rates B. assist the economy in achieving a full-employment, non-inflationary level of total output C. maintain steady exchange rates and lower inflation D. eliminate inflation and lower interest rates

B

Total money demand is the: A. vertical sum of the private money demand and the public money demand B. horizontal sum of transaction money demand and asset money demand C. vertical sum of transaction money demand and asset money demand D. horizontal sum of consumer money demand and producer money demand

B

When bond prices go up, interest rates go ___________. A. Nowhere. B. Down. C. Up.

B

Which of the following Fed actions will increase bank lending? A. The Fed raises the discount rate from 5 percent to 6 percent. B. The Fed lowers the discount rate from 4 percent to 2 percent. C. The Fed raises the reserve ratio from 10 percent to 11 percent. D. The Fed buys $400 million worth of Treasury bonds from commercial banks.

B & D

A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves? A. $100,000. B. $4,000. C. $0. D. $10,000.

C

A decrease in the supply of Federal funds is shown as an upshift of the supply curve above because the interest rate: A. rises to 4.5% which occurs when there are more funds available B. falls to 3.5% which occurs when there are more funds available. C. rises to 4.5% which occurs when there are fewer funds available D. falls to 3.5% which occurs when there are fewer funds available.

C

Monetary policy is easier to conduct than fiscal policy because: A. the Fed has more control of the economy B. the economy responds better to monetary policy than fiscal policy C. monetary policy has a much shorter administrative lag than fiscal policy D. monetary policy is easier to understand

C

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. You recommend a contraction of the money supply by: A. increasing the reserve ratio or decreasing the discount rate and selling bonds. B. decreasing the reserve ratio or discount rate and buying bonds. C. increasing the reserve ratio or discount rate or selling bonds D. decreasing the reserve ratio, increasing the discount rate, or buying bonds.

C

The Federal funds rate is: A. the interest rate the government charges for government loans, whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers B. the interest rate the banks charge on loans to their most creditworthy customers, whereas the prime interest rate is the interest rate banks charge one another on overnight loans. C. the interest rate the Fed charges banks for a loan, whereas the prime interest rate is the interest rate banks charge one another on overnight loans D. the interest rate the banks charge one another on overnight loans, whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers.

D

A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ________ in money-creating potential. If the reserve ratio is 14 percent, the bank has __________ in money-creating potential. A. $3,000; $2,100. B. -$5,000; $1,000. C. $5,000; $1,000. D. $20,000; $14,000.

B

A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply: A. Decreases by $100,000. B. Increases by $100,000. C. Is unaffected by the transaction.

B

When economists say that monetary policy can exhibit cyclical asymmetry, this means: A. recessions are shorter than inflations. B. expansionary and restrictive monetary policy do not have the same potential for economic expansion and contraction. C. expansionary and restrictive monetary policy cannot both be used for economic expansion and contraction. D. the Fed is only able to deal with inflation.

B

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. You recommend a contraction of the money supply which would: A. increase the lending ability of the banking system, decrease the real interest rate, and reduce investment spending, aggregate demand, and inflation. B. increase the lending ability of the banking system, decrease the real interest rate, and increase investment spending, aggregate demand, and inflation. C. reduce the lending ability of the banking system, increase the real interest rate, and reduce investment spending, aggregate demand, and inflation. D. reduce the lending ability of the banking system, decrease the real interest rate, and increase investment spending, aggregate demand, and inflation.

C

The basic determinant of the transactions demand for money is the: A. price level B. interest rate C. level of nominal GDP D. reserve ratio

C

Changes in the Federal funds rate and the prime interest rate closely track one another because: A. both rates are related to the relative scarcity or availability of reserves. B. there are fewer prime rate reserves available for lending. C .the Fed arranges this to be the case D. all interest rates will be equal whether the customers are banks, businesses, or households.

A

If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________ bonds. A. Sell. B. Buy.

A

If there is an increase in the nation's money supply, the interest rate will: A. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise. B. rise, investment spending will fall, aggregate demand will shift right, real GDP will rise, and the price level will fall. C. rise, investment spending will fall, aggregate demand will shift right, real GDP will fall, and the price level will rise. D. fall, investment spending will rise, aggregate demand will shift right, real GDP will rise, and the price level will fall.

A

The basic determinant of the asset demand for money is the: A. interest rate B. price level C. reserve ratio D. level of nominal GDP

A

A major strength of monetary policy is: A. the rule used to manage the economy B. its long term consequences C. its speed and flexibility D. the autonomy of the Fed

C

True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

True

True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

True