Chapter 16 Quiz

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of: $800 million, but only by $600 million if the securities are purchased directly from commercial banks $600 million, and also by $600 million if the securities are purchased directly from commercial banks $600 million, but by $800 million if the securities are purchased directly from commercial banks $800 million, and also by $800 million if the securities are purchased directly from commercial banks

$600 million, but by $800 million if the securities are purchased directly from commercial banks

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by: $9 billion $12 billion $15 billion $4.5 billion

$9 billion

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when: Investment demand decreases The demand for money decreases The discount rate increases The demand for money increases

The demand for money increases

The interest rate that the Fed charges banks for loans to them through the traditional channel is called: The discount rate The prime rate The federal funds rate Interest on reserves

The discount rate

In which case would the quantity of money demanded by the public tend to increase by the greatest amount? The interest rate increases and nominal GDP decreases The interest rate decreases and nominal GDP increases The interest rate decreases and nominal GDP decreases The interest rate increases and nominal GDP increases

The interest rate decreases and nominal GDP increases

The Fed's response to the zero lower bound problem was quantitative easing (or "QE"), where the Fed buys large amounts of bonds in order to: Lower the interest rates Increase banks' reserves Lower bond prices Reduce money supply

Increase banks' reserves

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary money policy is likened to: Completing the circle Filling in the blanks Pushing on a string Checking the list

Pushing on a string

According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one percent above potential GDP, then the Fed should: Lower the real federal funds rate by half of a percentage point Raise the real federal funds rate by half of a percentage point Lower the real federal funds rate by one percentage point Raise the real federal funds rate by one percentage point

Raise the real federal funds rate by half of a percentage point

The purpose of an expansionary monetary policy is to increase: The inflation rate The GDP-gap Interest rates Real GDP

Real GDP

In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP policy when it aimed to keep the Federal funds rate between: 0 and 0.25% 2% and 2.5% 2.5% and 3.0% 1.0% and 1.25%

0 and 0.25%

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective? Selling government securities and raising the discount rate Buying government securities and raising the discount rate Selling government securities and raising the reserve ratio Buying government securities and lowering the reserve ratio

Buying government securities and raising the discount rate

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to: Make no change in the interest rate Increase aggregate demand by increasing the interest rate Increase aggregate demand by decreasing the interest rate Decrease aggregate demand by increasing the interest rate

Decrease aggregate demand by increasing the interest rate

A decrease in the interest rate will cause a(n): Decrease in the transactions demand for money Increase in the transactions demand for money Decrease in the amount of money held as an as Increase in the amount of money held as an asset

Increase in the amount of money held as an asset

The Fed can induce banks to increase their reserve holdings by: Increasing the discount rate Reducing the required reserve ratio Increasing the interest on reserves Selling securities in the open market

Increasing the interest on reserves

The transactions demand for money is least likely to be a function of the: Level of national income Price level Interest rate Frequency of wage and salary payments

Interest rate