econ ch 16

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

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

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in

Bank A's excess reserves.

After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?

The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by

a downsloping line or curve from left to right.

Federal Reserve Notes in circulation are

a liability as viewed by the Federal Reserve Banks.

The major purpose of the Federal Reserve buying government securities in open-market operations is to

allow banks to increase their lending.

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

an increase in the money supply will decrease the rate of interest.

In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that

banks held on to excess reserves and people chose to pay off loans rather than spend.

Before the financial crisis of 2008, if the Fed wanted to lower the Federal funds rate, it

bought bonds from banks and the public.

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

cyclical asymmetry of monetary policy.

An increase in the legal reserve ratio

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.

false

The interest rate that banks charge one another on overnight loans is called the

federal funds rate.

Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to

hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.

An increase in nominal GDP will

increase the transactions demand and the total demand for money.

Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market

increased and the Federal funds rate decreased.

The prime interest rate

is influenced by Fed policies that change the money supply.

In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed

lowered the federal funds target rate.

Beginning in 2008, the Fed was allowed to

pay interest on excess reserves deposited at Fed banks.

The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the

prime interest rate.

Since the financial crisis of 2008, the main tool of expansionary monetary policy used by the Fed has been

quantitative easing

The Fed's normalization plan for monetary policy included

raising the interest rate paid on excess reserves.

The discount rate is the interest

rate at which the Federal Reserve Banks lend to commercial banks.

Which of the following actions by the Fed most likely increase commercial bank lending?

reducing the interest paid on excess reserves held at the Fed

Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, the supply of money in the economy will

rise by $500.

If the Fed sells government securities to the general public in the open market,

the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed.

The level of GDP, ceteris paribus, will tend to increase when

the Federal Reserve buys government securities in the open market.

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when

the demand for money increases.

What is one of the advantages of monetary policy over fiscal policy?

the quickness with which it can be used

Which of the following tools of monetary policy has not been used since 1992?

the reserve ratio

When the Fed sells bonds to the bank and the public, the expected result is that

the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur.

A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.

true

The effects on aggregate demand of an open market purchase and a tax cut are similar.

true

The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

true

The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.

true

When the Fed raises the interest rate paid on reserves, it discourages bank lending.

true