ECON - Monetary Policy Smartbook

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The Federal Reserve has determined the money supply will need to decrease by $25 billion in order to return the economy to full employment. If the money multiplier is 10, what is the required change in excess reserves? $2.5 billion $250 billion −$250 billion −$2.5 billion

$2.5 billion

The Federal Reserve has determined the money supply will need to decrease by $25 billion in order to return the economy to full employment. If the money multiplier is 10, what is the required change in excess reserves? $2.5 billion −$250 billion −$2.5 billion $250 billion

$2.5 billion

An economy experiences a change in excess reserves of −$5 billion, if the money multiplier is 10, how much as the money supply changed? $50 billion −$0.5 billion −$50 billion $0.5 billion

$50 billion

Suppose the Federal Reserve wants to decrease the money supply by $400 billion. If the reserve requirement (rr) is 0.2, calculate the change in reserves that the Federal Reserve must make.

$80 bil

Which of the following does the Fed carefully monitor? The interest rates banks charge Bank end-of-day balances All deposits made at a bank Bank reserves

Bank reserves

If the Fed finds that a bank fails to maintain a required level of reserves, what can happen to the bank? Banking inspectors will make an unwelcome appearance. They cannot make any loans. Banks will be fined by the Fed. Banking inspectors will shut down the bank.

Banking inspectors will make an unwelcome appearance.

What will happen in the money market if the Federal Reserve decreases the discount rate? Banks borrow less from the Fed and make fewer loans, causing the money supply to decrease. Banks borrow less from the Fed and make fewer loans, causing the money supply to increase. Banks borrow more from the Fed and make more loans, causing the money supply to increase. Banks borrow more from the Fed and make more loans, causing the money supply to decrease.

Banks borrow more from the Fed and make more loans, causing the money supply to increase.

Why might expansionary policy not work during a recession? Investors make ask for too much money in loans. Banks may choose not to make loans in a weak economy. Individuals may choose to consume more. Banks may make too many loans in a recession.

Banks may choose not to make loans in a weak economy.

The Federal Reserve sets reserve requirements for banks to: control the federal funds rate. ensure that banks don't lend out too much money. make sure that discount rates stay relatively constant. comply with international requirements.

ensure that banks don't lend out too much money.

The ______ price of money is the interest rate.

equilibrium

A bank can make loans depending on the value of _____ reserves.

excess

A bank can make loans depending on the value of ________ reserves.

excess

Loans created from borrowed reserves expand the money supply by creating _______ reserves in the banking system.

excess

The federal funds rate is determined by the supply and demand for ______ reserves.

excess

_____ reserves are equal to total reserves minus required reserves.

excess

_____ reserves held as currency earn no interest.

excess

_______ reserves are equal to total reserves minus required reserves.

excess

_______ reserves the amount the bank can lend out to earn interest equal _______ reserves minus ______ reserves.

excess total required

Actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is ______ monetary policy.

expansionary

An increase in the money supply and a decrease in the interest rate are effects consistent with ______ monetary policy.

expansionary

An increase in the money supply designed to stimulate economic activity is called ______ monetary policy.

expansionary

The Federal Reserve has decided to decrease the interest rate paid on reserves. This policy is consistent with ______ monetary policy.

expansionary

The actions taken by a country's central bank to expand the money supply and lower interest rates is called _____ monetary policy.

expansionary

When aggregate demand falls, to increase aggregate demand, we can use _____ monetary policy.

expansionary

______ monetary policy is sometimes referred to as "easy money."

expansionary

_______ monetary policy is sometimes referred to as "easy money."

expansionary

By keeping interest rates low and investment and consumption spending high,: expansionary fiscal policy can help reduce the size of recessions. expansionary monetary policy can increase the size of recessions. expansionary monetary policy can help reduce the size of recessions. expansionary fiscal policy can increase the size of recessions.

expansionary monetary policy can help reduce the size of recessions.

In countering recession,: expansionary monetary policy can lower interest rates increase gross investment and increase aggregate demand. contractionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand. contractionary monetary policy can lower interest rates increase gross investment and increase aggregate demand. expansionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand.

expansionary monetary policy can lower interest rates increase gross investment and increase aggregate demand.

In countering recession,: expansionary monetary policy can lower interest rates increase gross investment and increase aggregate demand. contractionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand. expansionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand. contractionary monetary policy can lower interest rates increase gross investment and increase aggregate demand.

expansionary monetary policy can lower interest rates increase gross investment and increase aggregate demand.

The actions taken by a country's central bank to expand the money supply and lower interest rates is called: contractionary fiscal policy. expansionary monetary policy. contractionary monetary policy. expansionary fiscal policy.

expansionary monetary policy.

A decrease in aggregate demand will cause the price level to _______ and unemployment to _______ in the short run.

fall rise

Monetary policy refers to the action of the ______ to influence the supply of money and credit in the U.S. economy.

fed

The market for borrowing and lending reserves between banks is the: loanable funds market. capita market. money market. federal funds market.

federal funds market.

The market for borrowing and lending reserves between banks is the: loanable funds market. money market. capita market. federal funds market.

federal funds market.

The Federal Reserve Board set a target for the __ to influence interest rates and to either encourage or discourage additional economic activity. prime rate discount rate federal funds rate

federal funds rate

One of the key interest rates in the economy is called the: lending rate. compound rate. federal funds rate. interest rate.

federal funds rate.

The Fed uses open market operations to target the: compound rate. federal funds rate. interest rate. lending rate.

federal funds rate.

The interest rate that banks pay one another for borrowing reserves or federal funds overnight so they can meet the reserve requirements set by the Federal Reserve is the: prime rate. lending rate. federal funds rate. discount rate.

federal funds rate.

The interest rate that helps determine the interest rates charged on other loans is called the: interest rate. federal funds rate. lending rate. compound rate.

federal funds rate.

Banks can create money by making use of: government authorized printing facilities. frictional reserve banking. fractional reserve banking. fractional reserve printing.

fractional reserve banking.

For decades, the reserve requirement has rarely been used as a tool of monetary policy because: this would require Congressional approval and that is too cumbersome for the Fed. most banks keep excess reserves anyway so such a change would not have much impact. it is difficult to determine the impact of such a change so other tools are used instead. frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets.

frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets.

When the Federal Reserve wants to buy or sell U.S. Treasury bonds, the Fed makes these transactions with the: Office of the Comptroller of the Currency. general public. U.S. Treasury Department directly. U.S. Department of Commerce.

general public.

Since 2009, the average interest rate on savings accounts: has been constant. has been up and down. has increased. has decreased.

has decreased.

Since 2009, the average interest rate on savings accounts: has been up and down. has been constant. has decreased. has increased.

has decreased.

Since 2009, the average interest rate on savings accounts: has decreased. has been constant. has been up and down. has increased.

has decreased.

During the 1970s, inflation was: low and the federal funds rate was less than 2%. high and the federal funds rate exceeded 36%. low and the federal funds rate was less than 5%. high and the federal funds rate exceeded 16%.

high and the federal funds rate exceeded 16%.

During the 1970s, inflation was: low and the federal funds rate was less than 5%. high and the federal funds rate exceeded 16%. high and the federal funds rate exceeded 36%. low and the federal funds rate was less than 2%.

high and the federal funds rate exceeded 16%.

During times of __, a decrease in interest rates will stimulate consumption and investment and will encourage firms to hire more workers. high unemployment low unemployment average unemployment natural unemployment

high unemployment

The supply curve for federal funds is: downward sloping. horizontal. upward sloping. vertical.

horizontal.

The time between when a policy is enacted and when it has its full effect on the economy is called the ______ lag.

implementation

The time between when a policy is enacted and when it has its full effect on the economy is called the __ lag. The time between when an event affects an economy and the time when we recognize that effect in the data collected is called the __ lag. cyclical; implementation implementation; cyclical recognition; implementation implementation; recognition

implementation; recognition

The money multiplier is the amount by which a $1 change: in money demand will change the money supply. in reserves will change the money supply. in reserves will change the money demand. in money supply will change the money demand.

in reserves will change the money supply.

All else equal, when the money supply decreases, interest rates (increase/decrease).

increase

Given the demand for money, a(n) _______ in the money supply shifts the money supply curve and lowers the interest rate.

increase

If consumers ______ the amount of spending, aggregate demand shifts to the right.

increase

To minimize the effects of recession, the Fed needs to _____ the money supply.

increase

When the Fed lowers the target federal funds rate, the money supply will _____ and interest rates will _______ .

increase decrease

An increase in aggregate demand will cause the price level to (increase/decrease) and unemployment to (fall/rise) in the short run.

increase fall

The Federal Reserve has determined excess reserves will need to increase by $50 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve should increase the marginal propensity to consume. reduce the marginal propensity to consume. increase the interest rate paid on reserves. reduce the interest rate paid on reserves.

increase the interest rate paid on reserves.

Suppose banks are concerned a recession is coming soon. What should the Federal Reserve do to try and maintain the target federal funds rate if Banks change their lending habits based on this concern? Conduct open market operations to buy bonds from the public Conduct open market operations to sell bonds to the public. Lower the discount rate Increase the discount rate

Conduct open market operations to sell bonds to the public.

Suppose banks are concerned a recession is coming soon. What should the Federal Reserve do to try and maintain the target federal funds rate if Banks change their lending habits based on this concern? Lower the discount rate Conduct open market operations to sell bonds to the public. Conduct open market operations to buy bonds from the public Increase the discount rate

Conduct open market operations to sell bonds to the public.

What is the effect of expansionary monetary policy on the economy? Increase in real GDP and increase in unemployment Decrease in real GDP and decrease in unemployment Increase in real GDP and decrease in unemployment Decrease in real GDP and increase in unemployment

Increase in real GDP and decrease in unemployment

Suppose the Federal Reserve plans to conduct contractionary monetary policy during a period of increasing inflation. Which of the following is a policy that would promote this decision? Decrease personal income taxes Increase the interest rate paid on reserves Decrease the interest rate paid on reserves Increase personal income taxes

Increase the interest rate paid on reserves

What three new tools did the Federal Reserve Bank use during the Great Recession? Discount rate, Reserve Requirement, purchasing mortgage-backed securities. Discount rate, Reserve Requirement, Open Market Operations Increasing short-term liquidity, changing the discount rate, purchasing mortgage-backed securities. Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities.

Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities.

What three new tools did the Federal Reserve Bank use during the Great Recession? Increasing short-term liquidity, changing the discount rate, purchasing mortgage-backed securities. Discount rate, Reserve Requirement, purchasing mortgage-backed securities. Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities. Discount rate, Reserve Requirement, Open Market Operations

Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities.

When the money supply increases, what happens to the interest rate and quantity of investment? Interest rate decreases and quantity of investment increases. Interest rate increases and quantity of investment decreases. Interest rate decreases and quantity of investment decreases. Interest rate increases and quantity of investment increases.

Interest rate decreases and quantity of investment increases.

What is one benefit of contractionary monetary policy? It reduces the size of recessions It decreases taxes. It combats inflation. It always shortens recessions.

It combats inflation.

What is one benefit of expansionary monetary policy? It combats inflation. It decreases taxes. It always shortens recessions. It reduces the size of recessions.

It reduces the size of recessions.

What is one benefit of expansionary monetary policy? It decreases taxes. It always shortens recessions. It reduces the size of recessions. It combats inflation.

It reduces the size of recessions.

Why does the Federal Reserve rarely change the reserve requirement? It would be disruptive to the banking sector and credit markets The Fed can never agree whether or not to change the reserve requirement. They need the approval of the president to do so. Changing the reserve requirement is not very effective.

It would be disruptive to the banking sector and credit markets

When the reserve requirement is set higher, what happens to the amount of money loaned and the amount of money created in the economy? Less money is loaned, and more money is created in the economy. More money is loaned, and less money is created in the economy. More money is loaned, and more money is created in the economy. Less money is loaned, and less money is created in the economy

Less money is loaned, and less money is created in the economy

Which of the following describes a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances? Factor market Money market Stock market Product market

Money market

Which of the following describes a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances? Product market Stock market Factor market Money market

Money market

Which of the following describes a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances? Product market Stock market Money market Factor market

Money market

When the equilibrium output is below potential output, the Fed should: buy bonds equal to the needed increase in reserves. sell bonds equal to the needed decrease in reserves. buy bonds equal to the needed decrease in reserves. sell bonds equal to the needed increase in reserves.

buy bonds equal to the needed decrease in reserves.

When the equilibrium output is below potential output, the Fed should: sell bonds equal to the needed increase in reserves. sell bonds equal to the needed decrease in reserves. buy bonds equal to the needed decrease in reserves. buy bonds equal to the needed increase in reserves.

buy bonds equal to the needed decrease in reserves.

When the Fed ______ bonds, it creates new money and additional reserves which expands the money supply and _____ interest rates.

buys lowers

The federal funds rate is the interest rate that banks: pay when they borrow money directly from the Fed. charge their best customers. receive when a deposit is reserved. charge one another for borrowing excess reserves from each other.

charge one another for borrowing excess reserves from each other.

The federal funds rate is the interest rate that banks: receive when a deposit is reserved. charge their best customers. charge one another for borrowing excess reserves from each other. pay when they borrow money directly from the Fed.

charge one another for borrowing excess reserves from each other.

"Tight money" describes ________ monetary policy.

contractionary

A decrease in the money supply and an increase in the interest rate are effects consistent with _______ monetary policy.

contractionary

A reduction in the money supply designed to slow down economic activity is called ______ monetary policy.

contractionary

Actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation is _______ monetary policy.

contractionary

The actions taken by a country's central bank to contract the money supply and raise interest rates is called _______ monetary policy

contractionary

When aggregate demand rises, to decrease aggregate demand, we can use ________ monetary policy.

contractionary

By keeping interest rates high and investment and consumption spending low,: contractionary fiscal policy can increase the size of recessions. contractionary monetary policy can increase the size of recessions. contractionary monetary policy can help reduce the inflation rate. contractionary fiscal policy can help reduce the size of recessions.

contractionary monetary policy can help reduce the inflation rate.

if an economy is experiencing __ inflation, an increase in interest rates will reduce consumption and investment and will cool the economy. demand-pull lower cost-push average

demand-pull

The _____ rate is the interest rate at which banks can borrow money directly from the Federal Reserve.

discount

When banks borrow from the Fed, the interest rate they pay is set by the Fed, and it's called the ______ rate.

discount

The Federal Reserve has determined excess reserves will need to increase by $50 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve should increase the marginal propensity to consume. reduce the marginal propensity to consume. reduce the interest rate paid on reserves. increase the interest rate paid on reserves.

increase the interest rate paid on reserves.

All else equal, when the money supply ______ interest rates decrease.

increases

When aggregate demand rises, to avoid _______ and return to the long-run equilibrium, we must decrease aggregate demand.

inflation

Banks allow households who are spending less than their total income to keep their unused income in a safe place while also earning ______ .

interest

Monetary policy affects ________ rates charged on loans and paid on savings.

interest

The ______ rate is the payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved.

interest

The demand and supply for money interact to determine the _____ rate.

interest

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called the __ rate. interest inflation investment unemployment

interest

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called the _____ rate.

interest

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called the ______ rate.

interest

A decrease in the supply of money will cause the: interest rate to fall and the investment demand to rise. interest rate to rise and the quantity of investment demanded to rise. interest rate to rise and the quantity of investment demanded to fall. interest rate to fall and the quantity of investment demanded to rise.

interest rate to rise and the quantity of investment demanded to fall.

Changing the money supply can affect: prices, thereby changing aggregate supply. productivity, thereby changing aggregate demand. interest rates, thereby changing investment spending. aggregate supply, thereby changing aggregate demand.

interest rates, thereby changing investment spending.

Monetary policy affects aggregate demand by changing the quantity of ______ demanded in the economy.

investment

Monetary policy primarily affects the economy by either encouraging or discouraging ______ in new capital.

investment

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate describes ______ demand.

investment

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate describes: the money market. antitrust laws. the interest rate. investment demand.

investment demand.

The interest rate: changes once per year. is constant across banks. is the price of money. is usually called the real interest rate.

is the price of money.

When the Fed's Open Market Committee decides on a target for the federal funds rate,: it cannot be changed for at least another six months. it adjusts the reserve requirement and the discount rate to meet the target. it commits to buy and sell bonds through open market operations to maintain the target. the Board of Governor's must review the target and they make adjustments.

it commits to buy and sell bonds through open market operations to maintain the target.

If consumers decrease the amount of spending, aggregate demand shifts to the ______ .

left

Implementation and recognition lags cyclical asymmetry and the liquidity trap are all: conducted by the Federal Reserve Bank during recessions. targets of monetary policy. tools of monetary policy. limitations to effective monetary policy.

limitations to effective monetary policy.

Implementation and recognition lags cyclical asymmetry and the liquidity trap are all: tools of monetary policy. targets of monetary policy. conducted by the federal reserve bank during recessions. limitations to effective monetary policy.

limitations to effective monetary policy.

Use a(n) ____ -case i to represent interest rates and a(n) ____ -case I for investment.

lower upper

Use a(n) ______ -case i to represent interest rates and a(n) _______ -case I for investment.

lower upper

The reserve requirement is the _____ percentage of deposits that banks must keep on hand as reserves.

minimum

The reserve requirement is the ______ percentage of deposits that banks must keep on hand as reserves.

minimum

The reserve requirement is the _______ percentage of deposits that banks must keep on hand as reserves.

minimum

Governments use _______ policy to keep prices stable and encourage economic growth.

monetary

Governments use ____ _____ to keep prices stable and encourage economic growth.

monetary policy

The ______ multiplier is the amount by which a $1 change in reserves will change the money supply.

money

The overall change in the money supply, given an initial change in reserves, depends on the ______ multiplier. (Enter one word for the blank.)

money

The point where the money demand curve and the money supply curve intersect is called: short-run equilibrium. investment equilibrium. money market equilibrium. long-run equilibrium.

money market equilibrium.

The point where the money demand curve and the money supply curve is called: short-run equilibrium. long-run equilibrium. investment equilibrium. money market equilibrium.

money market equilibrium.

For every dollar of bonds the Fed buys or sells, the money supply will increase or decrease by an amount equal to the: money multiplier. marginal propensity to save. marginal propensity to consume. expenditures multiplier.

money multiplier.

With monetary policy changes in the: money supply the quantity of investment demanded move in the same direction but Real GDP moves in the opposite direction. money supply the quantity of investment demanded and Real GDP rarely move in the same direction. money supply the quantity of investment demanded and Real GDP all move in the same direction. Real GDP and the quantity of investment demanded move in the same direction but the money supply moves in the opposite direction.

money supply the quantity of investment demanded move in the same direction but Real GDP moves in the opposite direction.

Suppose the Federal Reserve has decided to increase the interest rate paid on reserves. As a result, the money demand will increase. money supply will increase. money demand will decrease. money supply will decrease.

money supply will decrease.

The ______ loans a bank makes the more revenue it can generate.

more

The money _______ is the amount by which a $1 change in reserves will change the money supply.

multiplier

When excess reserves are lent, additional excess reserves are created which are then used to create additional loans further increasing the money supply through the money ______ process.

multiplier

To influence the money supply and interest rates, the Federal Reserve buys or sells government debt. This is called: debt financing. open market operations. financial control. debt reserve adjustment.

open market operations.

To minimize the effects of recession, the Fed most often uses: changes in the required reserve ratio. changes in the discount rate. open market operations. changes in taxes.

open market operations.

When conducting monetary policy, the Fed most often uses: open market operations. changes in taxes. changes in the discount rate. changes in the required reserve ratio.

open market operations.

At low interest rates, the ______ cost of borrowing funds falls so banks will be more willing to borrow reserves.

opportunity

The discount rate is the interest rate that banks: charge one another for borrowing excess reserves from each other. pay when they borrow money directly from the Fed. receive when that deposit reserves. charge their best customers.

pay when they borrow money directly from the Fed.

The ______ rate is the lowest commercially available interest rate.

prime

The interest rate banks charge their best customers is the called " _____ rate."

prime

When aggregate demand falls, to avoid a(n) _______ and return to the long-run equilibrium, we must increase aggregate demand.

recession

The Federal Reserve has determined excess reserves will need to decrease by $750 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve should reduce the marginal propensity to consume. increase the interest rate paid on reserves. increase the marginal propensity to consume. reduce the interest rate paid on reserves.

reduce the interest rate paid on reserves.

A limitation of utilizing interest rates paid on reserves at the Federal Reserve as a tool of monetary policy is increases in the interest rate can become ineffective if banks do not have any excess reserves. banks may decide lending to consumers is less risky than the interest rate paid on reserves. the Federal Reserve may run out of money to pay banks interest. reductions in the interest rate can become ineffective if banks do not have any excess reserves.

reductions in the interest rate can become ineffective if banks do not have any excess reserves.

A limitation of utilizing interest rates paid on reserves at the Federal Reserve as a tool of monetary policy is the Federal Reserve may run out of money to pay banks interest. reductions in the interest rate can become ineffective if banks do not have any excess reserves. increases in the interest rate can become ineffective if banks do not have any excess reserves. banks may decide lending to consumers is less risky than the interest rate paid on reserves.

reductions in the interest rate can become ineffective if banks do not have any excess reserves.

______ reserves are equal to deposits times the reserve requirement.

required

______ reserves are the fraction or portion of checkable deposits that a bank must keep on hand.

required

_______ reserves are the fraction or portion of checkable deposits that a bank must keep on hand.

required

A reserve ______ specifies the fraction of checkable deposits that a bank must keep on hand.

requirement

On any given day, while some banks come up short on their _______ holdings, other banks have more than they need.

reserve

The ______ requirement is the fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with the Federal Reserve.

reserve

The fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with the Federal Reserve is called the: prime rate. federal funds rate. discount rate. reserve requirement.

reserve requirement.

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve, is called the: discount rate. reserve requirement. federal funds rate. prime rate.

reserve requirement.

The federal funds market is the market for borrowing and lending ______ between banks.

reserves

The federal funds market is the market for borrowing and lending reserves between _____ .

reserves

The federal funds rate is determined by the supply and demand for borrowed ______

reserves

The federal funds rate is determined by the supply and demand for borrowed _______ . (Enter one word for the blank.)

reserves

The money multiplier is the amount by which a $1 change in ______ will change the money supply.

reserves

The money multiplier is the amount by which a $1 change in _______ will change the money supply. (Remember enter only one word in the blank.)

reserves

he federal funds market is the market for borrowing and lending ______ between banks.

reserves

Since 2009, the decrease in interest rates especially affects ______ , many of whom rely upon their acquired wealth to maintain their standard of living. (Answer in one word for the blank)

retirees

A "bank _____ " occurs when depositors rush in mass to withdraw their funds from a bank.

run

When the Fed decreases interest rates during tough economic times, it is hoping that investment spending and output in the economy will increase, but _______ are negatively affected by this policy.

savers

When the change in needed reserves is negative, the Fed should ______ bonds equal to the needed decrease in reserves.

sell

When the equilibrium output is above potential output, the Fed should ______ bonds equal to the needed decrease in reserves.

sell

When you believe the Federal Reserve will soon _____ bonds, you should sell them as soon as you can.

sell

When the equilibrium output is above potential output, the Fed should: sell bonds equal to the needed increase in reserves. buy bonds equal to the needed increase in reserves. buy bonds equal to the needed decrease in reserves. sell bonds equal to the needed decrease in reserves.

sell bonds equal to the needed decrease in reserves.

When the Fed ______ bonds, it takes money out of the economy and reduces reserves which contracts the money supply, causing interest rates to ______ .

sells rise

The ______ is the difference between the interest rate a bank earns on a loan and the interest rate it pays.

spread

An increase in the money ______ will cause the interest rate to fall.

supply

By changing the money _______ , the Federal Reserve can influence real GDP.

supply

By manipulating the money ________ , the Federal Reserve can change ______ rates ,thus encouraging or discouraging additional investment.

supply interest

The Federal Reserve can influence real GDP by changing the money _______ which will influence gross ______ .

supply investment

Money market equilibrium occurs where: the money demand curve and the money supply curve intersect. the demand curve and the supply curve in the product market intersect. AD equals AS. where MR = MC.

the money demand curve and the money supply curve intersect.

Money market equilibrium occurs where: where MR = MC. the demand curve and the supply curve in the product market intersect. AD equals AS. the money demand curve and the money supply curve intersect.

the money demand curve and the money supply curve intersect.

If an economy experiences a change in excess reserves, the change in money supply will also depend on money demand. government spending. the money multiplier. the velocity of money.

the money multiplier.

An economy experiences a change in excess reserves of $2 billion, if the money multiplier is 5, how much as the money supply changed? −$10 billion $0.4 billion −$0.4 billion $10 billion

−$10 billion

An economy experiences a change in excess reserves of $2 billion, if the money multiplier is 5, how much as the money supply changed? −$10 billion $10 billion −$0.4 billion $0.4 billion

−$10 billion

The Federal Reserve has determined the money supply will need to increase by $100 billion in order to return the economy to full employment. If the money multiplier is 5, what is the required change in excess reserves? $20 billion $500 billion −$500 billion −$20 billion

−$20 billion

The Federal Reserve has determined the money supply will need to increase by $100 billion in order to return the economy to full employment. If the money multiplier is 5, what is the required change in excess reserves? −$20 billion $20 billion −$500 billion $500 billion

−$20 billion

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve refers to: a liquidity trap. cyclical asymmetry. a recognition lag. an implementation lag.

a liquidity trap.

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve refers to: an implementation lag. cyclical asymmetry. a liquidity trap. a recognition lag.

a liquidity trap.

A money market is: a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances. a payment made to agents that lend or save money expressed as an annualized percentage of the monetary amount lent or saved. the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate. the total potential output combinations of any two goods or services produced in an economy in one year.

a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

A money market is: a payment made to agents that lend or save money expressed as an annualized percentage of the monetary amount lent or saved. a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances. the total potential output combinations of any two goods or services produced in an economy in one year. the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate.

a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

The money multiplier equals: 1/marginal propensity to save. reserve requirement/expenditure multipler. marginal propensity to save/reserve requirement. 1/reserve requirement.

1/reserve requirement.

The money multiplier equals: marginal propensity to save/reserve requirement. 1/marginal propensity to save. reserve requirement/expenditure multipler. 1/reserve requirement.

1/reserve requirement.

With an MPC of 0.6, the expenditures multiplier will equal _____

2.5

Which two items are closely related to the reserve requirement? The discount rate and the interest rate The federal funds rate and the money supply. The discount rate and the money supply. A bank's reserves and the money supply

A bank's reserves and the money supply

Which of the following refers to a liquidity trap? The time between when a policy is enacted and when it has its full effect on the economy. A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve. The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy. The time between when an event affects an economy and the time when we recognize that effect in the data collected.

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve.

Which of the following refers to a liquidity trap? The time between when a policy is enacted and when it has its full effect on the economy. The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy. The time between when an event affects an economy and the time when we recognize that effect in the data collected. A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve.

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve.

If the Fed decreases the money supply: AS decreases. AD increases. AS increases. AD decreases.

AD increases.

If the Fed increases the money supply,: AD decreases. AS decreases. AS increases. AD increases.

AD increases.

If the Fed increases the money supply,: AS decreases. AD increases. AD decreases. AS increases.

AD increases.

f the Fed decreases the money supply: AD increases. AD decreases. AS decreases. AS increases.

AD increases.

If the demand for reserves increases, what will the Federal Reserve to do maintain the target Federal Funds rate? Sell bonds to the public to increase the quantity of reserves supplied. Buy bunds from the public to decrease the quantity of reserve supplied. Sell bonds to the public to decrease the quantity of reserves supplied. Buy bonds from the public to increase the quantity of reserves supplied.

Buy bonds from the public to increase the quantity of reserves supplied.

Suppose the current federal funds rate is 4%, and Fed wants to decrease the rate to 2%. How will the Fed decrease the Federal Funds rate? Selling bonds in the open market. Buying bonds in the open market. Keeping the amount of reserves the same.

Buying bonds in the open market.

What is the effect of contractionary monetary policy on the economy? Decrease in real GDP and increase inflation Decrease in real GDP and decrease inflation Increase in real GDP and decrease inflation Increase in real GDP and increase inflation

Decrease in real GDP and decrease inflation

What is the effect of contractionary monetary policy on the economy? Increase in real GDP and increase inflation Decrease in real GDP and increase inflation Increase in real GDP and decrease inflation Decrease in real GDP and decrease inflation

Decrease in real GDP and decrease inflation

Suppose the Federal Reserve plans to conduct expansionary monetary policy during a recession. Which of the following is a policy that would promote this decision? Decrease personal income taxes Increase personal income taxes Decrease the interest rate paid on reserves Increase the interest rate paid on reserves

Decrease the interest rate paid on reserves

The Federal Reserve Bank is also called the ____ .

Fed

Monetary policy refers to the action of the _______ Reserve to influence the supply of money and credit in the U.S. economy. (Use only one word for the blank)

Federal

What happens to the money supply, real GDP, and investment demand with expansionary monetary policy? Money supply increases, investment demand increases, and real GDP increases. Money supply increases, investment demand decreases, and real GDP decreases. Money supply decreases, investment demand decreases, and real GDP decreases. Money supply decreases, investment demand increases, and real GDP increases.

Money supply increases, investment demand increases, and real GDP increases.

Which of the following tools is most commonly used by the Fed to conduct monetary policy? Changes in taxes Open market operations Changes in the discount rate. Changes in government spending. Changes in the required reserve ratio.

Open market operations

Which of the following is a monetary policy tool used by the Federal Reserve? Paying interest on excess reserves Collecting personal income taxes Collecting corporate taxes on banks Government spending

Paying interest on excess reserves

Identify one reason why expansionary monetary policy might be less effective during a recession. People or businesses are pessimistic because of a recession and are eager to spend money. In a severe recession the national debt is likely to decrease. People or businesses are pessimistic because of a recession and are reluctant to spend money. In a severe recession the national debt is likely to increase.

People or businesses are pessimistic because of a recession and are reluctant to spend money.

Identify one reason why expansionary monetary policy might be less effective during a recession. People or businesses are pessimistic because of a recession and are eager to spend money. People or businesses are pessimistic because of a recession and are reluctant to spend money. In a severe recession, the national debt is likely to increase. In a severe recession, the national debt is likely to decrease.

People or businesses are pessimistic because of a recession and are reluctant to spend money.

Suppose the Federal Reserve is planning to conduct expansionary monetary policy during a recession. Which of the following is a tool they may consider using? Reducing the interest rate paid on excess reserves Reducing corporate taxes on banks Increasing personal income taxes Increasing government spending

Reducing the interest rate paid on excess reserves

How does selling bonds in the open market change the federal funds rate? Selling bonds increases the supply of reserves, causing the federal funds rate to decrease. Selling bonds decreases the supply of reserves, causing the federal funds rate to increase. Selling bonds increases the supply of reserves, causing the federal funds rate to increase. Selling bonds decreases the supply of reserves, causing the federal funds rate to decrease.

Selling bonds decreases the supply of reserves, causing the federal funds rate to increase.

How does selling bonds in the open market change the federal funds rate? Selling bonds increases the supply of reserves, causing the federal funds rate to decrease. Selling bonds increases the supply of reserves, causing the federal funds rate to increase. Selling bonds decreases the supply of reserves, causing the federal funds rate to increase. Selling bonds decreases the supply of reserves, causing the federal funds rate to decrease.

Selling bonds decreases the supply of reserves, causing the federal funds rate to increase.

During the Great Recession, what actions did the Federal Reserve Bank take to keep liquidity flowing? (Choose all that apply) The Fed bought commercial bonds, rather than simple government bonds. The Fed sold trillions of dollars of mortgage-back securities. The Fed increased short-term liquidity. The Fed sold commercial bonds rather than simple government bonds. The Fed purchased trillions of dollars of mortgage-back securities.

The Fed purchased trillions of dollars of mortgage-back securities. The Fed bought commercial bonds, rather than simple government bonds. The Fed increased short-term liquidity.

How does the Federal Reserve conduct open market operations to maintain the target federal funds rate when the demand for reserves decreases? The Fed will buy bonds from the public in order to increase the quantity of reserves supplied. The Fed will sell bonds to the public in order to increase the quantity of reserves supplied The Fed will buy bonds from the public in order to decrease the quantity of reserves supplied. The Fed will sell bonds to the public in order to decrease the quantity of reserves supplied.

The Fed will sell bonds to the public in order to decrease the quantity of reserves supplied.

How does the Federal Reserve conduct open market operations to maintain the target federal funds rate when the demand for reserves decreases? The Fed will sell bonds to the public in order to increase the quantity of reserves supplied The Fed will sell bonds to the public in order to decrease the quantity of reserves supplied. The Fed will buy bonds from the public in order to decrease the quantity of reserves supplied. The Fed will buy bonds from the public in order to increase the quantity of reserves supplied.

The Fed will sell bonds to the public in order to decrease the quantity of reserves supplied.

How is a change in the money supply calculated when there is a change in excess reserves? The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves. The change in the money supply equals a positive reserve requirement (rr) multiplied by the change in excess reserves. The change in the money supply equals a positive money multiplier (1/rr) multiplied by the change in excess reserves. The change in the money supply equals a negative reserve requirement (−rr) multiplied by the change in excess reserves.

The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.

How is a change in the money supply calculated when there is a change in excess reserves? The change in the money supply equals a negative reserve requirement (−rr) multiplied by the change in excess reserves. The change in the money supply equals a positive money multiplier (1/rr) multiplied by the change in excess reserves. The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves. The change in the money supply equals a positive reserve requirement (rr) multiplied by the change in excess reserves.

The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.

What is spread? The interest rate at which banks can borrow money directly from the Federal Reserve. The amount of reserves a bank can lend out to earn interest. The difference between the interest rate a bank earns on a loan and the interest rate it pays. The total amount of reserves that a bank must keep on hand to meet regulatory requirements.

The difference between the interest rate a bank earns on a loan and the interest rate it pays.

Which three values are all related so that when one changes so do the others? The dollar value of reserves held by banks, the reserve requirement, and the money supply. The dollar value of deposits held by banks, fiscal policy, and the money supply. The dollar value of deposits held by banks, bank reserves, and the money demand. The dollar value of liquid cash with the public, the reserve requirement, and the money supply.

The dollar value of reserves held by banks, the reserve requirement, and the money supply.

Which of the following does the Federal Reserve Board set a target for? The federal funds rate The student loan rate The discount rate The prime rate

The federal funds rate

What is the reserve requirement? The interest rate at which banks can borrow money directly from the Federal Reserve. The total amount of reserves that a bank must keep on hand to meet regulatory requirements. The amount by which a $1 change in reserves will change the money supply. The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed.

The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed.

Which of the following refers to cyclical asymmetry? The time between when an event affects an economy and the time when we recognize that effect in the data collected. A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve. The time between when a policy is enacted and when it has its full effect on the economy. The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy.

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy.

Suppose aggregate demand decreases, and the Federal Reserve decides to conduct expansionary monetary policy. How does this expansionary monetary policy affect the money market? The money demand decreases, thus decreasing the interest rate. The money supply decreases, thus increasing the interest rate. The money supply increases, thus decreasing the interest rate. The money demand increases, thus increasing the interest rate.

The money supply increases, thus decreasing the interest rate.

Suppose aggregate demand decreases, and the Federal Reserve decides to conduct expansionary monetary policy. How does this expansionary monetary policy affect the money market? The money demand decreases, thus decreasing the interest rate. The money supply increases, thus decreasing the interest rate. The money demand increases, thus increasing the interest rate. The money supply decreases, thus increasing the interest rate.

The money supply increases, thus decreasing the interest rate.

Which of the following are also names for the interest rate? The price of money Easy money The nominal interest rate The marginal interest rate

The price of money The nominal interest rate

When the Federal Reserve wants to buy bonds as part of monetary policy, who does the Fed buy bonds from? Other country's central banks The U.S. Treasury Department The public State governments

The public

When the Federal Reserve wants to buy bonds as part of monetary policy, who does the Fed buy bonds from? State governments The public Other country's central banks The U.S. Treasury Department

The public

Why does the Federal Reserve lower the discount rate during recessions? (Choose all that apply). To generate less income for banks To force banks to make fewer loans To ensure that the financial sector will not collapse To generate more income for banks

To ensure that the financial sector will not collapse To generate more income for banks

Bank panics have occurred several times in the United States although not since the Great Depression. (True or False) True False

True

The Federal Reserve acts independently of the rest of the federal government. (True or False) True False

True

A money market is: the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate. a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances. the total potential output combinations of any two goods or services produced in an economy in one year. a payment made to agents that lend or save money expressed as an annualized percentage of the monetary amount lent or saved.

a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

______ demand describes the overall or total demand for all final goods and services produced in an economy.

aggregate

_______ demand describes the overall or total demand for all final goods and services produced in an economy.

aggregate

One reason the Federal Reserve lowered the discount rate during the Great Recession was to: allow banks to borrow at lower rates. help consumers who had defaulted on their mortgages. buy up all the defaulted mortgages from banks. stop banks from making risky loans.

allow banks to borrow at lower rates.

The federal funds rate is the interest rate that banks pay when borrowing reserves from other _____

banks

The federal funds rate is the interest rate that banks pay when borrowing reserves from other ______ .

banks

Expansionary policy may not be as effective during a recession because: (Choose all that apply) banks believe loans are too risky. the nominal interest rate is already at 0%. businesses may choose not to invest. individuals may choose to save more rather than consume more. businesses choose to invest too much. banks may make too many loans in a recession.

banks believe loans are too risky. the nominal interest rate is already at 0%. businesses may choose not to invest. individuals may choose to save more rather than consume more.

Reductions in the interest rate can become ineffective if banks run out of excess reserves. banks cannot meet their reserve requirement. government debt becomes unsustainable. the Federal Reserve is unable to pay the interest.

banks run out of excess reserves.

Reductions in the interest rate can become ineffective if government debt becomes unsustainable. banks run out of excess reserves. the Federal Reserve is unable to pay the interest. banks cannot meet their reserve requirement.

banks run out of excess reserves.

The ______ the reserve requirement, the smaller the money multiplier.

bigger

A(n) ______ is a financial instrument that obligates a borrower to repay money with interest to a lender (which may be a government municipality or corporation).

bond

A(n) _______ is a financial instrument that obligates a borrower to repay money with interest to a lender (which may be a government municipality or corporation).

bond

When the federal government borrows money, it issues three different assets: ______, ________, and ______ .

bonds notes bills

The federal funds rate is determined by the supply and demand for _____ reserves. bank borrowed nominal federal

borrowed

Banks can expand reserves, and make more loans by: borrowing from the Federal Reserve. lowering their reserves. paying lower interest rates. attracting deposits and encouraging saving.

borrowing from the Federal Reserve. attracting deposits and encouraging saving.

Banks can expand reserves, and make more loans by: lowering their reserves. paying lower interest rates. borrowing from the Federal Reserve. attracting deposits and encouraging saving.

borrowing from the Federal Reserve. attracting deposits and encouraging saving.

When you believe the Federal Reserve will soon _____ bonds, you should buy them as soon as you can.

buy

When you believe the Federal Reserve will soon ______ bonds, you should buy them as soon as you can.

buy

In countering inflation,: expansionary monetary policy can lower interest rates increase gross investment and increase aggregate demand. contractionary monetary policy can lower interest rates increase gross investment and increase aggregate demand. expansionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand. contractionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand.

contractionary monetary policy can raise interest rates decrease gross investment and depress aggregate demand.

The Federal Reserve has decided to increase the interest rate paid on reserves. This policy is consistent with: contractionary fiscal policy. contractionary monetary policy. expansionary monetary policy. expansionary fiscal policy.

contractionary monetary policy.

The Federal Reserve has decided to increase the interest rate paid on reserves. This policy is consistent with: expansionary fiscal policy. contractionary monetary policy. contractionary fiscal policy. expansionary monetary policy.

contractionary monetary policy.

The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy refers to _____ asymmetry.

cyclical

If the Federal Reserve would like to increase the money supply, they should (increase/decrease) the interest rate paid on reserves.

decrease

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, investment would need to: decrease by $20 billion. decrease by $50 billion. increase by $50 billion. increase by $20 billion.

decrease by $20 billion.

To increase gross investment, the interest rate must: increase. remain the same. decrease.

decrease.

Historically, during and in the immediate aftermath of recessions when the economy was still recovering, the Federal Reserve the ______ federal funds rate.

decreased

When the Fed ______ the federal funds rate target the money supply increases and interest rates fall.

decreases

Investment demand can be described as: the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate. a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances. the payment made to agents that lend or save money expressed as an annualized percentage of the monetary amount lent or saved.

the negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate.

Expansionary policy may not be as effective during a recession because: (Choose all that apply) businesses choose to invest too much. the nominal interest rate is already at 0%. businesses may choose not to invest. banks believe loans are too risky. individuals may choose to save more rather than consume more. banks may make too many loans in a recession.

the nominal interest rate is already at 0%. businesses may choose not to invest. banks believe loans are too risky. individuals may choose to save more rather than consume more.

The money multiplier equals: reserve requirement/the overall change in the money supply. the initial change in reserves/reserve requirement. the initial change in reserves/the overall change in the money supply. the overall change in the money supply/the initial change in reserves. the overall change in the money supply/reserve requirement. reserve requirement/the initial change in reserves.

the overall change in the money supply/the initial change in reserves.

The money multiplier equals: the overall change in the money supply/reserve requirement. the overall change in the money supply/the initial change in reserves. reserve requirement/the initial change in reserves. the initial change in reserves/the overall change in the money supply. the initial change in reserves/reserve requirement. reserve requirement/the overall change in the money supply.

the overall change in the money supply/the initial change in reserves.

The money multiplier equals: the overall change in the money supply/the initial change in reserves. the overall change in the money supply/reserve requirement. reserve requirement/the initial change in reserves. the initial change in reserves/the overall change in the money supply. the initial change in reserves/reserve requirement. reserve requirement/the overall change in the money supply.

the overall change in the money supply/the initial change in reserves.

Banks don't perfectly hit their reserve requirement lending up to the maximum of their deposits because: their accounting systems cannot do live reporting. the reserve requirement changes frequently. sometimes people don't want to borrow. they do not control how much is deposited or withdrawn in any particular day.

they do not control how much is deposited or withdrawn in any particular day.

The actions taken by a country's central bank to contract the money supply and raise interest rates is called: expansionary fiscal policy. easy money. contractionary fiscal policy. tight money. expansionary monetary policy. contractionary monetary policy.

tight money. contractionary monetary policy.

The Fed uses open market operations: every day. as a tool to control bank administration. to keep the discount rate on target. to keep the federal funds rate on target.

to keep the federal funds rate on target.

Graphical the federal funds market has the federal funds rate on the ______ axis and the quantity of reserves on the ______ axis.

vertical horizontal

An economy experiences a change in excess reserves of $2 billion, if the money multiplier is 5, how much as the money supply changed? $10 billion −$10 billion −$0.4 billion $0.4 billion

−$10 billion


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