MacroEconomics Chapter 16

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions. The commercial banking system has excess reserves of

zero

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

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.

In the United States, monetary policy is the responsibility of the

Board of Governors of the Federal Reserve System.

Which of the following statements is correct?

Interest rates and bond prices vary inversely.

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Open-market operations are focused exclusively on U.S. government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities.

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

a tax increase and an increase in the money supply

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.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

expands and commercial bank reserves increase.

If the Fed were to reduce the legal reserve ratio, we would expect

lower interest rates, an expanded GDP, and a higher rate of inflation.

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.

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits

of commercial banks are unchanged, but their reserves increase.

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the

prime interest rate.

Which of the following actions by the Fed would cause the money supply to increase?

purchases of government bonds from banks

The discount rate is the interest

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

The opportunity cost of holding money

varies directly with the interest rate.

Monetary policy is thought to be

more effective in controlling demand-pull inflation than in moving the economy out of a recession.

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

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.

The liquidity trap refers to the situation where

the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.

When a commercial bank borrows from a Federal Reserve Bank,

the commercial bank's lending ability is increased.

The four main tools of monetary policy are

the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of

$1,000.

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions. The monetary multiplier for the commercial banking system is

10

Based on the given table, the equilibrium interest rate is

8 percent.

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

can be implemented more quickly.

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result,

commercial bank reserves are increased by $10,000.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3, labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 8 percent and the goal of the Fed is full-employment output of Qf, it should

decrease the interest rate from 8 percent to 6 percent.

A federal funds rate reduction that is caused by monetary policy will

decrease the prime interest rate.

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

decrease; increase

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

federal funds rate.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should

increase the interest rate from 4 percent to 6 percent.

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

Which of the following will increase commercial bank reserves?

the purchase of government bonds in the open market by the Federal Reserve Banks