Macroeconomics Chapter 34 True and False

To increase the federal funds interest rate, the Federal Reserve buys bonds in the open market to increase the excess reserves of banks

False

In the cause-effect chain, an expansionary monetary policy increase the money supply, decreases the interest rate, increases investment spending, and increases aggregate demand

True

Monetary policy is limited by a time lag that occurs from when the problem is recognized to when the policy becomes operational

True

The prime interest rate is the rate that banks charge other banks for overnight loans of excess reserves at Federal Reserve banks

False

The goal of monetary policy is to lower interest rates

False

There is a transactions demand for money because households and business firms use money as a store of value

False

The least effective and least used tool of monetary policy is the open-market operations, in which government securities are bought and sold

False

A change in the reserve ratio will affect the multiple by which the banking system can create money, but it will not affect the actual or excess reserves of member banks

False

A restrictive monetary policy is designed to correct a problem of high unemployment and sluggish economic growth

False

An increase in the required reserve ratio will increase the lending capacity of banks

False

If the Federal Reserve Banks buy $15 in government securities from the public in the open market, the effect will be to increase the excess reserves of commercial banks by $15

False

It is generally agreed that fiscal policy is more effective than monetary policy in controlling the business cycle because fiscal policy is more flexible

False

Monetary policy is subject to more political pressure than fiscal policy

False

A expansionary monetary policy suffers from a "You can lead a horse to water, but you can't make the horse drink" problem

True

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

True

An increase in the price level would increase the transactions demand for money

True

Bond prices and interest rates are inversely related

True

If the Federal Reserve pays less interest on the reserves that banks hold at the Federal Reserve, the change in policy is likely to increase bank lending in the economy

True

If the monetary authority wished to follow a restrictive monetary policy, it would sell government securities in the open market

True

If the reserve ratio is lowered, some required reserves are turned into excess reserves

True

The Federal Reserve announces its changes in monetary policy by changing its targets for the federal funds rate

True

The Taylor rule provides a rule of thumb that is used for calculation the target that the Federal Reserve is likely to set for the federal funds rate

True

The securities owned by the Federal Reserve Banks are almost entirely U.S. government bonds

True

When commercial banks borrow from the Federal Reserve Banks at the discount rate, they increase their excess reserves and their money-creating potential

True

When the Federal Reserve sells securities in the open market, the price of these securities falls

True