Macros 201s - Chapter 16

Describe the two problems or complications of monetary policy -

1.Recognition and operational lag - It still takes time to recognize when there is a problem. Moves faster, but takes time to move through the economy to change the AD and PL. 2. Liquidity trap- Just because the fed lowers interest rates does not mean that the banks will lend money

Which of the following will increase commercial bank reserves? A) the purchase of government bonds in the open market by the Federal Reserve Banks B) a decrease in the reserve ratio C) an increase in the discount rate D) the sale of government bonds in the open market by the Federal Reserve Banks

A. The purchase of government bonds in the open market by the federal reserve banks

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease. D) and reserves of commercial banks are both unchanged.

A. of commercial banks are unchanged, but their reserves increase

The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease.

A. of commercial banks are unchanged, but their reserves increase

An increase in the legal reserve ratio: A) increases the money supply by increasing excess reserves and increasing the monetary multiplier. B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

B. Decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier

The purchase of government securities from the public by the Fed will cause: A) commercial bank reserves to decrease. B) the money supply to increase. C) demand deposits to decrease D) the interest rate to increase.

B. The money supply to increase

The securities held as assets by the Federal Reserve Banks consist mainly of: A) corporate bonds. B) Treasury bills and Treasury bonds. C) common stock D) certificates of deposit

B. Treasury Bills and treasury bonds

Federal Reserve Notes in circulation are: A) an asset as viewed by the Federal Reserve Banks. B) a liability as viewed by the Federal Reserve Banks. C) neither an asset nor a liability as viewed by the Federal Reserve Banks. D) part of M1, but not of M2 or M3.

B. a liability as viewed by the federal reserve banks

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease. D) of commercial banks are both unchanged.

B. and reserves of commercial banks both decrease

Open-market operations change: A) the size of the monetary multiplier, but not commercial bank reserves. B) commercial bank reserves, but not the size of the monetary multiplier. C) neither commercial bank reserves nor the size of the monetary multiplier. D) both commercial bank reserves and the size of the monetary multiplier.

B. commercial bank reserves, but not the size of the monetary multiplier

Explain how the federal reserve can expand the money supply by buying government securities from commercial banks and from the public.

By buying government securities it will be easier to obtain loans at commercial banks which increases money suppy

Explain how the federal reserve can contract the money supply by selling government securities to commercial banks and the public

By selling government securities, there will not be as many loans, which will decrease the money supply.

12. In the United States monetary policy is the responsibility of the: A) U.S. Treasury. B) Department of Commerce. C) Board of Governors of the Federal Reserve System. D) U.S. Congress.

C. Board of governors of the federal reserve system

If the Fed were to increase the legal reserve ratio, we would expect: A) lower interest rates, an expanded GDP, and depreciation of the dollar. B) lower interest rates, an expanded GDP, and appreciation of the dollar. C) higher interest rates, a contracted GDP, and appreciation of the dollar. D) higher interest rates, a contracted GDP, and depreciation of the dollar.

C. Higher interest rates, a contracted GDP and appreciation of the dollar

If the Federal Reserve System buys government securities from commercial banks and the public: A) commercial bank reserves will decline. B) commercial bank reserves will be unaffected. C) it will be easier to obtain loans at commercial banks. D) the money supply will contract.

C. It will be easier to obtain loans at commercial banks

The three main tools of monetary policy are: A) tax rate changes, the discount rate, and open-market operations. B) tax rate changes, changes in government expenditures, and open-market operations. C) the discount rate, the reserve ratio, and open-market operations. D) changes in government expenditures, the reserve ratio, and the discount rate.

C. The discount rate, the reserve ratio and the open market operations

Assuming no currency drains, when the Federal Reserve Banks purchase government securities the reserves of commercial banks are: A) decreased by a multiple of the amount of the purchase. B) decreased by the amount of the purchase. C) increased by a multiple of the amount of the purchase. D) increased by the amount of the purchase.

D. Increased by the amount of the purchase

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply: A) contracts and commercial bank reserves increase. B) expands and commercial bank reserves decrease. C) contracts and commercial bank reserves decrease. D) expands and commercial bank reserves increase.

D. expands and commercial bank reserves increases

Expansionary Monetary Policy

Increasing the money supply to encourage economic growth - BUYing securities

Federal Funds Rate

Interest rate banks charge other banks for over-night loans

Discount rate

Lending through the discount window to banks.

Higher discount interest rates=

Less banks making loans, Which means less money, slows down economy (CP)

Increase Reserves =

Less money for banks to lend, slows down economy (CP)

Advantages of monetary Policy

Less political pressure (Can do unpopular things) and works a lot faster than fiscal policy

Lower discount interest rates =

More banks making loans, Which creates money and speeds up economy (EP)

Decrease Reserves =

More money for banks to lend, Speeds up economy (EP)

Contractionary Monetary Policy

Slowing down the growth of the money supply to control inflation- SELLing securities

Open Market Operations

The fed buys and sells securities to change the amount of money in the economy.