Chapter 15

Which of the following statements is correct?

Interest rates and bond prices vary inversely.

Before the Great Recession the most important tool of the Fed was

Open Market Operations

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. Assets Liabilities & Net Worth Reserves $60 Checkable Deposits $600 Securities 140 Stock Shares 260 Loans 260 Property 400 The commercial banking system has excess reserves of

Zero

A restrictive monetary policy is designed to shift the

aggregate demand curve leftward.

A decrease in the reserve ratio increases the

amount of excess reserves in the banking system.

The federal funds rate is the interest rate that _______ charge(s) _______.

banks; other banks

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.

It is costly to hold money because

in doing so, one sacrifices interest income.

If the Fed wants to discourage commercial bank lending, it will

increase the interest paid on excess reserves held at the Fed.

When the Fed lends money to a commercial bank, the bank

increases its reserves and enhances its ability to extend credit to bank customers

A contraction of the money supply

increases the interest rate and decreases aggregate demand.

If the Federal Reserve System buys government securities from commercial banks and the public,

it will be easier to obtain loans at commercial banks

An increase in the money supply will

lower interest rates and increase the equilibrium GDP.

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.

Which of the following is a tool of monetary policy?

open market operations

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. All figures are in billions. Which of the following would shift the money supply curve from MS1 to MS3?

purchases of U.S. securities by the Fed in the open market

The discount rate is the interest

rate at which the Federal Reserve Banks lend to commercial banks

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. Assets Liabilities & Net Worth Reserves $60 Checkable Deposits $600 Securities 140 Stock Shares 260 Loans 260 Property 400 Suppose the Fed sold $10 billion of U.S. securities to the banks. This would

reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and ultimately decrease the money supply (checkable deposits) by $100 billion.

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

reserve ratio

Refer to the diagram of the market for money. The vertical money supply curve Sm reflects the fact that

the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.