Chapter 16: Quiz Review

If there is an increase in the nation's money supply, the interest rate will

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

The basic determinant of the asset demand for money is the

interest rate.

When the reserve requirement is increased:

the excess reserves of member banks are reduced.

The Federal funds rate is

the interest rate the banks charge one another on overnight loans, whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers.

Refer to the given balance sheets. If the reserve ratio is 25 percent, commercial banks have excess reserves of:

$12.

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.

The basic objective of monetary policy is to

assist the economy in achieving a full-employment, non-inflationary level of total output.

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions and each question should be answered independently of changes specified in any preceding ones. Refer to the given data. Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. Assuming that the money multiplier is operating to full effect, to accomplish the desired increase, the Fed could:

buy $40 billion of U.S. securities from the banks.

Total money demand is the

horizontal sum of transaction money demand and asset money demand.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:

discount rate.

Suppose there is an increase in the total demand for money. In this case, the

equilibrium interest rate will rise.

Refer to the diagram of the market for money. The equilibrium interest rate is:

i2

Other things equal, a restrictive monetary policy during a period of demand-pull inflation will:

increase the interest rate, reduce investment, and reduce aggregate demand.

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. In this case the Federal funds rate should be

increased.

The basic determinant of the transactions demand for money is the

level of nominal GDP.

The transactions demand for money is most closely related to money functioning as a:

medium of exchange.

The discount rate is the interest:

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

When bond prices go up, interest rates go ___________.

Down.

Which of the following statements is correct?

Interest rates and bond prices vary inversely.

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

Loans to commercial banks.

The equilibrium rate of interest in the market for money is determined by the intersection of the:

supply-of-money curve and the total-demand-for-money curve.

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

Open-market operations

If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________ bonds.

Sell.

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

True

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the transactions demand for money can be represented by:

a vertical line.

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.