ECON 102 monetary policy

Panel _______ illustrates what happens when the Fed decides to _______ government bonds and _______ the money supply.

sell; decrease

If the target rate of interest is higher than the current equilibrium interest rate, the Federal Reserve will _______ Treasury bills in the open market, ______ the supply of money, and ___________ the interest rate to the target rate.

sell; decrease; raise

At interest rates below equilibrium, people will want to:

shift their wealth into money.

Now that fast-food places such as McDonald's are accepting credit card payments:

the demand for money has decreased.

In a graph of a money demand curve, which of the following variables is plotted on the vertical axis?

the interest rate on liquid assets, like short-term CDs

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we expect:

the money demand curve to shift inward.

People forgo interest and hold money:

to reduce their transaction costs.

The Federal Reserve:

was established in 1913 in response to the Panic of 1907.

The Federal Reserve System was established in:

1913

Which of the following is not one of the reasons that the Japanese tend to keep large amounts of cash?

Banks have invested heavily in credit card technology.

Decisions about monetary policy are made by:

Federal Open Market Committee

24. The demand for money is higher in Japan than in the United States because:

Japanese interest rates are very low in comparison with interest rates in the United States.

Which of the following actions would allow banks to lend out more money?

a decrease in the discount rate

The economy could move from point g to point f as a result of:

a decrease in the money supply.

An increase in the supply of money with no change in demand for it will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.

an increase; a fall

Given a recessionary gap, the Federal Reserve will use monetary policy to _______ interest rates and _______ aggregate demand.

decrease; increase

If the Federal Reserve wants to close an inflationary gap, it will ________ the money supply and _________ the interest rate, thus __________ investment spending and GDP. The _____ curve will shift to the _________.

decrease; raise; lowering; aggregate demand ; left

The introduction of ATMs:

decreased the demand for cash because it reduced the cost of moving other assets into cash.

If during 2007 the interest rate on 1-month Treasury bills was 2.5% and during 2008 it was 2%, one would conclude that the opportunity cost of holding money:

decreased.

Contractionary monetary policy involves _______ the money supply, ________ interest rates, and _________ aggregate demand.

decreasing; increasing decreasing

To expand the money supply, the Federal Reserve would have to:

engage in an open purchase of Treasury bills.

If at the current interest rate the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

fall

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open-market operation. The result of this action will be a _____ in the interest rate as the money _____ curve shifts _____.

fall; supply; outward

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

falls; falls; rises

When banks borrow and lend reserves among each other, they are participating in the ______ market.

federal funds

Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. The money supply would:

increase by more than $100 million.

13. To _______ the money supply, the Federal Reserve could ________.

increase; conduct open-market purchases

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will ______ and the quantity demanded of money will ______.

increase; decrease

If the Federal Reserve conducts an open-market purchase, bank reserves ___________ and the money supply ___________.

increase; increases

12. To _______ the money supply, the Federal Reserve could ________.

increase; lower the reserve requirements

The concept of monetary neutrality describes a situation in the long run when:

increases in the money supply have no effect on real variables such as GDP but only raise the price level.

Expansionary monetary policy _________ the money supply, ______ interest rates, and ____________ consumption and investment.

increases; decreases; increases

Federal Reserve policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government bonds.

increases; demand for

The short-term interest rate applies to financial assets that mature within:

less than a year.

U.S. Treasury bills are a(n):

liability of the U.S. government but an asset of the Federal Reserve.

If the Federal Reserve increases the discount rate the:

money supply is likely to decrease.

23. The demand for money is higher in Japan than in the United States because:

most stores in Japan do not accept credit cards.

If the money market is initially in equilibrium at point E and the central bank sells bonds, then the interest rate will:

move toward point H.

Assume the money supply doubles, followed by a doubling of the wage rate and the price level. Under these circumstances, we can safely conclude that:

nominal output will double, but real output will remain unchanged.

The tool of monetary policy with which the Federal Reserve buys and sells government bonds is called:

open-market operations

To change the money supply, the Federal Reserve most frequently uses:

open-market operations

If the Federal Reserve uses expansionary monetary policy, there is a:

positive short-run effect on real GDP, but GDP remains equal to potential GDP in the long run.

If the economy is in a recessionary gap at point f, it could move to point g as a result of:

purchase of government securities in the open market.

A sale of bonds by the Federal Reserve __________ interest rates and __________ the money supply

raises; reduces

Suppose the Federal Reserve sells bonds. We can expect this transaction to________ the money supply, ________ bond prices, and _______ interest rates.

reduce; reduce; raise

The major tools of monetary policy available to the Federal Reserve System include:

reserve requirements, open-market operations, and the discount rate.

The federal funds rate is the interest rate on ______, and it is controlled by the _________.

reserves that banks lend to each other; Federal Open Market Committee

Suppose the economy is operating at potential output and there is an increase in the money supply. Aggregate output will ______ potential output, nominal wages will _______, and the short-run aggregate supply curve will shift ________.

rise above; rise; leftward