ECON 2301 CHAPTER 16

Open-market operations refer to

the purchase or sale of government securities, as well as collateralized money loans, by the Fed.

Which of the following tools of monetary policy has not been used since 1992?

the reserve ratio

Refer to the given market-for-money diagrams. Curve D1 represents the

transactions demand for money.

The opportunity cost of holding money

varies directly with the interest rate.

The asset demand for money

varies inversely with the rate of interest.

Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would

buy government securities in the open market.

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

decrease; increase

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

discount rate.

The interest rate that banks charge one another on overnight loans is called the

federal funds rate.

It is costly to hold money because

in doing so, one sacrifices interest income.

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.

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

store of value.

The four main tools of monetary policy are

the discount rate, the reserve ratio, interest on excess reserves, and open-market operations. Correct

If the quantity of money demanded exceeds the quantity supplied,

the interest rate will rise.

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

$200 billion.

Interest Rate Transactions Demand for Money Asset Demand for Money Money Supply 2% $220 $300 $460 4 220 280 460 6 220 260 460 8 220 240 460 10 220 220 460 Based on the given table, the equilibrium interest rate is

8 percent.

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

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

I2.

Monetary policy is expected to have its greatest impact on

Ig.

Refer to the given market-for-money diagrams. If the Federal Reserve increased the stock of money, the

S curve would shift rightward and the equilibrium interest rate would fall.

Which of the following statements is true?

The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations.

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

a downsloping line or curve from left to right.

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.

The prime interest rate

affects investment spending, while the federal funds rate affects overnight borrowing of bank reserves.

The total demand for money curve will shift to the right as a result of

an increase in nominal GDP.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

and reserves of commercial banks both decrease.

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to

increase the money supply.

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

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

If the Fed were to reduce the legal reserve ratio, we would expect

lower interest rates, an expanded GDP, and a higher rate of inflation.

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

medium of exchange.

Generally, the prime interest rate

moves in the same direction as the federal funds rate.

The Fed directly sets

neither the federal funds rate nor the prime interest rate.

In which of the following situations is it certain that the quantity of money demanded by the public will decrease?

nominal GDP decreases and the interest rate increases

The commercial banking system borrows from the Federal Reserve 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

Which of the following monetary policy tools was introduced in 2008?

paying interest on excess reserves held at the Fed

If the demand for money and the supply of money both decrease, the equilibrium

quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

The purpose of a restrictive monetary policy is to

raise interest rates and restrict the availability of bank credit.

The discount rate is the interest

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

The desire to hold money for transactions purposes arises because

receipts of income and expenditures are not perfectly synchronized.