Macro Chapter 16

The fundamental objective of monetary policy is to assist the economy in achieving:

A full-employment, noninflationary level of total output

Which of the following statements is true?

A lower interest rate raises the opportunity cost of holding money The supply of money is directly related to the interest rate Bond prices and the interest rate are inversely related The total demand for money is directly related to the interest rate ??

The transactions demand for money will shift to the:

Left when nominal GDP decreases

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:

Less excess reserves

Refer to the graph above. If the equilibrium interest rate is 4 percent, the supply of money must be:

$100 billion

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

$200 $225 $125 $175

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

$600 million, but by $800 million if the securities are purchased directly from commercial banks

Which line in the graph above would best illustrate the asset demand for money curve?

line 1

The interest rate that the Fed charges banks for loans to them through the traditional channel is called:

the discount rate

When bond prices go up, interest rates go

up ??

When the interest rate in the economy was 10%, the price of a bond with no expiration date and pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, the price of this bond will be about:

$8,333

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:

$9 billion

A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ________ in money-creating potential. If the reserve ratio is 14 percent, the bank has __________ in money-creating potential.

-$5,000; $1,000

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

The discount rate

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce:

The inflation rate

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

The interest rate decreases and nominal GDP increases

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

The money supply by potentially $200 million

After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:

The time lags of monetary policy

Which of the following best describes what occurs when monetary authorities sell government securities?

There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP

When the interest rate falls, the:

Total amount of money demanded increases

Disequilibrium in the money market is mainly corrected via a change in:

bond prices

Which of the following Fed actions will increase bank lending?

The Fed buys $400 million worth of Treasury bonds from commercial banks. The Fed lowers the discount rate from 4 percent to 2 percent.

If the Fed sells government securities to the general public in the open market:

The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed

The level of GDP, ceteris paribus, will tend to increase when:

The Federal Reserve buys government securities in the open market

Changes in interest rates, ceteris paribus, cause a shift in

The aggregate demand curve, but not the investment demand curve

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:

The demand for money increases

Other things equal, an increase in taxes on businesses will:

Decrease aggregate supply and decrease aggregate demand, and cause real GDP to fall

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

Decrease the excess reserves of member banks and thus decrease the money supply

Which of the following Fed actions increases the excess reserves of commercial banks?

Lower the reserve ratio

Lowering the discount rate has the effect of:

Making it less expensive for commercial banks to borrow from central banks

The Federal Reserve alters the amount of the nation's money supply by:

Manipulating the size of excess reserves held by commercial banks

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that:

On average, each dollar will be spent five times a year

The purchase and sale of government securities by the Fed is called:

Open market operations

The interest rate will fall when the:

Quantity of money supplied exceeds the quantity of money demanded

The purpose of an expansionary monetary policy is to increase:

Real GDP

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Reduce inflationary pressures in the economy

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Required reserve ratio Open-market operations Check collection Issuing currency ??

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to:

Sm3 and the interest rate will be 4 percent

The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $100, what will be the interest rate yield to a new buyer of the bond?

16.7 percent fixed amount / bond price=IR (150/900)*100=16.7

The major purpose of the Federal Reserve buying government securities in open market operations is to:

Allow banks to increase their lending

Lowering the reserve ratio:

Also reduces the discount rate Increases the total reserves in the banking system Reduces the amount of excess reserves the banks keep Turns required reserves into excess reserves ??

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:

Asset demand for money

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

Stimulate the economy

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to:

Buy government securities in the open market Increase the discount rate Increase the reserve ratio Sell government securities in the open market??

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

Buying government securities and lowering the discount rate

Refer to the graph above which shows the supply and demand for money where Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following an autonomous increase in the asset demand for money?

C

There is an asset demand for money primarily because of which function of money?

Store of value

If the Fed buys government securities from commercial banks in the open market:

Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the:

Supply of money curve is vertical

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to:

Decrease aggregate demand by increasing the interest rate from 4 to 6 percent

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately:

Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million ??

If bond prices decrease, then the:

Interest rate increase

An increase in the money supply is likely to reduce:

Interest rates

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is in equilibrium at the 6 percent rate of interest. If the money supply then decreases as shown, the transaction demand for money will change by:

$125 $0 $175 $75 ??

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the non-bank public, this action has the potential to increase money supply by a maximum of:

$16 billion, but only by $14 billion if the securities are purchased directly from commercial banks $14 billion, and by $20 billion if the securities are purchased directly from commercial banks $14 billion, but by $16 billion if the securities are purchased directly from commercial banks $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks??

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be:

$200 billion

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP?

$50 $150 $100 $225 ??

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by:

$75

Refer to the graph above. If the supply of money was $200 billion, the interest rate would be:

2 percent

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

25 percent of nominal GDP

Refer to the graph above. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be:

3 percent

Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:

5 percent

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is:

8,000

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

9 percent

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:

Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million

A decrease in the interest rate will cause a(n):

Decrease in the transactions demand for money Increase in the transactions demand for money Increase in the amount of money held as an asset Decrease in the amount of money held as an asset??

Other things equal, an appreciation of the U.S. dollar would:

Decrease net exports and decrease aggregate demand Increase the prices of imported resources and decrease aggregate supply Decrease the supply of money and decrease aggregate demand Increase productivity and increase aggregate supply ??

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should:

Decrease the interest rate from 10 to 8 percent Decrease the interest rate from 6 to 4 percent Increase investment spending from $30 to $60 billion Decrease the interest rate from 8 to 6 percent ??

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Y on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Decrease the money supply from $225 to $150 billion Increase aggregate demand from AD3 to AD2 Make no change in monetary policy Increase interest rates from 4 to 8 percent ??

Which of the following is a monetary policy intended to rein in inflation?

Decrease the money supply to shift the aggregate demand curve leftward

Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:

Decreased by $50 billion

An increase in the money supply, ceteris paribus, usually:

Decreases the interest rate and increases aggregate demand

Which of the following statements is correct?

Excess reserves may be found by subtracting actual from required reserves The supply of money declines when the public purchases securities from commercial banks Commercial bank reserves are a liability to commercial banks but an asset to Federal Reserve Banks Commercial banks reduce the supply of money when they purchase government bonds from the public ??

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except:

Exchange rate

Refer to the graph above which shows the supply and demand for money where Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following a decrease in the transactions demand for money?

F

The lending ability of commercial banks increases when the

Fed buys securities in the open market

Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

Fed has decided that money supply needed to be reduced Maximum money-creating potential of the banking system has been increased by $7 billion Banking system now has excess reserves of $3 billion Monetary multiplier has decreased ??

The conduct of monetary policy in the United States is the main responsibility of the:

Federal Reserve System

Other things equal, an increase in consumer wealth will:

Increase aggregate demand

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately:

Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million??

Assume that the MPC is 0.75 and that the price level is "sticky". If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to:

Increase by $32 billion

Other things equal, an improvement in the expected rate of net profit would:

Increase investment spending, real GDP, and the price level

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP?

Increase the money supply from $150 to $225 billion Decrease the money supply from $225 to $150 billion Increase the money supply from $75 to $150 billion Make no change in the money supply ??

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate demand curve AD3. What policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Increase the money supply from $75 to $150 billion

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Increase the money supply from $75 to $150 billion

An increase in nominal GDP will:

Increase the transactions demand and the total demand for money

A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. (assume that all proceeds from this bond sale are lent out) The money supply:

Increases by $100,000.

The Federal Reserve could reduce the money supply by:

Increasing the interest on reserves

The most recently-introduced tool of monetary policy is the:

Interest on reserves

Which line in the graph above would best illustrate the transactions demand for money curve?

Line 1 Line 3 Line 4 Line 2 ??

Which line in the graph above would best illustrate the supply of money curve?

Line 2 Line 3 Line 4 Line 1 ??

Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:

Rise to 6 percent

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary full-employment level of real GDP?

Sell government securities in the open market

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Sell government securities in the open market and decrease government spending

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective?

Selling government securities and raising the reserve ratio Selling government securities and raising the discount rate Buying government securities and lowering the reserve ratio Buying government securities and raising the discount rate ??

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

Which of the following varies directly with the interest rate?

The opportunity cost of holding money

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

The purchase of government securities in the open market and an increase in government spending

A consumer holds money to meet spending needs. This would be an example of the:

Transactions demand for money

If the Fed is trying to make the interest rates go down, it wants:

Unemployment to decrease