Macro Econ Chapter 16

(Last Word) In 2014, the European Central Bank (EC)

set negative interest rates to encourage bank lending.

The purpose of an expansionary monetary policy is to shift the

aggregate demand curve rightward.

Quantitative easing (QE) and traditional open-market purchase differ in that

an open-market purchase was intended to reduce the federal funds rate, while QE is not intended to do so.

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 nonbank public, this action has the potential to increase money supply by a maximum of

$16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.

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.

Monetary policy is expected to have its greatest impact on

Ig.

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

True

The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.

True

The major advantages of monetary policy include its flexibility, speed, and political palatability.

True

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

cyclical asymmetry of monetary policy.

Suppose that, for every 1-percentage-point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will

decline by $0.5 billion and the money supply will decline by $2.5 billion.

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

decrease the money supply to shift the aggregate demand curve leftward

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, and the maximum money-lending potential of the commercial banking system will increase by $400 million.

A contraction of the money supply

increases the interest rate and decreases aggregate demand.

Raising the interest paid on reserves has the effect of making it

less costly for banks to hold excess reserves.

Open-market operations include

repos and reverse repos.

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, do bond reverse-repos, and cut government spending