Macroeconomics - Chapter 15 - Monetary Policy

Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve System? a) The American people's loss of confidence in the nation's currency. b) Some severe banking crises at the end of the 19th century and early 20th century. c) The need to control inflation. d) World War I.

b) Some severe banking crises at the end of the 19th century and early 20th century.

The United States is divided into __________ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of __________ members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a __________ year, renewable term as the chairman.

12; 7; 4

What is inflation targeting? a) Committing the central bank to achieve an announced level of inflation. b) Another name for contractionary monetary policy. c) A target that links the Fed's target for the federal funds rate to inflation. d) A policy that attempts to reduce inflation to zero.

a) Committing the central bank to achieve an announced level of inflation.

Monetary policy is defined as: a) The actions the Federal Reserve takes to manage the money supply and interest rates. b) The actions the Federal Reserve takes to manage tax policy and interest rates. c) The actions Congress takes to manage the money supply and interest rates. d) The actions Congress takes to manage tax policy and interest rates.

a) The actions the Federal Reserve takes to manage the money supply and interest rates.

The indirect effect of an increase in the money supply works through a) a decrease in the interest rate increasing investment and consumption. b) an increase in consumption due to increases in household money balances. c) an increase in the stock exchange index indicating an improvement in investors' optimism increasing investment. d) an improvement in consumers' expectations causing aggregate demand to increase.

a) a decrease in the interest rate increasing investment and consumption.

The net export effect of contractionary monetary policy predicts that a country's a) imports decrease as the money supply contracts. b) exports decrease as the money supply contracts. c) value of currency depreciates as the money supply contracts. d) experience will include all of the above.

b) exports decrease as the money supply contracts.

Which of the following is a true statement? a) The direct effect of an expansionary monetary policy is to increase aggregate supply and the indirect effect is to increase aggregate demand. b) The direct effect of an expansionary monetary policy is to increase consumption spending and indirect effect is to increase interest rates. c) Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand. d) The direct effect of an expansionary monetary policy is to increase aggregate demand and the indirect effect is to increase aggregate supply.

c) Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.

In the graph of the money market, what could cause the money supply curve to shift from MS1 to MS2? a) Congress increases the money supply. b) The Fed increases the money supply by deciding to purchase U.S. Treasury securities. c) The Fed decreases the money supply by deciding to sell U.S. Treasury securities. d) The Fed decreases the money supply by raising interest rate.

c) The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

The Federal Reserve has multiple economic goals for monetary policy to achieve, however, it can be difficult to manage all the goals at once. Which of the following is not true regarding the multiple goals of the Fed? a) Achieving the goals of price stability and economic growth can be difficult because often the forces that lead to economic growth also can make prices increase at a rate higher than the Fed would desire. b) AS the Fed tried to ensure economic growth, it can also focus on financial market stability because efficient financial markets make it easier for investment to occur and create additional economic growth. c) The goal of financial market stability means that the Fed tried to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money. d) Having dual goals of high employment and economic growth does not create many issues because most of the time when the economy experiences economic growth, the economy also achieves higher rates of employment.

c) The goal of financial market stability means that the Fed tried to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.

Which of the following is not a viable monetary policy target for the Fed? a) The interest rate. b) The inflation rate. c) The money demand. d) The money supply.

c) The money demand.

Contractionary monetary policy causes the a) amount of government spending to increase. b) price level to increase. c) interest rate to increase. d) dollar value of real GDP to increase.

c) interest rate to increase.

The Federal Reserve Bank of New York is always a voting member of the FOMC because a) it always has an employee as a member of the Board of Governors. b) it is the largest of the Federal Reserve districts. c) it carries out the policy directives of the FOMC. d) it has the most political affiliations of the Federal Reserve districts.

c) it carries out the policy directives of the FOMC.

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal, a) prices should not be increasing and the inflation rate should be near zero percent. b) the level of unemployment should be low, less than 6%, and the inflation rate should be near zero percent. c) the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent. d) the inflation rate should be consistent but the rate of inflation can be zero, low (such as 1-3%), or high (such as 8-10%).

c) the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent.

Which of the following is a function of the Federal Reserve System? a) Taking deposits of lenders to pool savings and make loans. b) Issuing certificates of deposit and creating money market deposit accounts. c) Providing financing for consumer loans and mortgages. d) Acting as a lender of last resort to commercial banks. e) All of the above are functions of the Federal Reserve System.

d) Acting as a lender of last resort to commercial banks.

The (FOMC) Federal Open Market Committe a) includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). b) determines the target funds rate and direction of open market operation policies. c) makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. d) All of the above. e) A and B only.

d) All of the above.

In the graph of the money market, what could cause the demand curve to shift from MD1 to MD2? a) An increase in real GDP. b) A reduction in the interest rate. c) An increase in the price level. d) Both (a) and (c).

d) Both (a) and (c).

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment? a) Discount rate. b) M1 definition of the money supply. c) M2 definition of the money supply. d) Federal funds rate.

d) Federal funds rate.

The Fed changes the discount rate as a part of its policy to reach all of the following objectives except: a) Stability of financial markets and institutions b) Economic growth c) Price stability d) High unemployment

d) High unemployment

What is the basic structure of the Federal Reserve Bank? a) There is one major bank located in Washington, D.C. with branch banks located in every major city. b) There is one major bank with 25 branches. c) It is the combination of all private banks in the U.S. excluding Savings and Loans banks. d) There are 12 district banks, a Board of Governors and a Federal Open Market Committee.

d) There are 12 district banks, a Board of Governors and a Federal Open Market Committee.

In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." What is the relationship between the federal funds rate falling and the money supply increasing? a) Cutting the federal fund rate increases the money supply. b) Cutting the federal fund rate increases saving, which increases the money supply. c) Cutting the federal funds rate increases bank reserves, which increases the money supply. d) To decrease the federal funds rate, the Fed must increase the money supply. How does lowering the target for the federal funds rate "pour money" into the banking system? a) To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves. b) To increase the money supply, the Fed sells bonds on the open market, which increases bank reserves. c) To increase the money supply, the Fed decreases taxes, which increases consumer spending. d) To increase the money supply, the Fed increases government spending, which increases aggregate demand.

d) To decrease the federal funds rate, the Fed must increase the money supply. a) To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

Consider the variables the shift money demand and money supply. Match each of the following scenarios with one of the four graphs of money demand and money supply. a. More widespread use of mobile wallets b. Fed decreases the required reserve ratio. c. Fed sells Treasury securities. d. Real GDP increases. Figure A illustrates a) The Fed decreasing the required reserve ratio b) The Fed selling Treasury securities c) more widespread use of mobile wallets d) real GDP increases. Figure B illustrates a) the Fed selling Treasury securities b) more widespread use of mobile wallets. c) real GDP increases d) The Fed decreasing the required reserve ratio. Figure C illustrates a) real GDP increases b) more widespread use of mobile wallets c) the Fed decreasing the required reserve ratio d) the Fed selling Treasury securities Figure D illustrates a) more widespread use of mobile wallets b) real GDP increases c) the Fed selling Treasury securities d) the Fed decreasing the required reserve ratio

d) real GDP increases a) the Fed selling Treasury securities b) more widespread use of mobile wallets d) the Fed decreasing the required reserve ratio