Macroeconomics Chapter 16

Beginning in 2008, the Fed was allowed to:

pay interest on reserves deposited at Fed banks.

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the:

prime interest rate.

If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should:

reduce the real federal funds rate by 1 percentage point.

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. Refer to the given information. If the price of this bond falls by $200, the interest rate will:

rise by 2.5 percentage points.

To increase the federal funds rate, the Fed can:

sell government bonds to commercial banks.

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.

Open-market operations refer to:

the purchase or sale of government securities by the Fed.

As part of its zero interest rate policy (ZIRP), the Federal Reserve:

used open-market operations to keep the federal funds rate between zero and 0.25 percent.

The opportunity cost of holding money:

varies directly with the interest rate.

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.

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.

The securities held as assets by the Federal Reserve Banks consist mainly of:

Treasury bills, Treasury notes, and Treasury bonds.

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

Loans to commercial banks.

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Open-market operations are done in order to lower interest rates; quantitative easing is merely intended to increase bank reserves.

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

Open-market operations.

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Open-market operations.

Federal Reserve Notes in circulation are:

a liability as viewed by the Federal Reserve Banks.

The Federal Reserve System regulates the money supply primarily by:

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

A decrease in the reserve ratio increases the:

amount of excess reserves in the banking system.

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

and reserves of commercial banks both decrease.

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply:

expands and commercial bank reserves increase.

Monetary policy is expected to have its greatest impact on:

Ig.

According to the Taylor rule:

if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.

It is costly to hold money because:

in doing so, one sacrifices interest income.

Interest paid on reserves held at the Fed:

incentivizes financial institutions to hold more reserves and reduce risky lending.

If the quantity of money demanded exceeds the quantity supplied:

the interest rate will rise.

The purchase of government securities from the public by the Fed will cause:

the money supply to increase.

Other things equal, which of the following would increase the federal funds rate?

A decline in excess reserves in the banking system.

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

In the United States, monetary policy is the responsibility of the:

Board of Governors of the Federal Reserve System.

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

Interest on reserves held at the Fed.

Which of the following statements is correct?

Interest rates and bond prices vary inversely.

Which of the following actions by the Fed would cause the money supply to increase?

Purchases of government bonds from banks.

Which of the following actions by the Fed most likely increase commercial bank lending?

Reducing the interest paid on reserves held at the Fed.

Which of the following statements is true?

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

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

The reserve ratio.

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

The reserve ratio.

A restrictive monetary policy is designed to shift the:

aggregate demand curve leftward.

The purpose of an expansionary monetary policy is to shift the:

aggregate demand curve rightward.

Reserves must be deposited in the Federal Reserve Banks by:

all depository institutions, that is, all commercial banks and thrift institutions.

To reduce the federal funds rate, the Fed can:

buy government bonds from the public.

If the Fed wants to lower the federal funds rate, it should:

buy government securities in the open market.

Open-market operations change:

commercial bank reserves but not the size of the monetary multiplier.

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will:

decrease by $2 billion.

A federal funds rate reduction that is caused by monetary policy will:

decrease the prime interest rate.

An increase in the legal reserve ratio:

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

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

discount rate.

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. Refer to the given information. If the price of this bond increases to $1,250, the interest rate will:

fall to 8 percent.

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually:

fall.

All else equal, when the Federal Reserve Banks engage in an expansionary monetary policy, the interest rates received on government bonds usually:

fall.

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

federal funds rate.

When the required reserve ratio is decreased, the excess reserves of member banks are:

increased and the multiple by which the commercial banking system can lend is increased.

A contraction of the money supply:

increases the interest rate and decreases aggregate demand.

The price of government bonds and the interest rate received by a bond buyer are:

inversely related.

An increase in nominal GDP increases the demand for money because:

more money is needed to finance a larger volume of transactions.

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:

neither an excess nor a deficiency of reserves.

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase.

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.

When a commercial bank borrows from a Federal Reserve Bank:

the commercial bank's lending ability is increased.

The four main tools of monetary policy are:

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