Macroeconomics Chapter Sixteen

A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves? $10,000 $0 $4,000 $100,000

$0

When bond prices go up, interest rates go __________. up nowhere down

down

Suppose that in 1980, the U.S. inflation rate was 12.5 percent and the unemployment rate reached 7.4 percent. Suppose that the target rate of inflation was 2.5 percent back then and the full-employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed's target interest rate?

18.1 percent

In 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full-employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed's target interest rate?

18.95 percent

Suppose that actual inflation is 3 percentage points, the Fed's inflation target is 2 percentage points, and unemployment is 1 percent below the Fed's unemployment target. According to the Taylor Rule, what value will the Fed want to set for its targeted interest rate?

4.5 percent

In 2009, the inflation rate reached negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed's target interest rate back then? Would that rate have been possible given the zero lower bound problem? Negative 4.6 percent; not possible. Positive 0.4 percent; possible. Negative 5.6 percent; not possible. Positive 6.4 percent; possible.

Negative 4.6 percent; not possible.

Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. The Fed lowers the discount rate from 4 percent to 2 percent.checked The Fed raises the discount rate from 5 percent to 6 percent.checked The Fed raises the reserve ratio from 10 percent to 11 percent.checked The Fed sells bonds to commercial banks.

The Fed lowers the discount rate from 4 percent to 2 percent.checked

True or False. A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

True

Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves, and no additional currency is held. a. What is the money multiplier? b. By how much will the total potential money supply change if the Federal Reserve changes the amount of reserves by -$50 million? c. Suppose the Federal Reserve wants to decrease the total money supply by $600 million. By how much should the Federal Reserve change reserves to achieve this goal?

a. 10 b. -$500 million c. -$60 million

The Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $280 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 20 percent. a. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? b. What other option could the Fed pursue—rather than permanently transferring the ownership of securities—to achieve its goal?

a. The Fed will want to buy a total of $56 billion in government securities. b. The Fed could use some amount of repos to effectively lend money to commercial banks

The Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $160 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 5 percent. a. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? b. What other option could the Fed pursue—rather than permanently transferring the ownership of securities—to achieve its goal?

a. The Fed will want to buy a total of $8 billion in government securities. b. The Fed could use some amount of repos to effectively lend money to commercial banks

If there is an increase in the nation's money supply, the interest rate will fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise. rise, investment spending will fall, aggregate demand will shift right, real GDP will fall, and the price level will rise. fall, investment spending will rise, aggregate demand will shift right, real GDP will rise, and the price level will fall. rise, investment spending will fall, aggregate demand will shift right, real GDP will rise, and the price level will fall.

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply: increases by $100,000. is unaffected by the transaction. decreases by $100,000.

increases by $100,000.

If the current point lies to the ________ of the center of the bullseye, the state of the economy will suggest opposite monetary policy stances. northwest or southwest northeast or southwest northwest or southeast northeast or southeast

northeast or southwest

If the current point lies to the ________ of the center of the bullseye, the Fed's stance on monetary policy will be clear. northwest or southeast northeast or southwest northwest or southwest northeast or southeast

northwest or southeast