Chapter 8: Review Questions

The Federal Open Market Committee (FOMC) A) determines the government's tax policy. B) determines the Fed's monetary policy. C) oversees all transactions on the stock market. D) lends to the least credit-worthy customers who otherwise can't get loans.

determines the Fed's monetary policy.

Members of the Federal Reserve System's Board of Governors A) are elected for life. B) hold 14-year staggered terms. C) are a special subcommittee of the Senate. D) are elected at large by district banks.

hold 14-year staggered terms.

When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; stay the same B) increase; increase C) increase; decrease D) decrease; increase

increase; stay the same

In the short run, when the Fed increases the quantity of money A) bond prices rise and the interest rate falls. B) bond prices fall and the interest rate rises. C) the demand for money increases. D) the supply of money curve shifts leftward.

bond prices rise and the interest rate falls.

The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________. A) long run; real GDP B) short run; velocity C) long run; velocity D) long run; price level

long run; price level

Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy. B) monetary policy. C) fiscal policy. D) bank antitrust policy.

monetary policy.

The opportunity cost of holding money is the A) nominal interest rate on assets other than money. B) price of goods and services. C) level of wage and rental income. D) ease with which an asset can be converted into a means of payment.

nominal interest rate on assets other than money.

During periods of inflation, which function of money is most severely affected? A) medium of exchange B) unit of account C) means of payment D) store of value

store of value

When the Fed buys one million dollars in government securities from a commercial bank, A) the Fed's total assets decrease by one million dollars. B) the commercial bank's total assets increase by one million dollars. C) there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease. D) All of the above answers are correct.

there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease.

In October of 2012, the interest rate on money market accounts was about 0.4 percent. In 2007, the interest rate on money market accounts was about 4.0 percent. What has been the impact on the demand for money curve from this fall in the interest rate? A) the money demand curve shifted to the right B) the money demand curve shifted to the left C) there was a downward movement along the demand for money curve D) there was an upward movement along the demand for money curve

there was a downward movement along the demand for money curve

An open market operation occurs when the ________ buys or sells securities ________. A) Federal Reserve System; from or to the federal government B) Federal Reserve System; in the open market C) a commercial bank; from or to the federal government D) a commercial bank; from or to the public

Federal Reserve System; in the open market

Which of the following is a liability on the balance sheet of the Federal Reserve System? A) Federal Reserve notes B) U.S. government securities C) loans to depository institutions D) None of the above are correct because they are all liabilities of the Federal Reserve

Federal Reserve notes

In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated? A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down. B) Banks will lend out the surplus, lowering interest rates. C) The Federal Reserve will destroy currency, reducing the quantity of money. D) The high interest rate increases the demand for money, eliminating the surplus.

People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.

The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet? A) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million. B) Securities increase by $100 million and reserves of Bank A increase by $100 million. C) Securities increase by $100 million and reserves of Bank A decrease by $100 million. D) Securities decrease by $100 million and reserves of Bank A increase by $100 million.

Securities increase by $100 million and reserves of Bank A increase by $100 million.

Which of the following is NOT an economic benefit of depository institutions? A) They borrow long and lend short. B) They create liquidity. C) They pool risk. D) They reduce the cost of monitoring borrowers.

They borrow long and lend short.

The initial impact of the Fed's open market sale of government securities to banks is A) an increase in the quantity of money by some multiple of the dollar volume of the sale. B) an increase in bank deposits at the Fed. C) a decrease in the quantity of money by some multiple of the dollar volume of the sale. D) a decrease of the banking system's reserve deposits at the Fed.

a decrease of the banking system's reserve deposits at the Fed.

Monetary policy is conducted A) only by the Federal Reserve. B) by the Federal Reserve and the President of the United States. C) by the Federal Reserve, the President of the United States, and Congress. D) by the Federal Reserve with veto power residing with the President of the United States.

only by the Federal Reserve.

When the nominal interest rate rises, the quantity of money demanded decreases because A) people will buy fewer goods and hold less money. B) the price level also rises and people decrease their demand for money. C) people move funds from interest-bearing assets into money. D) people shift funds from money holdings to interest-bearing assets.

people shift funds from money holdings to interest-bearing assets.

The velocity of circulation is A) equal to the price level multiplied by real GDP. B) equal to the quantity of money multiplied by nominal GDP. C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP. D) average quantity of money that exists during a year.

the average number of times a dollar bill is used in a year to buy the goods and services in GDP.

Which of the following is NOT one of the Fed's monetary policy tools? A) last resort loans B) the required reserve ratio C) the income tax rate D) buying and selling U.S. government securities

the income tax rate