ECON Ch 26 The Federal Reserve System and monetary policy

d

If the Fed wishes to decrease the money supply, it a. buys stocks. b. sells stocks. c. can buy government bonds from the public in the nation's bond market. d. can sell government bonds to the public in the nation's bond market.

a

In a recession, appropriate monetary policy would tend to be for the Fed to bonds to AD. a. buy; increase b. buy; decrease c. sell; increase d. sell; decrease

c

In order to increase the rate of growth of the money supply, the Fed can a. raise the discount rate. b. raise the reserve requirement. c. buy U.S. governemnt bonds on the open market. d. U.S. government bonds on the open market.

d

In the long run, a sustained increase in growth of the money supply relative to the growth rate of potential real output will most likely a. cause the nominal interest rate to fall. b. cause the real interest rate to fall. c. reduce the natural rate of unemployment. d. increase real output growth. e. do none of the above.

b

The equation of exchange can be written as a. M × P = V × Q. b. M × V = P × Q. c. M × Q = P × V. d. Q × M = P × V.

c

The money demand curve shows a. the various amounts of money that individuals will hold at different price levels. b. the various amounts of money that individuals will spend at different levels of GDP. c. the various amounts of money that individuals will hold at different interest rates. d. the quantity of bonds that the Fed will buy at different price levels.

B

The most important role of the Federal Reserve System is: A. raising or lowering taxes B. regulating the supply of money C. increasing or reducing government spending D. none of the above.

b

To offset an inflationary boom, appropriate Fed policy could be to reserve requirements to AD. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

c

What will happen to the demand for money if real GDP rises? a. It will decrease. b. It will be unchanged. c. It will increase. d. It depends on what happens to interest rates.

a

When money demand increases, the Fed can choose between a. increasing interest rates or increasing the supply of money. b. increasing interest rates or decreasing the supply of money. c. decreasing interest rates or increasing the supply of money. d. decreasing interest rates or decreasing the supply of money.

b

According to the simple quantity theory of money, a change in the money supply of 6.5 percent would, holding velocity constant, lead to a. a 6.5 percent change in real GDP. b. a 6.5 percent change in nominal GDP. c. a 6.5 percent change in velocity. d. a 6.5 percent change in aggregate supply.

d

An important limitation of monetary policy is that a. it is conducted by people in Congress who are under pressure to get reelected every two years. b. when the Fed tries to buy bonds, it is often unable to find a seller. c. when the Fed tries to sell bonds, it is often unable to find a buyer. d. it must be conducted through the commercial banking system, and the Fed cannot always make banks do what it wants them to do.

c

Compared to fiscal policy, which of the following is an advantage of using monetary policy to attain macroeconomic goals? a. It takes a long time for fiscal policy to have an effect on the economy, but the effects of monetary policy are immediate. b. The effects of monetary policy are certain and predictable, while the effects of fiscal policy are not. c. The implementation of monetary policy is not slowed down by the same budgetary process as fiscal policy. d. The economists who help conduct monetary policy are smarter than those who help with fiscal policy.

d

Contractionary monetary policy will tend to have what effect? a. Increase the money supply and lower interest rates. b. Increase the money supply and increase interest rates. c. Decrease the money supply and lower interest rates. d. Decrease the money supply and increase interest rates.

a

If M increases and V increases, a. nominal GDP increases. b. nominal GDP decreases. c. nominal GDP stays the same. d. the effect on nominal GDP is indeterminate.

c

If a reduction in the money supply were desired in order to slow inflation, the Federal Reserve might a. decrease reserve requirements. b. buy U.S. government bonds on the open market. c. raise the discount rate. d. do either (b) or (c).

c

If nominal GDP is $3,200 billion and M1 is $800 billion, then velocity is a. 0.5. b. 2. c. 4. d. 8. e. 400.

d

If the Fed sells U.S. government bonds to the public in the the nation's bond market, a. the banking system has more reserves, and the money supply tends to grow. b. the banking system has fewer reserves, and the money supply tends to grow. c. the banking system has more reserves, and the money supply tends to fall. d. the banking system has fewer reserves, and the money supply tends to fall.

D

Reducing reserve requirements, other things being equal, would tend to a. increase the dollar volume of loans made by the banking system. b. increase the money supply. c. increase aggregate demand. d. do all of the above. e. do (a) and (b), but not (c).

b

The Fed is institutionally independent. A major advantage of this is that: a. monetary policy is subject to regular ratification by congressional votes. b. monetary policy is not subject to control by politicians. c. monetary policy cannot be changed once it has been determined. d. monetary policy will always be coordinated with fiscal policy. e. monetary policy will always offset fiscal policy.

b

The P in the equation of exchange represents the a. profit earned in the economy. b. average level of prices of final goods and services in the economy. c. marginal level of prices. d. marginal propensity to spend.

d

Which of the following Federal Reserve actions would most likely help counteract an oncoming recession? a. an increase in reserve requirements and an increase in the discount rate b. the sale of government bonds and an increase in the discount rate c. the sale of foreign currencies and an increase in reserve requirements d. the purchase of government bonds and a reduction in the discount rate

d

Which of the following is not a function of the Federal Reserve System? a. being a lender of last resort b. being concerned with the stability of the banking system c. serving as a major bank for the central government d. setting currency exchange rates

d

Which of the following statement is true? a. The FOMC of the Federal Reserve is unable to act quickly in emergencies. b. When the Fed is trying to constrain monetary expansion, it can be difficult to get banks to respond appropriately. c. Economic advisers, using sophisticated econometric models, can forecast what the economy will do in the future with reasonable accuracy. d. For government policy makers to be sure of doing more good than harm, they need far more accurate and timely information than experts can give them.

e

Which of the following statements is true? a. The Fed can change the environment in which banks act, but the banks themselves must take the steps necessary to increase or decrease the supply of money. b. Banks maintaining excess reserves hinder attempts by the Fed to induce monetary expansion. c. The Fed may be able to predict the impact of its monetary policies on loans by member banks, but the actions of global and nonbanking institutions can serve to offset, at least in part, the impact of monetary policies adopted by the Fed on the money and loanable funds markets. d. Given the difficulties of timing stabilization policy, an expansionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating. e. All of the above are true.

a

Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity? a. the Fed sells government bonds to the public in the nation's bond market b. an increase in government purchases, holding taxes constant c. a reduction in reserve requirements d. a reduction in taxes, holding government purchases constant