Econ Module 11

If Federal Reserve notes and coins are $765 billion, and banks' reserves at the Fed are $8 billion, the gold stock is $11 billion, and the Fed owns $725 billion of government securities, what does the monetary base equal? A) $773 billion B) $1,509 billion C) $765 billion D) $744 billion E) $776 billion

A) $773 billion

The main policy-making body of the Federal Reserve System is the A) Federal Open Market Committee. B) Board of Presidents of the Federal Reserve Banks. C) Board of Advisors. D) Board of Governors of the Federal Reserve System. E) Federal Monetary Conditions Board.

A) Federal Open Market Committee.

If the Fed lowers the federal funds rate, which of the following will NOT happen? A) The price level falls. B) The real interest rate falls. C) Real GDP increases. D) Aggregate demand increases. E) Other short-term interest rates fall.

A) The price level falls.

Which of the following is NOT an effect from a change in the federal funds rate? A) change in government expenditures B) change in aggregate demand C) change in the quantity of money D) change in the real interest rate E) change in investment

A) change in government expenditures

Open market operations are when the Fed buys or sells A) government securities from banks or some other business. B) corporate securities from banks or some other business. C) gold. D) corporate securities from the government. E) government securities from the government

A) government securities from banks or some other business.

Which of the following statements are correct? i. Congress does not play a role in making monetary policy decisions. ii. The FOMC meets eight times a year to make monetary policy decisions. iii. The President of the United States appoints members of the Board of Governors and the Chairman of the Board of Governors, but the President has little other formal authority over monetary policy. A) i, ii, and iii B) ii and iii C) i,and ii D) i and iii E) ii only

A) i, ii, and iii

Suppose the Federal Reserve lowers the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to a year afterwards i. Quantity of money increases. ii. Quantity of reserves increases. iii. Aggregate demand increases. iv. The long-term real interest rate falls. A) ii-i-iv-iii B) iii-iv-i-ii C) i-ii-iii-iv D) ii-i-iii-iv E) i-ii-iv-iii

A) ii-i-iv-iii

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? i. government expenditure on goods and services and taxes ii. the government budget deficit or surplus iii. changes in the federal funds rate A) iii only B) i and ii C) ii and iii D) ii only E) i and iii

A) iii only

The Federal Reserve monetary policy goals of maximum employment means A) keeping the unemployment rate close to the natural unemployment rate. B) a zero percent natural unemployment rate. C) aiming for an amount of employment that exceeds full employment. D) a zero percent unemployment rate. E) cyclical unemployment should not necessarily be minimized.

A) keeping the unemployment rate close to the natural unemployment rate.

The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________. A) lower; increase aggregate demand B) raise; increase aggregate demand C) raise; decrease aggregate demand D) lower; increase aggregate supply E) lower; decrease aggregate supply

A) lower; increase aggregate demand

A decrease in the federal funds rate A) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand. B) increases other short-term interest rates, decreases investment, and decreases aggregate demand. C) decreases the supply of loanable funds, raises the real interest rate, and decreases aggregate demand. D) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. E) lowers other sort-term interest rate, raises the real interest rate, and increases aggregate demand.

A) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.

If the Fed is concerned about a possible recession, it ________ the federal funds rate and, in response, long-term interest rates ________ by a ________ amount than the change in short-term rates. A) lowers; decrease; smaller B) raises; increase; smaller C) raises; increase; larger D) raises; decrease; larger E) lowers; increase; smaller

A) lowers; decrease; smaller

The Fed is a central bank and as such A) provides banking services to banks but not individuals. B) is where the Federal Government turns when it needs to borrow. C) provides banking services to individuals and firms. D) does business with international organizations such as the United Nations. E) does business only with the federal government.

A) provides banking services to banks but not individuals.

The Board of Governors of the Federal Reserve System has A) seven members serving for 14-year terms. B) seven members serving for 12-year terms. C) seven members serving for seven-year terms. D) 12 members serving for seven-year terms. E) seven members serving life terms.

A) seven members serving for 14-year terms.

The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. If the quantity of money grows at 4 percent, the inflation rate is A) 10 percent. B) 2 percent. C) 4 percent. D) zero. E) 8 percent.

B) 2 percent.

By using open market operations, the Federal Reserve A) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target. B) adjusts the supply of reserves to keep the federal funds interest rate equal to its target. C) controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target. D) adjusts the supply AND demand of reserves to keep the federal funds interest rate equal to its target. E) None of the above answers is correct.

B) adjusts the supply of reserves to keep the federal funds interest rate equal to its target.

If the Fed wants to raise the interest rate, in the short run in the money market the Fed A) increases the quantity of money. B) decreases the quantity of money. C) shifts the demand for money curve leftward. D) shifts the demand for money curve rightward. E) directly raises the interest rate and does nothing to either the supply of money or the demand for money.

B) decreases the quantity of money.

Because investment, consumption expenditure, and net exports are interest-sensitive components of expenditure, a ________ in the federal funds rate brings ________ in ________. A) rise; an increase; aggregate supply B) fall; an increase; aggregate demand C) fall; a decrease; aggregate supply D) fall; a decrease; aggregate demand E) rise; an increase; aggregate demand

B) fall; an increase; aggregate demand

If the Fed buys government securities, other things the same, the exchange rate ________ and U.S. exports ________. A) falls; decrease B) falls; increase C) rises; increase D) rises; decrease E) falls; do not change because they are autonomous expenditure

B) falls; increase

Monetary neutrality refers to the fact that changes in the money supply A) affect output more in the long run than in the short run. B) have no effect on output in the long run. C) affect only output in the long run. D) have a greater effect on prices in the short run than in the long run.

B) have no effect on output in the long run.

In the short run, lowering the federal funds rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________. A) rightward; decreases; rises B) rightward; increases; rises C) leftward; decreases; rises D) leftward; decreases; falls E) rightward; increases; falls

B) rightward; increases; rises

When the FOMC raises the federal funds rate, almost immediately ________, and a few weeks later the ________. A) long-term interest rates rise; quantity of money and supply of loanable funds decrease B) short-term interest rates rise; quantity of money and supply of loanable funds decrease C) short-term interest rates fall; quantity of money and supply of loanable funds increase D) long-term interest rates rise; quantity of money and supply of loanable funds increase E) short-term interest rates fall; quantity of money and supply of loanable funds decrease

B) short-term interest rates rise; quantity of money and supply of loanable funds decrease

The velocity of circulation is defined as the A) quantity of money demanded at equilibrium. B) speed with which changes in the interest rate spread throughout the economy. C) average number of times in a year that each dollar is used to buy goods and services. D) price level obtained when the money market is at its equilibrium. E) quantity of money supplied by the Fed.

C) average number of times in a year that each dollar is used to buy goods and services.

From 1970 to 2007 the quantity of M1 fell from 20 percent of GDP to less than 10 percent. This change is because the ownership of credit cards ________ during this time period since ________. A) expanded from 18 percent to 80 percent; there were several recessions during that period B) remained unchanged; credit cards do not affect the quantity of money C) expanded from 18 percent to 80 percent; credit cards became more widely available and utilized D) fell from 80 percent to 18 percent; there were several recessions during that period E) fell from 80 percent to 18 percent; credit cards became less widely available and utilized

C) expanded from 18 percent to 80 percent; credit cards became more widely available and utilized

If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) rises; increases B) rises; does not change C) falls; increases D) falls; decreases E) rises; decreases

C) falls; increases

If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________ because the interest rates ________. A) fewer loans; will rise B) more loans; will rise C) more loans; will fall D) the same number of loans; will not change E) fewer loans; are controlled by the economic conditions alone

C) more loans; will fall

If the Fed increases interest rates, other things remaining the same, foreigners demand ________ dollars, thereby ________ the exchange rate. A) more; decreasing B) fewer; decreasing C) more; increasing D) fewer; increasing E) the same number of; not affecting

C) more; increasing

If the Fed sells U.S. government securities to banks, the federal funds rate ________ and banks' reserves ________. A) falls; increase B) rises; do not change C) rises; decrease D) falls; decrease E) rises; increase

C) rises; decrease

The federal funds rate is A) the interest rate on the 30-year Treasury bond. B) also known as the prime rate. C) the interest rate banks charge each other on overnight loans. D) the interest rate on the 3-month Treasury bill. E) another name for the real interest rate.

C) the interest rate banks charge each other on overnight loans.

In the short run, when the Fed raises the federal funds rate A) investment and consumption expenditure increase, thereby raising the real interest rate temporarily. B) the real interest rate temporarily increases, thereby decreasing investment and increasing consumption expenditure. C) the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure. D) the real interest rate is unchanged, so investment and consumption expenditure are not changed. E) the real interest rate temporarily falls, thereby increasing investment and consumption expenditure.

C) the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure.

Suppose the quantity of money is $1,000, the velocity of circulation is 6, and real GDP is $4,000. Then the price level is A) 6.0. B) 1.1. C) 2.0. D) 1.5. E) 2.5.

D) 1.5.

All of the following are elements in the structure of the Fed EXCEPT the A) presidents of the 12 Federal Reserve Banks. B) 12 Federal Reserve Banks. C) Federal Open Market Committee. D) Executive Council to the Governor. E) Board of Governors.

D) Executive Council to the Governor.

The monetary base is the sum of A) Federal Reserve notes and banks' reserves at the Fed. B) coins, Federal Reserve notes, and gold at the Fed. C) Federal Reserve notes, Treasury deposits at the Fed, banks' reserves at the Fed, and coins. D) coins, Federal Reserve notes, and banks' reserves at the Fed. E) coins, Federal Reserve notes, and individuals' deposits at the Fed.

D) coins, Federal Reserve notes, and banks' reserves at the Fed.

If the Fed engages in quantitative easing, it has likely A) started paying interest on required reserves. B) increased the discount rate to prevent inflation. C) decreased the discount rate by selling its own securities. D) decreased the federal funds rate to almost zero by buying large sums of securities. E) increased the federal funds rate by selling private securities.

D) decreased the federal funds rate to almost zero by buying large sums of securities.

If the Fed increases the discount rate, commercial banks pay a ________ interest rate if they borrow money from the Fed and will therefore ________. A) higher; borrow more money from the Fed and make more loans to consumers B) lower; borrow more money from the Fed and make more loans to consumers C) higher; deposit more money into their reserves at the Fed D) higher; borrow less money from the Fed and make fewer loans to consumers E) lower; borrow less money from the Fed and make fewer loans to consumers

D) higher; borrow less money from the Fed and make fewer loans to consumers

In the short run, if the Fed wants to raise the federal funds rate, it A) tells large commercial banks to raise their interest rates. B) instructs large commercial banks to sell government securities in the open market. C) instructs the New York Fed to buy government securities in the open market. D) instructs the New York Fed to sell government securities in the open market. E) instructs the New York Fed to sell government securities in the foreign exchange market.

D) instructs the New York Fed to sell government securities in the open market.

To fight a recession, the Fed can A) raise the federal funds rate by buying securities. B) lower income taxes on interest income. C) lower the federal funds rate by selling securities. D) lower the federal funds rate by buying securities. E) raise the federal funds rate by selling securities.

D) lower the federal funds rate by buying securities.

If the Fed increases the quantity of money, in the short run the ________ and in the long run the ________. A) nominal interest rate falls; the price level falls B) price level rises; the nominal interest rate falls C) nominal interest rate rises; the price level falls D) nominal interest rate falls; the price level rises E) nominal interest rate rises; the price level rises

D) nominal interest rate falls; the price level rises

Quantitative easing by the Fed refers to A) lowering the federal funds rate while increasing the discount rate. B) decreasing the money supply during a recession to prevent inflation. C) lowering the required reserve ratio to zero percent. D) the creation of bank reserves by engaging in large-scale open market operation at very low-interest rates. E) selling private securities issued by the Fed.

D) the creation of bank reserves by engaging in large-scale open market operation at very low-interest rates.

When the Fed changes the quantity of money, there is an immediate effect on A) the price level and the inflation rate. B) the price level but not the inflation rate. C) the inflation rate but not the price level. D) the nominal interest rate. E) real GDP.

D) the nominal interest rate.

The Federal Open Market Committee consists of A) 12 committees, all serving on the Board of Governors. B) 12 members, split evenly so that six of whom are members of the Board of Governors and six of whom are presidents of Federal Reserve Banks. C) 12 members, seven of whom are the members of the Board of Governors, four of whom are presidents of Federal Reserve Banks, and the president of the United States. D) 12 members, all of whom are the presidents of Federal Reserve Banks. E) 12 members, seven of whom are the members of the Board of Governors and five of whom are presidents of Federal Reserve Banks.

E) 12 members, seven of whom are the members of the Board of Governors and five of whom are presidents of Federal Reserve Banks.

Which of the following statements are correct? i. The Federal Reserve's monetary policy must be approved by the President of the United States. ii. The Federal Reserve Board of Directors meets approximately every six months to review the state of the economy and determine monetary policy. iii. The Federal Reserve has determined it will use the monetary base as its policy instrument. A) ii only B) iii only C) i and ii D) i only E) None of the above answers is correct.

E) None of the above answers is correct.

The monetary policy instrument the Federal Reserve chooses to use is the A) discount rate. B) flexible exchange rate. C) fixed exchange rate. D) monetary base. E) federal funds rate.

E) federal funds rate.

The ________ the price level, the ________. A) higher; greater the supply of money B) higher; smaller the supply of money C) higher; smaller the demand for money D) lower; greater the demand for money E) higher; greater the demand for money

E) higher; greater the demand for money

In the demand and supply model of the money market, the i. supply of money curve is a vertical straight line. ii. supply of money is the quantity that must be held by households and firms. iii. quantity of money is determined by Fed actions. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii

E) i, ii, and iii

Which of the following is a monetary policy goal? i. keeping the inflation rate low ii. attaining maximum employment iii. keeping the long-term interest rate at a moderate level A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii

E) i, ii, and iii

Which of the following is a tool the Fed uses to adjust the quantity of money? i. The Fed can change the interest rate banks charge for loans to their prime customers. ii. The Fed can change the discount rate on loans to banks. iii. The Fed can buy or sell government securities. A) i only B) ii only C) iii only D) i and iii E) ii and iii

E) ii and iii

The opportunity cost of holding money is the A) inflation rate. B) growth rate of real GDP. C) real interest rate. D) time it takes to go to the ATM or bank. E) nominal interest rate.

E) nominal interest rate.

Which of the following Federal Reserve Banks carries out the decisions of the FOMC? A) the Dallas Federal Reserve Bank B) the San Francisco Federal Reserve Bank C) the Kansas City Federal Reserve Bank D) the Atlanta Federal Reserve Bank E) the New York Federal Reserve Bank

E) the New York Federal Reserve Bank