monetary policy
place the following items in order from longest issue time to shortest issue time.
1. us reasury bonds 2.us treasury notes 3.Us treasury bills
the money multiplier equals:
1/reserve requirement.
Which of the following refers to a liquidity trap?
A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve
What will happen in the money market if the Federal Reserve decreases the discount rate? Multiple choice question.
Banks borrow more from the Fed and make more loans, causing the money supply to increase.
Which of the following is a monetary policy tool used by the Federal Reserve?
Paying interest on excess reserves
he time between when a policy is enacted and when it has its full effect on the economy is called the lag
RECOGNITION
How does selling bonds in the open market change the federal funds rate?
Selling bonds decreases the supply of reserves, causing the federal funds rate to increase
How is a change in the money supply calculated when there is a change in excess reserves?
The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.
how is a change in the money supply calculated when there is a change in excess reserves
The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.
What is spread
The difference between the interest rate a bank earns on a loan and the interest rate it pays.
What is the reserve requirement?
The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed.
If the Fed decreases the money supply:
ad increases
With fractional reserve banking,
banks have to keep a fraction of deposits on hand.
Reductions in the interest rate can become ineffective if
banks run out of excess reserves.
When the federal government borrows money, it issues three different assets:
bonds, notes, bills
Expansionary policy may not be as effective during a recession because: (Choose all that apply)
businesses may choose not to invest. banks believe loans are too risky. the nominal interest rate is already at 0%. individuals may choose to save more rather than consume more.
To decrease gross investment, the interest rate must
rise
The money multiplier equals:
the overall change in the money supply/the initial change in reserves.
The Fed uses open market operation
to keep the federal funds rate on target.
the supply curve for federal funds is
horizontal
The money multiplier is the amount by which a $1 change:
in reserves will change the money supply.
o increase gross investment, the interest rate must:
decrease
The point where the money demand curve and the money supply curve is called
tight money. contractionary monetary policy.
uppose the Federal Reserve wants to decrease the money supply by $400 billion. If the reserve requirement (rr) is 0.2, calculate the change in reserves that the Federal Reserve must make.
$80 billion
What three new tools did the Federal Reserve Bank use during the Great Recession?
Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities.
hat three new tools did the Federal Reserve Bank use during the Great Recession?
Increasing short-term liquidity, buying commercial bonds, purchasing mortgage-backed securities.
During the Great Recession, what actions did the Federal Reserve Bank take to keep liquidity flowing? (Choose all that apply)
The Fed purchased trillions of dollars of mortgage-back securities. The Fed increased short-term liquidity. The Fed bought commercial bonds, rather than simple government bond
When the change in needed reserves is positive, the Fed should bonds equal to the needed decrease in reserves.
buy
Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggre
decrease 20 billion
The point where the money demand curve and the money supply curve intersect is called:
money market equilibrium.
Suppose the Federal Reserve has decided to increase the interest rate paid on reserves. As a result, the
money supply will decrease.
The---- loans a bank makes the more revenue it can generate.
more
The discount rate is the interest rate that banks:
pay when they borrow money directly from the Fed.
----- reserves are the fraction or portion of checkable deposits that a bank must keep on hand.
required
The funds rate is the interest rate that banks pay when borrowing reserves from other banks.
reserves
he money multiplier is the amount by which a $1 change in will change the money supply.
reserves
When the equilibrium output is above potential output, the Fed should bonds equal to the needed decrease in reserve
sell
Graphical the federal funds market has the federal funds rate on the axis and the quantity of reserves on the
y,x
Historically, during and in the immediate aftermath of recessions when the economy was still recovering, the Federal Reserve the federal funds rate. (Enter one word in the blank.)
$10 billion decrease
Referring to the graph, if the Fed has determined interest rates need to fall to 6%, and the reserve requirement is 0.2, what will be the change in reserves necessary to change the money supply the correct amount? (graph)
$4 billion
If the Federal Reserve would like to increase the money supply, they should (increase/decrease) the interest rate paid on reserves.
decrease
When the Fed raises the target federal funds rate, the money supply will ---- and interest rates ---
decrease, increase
When the Fed the federal funds rate target the money supply increases and interest rates fall.
decreases
the --- price of money is the interest rate.
equilibrium
When aggregate demand falls, to increase aggregate demand, we can use monetary policy
expansionary
decrease in aggregate demand will cause the price level to and unemployment to in the short run
fall, rise
To minimize the effects of , the Fed needs to decrease the money supply
inflation
Governments use to keep prices stable and encourage economic growth.
monetary policy
A limitation of utilizing interest rates paid on reserves at the Federal Reserve as a tool of monetary policy is
reductions in the interest rate can become ineffective if banks do not have any excess reserves.
The two factors that affect whether or not a firm chooses to invest in new equipment machinery or facilities are:
the interest rate and the expected rate of return.
Which of the following refers to cyclical asymmetry?
The idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy.
Refer to the graph above. Suppose AD increases from AD1 to AD2. If the appropriate type of monetary policy is implemented, what is the effect on the interest rate and quantity of investment demanded?
The interest rate increases and the quantity of investment demanded decreases.
Suppose aggregate demand decreases, and the Federal Reserve decides to conduct expansionary monetary policy. How does this expansionary monetary policy affect the money market?
The money supply increases, thus decreasing the interest rate.
When the Fed bonds, it creates new money and additional reserves which expands the money supply and
buyS, lowerS
The federal funds rate is the interest rate that ban
charge one another for borrowing excess reserves from each other.
A decrease in the money supply and an increase in the interest rate are effects consistent with monetary pol
contractionary
the -- rate is the interest rate at which banks can borrow money directly from the Federal Reserve
discount
The Federal Reserve sets reserve requirements for banks to:
ensure that banks don't lend out too much money.
The actions taken by a country's central bank to expand the money supply and lower interest rates is called monetary policy.
expansionary
Given the demand for money, a(n) in the money supply shifts the money supply curve and lowers the interest rate.
increase
in aggregate demand will cause the price level to rise and unemployment to fall in the short run.
increase
When the Fed's Open Market Committee decides on a target for the federal funds rate,:
it commits to buy and sell bonds through open market operations to maintain the target.
hen the Federal Reserve wants to buy bonds as part of monetary policy, who does the Fed buy bonds from?
the public
How does the Federal Reserve conduct open market operations to maintain the target federal funds rate when the demand for reserves decreases?
The Fed will sell bonds to the public in order to decrease the quantity of reserves supplied
What is the effect of contractionary monetary policy on the economy?
Decrease in real GDP and decrease inflation
What happens to the money supply, real GDP, and investment demand with expansionary monetary policy?
Money supply increases, investment demand increases, and real GDP increases.
Which two items are closely related to the reserve requirement?
A bank's reserves and the money supply
Referring to the graph, which of the following Fed actions would cause the shift in the money supply. (Money line shifts to the left, decreasing slope line, moves up)
An increase in the discount rate. Reason: An increase in the discount rate causes banks to borrow less and thus make fewer loans. Banks making fewer loans means that the money supply will decrease.
If the Fed finds that a bank fails to maintain a required level of reserves, what can happen to the bank?
Banking inspectors will make an unwelcome appearance
If the demand for reserves increases, what will the Federal Reserve to do maintain the target Federal Funds rate?
Buy bonds from the public to increase the quantity of reserves supplied.
Suppose the current federal funds rate is 4%, and Fed wants to decrease the rate to 2%. How will the Fed decrease the Federal Funds rate?
Buying bonds in the open market
Referring to the graph above, suppose the Federal Reserve wants to maintain a 4% target Federal Funds rate. If banks make more loans, what will the Federal Reserve do to maintain the target Federal Funds rat
Conduct open market operations to buy bonds from the public.
Suppose banks are concerned a recession is coming soon. What should the Federal Reserve do to try and maintain the target federal funds rate if Banks change their lending habits based on this concern
Conduct open market operations to sell bonds to the public.
When the money supply increases, what happens to the interest rate and quantity of investment?
Interest rate decreases and quantity of investment increases.
An economy experiences a change in excess reserves of −$5 billion, if the money multiplier is 10, how much as the money supply changed?
$50 billion
During the 1970s, inflation was:
16%
An increase in the money supply and a decrease in the interest rate are effects consistent with monetary policy.
EXPANSIONARY
Which three values are all related so that when one changes so do the others?
The dollar value of reserves held by banks, the reserve requirement, and the money supply.
Why does the Federal Reserve lower the discount rate during recessions? (Choose all that apply).
To generate more income for banks To ensure that the financial sector will not collapse
A money market is
a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances
hen aggregate demand falls, to avoid a(n) and return to the long-run equilibrium, we must increase aggregate de
recession
The Federal Reserve has determined excess reserves will need to decrease by $750 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve should
reduce interest paid on reserves
On any given day, while some banks come up short on their holdings, other banks have more than they need.
reserve
One reason the Federal Reserve lowered the discount rate during the Great Recession was to:
allow banks to borrow at lower rates.
When aggregate demand rises, to decrease aggregate demand, we can use monetary policy.
contractionary
By keeping interest rates high and investment and consumption spending low,:
contractionary monetary policy can help reduce the inflation rate.
The Federal Reserve has decided to increase the interest rate paid on reserves. This policy is consistent with
contractionary monetary policy.
By keeping interest rates low and investment and consumption spending high,:
expansionary monetary policy can help reduce the size of recessions.
by keeping interest rates low and investment and consumption spending high,:
expansionary monetary policy can help reduce the size of recessions.
The Fed uses open market operations to target the
federal funds rate.
The Fed uses open market operations to target the:
federal funds rate.
The Federal Reserve has determined excess reserves will need to increase by $50 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve should
increase the interest rate paid on reserve
he negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate describes -- demand
investment
Why might expansionary policy not work during a recession?
Banks may choose not to make loans in a weak economy.
Suppose the Federal Reserve plans to conduct contractionary monetary policy during a period of increasing inflation. Which of the following is a policy that would promote this decision?
Increase the interest rate paid on reserves
What is one benefit of contractionary monetary policy?
It combats inflation.
What is one benefit of expansionary monetary policy?
It reduces the size of recessions.
When the reserve requirement is set higher, what happens to the amount of money loaned and the amount of money created in the economy?
Less money is loaned, and less money is created in the economy
An economy experiences a change in excess reserves of $2 billion, if the money multiplier is 5, how much as the money supply changed?
-10 billion
With an MPC of 0.6, the expenditures multiplier will equal
2.5
The Federal Reserve has determined the money supply will need to increase by $100 billion in order to return the economy to full employment. If the money multiplier is 5, what is the required change in excess reserves?
20 billion
With an MPC of 0.75, the expenditures multiplier will equal
4
Implementation and recognition lags cyclical asymmetry and the liquidity trap are
limitations to effective monetary policy.
Use a(n) -case i to represent interest rates and a(n) -case I for investment.
lower, upper
rate is the lowest commercially available interest rate.
prime
