Question 1

If the Fed buys government securities from commercial banks in the open market,

Accepted Answer

A)  the Fed gives the securities to the commercial banks and increases the banks' reserves.
B)  the Fed gives the securities to the commercial banks and decreases the banks' reserves.
C)  commercial banks give the securities to the Fed, and the Fed increases the banks' reserves.
D)  commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves.E) A) and B)
F) A) and C)

Question 2

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

Accepted Answer

A)  increase the excess reserves of member banks and thus increase the money supply.
B)  increase the excess reserves of member banks and thus decrease the money supply.
C)  decrease the excess reserves of member banks and thus decrease the money supply.
D)  decrease the excess reserves of member banks and thus increase the money supply.E) C) and D)
F) A) and C)

Question 3

It is costly to hold money because

Accepted Answer

A)  deflation may reduce its purchasing power.
B)  in doing so, one sacrifices interest income.
C)  bond prices are highly variable.
D)  the rate at which money is spent may decline.E) A) and C)
F) A) and D) B

Question 4

Before the financial crisis of 2008, expansionary monetary policy would have entailed the Fed targeting a lower federal funds rate and using open-market purchases to increase bank reserves and cause the federal funds rate to hit its target.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Accepted Answer

A)  There is no difference between the two policy tools.
B)  Open-market operations are focused exclusively on U.S.government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities.
C)  Quantitative easing is done in order to lower interest rates; open-market operations are merely intended to increase bank reserves.
D)  Open-market operations involve forward commitment; quantitative easing is intentionally vague to maintain flexibility.E) C) and D)
F) A) and B) B

Question 6

The Federal Reserve alters the amount of the nation's money supply by

Accepted Answer

A)  reducing the liabilities of the banking system.
B)  controlling the assets of the nation's largest banks.
C)  minting coins and printing currency that is distributed to banks.
D)  manipulating the size of excess reserves held by commercial banks.Topic: Tools of Monetary PolicyE) A) and B)
F) A) and C)

Question 7

The federal funds rate target is the most frequently used monetary policy tool.

Accepted Answer

A) True 
 B)False

Question 8

According to the Taylor rule, if the inflation rate is one percentage point below the target of 2 percent, then the Fed should

Accepted Answer

A)  raise the real federal funds rate by one percentage point.
B)  lower the real federal funds rate by one percentage point.
C)  raise the real federal funds rate by half of a percentage point.
D)  lower the real federal funds rate by half of a percentage point.E) A) and D)
F) B) and C)

Question 9

Reverse repos are used to offset the Fed's inability to stop nonbanks from lending to banks.

Accepted Answer

A) True 
 B)False

Question 10

The transactions demand for money is least likely to be a function of the

Accepted Answer

A)  price level.
B)  interest rate.
C)  level of national income.
D)  frequency of wage and salary payments.E) A) and D)
F) C) and D)

Question 11

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

Accepted Answer

A)  a liability of the Federal Reserve Banks and commercial banks.
B)  an asset of the Federal Reserve Banks and commercial banks.
C)  a liability of the Federal Reserve Banks and an asset for commercial banks.
D)  an asset of the Federal Reserve Banks and a liability for commercial banks.E) All of the above
F) B) and C)

Question 12

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

Accepted Answer

A)  open-market operations
B)  check collection
C)  the reserve ratio
D)  the discount rateE) B) and D)
F) C) and D)

Question 13

An increase in nominal GDP increases the demand for money because

Accepted Answer

A)  interest rates will rise.
B)  more money is needed to finance a larger volume of transactions.
C)  bond prices will fall.
D)  the opportunity cost of holding money will decline.E) B) and D)
F) A) and B)

Question 14

An increase in nominal GDP will

Accepted Answer

A)  increase the transactions demand and the total demand for money.
B)  decrease the transactions demand and the total demand for money.
C)  increase the transactions demand for money but decrease the total demand for money.
D)  decrease the transactions demand for money but increase the total demand for money.E) A) and B)
F) A) and C) A

Question 15

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

Accepted Answer

A)  sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.
B)  buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of interest paid on reserves held at the Fed
C)  sell government securities, lower reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.
D)  sell government securities, raise reserve requirements, lower the discount rate, and increase the interest paid on reserves held at the Fed banks.E) A) and B)
F) A) and C)

Question 16

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 17

In a repo transaction (or repurchase agreement) , the one "buying" the collateral asset (with the promise of selling it back soon)  is the

Accepted Answer

A)  lender.
B)  borrower.
C)  broker.
D)  speculator.E) A) and D)
F) All of the above

Question 18

Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would

Accepted Answer

A)  increase the discount rate.
B)  increase the reserve ratio.
C)  buy government securities in the open market.
D)  sell government securities in the open market.E) None of the above
F) A) and D)

Question 19

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

Accepted Answer

A) True 
 B)False

Question 20

Restrictive monetary policy since the mortgage debt crisis

Accepted Answer

A)  has been aggressively implemented to stop inflationary pressure fueled by quantitative easing.
B)  has raised interest rates back to pre-financial crisis levels.
C)  has been limited to an attempt to "normalize" monetary policy by paying interest on excess reserves and using reverse repos.
D)  has been limited by the zero lower bound problem.E) A) and C)
F) A) and B)

Exam 36: Interest Rates and Monetary Policy

If the Fed buys government securities from commercial banks in the open market,

Correct AnswerverifiedShow Answer

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

Correct AnswerverifiedShow Answer

It is costly to hold money because

Correct AnswerverifiedB

Before the financial crisis of 2008, expansionary monetary policy would have entailed the Fed targeting a lower federal funds rate and using open-market purchases to increase bank reserves and cause the federal funds rate to hit its target.

Correct AnswerverifiedShow Answer

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Correct AnswerverifiedB

The Federal Reserve alters the amount of the nation's money supply by

Correct AnswerverifiedShow Answer

The federal funds rate target is the most frequently used monetary policy tool.

Correct AnswerverifiedShow Answer

According to the Taylor rule, if the inflation rate is one percentage point below the target of 2 percent, then the Fed should

Correct AnswerverifiedShow Answer

Reverse repos are used to offset the Fed's inability to stop nonbanks from lending to banks.

Correct AnswerverifiedShow Answer

The transactions demand for money is least likely to be a function of the

Correct AnswerverifiedShow Answer

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

Correct AnswerverifiedShow Answer

What policy tool of the Federal Reserve relies on bank borrowing to be effective?

Correct AnswerverifiedShow Answer

An increase in nominal GDP increases the demand for money because

Correct AnswerverifiedShow Answer

An increase in nominal GDP will

Correct AnswerverifiedA

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

Correct AnswerverifiedShow Answer

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

Correct AnswerverifiedShow Answer

In a repo transaction (or repurchase agreement) , the one "buying" the collateral asset (with the promise of selling it back soon) is the

Correct AnswerverifiedShow Answer

Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would

Correct AnswerverifiedShow Answer

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

Correct AnswerverifiedShow Answer

Restrictive monetary policy since the mortgage debt crisis

Correct AnswerverifiedShow Answer

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A

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