Question 1

In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the Federal funds rate between

Accepted Answer

A)  2.5 percent and 3.0 percent.
B)  2 percent and 2.5 percent.
C)  1.0 percent and 1.25 percent.
D)  0 and 0.25 percent.E) None of the above
F) All of the above

Question 2

(Last Word)  Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?

Accepted Answer

A)  Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions.
B)  The rate of deflation that one would expect at the negative lower bound would keep real interest rates at or above zero.
C)  Because of the premium that banks charge on loans over what they pay depositors, up to a point they are always guaranteed to earn a positive rate of interest.
D)  Negative lower bounds refer only to real rates of interest, not nominal rates.E) B) and C)
F) None of the above

Question 3

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Accepted Answer

A)  the discount rate
B)  the reserve ratio
C)  open-market operations
D)  the federal funds rateE) A) and D)
F) A) and C)

Question 4

According to the Taylor rule, when real GDP is equal to potential GDP and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be

Accepted Answer

A)  2 percent, and this implies a real interest rate of 0 percent.
B)  2 percent, and this implies a real interest rate of 4 percent.
C)  4 percent, and this implies a real interest rate of 2 percent.
D)  4 percent, and this implies a real interest rate of 4 percent.E) A) and B)
F) All of the above

Question 5

The Fed directly sets

Accepted Answer

A)  the prime interest rate but not the federal funds rate.
B)  both the federal funds rate and the prime interest rate.
C)  neither the federal funds rate nor the prime interest rate.
D)  the discount rate and the prime interest rate.E) B) and C)
F) C) and D)

Question 6

The securities held as assets by the Federal Reserve Banks consist mainly of

Accepted Answer

A)  corporate bonds.
B)  Treasury bills, Treasury notes, and Treasury bonds.
C)  common stock.
D)  certificates of deposit.E) A) and C)
F) None of the above

Question 7

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

Accepted Answer

A) True 
 B)False

Question 8

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 9

A consumer holds money to meet spending needs.This would be an example of the

Accepted Answer

A)  use of money as a measure of value.
B)  use of money as legal tender.
C)  transactions demand for money.
D)  asset demand for money.E) None of the above
F) B) and D)

Question 10

A decrease in the reserve ratio increases the

Accepted Answer

A)  amount of actual reserves in the banking system.
B)  amount of excess reserves in the banking system.
C)  number of government securities held by the Federal Reserve Banks.
D)  ratio of coins to paper currency in the economy.E) A) and B)
F) None of the above

Question 11

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Accepted Answer

A) True 
 B)False

Question 12

According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, 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 B)
F) None of the above

Question 13

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should

Accepted Answer

A)  grow the money supply at a rate of 6 percent per year.
B)  raise the real federal funds rate by 6 percentage points.
C)  raise the real federal funds rate by 3 percentage points.
D)  raise the real federal funds rate by 12 percentage points.E) B) and C)
F) A) and C)

Question 14

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Accepted Answer

A)  issuing currency
B)  check collection
C)  open-market operations
D)  required reserve ratioE) A) and B)
F) A) and C)

Question 15

As a result of policy actions taken by the Fed since 2008, it (the Fed)  can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system.This is because

Accepted Answer

A)  Congress has taken this power away from the Fed.
B)  there is a massive amount of excess reserves already in the banking system.
C)  the federal funds rate has become rigidly fixed by law.
D)  banks are no longer holding any excess reserves.E) B) and D)
F) None of the above

Question 16

Assume the economy faces high unemployment but stable prices.Which combination of government policies is most likely to reduce unemployment?

Accepted Answer

A)  the purchase of government securities in the open market and an increase in taxes
B)  the sale of government securities in the open market and a decrease in taxes
C)  the sale of government securities in the open market and a decrease in government spending
D)  the purchase of government securities in the open market and an increase in government spendingE) C) and D)
F) A) and B)

Question 17

The Federal Reserve System regulates the money supply primarily by

Accepted Answer

A)  controlling the production of coins at the U.S.mint.
B)  altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
C)  altering the reserves of commercial banks, largely through sales and purchases of government bonds.
D)  restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.E) B) and C)
F) None of the above

Question 18

(Last Word)  In 2014, the European Central Bank (EC)

Accepted Answer

A)  began paying interest on the excess reserves of banks in the European Union.
B)  implemented quantitative easing.
C)  set negative interest rates to encourage bank lending.
D)  engaged in reverse repos to increase interest rates.E) A) and C)
F) None of the above

Question 19

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

A)  There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP.
B)  There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.
C)  There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP.
D)  There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.E) A) and B)
F) All of the above

Question 20

(Consider This)  In reverse repurchase agreements (reverse repos) ,

Accepted Answer

A)  banks borrow from nonbanks.
B)  the Fed buys bonds from banks with the promise to sell them back the next day.
C)  banks sell bonds to the Fed with the promise to buy them back the next day.
D)  the Fed sells bonds to the bank with the promise to buy them back the next day.E) C) and D)
F) None of the above

Exam 36: Interest Rates and Monetary Policy

The transactions demand for money will decrease when income decreases, but it is not much affected by interest rates.

Correct AnswerverifiedShow Answer

The Federal Reserve System regulates the money supply primarily by

Correct AnswerverifiedShow Answer

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should

Correct AnswerverifiedShow Answer

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

Correct AnswerverifiedShow Answer

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?

Correct AnswerverifiedShow Answer

A decrease in the reserve ratio increases the

Correct AnswerverifiedShow Answer

An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand.

Correct AnswerverifiedShow Answer

A consumer holds money to meet spending needs.This would be an example of the

Correct AnswerverifiedShow Answer

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

Correct AnswerverifiedShow Answer

According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, then the Fed should

Correct AnswerverifiedShow Answer

(Consider This) In reverse repurchase agreements (reverse repos) ,

Correct AnswerverifiedShow Answer

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system.This is because

Correct AnswerverifiedShow Answer

According to the Taylor rule, when real GDP is equal to potential GDP and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be

Correct AnswerverifiedShow Answer

Assume the economy faces high unemployment but stable prices.Which combination of government policies is most likely to reduce unemployment?

Correct AnswerverifiedShow Answer

The Fed directly sets

Correct AnswerverifiedShow Answer

(Last Word) In 2014, the European Central Bank (EC)

Correct AnswerverifiedShow Answer

(Last Word) Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?

Correct AnswerverifiedShow Answer

In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the Federal funds rate between

Correct AnswerverifiedShow Answer

Which of the following best describes what occurs when monetary authorities sell government securities?

Correct AnswerverifiedShow Answer

The securities held as assets by the Federal Reserve Banks consist mainly of

Correct AnswerverifiedShow Answer

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