Question 1

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective?

Accepted Answer

A)   Selling government securities and raising the discount rate.
B)   Selling government securities and raising the reserve ratio.
C)   Buying government securities and raising the discount rate.
D)   Buying government securities and lowering the reserve ratio.E) A) and B)
F) A) and C)

Question 2

1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP (Qf) ? A)  $50. B)  $100. C)  $150. D)  $225." class="answers-bank-image d-inline" rel="preload" > 
-Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP (Qf) ?

Accepted Answer

A)   $50.
B)   $100.
C)   $150.
D)   $225.E) B) and C)
F) A) and D)

Question 3

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 spending.E) None of the above
F) All of the above

Question 4

Which of the following is an example of a tight money policy action?

Accepted Answer

A)   Reverse repo transactions.
B)   Repo transactions.
C)   Lowering the interest rate paid on excess reserves.
D)   Quantitative easing.E) C) and D)
F) B) and C) A

Question 5

Negative interest rates set by the European Central Bank:

Accepted Answer

A)   encouraged banks to lend excess reserves, but also discouraged the deposits that provide those excess reserves.
B)   encouraged banks to lend excess reserves and customers to increase deposits.
C)   encouraged people to turn cash into electronic bank balances.
D)   discouraged bank lending.E) A) and B)
F) A) and C)

Question 6

Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the public, then the money supply will immediately:

Accepted Answer

A)   increase by $80 million, and the maximum money-lending potential of the commercial banking system will increase by $80 million.
B)   increase by $80 million, but the maximum money-lending potential of the commercial banking system will decrease by $80 million.
C)   increase by $80 million, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
D)   decrease because the securities are an asset to the commercial banks and a liability to the Federal Reserve.E) A) and D)
F) A) and C)

Question 7

Refer to the above graph. If the Federal Reserve wants to lower the interest rate from 4 percent to 1 percent, how much must it increase the money supply?

Accepted Answer

A)   $100 billion.
B)   $200 billion.
C)   $150 billion.
D)   $250 billion.E) C) and D)
F) B) and D)

Question 8

In 2014, the European Central Bank took the unusual step of:

Accepted Answer

A)   returning to the gold standard.
B)   raising interest rates during a recession.
C)   dissolving the euro as a common currency.
D)   setting negative interest rates.E) A) and B)
F) A) and D)

Question 9

The asset demand for money and the rate of interest are:

Accepted Answer

A)   inversely related.
B)   directly related.
C)   unrelated.
D)   both stable.E) A) and B)
F) A) and C)

Question 10

If the Federal Reserve Bank sells $10 million in government securities to commercial banks, the effect will be to increase the excess reserves of commercial banks by $10 million.

Accepted Answer

A) True 
 B)False

Question 11

When the Federal Reserve acts to tighten money and credit in the economy, then the aggregate:

Accepted Answer

A)   demand curve will shift to the right.
B)   demand curve will shift to the left.
C)   supply curve will shift to the left.
D)   demand curve will stay the same but there will be a movement along the existing demand curve.E) A) and B)
F) A) and D)

Question 12

Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Accepted Answer

A)   A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment.
B)   A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment.
C)   The money supply is decreased, which increases the interest rate and causes investment spending, output, and employment to decrease.
D)   The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase.E) A) and B)
F) B) and C)

Question 13

1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should: A)  increase aggregate demand by increasing the interest rate. B)  decrease aggregate demand by increasing the interest rate. C)  increase aggregate demand by decreasing the interest rate. D)  make no change in the interest rate." class="answers-bank-image d-inline" rel="preload" >
- Refer to the above graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should:

Accepted Answer

A)   increase aggregate demand by increasing the interest rate.
B)   decrease aggregate demand by increasing the interest rate.
C)   increase aggregate demand by decreasing the interest rate.
D)   make no change in the interest rate.E) None of the above
F) All of the above

Question 14

Aggregate demand tends to be increased when the Federal Reserve System sells government securities in the open market.

Accepted Answer

A) True 
 B)False

Question 15

Assume the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the public, the money supply will immediately:

Accepted Answer

A)   decrease by $120 million and the maximum money-lending potential of the commercial banking system will decrease by $120 million.
B)   decrease by $120 million and the maximum money-lending potential of the commercial banking system will decrease by $480 million.
C)   increase by $120 million and the maximum money-lending potential of the commercial banking system will increase by $480 million.
D)   increase because the securities are an asset to the commercial banks and a liability to the Federal Reserve.E) B) and C)
F) A) and D)

Question 16

If the Fed implements a zero interest rate policy, it will:

Accepted Answer

A)   cause the U.S. dollar to appreciate against foreign currencies from nations with positive interest rates.
B)   be in the pursuit of lower inflation.
C)   set real interest rates at or near zero.
D)   set nominal interest rates at or near zero.E) A) and D)
F) A) and B)

Question 17

m1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following an increase in the asset demand for money? A)  C. B)  D. C)  G. D)  I." class="answers-bank-image d-inline" rel="preload" >
- Refer to the above graph, which shows the supply and demand for money where  Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following an increase in the asset demand for money?

Accepted Answer

A)   C.
B)   D.
C)   G.
D)   I.E) A) and B)
F) A) and C)

Question 18

1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to: A)  increase the interest rate paid on excess reserves. B)  increase the discount rate. C)  buy government securities in the open market. D)  sell government securities in the open market." class="answers-bank-image d-inline" rel="preload" > 
-Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to:

Accepted Answer

A)   increase the interest rate paid on excess reserves.
B)   increase the discount rate.
C)   buy government securities in the open market.
D)   sell government securities in the open market.E) C) and D)
F) B) and D) C

Question 19

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Accepted Answer

A)   $600 million, and also by $600 million if the securities are purchased directly from commercial banks.
B)   $800 million, and also by $800 million if the securities are purchased directly from commercial banks.
C)   $600 million, but by $800 million if the securities are purchased directly from commercial banks.
D)   $800 million, but only by $600 million if the securities are purchased directly from commercial banks.E) B) and C)
F) A) and D) C

Question 20

The term "liquidity trap" describes a situation where:

Accepted Answer

A)   potential borrowers and lenders do not respond to expansionary monetary policies implemented during a recession.
B)   excessive injections of money into the system create an inflationary cycle that is difficult to break.
C)   nominal interest rates become negative.
D)   political pressures prevent the Federal Reserve from implementing the appropriate monetary policy actions.E) A) and B)
F) None of the above

Exam 15: Interest Rates and Monetary Policy

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

Correct Answer
verified

Which of the following is an example of a tight money policy action?

Correct Answer
verified
A

Negative interest rates set by the European Central Bank:

Correct Answer
verified

Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the public, then the money supply will immediately:

Correct Answer
verified

Refer to the above graph. If the Federal Reserve wants to lower the interest rate from 4 percent to 1 percent, how much must it increase the money supply?

Correct Answer
verified

In 2014, the European Central Bank took the unusual step of:

Correct Answer
verified

The asset demand for money and the rate of interest are:

Correct Answer
verified

If the Federal Reserve Bank sells $10 million in government securities to commercial banks, the effect will be to increase the excess reserves of commercial banks by $10 million.

Correct Answer
verified

When the Federal Reserve acts to tighten money and credit in the economy, then the aggregate:

Correct Answer
verified

Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Correct Answer
verified

Correct Answer
verified

Aggregate demand tends to be increased when the Federal Reserve System sells government securities in the open market.

Correct Answer
verified

Assume the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the public, the money supply will immediately:

Correct Answer
verified

If the Fed implements a zero interest rate policy, it will:

Correct Answer
verified

Correct Answer
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Correct Answer
verified
C

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Correct Answer
verified
C

The term "liquidity trap" describes a situation where:

Correct Answer
verified

Exam 15: Interest Rates and Monetary Policy

Correct AnswerverifiedShow Answer

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

Which of the following is an example of a tight money policy action?

Correct AnswerverifiedA

Negative interest rates set by the European Central Bank:

Correct AnswerverifiedShow Answer

Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the public, then the money supply will immediately:

Correct AnswerverifiedShow Answer

Refer to the above graph. If the Federal Reserve wants to lower the interest rate from 4 percent to 1 percent, how much must it increase the money supply?

Correct AnswerverifiedShow Answer

In 2014, the European Central Bank took the unusual step of:

Correct AnswerverifiedShow Answer

The asset demand for money and the rate of interest are:

Correct AnswerverifiedShow Answer

If the Federal Reserve Bank sells $10 million in government securities to commercial banks, the effect will be to increase the excess reserves of commercial banks by $10 million.

Correct AnswerverifiedShow Answer

When the Federal Reserve acts to tighten money and credit in the economy, then the aggregate:

Correct AnswerverifiedShow Answer

Which would provide the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Aggregate demand tends to be increased when the Federal Reserve System sells government securities in the open market.

Correct AnswerverifiedShow Answer

Assume the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the public, the money supply will immediately:

Correct AnswerverifiedShow Answer

If the Fed implements a zero interest rate policy, it will:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

-Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD3 to AD2 can be achieved by Federal Reserve action to:

Correct AnswerverifiedC

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Correct AnswerverifiedC

The term "liquidity trap" describes a situation where:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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C

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C

Correct Answer
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