Question 1

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Accepted Answer

A)   Buy government securities in the open market and increase taxes
B)   Buy government securities in the open market and decrease taxes
C)   Sell government securities in the open market and increase government spending
D)   Sell government securities in the open market and decrease government spendingE) A) and D)
F) A) and C)

Question 2

t is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to: A)  Sm3 and the interest rate will be 4 percent B)  Sm3 and the interest rate will be 8 percent C)  Sm1 and the interest rate will be 8 percent D)  Sm1 and the interest rate will be 4 percent" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to:

Accepted Answer

A)   Sm3 and the interest rate will be 4 percent
B)   Sm3 and the interest rate will be 8 percent
C)   Sm1 and the interest rate will be 8 percent
D)   Sm1 and the interest rate will be 4 percentE) None of the above
F) A) and B)

Question 3

The important effects of ZIRP, QE, and Operation Twist include the following, except:

Accepted Answer

A)   The federal government was able to fund huge budget deficits at lower than normal interest rates
B)   The Fed became the federal government's primary lender, financing a huge portion of the budget deficit
C)   Government spending in effect became largely funded by "newly printed" money
D)   The Fed's monetary policy somewhat offset the effects of the federal government's fiscal policyE) A) and C)
F) B) and C)

Question 4

The Fed's response to the zero lower bound problem was quantitative easing (or "QE") , where the Fed buys large amounts of bonds in order to:

Accepted Answer

A)   Lower the interest rates
B)   Increase banks' reserves
C)   Lower bond prices
D)   Reduce money supplyE) B) and C)
F) A) and B)

Question 5

Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:

Accepted Answer

A)   Decreased by $50 billion
B)   Decreased by $100 billion
C)   Decreased by $150 billion
D)   Increased by $50 billionE) B) and C)
F) A) and D)

Question 6

The Federal Reserve can increase aggregate demand by:

Accepted Answer

A)   Reducing the money supply
B)   Reducing the discount rate
C)   Raising the reserve requirement
D)   Selling government securities in the open marketE) A) and B)
F) None of the above

Question 7

According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one 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 pointE) All of the above
F) B) and C)

Question 8

Raising the interest paid on reserves has the effect of making it:

Accepted Answer

A)   More costly for banks to hold excess reserves
B)   Less costly for banks to hold excess reserves
C)   More attractive for banks to lend out their excess reserves
D)   Less attractive for banks to hold required reservesE) All of the above
F) C) and D)

Question 9

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

Accepted Answer

A) True 
 B)False

Question 10

f1 to Sf2 B)  Shifting Sf4 to Sf3 C)  Shifting Sf3 to Sf1 D)  Shifting Sf4 to Sf2" class="answers-bank-image d-inline" rel="preload" > Refer to the figure above. Which change would be consistent with an attempt by the Federal Reserve to rein in inflation?

Accepted Answer

A)   Shifting Sf1 to Sf2
B)   Shifting Sf4 to Sf3
C)   Shifting Sf3 to Sf1
D)   Shifting Sf4 to Sf2E) All of the above
F) A) and C)

Question 11

Other things equal, an increase in consumer wealth will:

Accepted Answer

A)   Increase aggregate supply
B)   Increase aggregate demand
C)   Reduce the price level
D)   Reduce the money supplyE) A) and B)
F) A) and D)

Question 12

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars.  In the balance sheet above for the Federal Reserve, the liabilities and net worth would be items 7 and:

Accepted Answer

A)   1, 3, and 5
B)   2, 4, and 5
C)   1, 2, and 3
D)   4, 5, and 6E) All of the above
F) None of the above

Question 13

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:

Accepted Answer

A)   $4.5 billion
B)   $9 billion
C)   $12 billion
D)   $15 billionE) C) and D)
F) B) and D)

Question 14

When the Fed lowered short-term interest rates to near zero but the policy didn't seem to stimulate the economy enough, the Fed in 2009 also began conducting the policy of expansive buying of bonds now known as:

Accepted Answer

A)   ZIRP (zero interest rate policy) 
B)   QE (quantitative easing) 
C)   Operation Twist
D)   Zero Lower BoundE) B) and C)
F) A) and B)

Question 15

After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:

Accepted Answer

A)   Monetary policy's cyclical asymmetry
B)   The banking system fell into a liquidity trap
C)   Interest rates had already been cut to very low levels
D)   The time lags of monetary policyE) None of the above
F) All of the above

Question 16

If the Fed is trying to make the interest rates go down, it wants:

Accepted Answer

A)   The money supply to decrease
B)   The price level to decrease
C)   Unemployment to decrease
D)   Investment to decreaseE) B) and C)
F) All of the above

Question 17

Which line in the graph above would best illustrate the supply of money curve?

Accepted Answer

A)   Line 4
B)   Line 3
C)   Line 2
D)   Line 1E) None of the above
F) A) and B)

Question 18

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

Accepted Answer

A)   Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million
B)   Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million
C)   Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million
D)   Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 millionE) All of the above
F) A) and D)

Question 19

Which line in the graph above would best illustrate the transactions demand for money curve?

Accepted Answer

A)   Line 1
B)   Line 2
C)   Line 3
D)   Line 4E) B) and C)
F) B) and D)

Question 20

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 reinforce each other to achieve that objective?

Accepted Answer

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

Exam 16: Interest Rates and Monetary Policy

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

Correct Answer
verified

Raising the interest paid on reserves has the effect of making it:

Correct Answer
verified

The Fed's response to the zero lower bound problem was quantitative easing (or "QE") , where the Fed buys large amounts of bonds in order to:

Correct Answer
verified

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then S_m₂ will shift to:

Correct Answer
verified

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

Correct Answer
verified

After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:

Correct Answer
verified

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Correct Answer
verified

If the Fed is trying to make the interest rates go down, it wants:

Correct Answer
verified

The important effects of ZIRP, QE, and Operation Twist include the following, except:

Correct Answer
verified

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

Correct Answer
verified

Correct Answer
verified

Which line in the graph above would best illustrate the transactions demand for money curve?

Correct Answer
verified

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:

Correct Answer
verified

Other things equal, an increase in consumer wealth will:

Correct Answer
verified

When the Fed lowered short-term interest rates to near zero but the policy didn't seem to stimulate the economy enough, the Fed in 2009 also began conducting the policy of expansive buying of bonds now known as:

Correct Answer
verified

Which line in the graph above would best illustrate the supply of money curve?

Correct Answer
verified

Correct Answer
verified

The Federal Reserve can increase aggregate demand by:

Correct Answer
verified

Refer to the figure above. Which change would be consistent with an attempt by the Federal Reserve to rein in inflation?

Correct Answer
verified

Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

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

Correct AnswerverifiedShow Answer

Raising the interest paid on reserves has the effect of making it:

Correct AnswerverifiedShow Answer

The Fed's response to the zero lower bound problem was quantitative easing (or "QE") , where the Fed buys large amounts of bonds in order to:

Correct AnswerverifiedShow Answer

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

After the Great Recession when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy because of the following reasons, except:

Correct AnswerverifiedShow Answer

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Correct AnswerverifiedShow Answer

If the Fed is trying to make the interest rates go down, it wants:

Correct AnswerverifiedShow Answer

The important effects of ZIRP, QE, and Operation Twist include the following, except:

Correct AnswerverifiedShow Answer

If the Fed sells $10 million in government securities to commercial banks, the size of the effect on the banks' excess reserves is not the same as if the Fed sold the securities to the public instead.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which line in the graph above would best illustrate the transactions demand for money curve?

Correct AnswerverifiedShow Answer

Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by:

Correct AnswerverifiedShow Answer

Other things equal, an increase in consumer wealth will:

Correct AnswerverifiedShow Answer

When the Fed lowered short-term interest rates to near zero but the policy didn't seem to stimulate the economy enough, the Fed in 2009 also began conducting the policy of expansive buying of bonds now known as:

Correct AnswerverifiedShow Answer

Which line in the graph above would best illustrate the supply of money curve?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Federal Reserve can increase aggregate demand by:

Correct AnswerverifiedShow Answer

Refer to the figure above. Which change would be consistent with an attempt by the Federal Reserve to rein in inflation?

Correct AnswerverifiedShow Answer

Refer to the graph above. If the interest rate rises from 2 percent to 3 percent, the supply of money must have:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Refer to the graph above, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then S_m₂ will shift to:

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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