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Exam 35: Interest Rates and Monetary Policy

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Question 41

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Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

A) The required reserve ratio will increase.
B) The money supply will decrease.
C) The deposits of commercial banks will decline.
D) Commercial bank reserves will increase.

E) A) and D)
F) A) and C)

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Question 42

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Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 200 \\300 \\500 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$1,100\\400\\\\\\\end{array}\end{array}$ Refer to the given data.If the Fed increased the reserve requirement from 20 percent to 25 percent,a deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier would fall to ____.

A) $50 billion;5
B) $10 billion;4
C) $50 billion;4
D) $10 billion;8

E) B) and D)
F) None of the above

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Question 43

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Which of the following actions by the Fed would cause the money supply to increase?

When QE2 and Operation Twist were implemented,the Fed suspended its policy of forward commitment.

From 2004 to 2006 the Fed raised the federal funds rate gradually in a series of steps.The Fed's purpose was to raise the prime interest rate so that:

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$ Refer to the given data.Suppose the Fed bought $20 billion of U.S.securities from the banks.This would:

Which of the following is not a tool of monetary policy?

Other things equal,if there is an increase in nominal GDP:

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$ Refer to the given data.The monetary multiplier for the commercial banking system is:

Answer the question on the basis of the following table in which columns (1) and (2) indicate the transactions demand (D_t) for money and columns (1) and (3) show the asset demand (D_a) for money: $\begin{array}{c}\begin{array}{c}(1) \\\underline{\text {Interest Rate}}\\12 \% \\10 \\8 \\6 \\4 \\2\end{array}\begin{array}{c}(2) \\\underline{D_{t} }\\ \$ 100 \\100 \\100 \\100 \\100 \\100\end{array}\begin{array}{c}(3) \\\underline{D_{a}} \\\$ 0 \\20 \\40 \\60 \\80 \\100\end{array}\end{array}$ The given data suggest that the amount of money demanded for transactions:

The asset demand for money is most closely related to money functioning as a:

If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve,a reduction in the money supply will:

If the Fed wants to discourage commercial bank lending,it will:

Answer the question on the basis of the following information.For transactions,households and businesses want to hold an amount of money equal to one-half of nominal GDP.The table shows the amounts of money they want to hold as an asset at various interest rates. $\begin{array}{l}\begin{array}{cc}\underline{\text { Interest Rate} } & \underline{\text { Amount of Money Demanded }}\\10 \% & \$ 20 \\8 & 40 \\6 & 60 \\4 & 80 \\2 & 100\end{array}\end{array}$ Refer to the given information.If nominal GDP is $200 and the interest rate is 6 percent,the total amount of money that households and businesses will want to hold is:

An expansionary monetary policy may be frustrated if the:

Other things equal,which of the following would increase the federal funds rate?

The demand for federal funds is:

The purchase of government securities from the public by the Fed will cause:

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

Assuming government wishes to either increase or decrease the level of aggregate demand,which of the following pairs are not consistent policy measures?