Question 1

Open-market operations change:

Accepted Answer

A)   the size of the monetary multiplier but not commercial bank reserves.
B)   commercial bank reserves but not the size of the monetary multiplier.
C)   neither commercial bank reserves nor the size of the monetary multiplier.
D)   both commercial bank reserves and the size of the monetary multiplier.E) None of the above
F) A) and B)

Question 2

Other things equal,a restrictive monetary policy during a period of demand-pull inflation will:

Accepted Answer

A)   lower the interest rate,increase investment,and reduce net exports.
B)   lower the price level,increase investment,and increase aggregate demand.
C)   increase productivity,aggregate supply,and real output.
D)   increase the interest rate,reduce investment,and reduce aggregate demand.E) A) and B)
F) A) and C)

Question 3

The higher the interest rate,the larger will be the amount of money demanded for transaction purposes.

Accepted Answer

A) True 
 B)False

Question 4

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond increases to $1,250,the interest rate will:

Accepted Answer

A)   fall to 9 percent.
B)   fall to 8 percent.
C)   rise to 11 percent.
D)   rise to 12 percent.E) A) and B)
F) A) and C)

Question 5

Operation Twist:

Accepted Answer

A)   ended the forward commitment policy of the Fed.
B)   involved the Fed simultaneously selling long-term government bonds and buying short-term government bonds.
C)   involved the Fed simultaneously selling short-term government bonds and buying long-term government bonds.
D)   was intended to raise short-term interest rates and lower long-term rates until the two were equal.E) All of the above
F) A) and B)

Question 6

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Accepted Answer

A)   10 percent.
B)   12 percent.
C)   14 percent.
D)   16 percent.E) All of the above
F) None of the above

Question 7

If the Fed wants to lower the federal funds rate,it should:

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) A) and C)
F) A) and B)

Question 8

The demand for federal funds is

Accepted Answer

A)   downsloping because higher interest rates discourage commercial banks from borrowing federal funds,but lower rates will encourage borrowing.
B)   downsloping because higher interest rates encourage commercial banks to borrow federal funds.
C)   upsloping because higher interest rates encourage commercial banks to lend federal funds.
D)   upsloping because higher interest rates discourage commercial banks from lending federal funds.E) C) and D)
F) A) and B)

Question 9

Other things equal,a reduction in income taxes would:

Accepted Answer

A)   reduce productivity and reduce aggregate supply.
B)   increase consumption and increase aggregate demand.
C)   increase the supply of money and reduce investment.
D)   increase government spending and increase aggregate demand.E) A) and B)
F) B) and D)

Question 10

The prime interest rate usually:

Accepted Answer

A)   rises when the federal funds rate rises.
B)   rises when the discount rate falls.
C)   falls when the federal funds rate rises.
D)   falls when the Fed sells bonds in the open market.E) A) and B)
F) None of the above

Question 11

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.   Assets‾ Reserves Securities Loans Property$200300500400 Liabilities & Net Worth ‾ Checkable Deposits Stock Shares$1,100400\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{	ext { Assets}}\	ext { Reserves}\	ext { Securities}\	ext { Loans}\	ext { Property} \end{array}\begin{array}{l}\\$ 200 \300 \500 \400 \end{array}\begin{array}{lll}\quad\quad \underline{	ext { Liabilities \& Net Worth }}\	ext { Checkable Deposits}\	ext {  Stock Shares}\\\\end{array}\begin{array}{lll}\\$1,100\400\\\\end{array}\end{array} Assets​ Reserves Securities Loans Property​$200300500400​ Liabilities & Net Worth ​ Checkable Deposits Stock Shares​$1,100400​​

Refer to the given data.If the Fed reduced the reserve requirement from 20 percent to 16 percent,excess reserves in the commercial banking system would increase by _____ and the monetary multiplier would rise to ____.

Accepted Answer

A)   $10 billion;5
B)   $40 billion;6.25
C)   $10 billion;10
D)   $40 billion;12.5 E) All of the above
F) A) and B)

Question 12

The interest rate that banks charge one another on overnight loans is called the:

Accepted Answer

A)   discount rate.
B)   prime lending rate.
C)   overnight lending rate.
D)   federal funds rate.E) None of the above
F) A) and D)

Question 13

Interest paid on reserves held at the Fed:

Accepted Answer

A)   is available to the general public,but not to commercial banks.
B)   incentivizes financial institutions to hold more reserves and reduce risky lending.
C)   is determined by the federal funds rate.
D)   totaled over $1 trillion in 2012.E) A) and B)
F) None of the above

Question 14

Answer the question on the basis of the following table in which columns (1) and (2) indicate the transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money:  (1) Interest Rate‾12%108642(2) Dt‾$100100100100100100(3) Da‾$020406080100\begin{array}{c}\begin{array}{c}(1) \\underline{	ext {Interest Rate}}\12 \% \10 \8 \6 \4 \2\end{array}\begin{array}{c}(2) \\underline{D_{t} }\ \$ 100 \100 \100 \100 \100 \100\end{array}\begin{array}{c}(3) \\underline{D_{a}} \\$ 0 \20 \40 \60 \80 \100\end{array}\end{array}(1) Interest Rate​12%108642​(2) Dt​​$100100100100100100​(3) Da​​$020406080100​​ 
 The given data suggest that the amount of money that society wishes to hold as an asset:

Accepted Answer

A)   varies directly with the interest rate.
B)   varies inversely with the interest rate.
C)   varies inversely with nominal GDP.
D)   is independent of the interest rate. E) None of the above
F) B) and C)

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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)

Question 17

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) None of the above
F) C) and D)

Question 18

The Fed reduces interest rates mainly by selling government securities.

Accepted Answer

A) True 
 B)False

Question 19

A restrictive monetary policy is designed to shift the:

Accepted Answer

A)   aggregate demand curve rightward.
B)   aggregate demand curve leftward.
C)   aggregate supply curve rightward.
D)   aggregate supply curve leftward.E) A) and B)
F) All of the above

Question 20

Which of the following statements is true?

Accepted Answer

A)   The Federal Reserve sets the federal funds rate.
B)   The Federal Reserve sets the target for the federal funds rate,and then uses the reserve ratio to push banks toward that target.
C)   The Federal Reserve does not set the federal funds rate,but it influences it through the use of its open-market operations.
D)   The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.E) All of the above
F) A) and B)

Exam 35: Interest Rates and Monetary Policy

The higher the interest rate,the larger will be the amount of money demanded for transaction purposes.

Correct Answer
verified

It is costly to hold money because:

Correct Answer
verified

The interest rate that banks charge one another on overnight loans is called the:

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

The prime interest rate usually:

Correct Answer
verified

Open-market operations change:

Correct Answer
verified

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Correct Answer
verified

Correct Answer
verified

Operation Twist:

Correct Answer
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If the Fed wants to lower the federal funds rate,it should:

Correct Answer
verified

Correct Answer
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Which of the following statements is true?

Correct Answer
verified

Interest paid on reserves held at the Fed:

Correct Answer
verified

The demand for federal funds is

Correct Answer
verified

An increase in nominal GDP increases the demand for money because:

Correct Answer
verified

The Fed reduces interest rates mainly by selling government securities.

Correct Answer
verified

Other things equal,a reduction in income taxes would:

Correct Answer
verified

A restrictive monetary policy is designed to shift the:

Correct Answer
verified

Other things equal,a restrictive monetary policy during a period of demand-pull inflation will:

Correct Answer
verified

Exam 35: Interest Rates and Monetary Policy

The higher the interest rate,the larger will be the amount of money demanded for transaction purposes.

Correct AnswerverifiedShow Answer

It is costly to hold money because:

Correct AnswerverifiedShow Answer

The interest rate that banks charge one another on overnight loans is called the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The prime interest rate usually:

Correct AnswerverifiedShow Answer

Open-market operations change:

Correct AnswerverifiedShow Answer

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Operation Twist:

Correct AnswerverifiedShow Answer

If the Fed wants to lower the federal funds rate,it should:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Interest paid on reserves held at the Fed:

Correct AnswerverifiedShow Answer

The demand for federal funds is

Correct AnswerverifiedShow Answer

An increase in nominal GDP increases the demand for money because:

Correct AnswerverifiedShow Answer

The Fed reduces interest rates mainly by selling government securities.

Correct AnswerverifiedShow Answer

Other things equal,a reduction in income taxes would:

Correct AnswerverifiedShow Answer

A restrictive monetary policy is designed to shift the:

Correct AnswerverifiedShow Answer

Other things equal,a restrictive monetary policy during a period of demand-pull inflation will:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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