Multiple Choice Questions

Refer to the diagram of the market for money. The downward slope of the money demand curve Dm is best explained in terms of the:
  • asset demand for money.
  • Rise to 6 percent
  • Decrease the money supply from $225 to $150 billion
  • decrease by $2 billion.
Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?
  • A decline in excess reserves in the banking system.
  • lower interest rates and increase the equilibrium GDP.
  • lower interest rates, an expanded GDP, and a higher rate of inflation.
  • A tax increase and an increase in the money supply.
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.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 ____.
  • 10 percent
  • Interest rates
  • $600 million, but by $800 million if the securities are purchased directly from commercial banks
  • $50 billion; 4
An expansionary monetary policy is one that reduces the supply of money.
  • True
  • False
A federal funds rate reduction that is caused by monetary policy will:
  • increase the interest rate, reduce investment, and reduce aggregate demand.
  • decrease the prime interest rate.
  • Decrease net exports and decrease aggregate demand
  • interest rate will rise.
In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed:
  • Purchases of government bonds from banks.
  • Supply of money curve is vertical
  • lowered the federal funds target rate.
  • asset demand for money.
Other things equal, an appreciation of the U.S. dollar would:
  • Increase aggregate demand
  • increase the interest rate, reduce investment, and reduce aggregate demand.
  • Decrease net exports and decrease aggregate demand
  • Decrease the money supply from $225 to $150 billion
If the Federal Reserve System buys government securities from commercial banks and the public:
  • it will be easier to obtain loans at commercial banks.
  • False
  • Less excess reserves
  • An increase in the money supply will decrease the rate of interest
To increase the federal funds rate, the Fed can:
  • sell government bonds to commercial banks.
  • Sell government securities in the open market
  • lower interest rates and increase the equilibrium GDP.
  • Increase the transactions demand and the total demand for money
If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:
  • lower interest rates, an expanded GDP, and a higher rate of inflation.
  • nominal GDP decreased.
  • Less excess reserves
  • The demand for money increases
One of the strengths of monetary policy relative to fiscal policy is that monetary policy:
  • can be implemented more quickly.
  • Purchases of government bonds from banks.
  • Increasing the interest on reserves
  • transactions demand for money.
Among the worrisome consequences of the government's aggressive implementation of ZIRP and QE are the following, except:
  • not accurately predict what will happen to interest rates or bond prices.
  • the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
  • Senior citizens are finding it easier to live off the earnings from their life-time investments
  • Sell government securities in the open market and decrease government spending
Which of the following actions by the Fed would cause the money supply to increase?
  • Purchases of government bonds from banks.
  • Decrease the money supply from $225 to $150 billion
  • the supply of bonds in the bond market will rise and the interest rate will rise.
  • increase consumption and increase aggregate demand.
Other things equal, if there is an increase in nominal GDP:
  • the interest rate will rise.
  • A decline in excess reserves in the banking system.
  • Increase aggregate demand
  • interest rate will rise.
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?
  • Decrease the money supply to shift the aggregate demand curve leftward
  • Sell government securities in the open market
  • not accurately predict what will happen to interest rates or bond prices.
  • Sell government securities in the open market and decrease government spending
Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?
  • $200 billion
  • Decrease the money supply from $225 to $150 billion
  • Sm3 and the interest rate will be 4 percent
  • transactions demand for money.
In the cause-effect chain of monetary policy an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market.
  • True
  • False
A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:
  • Stimulate the economy
  • will have to increase the money supply to keep the price level from falling.
  • Less excess reserves
  • Reducing the discount rate
The major advantages of monetary policy include its flexibility, speed, and political palatability.
  • True
  • False
Which line in the graph above would best illustrate the asset demand for money curve?
  • Line 1
  • True
  • Interest rate
  • False
The impact of monetary policy on investment spending may be weakened:
  • it will be easier to obtain loans at commercial banks.
  • if the investment-demand curve shifts to the right during inflation and to the left during recession.
  • altering the reserves of commercial banks, largely through sales and purchases of government bonds.
  • True
Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP?
  • $200 billion
  • increase the interest rate, reduce investment, and reduce aggregate demand.
  • asset demand for money.
  • Decrease the money supply from $225 to $150 billion
Which of the following is a primary difference between QE2 and QE3?
  • Purchases of government bonds from banks.
  • Decrease the money supply to shift the aggregate demand curve leftward
  • QE2 had a specific deadline; QE3 was open-ended.
  • Open-market operations.
In the balance sheet above for the Federal Reserve, the assets would be items 5 and:
  • Ben Bernanke
  • 4 and 6
  • Line 2
  • Less excess reserves
Refer to the table. An interest rate of 2 percent is not sustainable because:
  • Decrease the money supply from $225 to $150 billion
  • QE2 had a specific deadline; QE3 was open-ended.
  • the supply of bonds in the bond market will rise and the interest rate will rise.
  • A decline in excess reserves in the banking system.
Suppose the demand for money and the supply of money increase simultaneously. We can:
  • Decrease the money supply to shift the aggregate demand curve leftward
  • can be implemented more quickly.
  • not accurately predict what will happen to interest rates or bond prices.
  • An increase in the money supply will decrease the rate of interest
Refer to the table above. Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is:
  • nominal GDP decreased.
  • 5 percent
  • the supply of bonds in the bond market will rise and the interest rate will rise.
  • Sell government securities in the open market
Monetary policy, unlike fiscal policy, does not have any time lags.
  • True
  • False
A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:
  • decrease by $2 billion.
  • threats to the financial system from the mortgage default crisis.
  • Ease monetary policy
  • Rise to 6 percent
If the Fed were to reduce the legal reserve ratio, we would expect:
  • Decrease the money supply to shift the aggregate demand curve leftward
  • lower interest rates and increase the equilibrium GDP.
  • An increase in the money supply will decrease the rate of interest
  • lower interest rates, an expanded GDP, and a higher rate of inflation.
Refer to the diagram of the market for money. The vertical money supply curve Sm reflects the fact that:
  • asset demand for money.
  • the supply of bonds in the bond market will rise and the interest rate will rise.
  • the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
  • Decrease the money supply from $225 to $150 billion
Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:
  • neither an excess nor a deficiency of reserves.
  • it will be easier to obtain loans at commercial banks.
  • $600 million, but by $800 million if the securities are purchased directly from commercial banks
  • False
Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?
  • Open-market operations.
  • QE2 had a specific deadline; QE3 was open-ended.
  • Rise to 6 percent
  • nominal GDP decreased.
An increase in nominal GDP will:
  • Increase the transactions demand and the total demand for money
  • Increases, the prime interest rate will increase
  • Decrease the money supply to shift the aggregate demand curve leftward
  • lower interest rates and increase the equilibrium GDP.
Refer to the table above. Suppose that the transactions demand for money is $300 billion and the money supply is $700 billion. A decrease in the money supply to $600 billion would cause the interest rate to:
  • 5 percent
  • Rise to 6 percent
  • $200 billion
  • nominal GDP decreased.
Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.
  • True
  • False
If the Fed is targeting a lower federal funds rate, then it is pursuing a restrictive monetary policy.
  • True
  • False
From September 2007 to April 2008 the Fed lowered the federal funds rate from 5.25 percent to 2 percent in a series of steps. The Fed's actions were largely in response to:
  • threats to the financial system from the mortgage default crisis.
  • Increases, the prime interest rate will increase
  • Ease monetary policy
  • Decrease the money supply to shift the aggregate demand curve leftward
Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will:
  • Sell government securities in the open market and decrease government spending
  • decrease by $2 billion.
  • Open-market operations.
  • Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million
Other things equal, a reduction in income taxes would:
  • increase consumption and increase aggregate demand.
  • increase the interest rate, reduce investment, and reduce aggregate demand.
  • Increase aggregate demand
  • Decrease net exports and decrease aggregate demand
There is an asset demand for money because households and business firms use money as a store of value.
  • True
  • False
Holding money as an asset presents a risk of capital loss.
  • True
  • False
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:
  • $50 billion; 4
  • Sell government securities in the open market and decrease government spending
  • will have to increase the money supply to keep the price level from falling.
  • $600 million, but by $800 million if the securities are purchased directly from commercial banks
A decrease in the reserve ratio increases the:
  • A decline in excess reserves in the banking system.
  • Less costly for banks to hold excess reserves
  • Decrease net exports and decrease aggregate demand
  • amount of excess reserves in the banking system.
Raising the interest paid on reserves has the effect of making it:
  • transactions demand for money.
  • Less costly for banks to hold excess reserves
  • Decrease the money supply to shift the aggregate demand curve leftward
  • the supply of bonds in the bond market will rise and the interest rate will rise.
The Federal Reserve can increase aggregate demand by:
  • Reducing the discount rate
  • decrease the prime interest rate.
  • Increases, the prime interest rate will increase
  • Increase aggregate demand
Operation Twist was aimed at lowering long-term interest rates.
  • True
  • False
Other things equal, an increase in consumer wealth will:
  • interest rate will rise.
  • Increase aggregate demand
  • the interest rate will rise.
  • Increasing the interest on reserves
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Multiple Choice Questions
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