Question 1

Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling.If aggregate supply increases in the economy, the Fed

Accepted Answer

A)  will have to increase interest rates to keep the price level from falling.
B)  will have to reduce the money supply to keep the price level from rising.
C)  will have to increase the money supply to keep the price level from falling.
D)  can keep the price level stable without altering the money supply or interest rate.

Question 2

In recent years (after the financial crisis of 2008) , the Fed has added a new element to its open-market operations, which is

Accepted Answer

A)  buying and selling foreign-government securities.
B)  taking government bonds as collateral on loans to banks and other financial institutions.
C)  the trading of state- and local-government bonds.
D)  accepting corporate stocks and bonds as bank reserves.

Question 3

When the Fed undertakes a "repo" transaction with a financial institution, the Fed in essence

Accepted Answer

A)  grants a collateralized loan to the financial institution.
B)  provides an insurance coverage to the financial institution.
C)  buys shares of stock of the financial institution.
D)  reduces the reserves of the financial institution.

Question 4

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

Accepted Answer

A)  fall, causing households and businesses to hold less money.
B)  rise, causing households and businesses to hold less money.
C)  rise, causing households and businesses to hold more money.
D)  fall, causing households and businesses to hold more money.

Question 5

Before the financial crisis of 2008, if the Fed wanted to lower the Federal funds rate, it

Accepted Answer

A)  increased the discount rate.
B)  increased the reserve ratio.
C)  bought bonds from banks and the public.
D)  sold bonds to banks and the public.

Question 6

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

Accepted Answer

A)  purchases of government bonds from banks
B)  an increase in the reserve requirement
C)  an increase in the discount rate
D)  sales of government bonds to the public

Question 7

According to the Taylor rule,

Accepted Answer

A)  for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP.
B)  growth in the money supply should be limited to the long-run average growth rate of real GDP.
C)  if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.
D)  the rate of money growth should be set at 4 percent per year.

Question 8

The ZIRP (zero interest rate policy)  of the Fed led to the so-called zero lower bound problem, which refers to the problem of

Accepted Answer

A)  having a very low level of employment with zero new jobs created.
B)  huge budget deficits leaving the government no more ability to spend.
C)  interest rates that can't go any lower, i.e., they cannot be driven down below zero.
D)  zero real-GDP growth due to very weak aggregate demand.

Question 9

The prime interest rate

Accepted Answer

A)  is lower than the federal funds rate because it is the rate charged to a bank's most creditworthy customers.
B)  usually is at the same level as the federal funds rate.
C)  is a benchmark interest rate set directly by the Fed.
D)  is influenced by Fed policies that change the money supply.

Question 10

Other things equal, an appreciation of the U.S.dollar would

Accepted Answer

A)  increase productivity and increase aggregate supply.
B)  decrease net exports and decrease aggregate demand.
C)  increase the prices of imported resources and decrease aggregate supply.
D)  decrease the supply of money and decrease aggregate demand.

Question 11

Assume that the required reserve ratio is 20 percent.If the Federal Reserve buys $80 million in government securities from commercial banks, 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
D)  increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will decrease by another

Question 12

In response to the zero lower bound problem,

Accepted Answer

A)  the Fed implemented the zero interest rate policy (ZIRP) .
B)  Congress approved additional fiscal stimulus in 2010.
C)  the Fed pursued quantitative easing.
D)  the Fed ended its forward commitment in order to encourage further lending.

Question 13

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

Accepted Answer

A)  excess reserves of $2 billion.
B)  neither an excess nor a deficiency of reserves.
C)  a deficiency of reserves of $.5 billion.
D)  excess reserves of only $.5 billion.

Question 14

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

Accepted Answer

A)  prime rate.
B)  short-term rate.
C)  discount rate.
D)  federal funds rate.

Question 15

An expansionary monetary policy may be frustrated if the

Accepted Answer

A)  demand-for-money curve shifts to the left.
B)  investment-demand curve shifts to the left.
C)  saving schedule shifts downward.
D)  investment-demand curve shifts to the right.

Question 16

Other things equal, an increase in taxes on businesses will

Accepted Answer

A)  increase aggregate supply, decrease aggregate demand, and cause the price level to fall.
B)  increase aggregate supply, increase aggregate demand, and cause real GDP to rise.
C)  decrease aggregate supply, decrease aggregate demand, and cause real GDP to fall.
D)  decrease aggregate supply, increase aggregate demand, and cause the price level to rise.

Question 17

In traditional (before 2008) analysis, 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.

Accepted Answer

A) True 
 B)False

Question 18

If the Federal Reserve System buys government securities from commercial banks and the public,

Accepted Answer

A)  commercial bank reserves will decline.
B)  commercial bank reserves will be unaffected.
C)  it will be easier to obtain loans at commercial banks.
D)  the money supply will contract.

Question 19

The Fed's inability to stimulate the economy by reducing interest rates is known as the

Accepted Answer

A)  zero lower bound problem.
B)  zero upper bound problem.
C)  negative interest rate problem.
D)  quantitative easing problem.

Question 20

Which of the following statements is most accurate about the Fed's zero interest rate policy (ZIRP) ?

Accepted Answer

A)  The Fed has abandoned the ZIRP, recognizing the need to reduce nominal interest rates to below zero.
B)  As of 2016, the ZIRP is being pursued by the Fed.
C)  It ended in late 2015, with the Fed increasing the IOER and engaging in reverse repo transactions.
D)  In an effort to end the ZIRP, the Fed prohibited nonbank lending to banks.

Exam 36: Interest Rates and Monetary Policy

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

Correct AnswerverifiedShow Answer

Before the financial crisis of 2008, if the Fed wanted to lower the Federal funds rate, it

Correct AnswerverifiedShow Answer

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

Correct AnswerverifiedShow Answer

In response to the zero lower bound problem,

Correct AnswerverifiedShow Answer

The prime interest rate

Correct AnswerverifiedShow Answer

Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling.If aggregate supply increases in the economy, the Fed

Correct AnswerverifiedShow Answer

If the Federal Reserve System buys government securities from commercial banks and the public,

Correct AnswerverifiedShow Answer

Other things equal, an appreciation of the U.S.dollar would

Correct AnswerverifiedShow Answer

An expansionary monetary policy may be frustrated if the

Correct AnswerverifiedShow Answer

Other things equal, an increase in taxes on businesses will

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The ZIRP (zero interest rate policy) of the Fed led to the so-called zero lower bound problem, which refers to the problem of

Correct AnswerverifiedShow Answer

When the Fed undertakes a "repo" transaction with a financial institution, the Fed in essence

Correct AnswerverifiedShow Answer

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

Correct AnswerverifiedShow Answer

In traditional (before 2008) analysis, 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.

Correct AnswerverifiedShow Answer

Which of the following statements is most accurate about the Fed's zero interest rate policy (ZIRP) ?

Correct AnswerverifiedShow Answer

The Fed's inability to stimulate the economy by reducing interest rates is known as the

Correct AnswerverifiedShow Answer

In recent years (after the financial crisis of 2008) , the Fed has added a new element to its open-market operations, which is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the Taylor rule,

Correct AnswerverifiedShow Answer

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