Full Test Bank Ch.14 Monetary Policy 11th Edition

Chapter 14 Test Bank KEY

1. Which of the following is often described as the most powerful person in the U.S. economy?

A. the President of the United States

B. the Speaker of the House of Representatives

C. the chairman of the House Ways and Means Committee

D. the chairman of the Federal Reserve

2. The use of money and credit controls to change macroeconomic activity is known as

A. fiscal policy.

B. monetary policy.

C. supply-side policy.

D. eclectic policy.

3. Monetary policy involves the use of money and credit controls to

A. move the economy along the aggregate demand curve.

B. move the economy along the aggregate supply curve.

C. shift the aggregate demand curve.

D. shift the aggregate supply curve.

4. U.S. monetary policy relies on the

A. Federal Reserve System's control over taxes.

B. Federal Reserve System's control over the money supply.

C. President's control over the printing of money.

D. President's control over interest rates.

5. Which of the following serves as the central banker for private banks in the United States?

A. the 12 regional Federal Reserve banks

B. the Executive Branch of government

C. the Board of Governors of the Federal Reserve System

D. the Fed Open Market Committee

6. Checks are cleared between private banks by

A. the 12 regional Federal Reserve banks.

B. the Executive Branch of government.

C. the Federal Reserve Board of Governors.

D. state banking commissions.

7. The 12 regional Fed banks do all of the following except

A. clear checks between private banks.

B. lend money to individuals.

C. provide currency to banks.

D. hold bank reserves.

8. The 12 regional Fed banks do not

A. provide loans to banks.

B. hold reserves for banks.

C. accept deposits from individuals.

D. provide currency to banks.

9. The twelve regional Federal Reserve banks are responsible for

A. accepting deposits from nonbank businesses.

B. providing currency to other countries.

C. lending money to individuals.

D. lending reserves to private banks.

10. Suppose Alan receives a check for $300 from a bank in Dallas. He deposits the check in his account at his Baltimore bank. Which of the following is Alan's Baltimore bank likely to collect the $300 from?

A. the Baltimore bank's regional Federal Reserve bank

B. the U.S. Treasury

C. the main Federal Reserve Bank in Washington, D.C

D. the Federal Reserve Board of Governors

11. Which of the following is responsible for holding bank reserves?

A. the Federal Reserve Board of Governors

B. the 12 regional Federal Reserve banks

C. the executive branch of government

D. the Fed chairman

12. Which of the following is responsible for providing currency and cash to banks?

A. the legislative branch of government

B. comptroller of the currency

C. the Federal Reserve system

D. the U.S. Treasury

13. The key decision maker for general Federal Reserve policy is the

A. Federal Open Market Committee.

B. Board of Governors.

C. Federal Advisory Council.

D. Regional Federal Reserve banks.

14. The key decision maker for U.S. monetary policy is

A. Congress.

B. the president.

C. the president's cabinet.

D. the Board of Governors.

15. The Federal Reserve Board of Governors has

A. seven members appointed by the President of the United States.

B. fourteen members appointed for seven-year terms by the President of the United States.

C. seven members elected by U.S. citizens.

D. fourteen members selected by the U.S. Senate.

16. The Board of Governors has ___ members, and they are appointed for ___ year terms.

A. 10; 12

B. 7; 14

C. 14; 7

D. 12; 10

17. Which of the following is NOT about the members of the Federal Reserve Board of Governors?

A. They are appointed to fourteen-year terms by the President of the United States.

B. They are relatively immune to short-term political pressures.

C. They may not be reappointed after serving a full term.

D. They each serve as chairman of the Board of Governors on a rotating basis.

18. Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they

A. have time to learn how the Fed operates.

B. are more likely to make politically acceptable decisions.

C. make their decisions based on economic, rather than political, considerations.

D. have enough time to travel to all 12 regional banks.

19. Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term

A. in an effort to isolate the Fed from political pressures.

B. so that Fed decisions will be based on political considerations.

C. to give Congress better control over the money supply.

D. in an effort to make the Fed responsive to voters.

20. Which of the following is about the chairman of the Federal Reserve Board of Governors?

A. The chairman is elected by the Fed regional bank presidents.

B. The chairman serves a 21-year term.

C. A new chairman is elected as soon as a new U.S. president takes office.

D. The chairman can be reappointed for more than one term.

21. The chairman of the Federal Reserve Board of Governors

A. is elected by U.S. voters.

B. will typically change following each presidential election.

C. serves a four-year term and can be reappointed.

D. is always closely tied to the same political party as the president.

22. All of the following are about the basic money supply except

A. it includes credit card balances.

B. it includes currency held by the public.

C. it includes money kept in transactions accounts.

D. it is known as M1.

23. The basic money supply

A. is controlled by Congress and the U.S. Treasury.

B. includes savings accounts.

C. includes currency and transactions accounts.

D. includes money market mutual funds.

24. Which of the following is NOT a basic monetary policy tool used by the Fed?

A. the discount rate

B. reserve requirements

C. open-market operations

D. the income tax rate

25. Which of the following is NOT a basic monetary policy tool used by the Fed?

A. deposit insurance

B. the reserve requirement

C. the discount rate

D. the sale and purchase of Treasury bonds

26. Which of the following is NOT a basic monetary policy tool used by the Fed?

A. the discount rate

B. the reserve requirement

C. taxes

D. open-market operations

27. Required reserves

A. are equal to the required reserve ratio times excess reserves.

B. are the minimum amount of reserves a bank is required to hold.

C. represent the dollars a bank can lend.

D. must be held in a bank's vault.

28. Required reserves

A. must be held at the regional Fed bank.

B. represent the dollars that a bank can lend.

C. are the minimum amount of reserves a bank is required to hold.

D. are equal to total reserves minus expected reserves.

29. The reserve requirement

A. is the most frequently used tool by the Fed.

B. changes required reserves but not excess reserves.

C. does not affect the lending capacity for a bank.

D. affects the level of bank reserves.

30. A change in the reserve requirement is the tool used least often by the Fed because it

A. does not affect bank reserves.

B. can cause abrupt changes in the money supply.

C. does not affect the money multiplier.

D. has no impact on the lending capacity of the banking system.

31. Excess reserves are:

A. Bank reserves in excess of required reserves.

B. Legal reserves in excess of lending reserves.

C. Transactions deposits plus traveler's checks.

D. Total reserves plus deficient reserves.

32. Which of the following is NOT about excess reserves?

A. They change when the reserve requirement changes.

B. They are equal to the required reserve ratio times transactions deposits.

C. They are bank reserves beyond what the bank is required to hold.

D. They represent the dollars an individual bank can lend.

33. A change in the reserve requirement affects

A. the money multiplier and excess reserves.

B. excess reserves and the discount rate.

C. the discount rate and the federal funds rate.

D. the money multiplier and the federal funds rate.

34. Ceteris paribus, if the Fed raises the reserve requirement, then

A. the money multiplier increases.

B. the lending capacity of the banking system decreases.

C. excess reserves increase.

D. required reserves decrease.

35. Ceteris paribus, if the Fed reduces the reserve requirement, then

A. total reserves increase.

B. total deposits decrease.

C. the lending capacity of the banking system increases.

D. the money multiplier decreases.

36. The money multiplier

A. is equal to the required reserve ratio times transactions deposits.

B. gets larger as the required reserve ratio increases.

C. is the reciprocal of the required reserve ratio.

D. represents the lending capacity of an individual bank.

37. The money multiplier

A. Is the number of deposit dollars the banking system can create from $1 of excess reserves.

B. Decreases as the required reserve ratio decreases.

C. Is equal to excess reserves plus required reserves.

D. Is equal to the required reserve ratio times transactions deposits.

38. Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.05, then excess reserves will increase by

A. $1 million.

B. $20 million.

C. $40 million.

D. $2 billion.

39. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.20. Ceteris paribus, if the reserve requirement is increased to 0.25, then excess reserves will

A. increase by $250 million.

B. increase by $50 million.

C. decrease by $250 million.

D. decrease by $50 million.

40. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is increased to 0.20, then excess reserves will

A. increase by $100 million.

B. increase by $200 million.

C. decrease by $100 million.

D. decrease by $200 million.

41. Suppose the banks in the Federal Reserve System have $100 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.07, then excess reserves will increase by

A. $3 million.

B. $7 million.

C. $10 million.

D. $700 billion.

42. The discount rate is the interest rate charged by

A. the Federal Reserve when it lends money to private banks.

B. a private bank when it lends money to another private bank.

C. a private bank when it lends money to commercial customers.

D. a regional Fed bank when it lends money to another regional Fed bank.

43. The rate of interest banks charge each other for lending reserves is the

A. federal funds rate.

B. discount rate.

C. money multiplier.

D. excess reserve rate.

44. Which of the following lends reserves to private banks?

A. the legislative branch of government

B. comptroller of the currency

C. state banking commissions

D. the Federal Reserve System

45. If a bank does not have enough reserves, it can

A. buy bonds on the open market.

B. raise the interest rate it charges borrowers.

C. borrow reserves from the discount window.

D. make more loans.

46. Which of the following is NOT a possible source of last-minute reserves for a private bank?

A. selling bonds

B. borrowing reserves from other banks

C. raising the discount rate

D. borrowing reserves from the Federal Reserve System

47. By raising or lowering the _______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves.

A. reserve ratio

B. discount rate

C. money multiplier

D. yield

48. Ceteris paribus, if the Fed reduces the discount rate, then

A. the incentive to borrow funds increases.

B. required reserves decrease.

C. the money multiplier increases.

D. total reserves decrease.

49. If the Fed wishes to increase the money supply it can

A. raise the federal funds rate.

B. sell bonds on the open market.

C. decrease the discount rate.

D. increase the required reserve ratio.

50. Ceteris paribus, if the Fed raises the discount rate, then

A. the money multiplier decreases.

B. the lending capacity of the banking system increases.

C. excess reserves decrease.

D. the incentive to borrow reserves decreases.

51. If the Fed wishes to decrease the money supply it can

A. raise the discount rate.

B. buy bonds on the open market.

C. decrease the required reserve ratio.

D. decrease the federal funds rate.

52. The policy lever most commonly used by the Fed is

A. changes in the discount rate.

B. buying and selling bonds.

C. changes in the reserve requirement.

D. foreign-exchange operations.

53. The principal mechanism for directly changing the reserves of the banking system is

A. the discount rate.

B. the reserve requirement.

C. open-market operations.

D. the federal funds rate.

54. The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is referred to as

A. open-market operations.

B. closed-market operations.

C. discounting.

D. expansionary fiscal policy.

55. The buying and selling of government bonds to influence reserves in the banking system is the responsibility of the

A. twelve regional Federal Reserve banks.

B. executive Branch of the government.

C. board of Governors of the Federal Reserve.

D. federal Open Market Committee.

56. When the Fed makes bonds more or less attractive, it influences the

A. open market decision.

B. money multiplier.

C. portfolio decision.

D. reserve decision.

57. If the Fed wants to increase bank reserves, it can

A. buy bonds.

B. raise the discount rate.

C. raise the reserve requirement.

D. sell bonds.

58. If the Fed wants to increase bank reserves, it can

A. raise the discount rate.

B. buy government bonds from the public.

C. increase the minimum reserve ratio.

D. decrease the money multiplier.

59. If the Fed wants to decrease the money supply, it can

A. increase the money multiplier.

B. decrease the discount rate.

C. sell government bonds.

D. decrease the minimum reserve ratio.

60. If the Fed wants to reduce bank reserves, it can

A. raise the discount rate or buy bonds on the open market.

B. reduce the minimum reserve ratio or sell bonds on the open market.

C. raise the discount rate or sell bonds on the open market.

D. decrease the minimum reserve ratio or reduce the discount rate.

61. Aggregate demand is the

A. total quantity of output demanded at alternative price levels.

B. total quantity of output demanded, but only at full employment.

C. quantity of goods demanded by the largest corporations in the country.

D. quantity of new goods and services produced.

62. Which of the following cannot be used to shift aggregate demand?

A. a change in government spending

B. a change in taxes

C. monetary policy

D. a change in the price level

63. Which of the following is NOT a monetary policy tool for shifting the aggregate demand curve?

A. open market operations

B. government spending

C. the discount rate

D. the reserve requirement

64. Ceteris paribus, which of the following will occur if the Fed buys bonds through open market operations?

A. The aggregate supply curve should shift leftward.

B. The aggregate supply curve should shift rightward.

C. The aggregate demand curve should shift leftward.

D. The aggregate demand curve should shift rightward.

65. Which of the following will cause an increase in aggregate demand?

A. restrictive fiscal policy

B. an increase in the reserve requirement

C. expansionary monetary policy

D. the sale of bonds by the Fed

66. If the Fed buys more bonds from the public, then the money supply will

A. decrease and the aggregate demand curve will shift to the right.

B. increase and the aggregate demand curve will shift to the right.

C. increase and the aggregate demand curve will shift to the left.

D. decrease and the aggregate demand curve will shift to the left.

67. Expansionary monetary policy will

A. reduce the lending capacity for banks.

B. raise interest rates.

C. encourage people to borrow more money.

D. reduce the equilibrium price level.

68. To increase the money supply, the Fed can

A. reduce the reserve requirement, reduce the discount rate, or sell bonds.

B. raise the reserve requirement, reduce the discount rate, or sell bonds.

C. reduce the reserve requirement, reduce the discount rate, or buy bonds.

D. raise the reserve requirement, raise the discount rate, or buy bonds.

69. Which of the following will occur if the Fed raises the reserve requirement, ceteris paribus?

A. The aggregate supply curve should shift leftward.

B. The aggregate supply curve should shift rightward.

C. The aggregate demand curve should shift leftward.

D. The aggregate demand curve should shift rightward.

70. Which of the following will cause a decrease in aggregate demand?

A. restrictive monetary policy

B. a decrease in the reserve requirement

C. expansionary monetary policy

D. the purchase of bonds by the Fed

71. If the Fed sells more bonds to the public, then the money supply will

A. decrease and the aggregate demand curve will shift to the right.

B. increase and the aggregate demand curve will shift to the right.

C. increase and the aggregate demand curve will shift to the left.

D. decrease and the aggregate demand curve will shift to the left.

72. Restrictive monetary policy will

A. decrease the lending capacity for banks.

B. reduce interest rates.

C. cause a rightward shift of aggregate demand.

D. raise the equilibrium price level.

73. To decrease the money supply, the Fed can

A. reduce the reserve requirement, raise the discount rate, or sell bonds.

B. raise the reserve requirement, raise the discount rate, or sell bonds.

C. raise the reserve requirement, reduce the discount rate, or buy bonds.

D. raise the reserve requirement, raise the discount rate, or buy bonds.

74. When the Fed announces that it is raising the federal funds rate, this signals its intention to _______ bonds in the open market and _______ the money supply.

A. buy; reduce

B. buy; increase

C. sell; reduce

D. sell; increase

75. As the money supply increases, interest rates _______ and aggregate demand shifts to the _______.

A. increase; left

B. increase; right

C. decrease; left

D. decrease; right

76. When the Fed sells bonds in the open market, interest rates _______ and aggregate demand shifts to the _______.

A. rise; left

B. rise; right

C. fall; left

D. fall; right

77. The shape of the _____ curve determines the impact of an aggregate demand shift on prices and output.

A. marginal revenue

B. total cost

C. production possibilities

D. aggregate supply

78. The different shapes of the aggregate supply curve

A. determine the level of reserves held by the banking system.

B. result in the Fed's need for total control of the money supply.

C. determine the impact of monetary policy on price level and output.

D. explain why the Fed must respond to market instability.

79. Given Keynesian assumptions about the shape of the aggregate supply curve and an economy suffering a recession, which of the following is most likely to occur if the Fed pursues expansionary monetary policy?

A. The equilibrium price level and output will both increase until full employment is reached.

B. The equilibrium price level and output will both decrease.

C. The equilibrium price level will increase but output will stay the same.

D. The equilibrium output will increase but the price level will stay the same until full employment is reached.

80. Using aggregate supply and demand curves drawn according to the Keynesian view, which of the following will occur if the Fed buys bonds in the open market and the economy is below full employment?

A. Aggregate demand will shift to the left and the unemployment rate will rise.

B. Aggregate demand will shift to the right and the unemployment rate will fall.

C. Aggregate demand will shift to the left and the price level will remain unchanged.

D. Aggregate demand will shift to the right and the price level will fall.

81. According to the Keynesian view of aggregate supply, an increase in the money supply will

A. always cause inflation.

B. cause inflation if the economy is at full employment.

C. cause inflation only if aggregate supply is horizontal.

D. never cause inflation.

82. According to the Monetarist view, the aggregate supply curve is

A. upward sloping to the right.

B. perfectly vertical at the natural rate of unemployment.

C. flat or horizontal until full employment is reached.

D. flat or horizontal at all levels of output.

83. According to the monetarist view, the aggregate supply curve is

A. horizontal until full employment is reached and then it becomes vertical.

B. horizontal at all levels of output.

C. vertical at the natural rate of unemployment.

D. first horizontal, then upward sloping, and finally vertical.

84. According to the aggregate supply drawn under the monetarist view, which of the following policies would lead to a higher price level?

A. the purchase of bonds in the open market by the Fed

B. an increase in the discount rate

C. an increase in the reserve requirement

D. a decrease in the money multiplier

85. Using the aggregate supply drawn under the monetarist view, what should happen to the equilibrium price level and quantity of output if the Fed buys bonds?

A. Equilibrium price level and equilibrium output should both increase.

B. Equilibrium price level should increase, and equilibrium output should decrease.

C. Equilibrium price level should decrease, and equilibrium output should increase.

D. Equilibrium price level should increase and equilibrium output should stay constant.

86. Which of the following best describes the eclectic aggregate supply curve?

A. horizontal until full employment is reached, and then it becomes vertical

B. vertical at all output levels

C. first horizontal, then upward sloping, and finally vertical

D. downward sloping

87. An eclectic aggregate supply curve

A. is the supply-side counterpart to monetarist and Keynesian assumptions about the shape of aggregate demand.

B. combines elements of the monetarist and Keynesian assumptions about the shape of aggregate supply.

C. maintains a constant upward slope as the economy moves through the business cycle.

D. is horizontal at all levels of output.

88. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed sells bonds in the open market, ceteris paribus?

A. greater inflation and more unemployment

B. greater inflation and less unemployment

C. lower average prices and less unemployment

D. lower average prices and more unemployment

89. Given an upward-sloping aggregate supply curve, attempts to reduce unemployment through monetary policy will require a

A. leftward shift of aggregate demand.

B. rightward shift of aggregate demand.

C. leftward shift of aggregate supply.

D. rightward shift of aggregate supply.

90. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed pursues restrictive monetary policy, ceteris paribus?

A. The equilibrium price level and output will both decrease.

B. The equilibrium price level and output will both increase.

C. The equilibrium price level will decrease, but output will stay the same.

D. The equilibrium output will decrease, but the price level will stay the same.

91. With an upward-sloping aggregate supply curve, tight monetary policy

A. reduces aggregate demand and decreases inflationary pressures.

B. reduces aggregate demand and increases inflationary pressures.

C. raises aggregate demand and increases inflationary pressures.

D. raises aggregate demand and decreases inflationary pressures.

92. Which of the following policies supports the concept of continual adjustment of the money supply to achieve macroeconomic goals?

A. restrictive policy

B. fixed rules

C. discretionary policy

D. fiscal policy

93. A vertical aggregate supply curve favors which of the following policies?

A. discretionary policy

B. fiscal policy

C. the Fed's eclecticism

D. fixed rules

94. Which of the following policies is supported by the idea that producers and workers will demand higher prices and wages when they see the money supply expanding?

A. discretionary policy

B. fixed rules

C. the Fed's eclecticism

D. fiscal policy

95. Which of the following approaches should the Fed use if it experiences large lags and mistakes in monetary policy?

A. discretionary policy

B. an eclectic approach

C. fixed rules

D. fiscal policy

96. The Fed's eclecticism reflects

A. a combination of flexible rules and limited discretion.

B. fixed rules that are set for monetary growth rates.

C. discretionary policy but not rules.

D. the targeting of interest rates as the primary goal to be achieved by monetary policy.

97. Under Alan Greenspan, the Fed

A. targeted interest rates only.

B. targeted the money supply only.

C. targeted the unemployment level.

D. used a mix of money supply and interest rate adjustments.

98. Monetary Data

Refer to the table. The basic money supply (M1) is

A. $120 billion.

B. $800 billion.

C. $920 billion.

D. $1 trillion.

99. Monetary Data

Refer to the table. The required reserve ratio is

A. 8.7 percent.

B. 10.0 percent.

C. 13.3 percent.

D. 66.7 percent.

100. Monetary Data

Refer to the table. If the Fed changes the required reserve ratio to 5 percent, the lending capacity of the banking system will eventually

A. rise by $800 billion.

B. fall by $800 billion.

C. rise by $40 billion.

D. fall by $40 billion.

101. Monetary Data

Refer to the table. The money multiplier is equal to

A. 1.5.

B. 7.5.

C. 10.0.

D. 11.6.

102. Monetary Data

Refer to the table. The level of total reserves is equal to

A. $1 trillion.

B. $920 billion.

C. $880 billion.

D. $80 billion.

103. Monetary Data

Refer to the table. Suppose the Fed sells $15 billion worth of bonds in the open market and the public finances these purchases with their transactions account balances. The lending capacity of the banking system will _______ by _______ $15 billion

A. rise; more than

B. rise; less than

C. fall; more than

D. fall; less than

104. Monetary Data

Refer to the table. If the Fed buys $25 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______

A. rise; $25 billion

B. rise; $225 billion

C. fall; $25 billion

D. rise; $250 billion

105. Monetary Data

Refer to the table. The basic money supply (M1) is

A. $260 billion

B. $600 billion

C. $660 billion

D. $900 billion

106. Monetary Data

Refer to the table. The required reserve ratio is

A. 30 percent.

B. 20 percent.

C. 15 percent.

D. 10 percent.

107. Monetary Data

Refer to the table. If the Fed changes the required reserve ratio to 25 percent, the lending capacity of the banking system will eventually

A. rise by $160 billion.

B. fall by $160 billion.

C. rise by $40 billion.

D. fall by $40 billion.

108. Monetary Data

Refer to the table. The money multiplier is equal to

A. 10.0.

B. 6.7.

C. 5.0.

D. 3.3.

109. Monetary Data

Refer to the table. The level of total reserves is equal to

A. $60 billion.

B. $260 billion.

C. $460 billion.

D. $660 billion.

110. Monetary Data

Refer to the table. If the Fed buys $20 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______

A. rise; $20 billion

B. rise; $113.3 billion

C. fall; $20 billion

D. rise; $133.0 billion

111.

Refer to the chart. Ceteris paribus, if the Federal Reserve increases the discount rate, this indicates a desire to _______ the money supply and will cause a shift from _______.

A. expand; AD1 to AD2

B. expand; AS1 to AS2

C. contract; AD2 to AD1

D. contract; AS3 to AS2

112.

Refer to the figure. Ceteris paribus, which of the following Fed actions will shift the aggregate demand curve from AD1 to AD2?

A. an increase in the discount rate.

B. a decrease in the reserve requirement.

C. the sale of bonds in the open market by the Fed.

D. a decrease in the money multiplier.

113.

Refer to the figure. Suppose the Federal Reserve buys bonds in the open market. The money supply will _______ and cause a shift from _______.

A. increase; AD1 to AD2

B. increase; AS1 to AS2

C. decrease; AD2 to AD1

D. decrease; AS3 to AS2

114.

Refer to the figure. Suppose the Federal Reserve _______ bonds in the open market. The money supply will decrease and cause a shift from _______.

A. buys; AD1 to AD2

B. buys; AS2 to AS3

C. sells; AD2 to AD1

D. sells; AS2 to AS3

115.

Refer to the figure. As shift in aggregate demand from AD1 to AD2 will cause, ceteris paribus

A. an increase in real output and an increase in the price level

B. an increase in real output, but almost no change in the price level

C. an increase in price level, but almost no change in real output

D. a decrease in the price level, but almost no change in real output

116.

Refer to the figure. A shift in aggregate demand from AD3 to AD4 will cause, ceteris paribus

A. almost no change in real output and an increase in the price level.

B. an increase in real output, but almost no change in the price level.

C. an increase in the price level, but a decrease in real output.

D. a decrease in the price level, but almost no change in real output.

117.

Refer to the figure. A shift in aggregate demand from AD2 to AD3 will cause, ceteris paribus

A. an increase in real output and an increase in the price level.

B. an increase in real output but no change in the price level.

C. an increase in the price level but no change in real output.

D. a decrease in the price level but no change in real output.

118. Suppose the Fed decreases interest rates by half of a percent. Which of the following is the Fed trying to accomplish as a result of this action?

A. a leftward shift of aggregate demand

B. a rightward shift of aggregate demand

C. a leftward shift of aggregate supply

D. a rightward shift of aggregate supply

119. Suppose the Fed decreases interest rates by half of a percent. Assuming the economy is in the upward sloping portion of the eclectic aggregate supply curve, what should happen to the price level and output as a result of the Fed's action, ceteris paribus?

A. The equilibrium price level and equilibrium output should both increase.

B. The equilibrium price level should increase, but equilibrium output should decrease.

C. The equilibrium price level should decrease, but equilibrium output should increase.

D. The equilibrium price level and equilibrium output should both decrease.

120. Suppose the Fed decreases interest rates by half of a percent. The Fed has most likely reduced the

A. discount rate.

B. rate for purchasing bonds in the open market.

C. prime lending rate.

D. rate for foreign exchange.

121. Monetary policy involves the use of money and credit controls to impact the macroeconomy.

Monetary policy is the use of money and credit controls to influence macroeconomic activity.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: The Federal Reserve System

122. Monetary policy involves the use of federal government spending to change the money supply.

Monetary policy is the use of money and credit controls to influence macroeconomic activity. Fiscal policy uses changes to federal government spending to change macroeconomic outcomes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: The Federal Reserve System

123. The Federal Reserve banks accept deposits from individuals and banks.

The Federal Reserve bank accepts deposits from banks only.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

124. The Federal Reserve banks clear checks between private banks, hold bank reserves, provide currency for banks, and make loans to private banks.

The Federal Reserve acts as a clearinghouse between private banks, and holds bank reserves. Also, since most banks do not keep large supplies of cash on hand the Fed provides banks with currency.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

125. The Board of Governors consists of seven members elected by the public every four years.

The Board of Governors is appointed by the president of the U.S. and are appointed for 14-year terms.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

126. Members of the Federal Reserve Board of Governors are appointed to 14-year terms to provide a level of isolation from political influence.

The board members will outlast the term of the president and other politicians, making them less likely to succumb to their political influence.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

127. The Board of Governors of the Federal Reserve System is the key decision maker for monetary policy.

The Board of Governors is the decision maker for monetary policy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

128. Congress and the president are the key decision makers for U.S. monetary policy.

The Board of Governors is the decision maker for monetary policy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

129. The reserve requirement is the tool used least frequently by the Fed because it can cause abrupt changes in the money supply.

By changing the reserve requirement, the Fed can directly alter the lending capacity of the banking system and these effects can be much larger than monetary policy often requires.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

130. By changing the reserve requirement, the Fed can change the level of bank reserves and the lending capacity of the banking system.

A change in the reserve requirement changes the money multiplier and affects the proportion of deposits that banks must hold as required reserves.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-04 Tell how monetary stimulus or restraint is achieved.
Topic: Monetary Tools

131. Ceteris paribus, the amount of required reserves decreases when the dollar volume of transactions accounts increases.

Required reserves increase when the dollar volume of transaction accounts increases because the bank must save a portion of all deposits on hand as required reserves.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

132. For a given amount of total reserves, a decrease in required reserves causes an increase in excess reserves.

A decrease in required reserves frees funds up to be used for loans (called excess reserves).

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

133. A decrease in the reserve requirement will cause a decrease in the money multiplier.

Because the money multiplier is calculated as one divided by the required reserve ratio, a decrease in the required reserve ratio will increase the size of the money multiplier.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

134. Profit-maximizing banks try to keep their excess reserves as high as possible.

A bank's profits increase when excess reserves are kept low as this means the bank is maximizing the amount of loans it makes and interest it receives.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-04 Tell how monetary stimulus or restraint is achieved.
Topic: Monetary Tools

135. The interest rate private banks charge each other for lending reserves is called the federal funds rate.

A bank that finds itself short of reserves can turn to other banks for help. The interest rate charged by the other banks is called the federal funds rate.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

136. If the Fed wants to increase the money supply, it should increase the discount rate.

The Fed should lower the discount rate in order to give incentives to banks to loan money and increase the money supply.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

137. One of the portfolio choices people must make is whether to deposit idle funds in a bank or purchase government bonds.

Idle funds are also used to purchase stocks, build up savings account balances, and purchase bonds. These funds promise some additional income if invested correctly.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain how open market operations work.
Topic: Monetary Tools

138. Open market operations are the tool used least frequently by the Fed to alter the reserves of the banking system.

Since reserves are the lifeblood of the banking system, open market operations have an immediate and direct impact on lending capacity.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain how open market operations work.
Topic: Monetary Tools

139. By buying bonds, the Fed decreases the quantity of reserves in the banking system and decreases the money supply.

By buying bonds, the Fed actually increases bank reserves and increases the money supply. By offering to pay high prices for bonds, people will sell some of their bonds to the Fed, and deposit the proceeds into their individual bank accounts.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-03 Explain how open market operations work.
Topic: Monetary Tools

140. When the Fed sells bonds, the quantity of reserves in the banking system declines and the money supply decreases.

When the Fed sells bonds it is attempting to entice investors to use their funds in their individual bank accounts and when they do, the Fed has reduced the money supply.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-04 Tell how monetary stimulus or restraint is achieved.
Topic: Monetary Tools

141. When the Fed sells bonds, bank reserves increase.

By selling bonds, the Fed reduces bank reserves. Bonds end up in the hands of firms and consumers, who pay money from their transactions account balances to purchase the bonds. This generates a decrease in bank reserves and therefore, a decrease in the money supply.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-04 Tell how monetary stimulus or restraint is achieved.
Topic: Monetary Tools

142. Both monetary policy and fiscal policy shift the aggregate demand curve.

Monetary policy tries to alter macro outcomes by managing the amount of money available in the economy. Fiscal policy tries to do the same through direct or indirect changes to the amount of spending in the economy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Shifting Aggregate Demand

143. Keynesians believe a change in the money supply cannot lower the unemployment rate.

In the Keynesian model, the rate of output responds fully and automatically to increases in demand until full employment is reached.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Price Versus Output Effects

144. Discretionary policy calls for continual adjustments to the money supply and is associated with the monetarist perspective.

Discretionary policy, applied to monetary policy, implies the need for continual adjustments to the money supply but is not associated with the monetarist perspective.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Policy Perspectives

145. Proponents of monetary policy based on fixed rules base their position on the assumption of a vertical aggregate supply curve.

The argument here is that the quantity of goods produced is primarily dependent on production capacity, labor-market efficiency, and other structural forces.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Policy Perspectives

146. What is monetary policy and why is the monetary policy lever important?

The monetary policy is the use of money and credit controls to influence macroeconomic activity. Monetary policy tries to alter macro outcomes by managing the amount of money available in the economy. By changing the money supply, monetary policy seeks to shift aggregate demand through resulting interest rate changes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: Monetary Tools

147. Briefly explain how the advocates of "discretionary" monetary policy differ from the advocates of "fixed rules" monetary policy.

Advocates of discretionary monetary policy argue that the Fed should be free to counter market instability by changing the growth rate of the money supply. Advocates of fixed rules believe the Fed should simply keep the money supply growing at a constant rate.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Price Versus Output Effects

148. Discuss the effects of the money supply when the Fed sells bonds in the open market.

When the Fed sells a bond, money is paid to the Fed by the purchaser. This money is then kept by the Fed and is no longer part of the money supply because it is out of circulation. The money supply decreases as a result and this hinders the ability of firms and consumers to spend, so aggregate demand decreases.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Describe how the Federal Reserve is organized.
Topic: The Federal Reserve System

149. If a private bank lends money to another bank, the interest rate that is charged for the loan is the

A. discount rate.

B. prime rate.

C. federal funds rate.

D. loan rate.

150. How many members are there of the U.S. Senate Committee on Banking, Housing and Urban Affairs?

A. 15

B. 20

C. 21

D. 28

151. By increasing the required reserve ratio, the banking industry will have more excess reserves available for lending.

If the required reserve ratio is increased, there will be fewer excess reserves that are available for lending.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Identify the Fed's three primary policy tools.
Topic: Monetary Tools

152. Monetary policy directed at expanding GDP growth would include the following?

A. selling bonds and increasing the discount rate

B. buying bonds and increasing the discount rate

C. decreasing the discount rate and increasing the reserve requirement

D. decreasing the discount rate and buying bonds

153. Explain how increasing the money supply may not acquire the desired effect of increasing output while keeping inflation low.

Increasing the money supply will increase the AD but if the slope of the AS curve is vertical, then the nation’s output will not increase. Instead, price levels will rise and so inflation will be generated.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 14-05 Discuss how monetary policy affects macro outcomes.
Topic: Price Versus Output Effects

154. Monetary policy

A. is the use of tax increases or cuts designed to change the amount of money available for spending.

B. is the use of audits to make certain that banks follow bank policy.

C. is the use of money and credit controls to influence macroeconomic activity.

D. exists only in textbooks and has no applicability to the "real world."

155. The Board of Governors of the Fed

A. consists of seven state governors who represent the views of individual states in monetary policy.

B. consists of seven members appointed by the President of the United States, who together act as the key decision-making entity for monetary policy.

C. consists of 13 large commercial bank CEOs who represent the interests of the private banking sector in monetary policy.

D. is the primary monetary group responsible for buying and selling bonds designed to change reserves in the banking system.

156. The discount rate

A. is the rate of interest charged by the Fed when it lends money to private banks.

B. is the reduction in the prime rate that big banks provide to corporate borrowers.

C. is always equal to the market rate minus the core rate of inflation.

D. is the rate that private banks charge other private banks for a loan.

157. If the Federal Reserve wanted to stimulate the economy, it would most likely

A. reduce the discount rate.

B. decrease required reserves in the banking system.

C. increase required reserves in the banking system.

D. both reduce the discount rate and decrease required reserves to the banking system are correct.

158. Fed purchases of bonds from the public, called open market operations

A. tend to increase reserves in the system leading to reductions in interest rates.

B. tend to reduce the money supply because the bonds are expensive to purchase.

C. tend to reduce reserves in the banking system because all the Fed gets is more bonds.

D. tend to increase bond prices but generally have no effect on bank reserves.

159. In 2008, the Fed _____ the discount rate in order to _____ the economy.

A. increased; stimulate

B. decreased; stimulate

C. increased; restrain

D. decreased; restrain

160. Which of the following functions does the Fed perform?

A. printing money

B. holding bank reserves

C. providing loans to other countries

D. All of the above are functions the Fed performs

161. Which of the following is a tool of monetary policy?

A. buying and selling government bond

B. making loans to banks

C. setting reserve requirement

D. All of these choices are correct

162. If the Fed is concerned about inflation, it should

A. buy bonds or raise the discount rate.

B. buy bonds or reduce the discount rate.

C. sell bonds or raise the discount rate.

D. sell bonds or reduce the discount rate.

163. If unemployment is a problem, the Fed could ______ bonds and ______ the reserve requirement.

A. buy; increase

B. buy; decrease

C. sell; increase

D. sell; decrease

164. If the Fed wants to stimulate aggregate demand it should _____ bonds to _____ the money supply.

A. buy; increase

B. sell; increase

C. buy; decrease

D. sell; decrease

165. A bank’s required reserves may be held in which two forms?

A. coins and gold

B. vault cash and deposits at the Fed

C. vault cash and gold

D. deposits at the Fed and gold

166. The impact of monetary policy on prices and output depends on the

A. regulations passed by Congress

B. cooperation from business leaders

C. slope of the aggregate demand curve

D. slope of the aggregate supply curve

167. When the Fed _____ bonds, the money supply _____.

A. buys; increases

B. buys; decreases

C. sells; increases

D. sells; is not affected