Question 1

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r,the interest rate is currently 2 percent (0.02) .If potential output equals 8,000,the central bank must ______ the interest rate to close the ______ gap.

Accepted Answer

A)  lower;expansionary
B)  lower;recessionary
C)  raise;recessionary
D)  raise;expansionaryE) A) and D)
F) All of the above

Question 2

If the Federal Reserve wants to decrease the money supply,it should:

Accepted Answer

A)  decrease reserve requirements.
B)  decrease the discount rate.
C)  decrease the interest that it pays on reserves.
D)  conduct open-market sales.E) C) and D)
F) A) and B)

Question 3

To close a recessionary gap,the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

Accepted Answer

A)  reduces;increases;increases
B)  raises;decreases;increases
C)  raises;decreases;decreases
D)  reduces;increases;decreasesE) C) and D)
F) A) and B)

Question 4

The Federal Reserve can decrease the money supply by:

Accepted Answer

A)  increasing reserve requirements.
B)  decreasing the discount rate.
C)  introducing deposit insurance.
D)  conducting open market purchases.E) A) and D)
F) B) and C)

Question 5

During the Christmas shopping season,the demand for money increases significantly.To offset the increase in money demand,the Fed must ______ the money supply,which will put ______ pressure on nominal interest rates.

Accepted Answer

A)  increase;downward
B)  increase;upward
C)  decrease;downward
D)  decrease;upwardE) A) and C)
F) A) and D)

Question 6

The seven leaders of the Federal Reserve System headquartered in Washington,D.C.constitute the:

Accepted Answer

A)  Federal Reserve Bank of Washington,D.C.
B)  Federal Open Market Committee.
C)  Federal Economic Advisory Board.
D)  Board of Governors.E) A) and B)
F) None of the above

Question 7

If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units,then a 1,000 unit expansionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

Accepted Answer

A)  increasing;2.5
B)  increasing;4.0
C)  increasing;2.0
D)  decreasing;2.0E) B) and C)
F) A) and D)

Question 8

A banking panic is an episode in which:

Accepted Answer

A)  depositors,spurred by news or rumors of possible bankruptcy of one bank,rush to withdraw deposits from the banking system.
B)  commercial banks,fearing Federal Reserve sanctions,unwillingly participate in open-market operations.
C)  commercial banks,concerned about high interest rates,rush to borrow at the Federal Reserve discount rate.
D)  depositors,afraid of increasing interest rates,attempt to engage in discount-window borrowing at the Federal Reserve.E) B) and C)
F) None of the above

Question 9

The Federal Reserve can:

Accepted Answer

A)  simultaneously set independent money supply and nominal interest rate targets.
B)  only target the nominal interest rate,not the money supply.
C)  only set a money supply target that is consistent with a nominal interest rate target,and vice versa.
D)  only target the money supply,not the nominal interest rate.E) A) and D)
F) B) and C)

Question 10

If potential output equals 8,000 and short-run equilibrium output equals 8,500,there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

Accepted Answer

A)  recessionary;raise
B)  recessionary reduce
C)  recessionary;not change
D)  expansionary;raiseE) C) and D)
F) B) and D)

Question 11

Financial markets pay close attention to changes in the federal funds rate because these changes:

Accepted Answer

A)  directly affect a large volume of loans.
B)  indicate the Fed's plans for monetary policy.
C)  indicate commercial bank lending policies.
D)  directly affect the interest payments on the national debt.E) A) and B)
F) A) and D)

Question 12

The U.S.Congress instituted a system of deposit insurance for banks in:

Accepted Answer

A)  1934.
B)  1789.
C)  1865.
D)  1913.E) A) and D)
F) B) and C)

Question 13

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ______ rate.

Accepted Answer

A)  Fed funds
B)  prime
C)  discount
D)  FederalE) A) and C)
F) None of the above

Question 14

A lower real interest rate ______ saving and ______ consumption spending.

Accepted Answer

A)  increases;increases
B)  increases;decreases
C)  does not change;does not change
D)  decreases;increasesE) A) and B)
F) B) and C)

Question 15

Which of the following would be expected to increase the demand for money in the U.S.?

Accepted Answer

A)  Financial investors become concerned about increasing riskiness of stocks.
B)  The economy enters a recession.
C)  Political instability decreases dramatically in developing nations.
D)  On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.E) None of the above
F) All of the above

Question 16

Lower nominal interest rates ______ the amount of money demanded and lower real income ______ the amount of money demanded.

Accepted Answer

A)  increase;increases
B)  increase;decreases
C)  increase;does not change
D)  decrease;decreasesE) C) and D)
F) A) and B)

Question 17

The decision about how much money to hold is an application of the:

Accepted Answer

A)  scarcity principle.
B)  principle of comparative advantage.
C)  equilibrium principle.
D)  cost-benefit principle.E) C) and D)
F) A) and B)

Question 18

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

Accepted Answer

A)  close a recessionary gap.
B)  close an expansionary gap.
C)  raise the rate of inflation.
D)  raise bond prices.E) A) and B)
F) A) and C)

Question 19

When commercial banks borrow reserves from the Fed,the quantity of reserves in the banking system ______ and,ultimately,the money supply _____.

Accepted Answer

A)  increases;increases
B)  increases;decreases
C)  decreases;increases
D)  decreases;decreasesE) None of the above
F) A) and D)

Question 20

The most important,most convenient,and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

Accepted Answer

A)  conducting open-market operations.
B)  changing the Federal Reserve discount rate.
C)  changing bank reserve requirement ratios.
D)  changing interest rates.E) A) and D)
F) B) and C)

Exam 23: Monetary Policy and the Federal Reserve

A banking panic is an episode in which:

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The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ______ rate.

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The seven leaders of the Federal Reserve System headquartered in Washington,D.C.constitute the:

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If potential output equals 8,000 and short-run equilibrium output equals 8,500,there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

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During the Christmas shopping season,the demand for money increases significantly.To offset the increase in money demand,the Fed must ______ the money supply,which will put ______ pressure on nominal interest rates.

Correct AnswerverifiedShow Answer

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

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The most important,most convenient,and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

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If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units,then a 1,000 unit expansionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

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When commercial banks borrow reserves from the Fed,the quantity of reserves in the banking system ______ and,ultimately,the money supply _____.

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The Federal Reserve can:

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To close a recessionary gap,the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

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A lower real interest rate ______ saving and ______ consumption spending.

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Which of the following would be expected to increase the demand for money in the U.S.?

Correct AnswerverifiedShow Answer

Financial markets pay close attention to changes in the federal funds rate because these changes:

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In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r,the interest rate is currently 2 percent (0.02) .If potential output equals 8,000,the central bank must ______ the interest rate to close the ______ gap.

Correct AnswerverifiedShow Answer

Lower nominal interest rates ______ the amount of money demanded and lower real income ______ the amount of money demanded.

Correct AnswerverifiedShow Answer

The Federal Reserve can decrease the money supply by:

Correct AnswerverifiedShow Answer

If the Federal Reserve wants to decrease the money supply,it should:

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The U.S.Congress instituted a system of deposit insurance for banks in:

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The decision about how much money to hold is an application of the:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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If potential output equals 8,000 and short-run equilibrium output equals 8,500,there is a(n) gap and the Federal Reserve must real interest rates in order to close the gap.

Correct Answer
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During the Christmas shopping season,the demand for money increases significantly.To offset the increase in money demand,the Fed must the money supply,which will put pressure on nominal interest rates.

Correct Answer
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Correct Answer
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Correct Answer
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If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units,then a 1,000 unit expansionary gap can be eliminated by the real interest rate by percentage points.

Correct Answer
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When commercial banks borrow reserves from the Fed,the quantity of reserves in the banking system __ and,ultimately,the money supply _.

Correct Answer
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Correct Answer
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To close a recessionary gap,the Fed interest rates which planned aggregate spending and __ short-run equilibrium output.

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A lower real interest rate saving and consumption spending.

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In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r,the interest rate is currently 2 percent (0.02) .If potential output equals 8,000,the central bank must the interest rate to close the gap.

Correct Answer
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Lower nominal interest rates the amount of money demanded and lower real income the amount of money demanded.

Correct Answer
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