The U.S. money supply is regulated by:
A. Congress.
B. the President.
C. the Supreme Court.
Correct D. the Federal Reserve.
answer
D
The Federal Reserve controls monetary policy through its ability to influence the banking system, credit, and ultimately the money supply.
question
Keynesians believe that:
A. it is necessary to maintain an active discretionary monetary policy to keep the saving/investment equilibrium at the target level of aggregate equilibrium income and output.
Incorrect B. it is necessary to maintain an active discretionary monetary policy to keep the money supply growing at a constant rate.
C. the Fed should be reorganized to remove its independence and give control of monetary policy to elected officials or politicians.
D. monetary policy works and fiscal policy positively does not.
answer
A
Keynesians believe that monetary policy affects the economy through changes in the interest rate, which alters investment spending (and personal consumption), which then affects aggregate equilibrium income and output. Money supply growth is a Classical/monetarist belief, and the others are definitely not Keynesian beliefs.
question
Money is created when:
A. your bank prints currency or cash.
B. you make a deposit at your bank.
Correct C. banks place a loan it has made to you in your checking account backed by customer deposits.
D. the Fed sells bonds.
answer
C
The loan is a financial liability for you and a financial asset for the bank, but the act of placing that loan in your checking account (backed by customer deposits) has created a financial asset for you that serves the function of money. Depositing money does not create money. What the bank does with that deposit might create money however. By the way, banks do not print money. By law, only the Federal Reserve can print money.
question
Suppose the economy of Japan is below potential output and there is a recessionary gap. Given this, the Japanese Government decides to increase government expenditures "G" by $240 billion. If the mpe is 0.8, aggregate equilibrium income/output:
A. would increase by $240 Billion.
B. would increase by $480 Billion.
C. would increase by $500 Billion.
Correct D. would increase by $1.2 Trillion.
answer
D
Income would increase by $1200 billion or $1.2 trillion. $240 billion X 1/1-.8 = $1200 billion or $1.2 trillion.
question
Crowding out occurs when:
Incorrect A. workers lose their jobs as a result of anti-inflationary fiscal policies.
B. financing the government's budget deficit causes interest rates to rise.
C. the Congress enacts budget cuts to balance the budget.
D. tax receipts rise more slowly than anticipated, resulting in the need to reduce government spending.
answer
B
Crowding out occurs when government bond sales drive up interest rates and reduce business investment "I". For further information, please see the text or the lecture regarding "crowding out."
question
Contractionary fiscal policy that reduces the budget deficit will likely _____________ business investment by ______________ interest rates.
A. reduce; increasing
B. reduce; reducing
Incorrect C. increase; increasing
D. increase; reducing
answer
D
Contractionary fiscal policy reduces interest rates by reducing government borrowing and thus bond sales. Lower interest rates typically stimulate business investment and private sector spending.
question
Banks earn more profits when they hold the smallest permissible fraction of deposits on reserve.
Correct True
False
answer
True.
Holding excess reserves reduces bank profitability because banks earn no interest on these reserves. They make money/profits from making loans.
question
Which of the following is not a tool of monetary policy?
A. The reserve requirement.
Incorrect B. The discount rate.
C. Open market operations.
D. The corporate tax rate.
answer
D
The corporate tax rate is controlled by Congress, not the Fed. Therefore it is not a tool of monetary policy.
question
Government policy can affect business investment only by changing expenditures. It cannot alter people's expectations about the future.
Incorrect True
False
answer
False.
If Government policy produces positive expectations about the future, autonomous investment by business usually increases. Expectations do affect the autonomous expenditure catagories, mainly C, I and X-M.
question
When the Fed increases the reserve requirement, the money supply:
A. expands and the money multiplier is smaller.
Incorrect B. expands and the money multiplier is larger.
C. contracts and the money multiplier is smaller.
D. contracts and the money multiplier is larger.
answer
C
An increase in the reserve requirement decreases the money multiplier because it does not allow banks to lend out as much because they now have to hold more of depositors money in reserves. And with a smaller money multiplier, this causes the money supply to decrease or contract.
question
Cash or currency is an example of a liquid financial asset.
Correct True
False
answer
True.
An asset that is easily converted into another asset or good is considered liquid. Cash or currency is highly liquid.
question
If the Fed sells securities through its open market operations, the money supply will:
Incorrect A. increase.
B. decrease.
C. remain the same.
D. increase by a certain amount depanding on what happens to the discount rate.
answer
B
When the Fed sells government securities on the open market, it literally is taking money out of the system or circulation, therefore decreasing the money supply.
question
The example of a contractionary monetary policy action would be the Fed's:
A. reducing the discount rate.
B. buying bonds in the open market.
Correct C. increasing the reserve requirement.
D. increasing the prime rate.
answer
C
Contractionary monetary policy is achieved here by raising or increasing the reserve requirement, thereby making fewer reserves available for banks to loan out, and through the money multiplier, would cause the money supply ultimately to decrease. Increasing the prime rate is a policy the Fed does not control. Banks determine the prime rate, not the Fed.
question
Financing the deficit may cause interest rates to rise, so that the stimulative effect of government spending is at least partially offset by lower investment by the private sector.
Correct True
False
answer
True.
Financing the deficit normally raises interest rates because the government must issue additional bonds to finance the deficit. Higher interest rates have offsetting effects because they typically reduce business investment "I".
question
If the Fed is buying bonds or government securities in the open market, you would expect:
A. the interest rate to decrease.
B. the interest rate to increase.
Incorrect C. the money supply to decrease.
D. no effect on either the federal funds rate or the money supply.
answer
A
The purchase of bonds or government securities causes the demand for bonds to increase, causing the price for bonds to increase, and thus the interest rate to decrease. Also, the money supply increases, decreasing the "value" or price of money, therefore interest rates decline.
question
Which of the following best describes a policy which moves the economy to the right and downward along a given short-run Phillips Curve?
A. A contractionary fiscal policy has been employed in an attempt to reduce inflationary pressures.
Incorrect B. An expansionary fiscal policy has been employed in an attempt to stimulate the economy and decrease unemployment.
C. A contractionary fiscal policy has been employed in an attempt to stimulate the economy and decrease unemployment.
D. An expansionary fiscal policy has been employed in an attempt to reduce inflationary pressures.
answer
A
Contractionary fiscal policy reduces aggregate demand, aggregate expenditures, and thus aggregate equilibrium income/output and typically increases unemployment, which ultimately helps to reduce inflationary pressures.Therefore we move along an existing short-run Phillips curve, as inflation decreases, unemployment increases.
question
A bank has a reserve requirement of 20%. This means that if a customer deposits $50,000, the bank may lend:
A. $10,000
Incorrect B. $20,000
C. $30,000
D. $40,000
answer
D
Multiply total deposits times (1-reserve requirement) to find out how much the bank can lend. In this case, $50,000 x (1-.2) = $40,000
question
According to the Quantity Theory of Money, in the long run:
A. if the money supply goes up by 6%, prices go down by 6%.
B. if the money supply goes up by 6%, prices go up but by less than 6%.
Correct C. if the money supply goes up by 6%, prices go up by 6%.
D. if the money supply goes up by 6%, prices go up by more than 6%.
answer
C
According to the Quantity Theory of Money, the price level varies in response to changes in the quantity of money. If the money supply increases by 6%, price level will rise by 6%. They go up and down by the same proportion.
question
The purpose of an expansionary monetary policy is to:
A. reduce investment spending.
B. shift the AD Curve to the left.
C. keep the budget deficit balanced.
Correct D. increase aggregate expenditures and reduce unemployment.
answer
D
Expansionary monetary policy increases aggregate demand and output/income, thereby reducing unemployment through increasing the money supply, reducing interest rates, and increasing the supply of credit available for consumers and businesses to spend.
question
In the short run, the Fed can reduce interest rates using:
A. open market sales of government securities.
Correct B. open market purchases of government securities.
C. increases in the discount rate.
D. increases in the reserve requirement.
answer
B
An open market purchase of government securities by the Fed increases the demand for bonds, causing an increase in the price of bonds, therefore a decrease in the short-term interest rates for bonds. Also, short term interest rates in general will fall (the discount rate and the fed funds rate) because there is now more money in circulation, making money worth less due to excess supply, so its price (or the interest rate) decreases as a result.
question
Assuming the Government knew the level of potential output/income and had sufficient information about the economy (i.e. knew the mpe, the multiplier, etc.), it still cannot truly fine tune the economy with 100% accuracy.
True
Incorrect False
answer
True.
Even if the Government had all this information (and it was 100% accurate), it would still have to formulate and implement the appropriate fiscal policies, and this takes time. Not only that, human behavior, to say the least, is unpredictable.
question
Expectations of inflation are always greater than actual inflation along the long run Phillips Curve.
Incorrect True
False
answer
False.
All along the long-run Phillips curve, expectations of inflation equal actual inflation.
question
Which of the following would tend to increase the Fed Funds Rate?
A. A reduction in the Discount Rate.
B. An increase in the excess reserves in the banking system.
Incorrect C. An open market purchase of government securities.
D. An open market sale of government securities.
answer
D
An open market sale of bonds will cause the supply of money to decrease, and cause short term interest rates, such as the fed funds rate, to increase.
question
According to Keynesians, to help the economy get out of a recession, the Fed should:
A. engage in quantum physics.
Correct B. engage in expansionary monetary policy.
C. engage in contractionary monetary policy.
D. don't get engaged at all and stay single.
answer
B
Keynesians believe in an activist monetary policy prescription to fix an economy in a recession, mainly by increasing the money supply when output is too low, thereby stimulating aggregate expenditures through a lower interest rate and greater supply of money circulating in the economy. Thus causing unemployment to fall and aggregate equilibrium income/output to rise, and moving the economy into an expansionary phase of the business cycle.
question
If the expectations of inflation decrease:
A. the short-run Phillips Curve shifts to the left.
Incorrect B. the short-run Phillips Curve shifts to the right.
C. the short-run Phillips Curve remains unchanged.
D. there will be a movement up along the existing short-run Phillips Curve.
answer
A
Because some levels of unemployment will be associated with lower levels of inflation, the short-run Phillips Curve shifts to the left when expectations of inflation decrease. Increases in expectations tend to shift the short-run Phillips Curve to the right.
question
In 1996, the lead sentence in a Wall Street Journal article read, "Tight job markets, rising wages, and the economy's continued strength put more pressure on the Federal Reserve to raise short-term interest rates." If the Fed responded to halt the economy's growth, it would:
A. run expansionary monetary policy leading to lower real output, thus reversing the economy's strength.
B. run expansionary monetary policy leading to higher real output, thus adding to the economy's strength.
C. run contractionary monetary policy leading to higher real output, thus adding to the economy's strength.
Correct D. run contractionary monetary policy leading to lower real output, thus reversing the economy's strength.
answer
D
To reduce real growth, the Fed would likely raise real interest rates, accomplished by reducing the money supply. Since investment demand is negatively or inversely related to interest rates, investment spending (and household spending) would likely decline, thus lowering aggregate demand, aggregate expenditures, and therefore aggregate equilibrium income and output (real GDP).
question
When the Fed decreases the reserve requirement, it:
A. expands the money supply because banks can make out more loans, thus increasing the money supply.
B. expands the money supply because banks can make out less loans, thus increasing the money supply.
Incorrect C. contracts the money supply because banks can make out more loans, thus decreasing the money supply.
D. contracts the money supply because banks can make out less loans, thus decreasing the money supply.
answer
A
A lower reserve requirement creates additional reserves which the banks can then loan out to others, thus increasing the money supply as a result.
question
The fiscal policy tools include:
A. government regulation and user fees.
B. changes in the money supply.
Correct C. government spending and taxation policies.
D. government taxation and regulation policies.
answer
C
Fiscal Policy uses changes in taxes and Government spending to help the economy reach its potential output/income level.
question
According to the Quantity Theory of Money, inflation is caused by:
A. increases in velocity.
Incorrect B. increases in real GDP.
C. increases in velocity in excess of increases in real GDP.
D. increases in the money supply in excess of increases in real GDP.
answer
D
Since velocity is assumed constant, nominal GDP must grow at the same rate as the money supply. Because the rate of growth in nominal GDP equals the rate of growth in real GDP plus inflation, any growth in the money supply that exceeds growth in real GDP must be translated into inflation, according to a Classical.
question
Which of the following is not a problem of monetary policy?
A. Knowing whether to use contractionary or expansionary monetary policy.
B. Monetary policy has effects on international goals that may be undesirable.
Incorrect C. Politicians pressure the Fed for expansionary monetary policy even when the economy is starting to show signs of overheating.
D. Monetary policy requires legislation and the approval of Congress before in can be enacted.
answer
D
We are looking for the answer that is not a problem with monetary policy, which is the fact that monetary policy does not require legislation or approval from Congress. The Fed is independent and is the only entity to determine monetary policy for the U.S. The others mentioned are legitimate problems with monetary policy.
question
The Institutional Theory of Inflation (i.e., the Keynesian Theory) can be summed up in one sentence: Inflation is everywhere and always a monetary phenomenon.
True
Correct False
answer
False.
This sentence reflects the Classical theory of inflation, not the Keynesian theory.
question
If the reserve ratio is 5%, the simple money multiplier is:
A. 4
B. 5
Incorrect C. 10
D. 20
answer
D
The simple money multiplier is 1/r = 1/.05 = 20
question
The main purpose of an expansionary fiscal policy is to:
A. reduce inflationary pressures.
B. reduce aggregate output/income.
Correct C. reduce unemployment.
D. reduce interest rates.
answer
C
One of the main purposes behind expansionary fiscal policy is to increase aggregate equilibrium income and output and employment by increasing aggregate expenditures, mainly through increasing "G" or by reducing taxes.
question
Why is it often impossible to distinguish whether an on-going inflation is cost-push or demand-pull inflation?
A. Changes in the money supply are often difficult to measure.
B. Expectations of inflation, once a part of people's daily lives, are difficult to change or eliminate.
C. Changes in aggregate production are often difficult to measure.
Incorrect D. Money supply increases sometimes lead to inflation and sometimes deflation.
answer
B
Expectations of inflation can sometimes blur the causal relationship between money and prices. An inflation can appear to be cost-push inflation if laborers demand higher wages in anticipation of increased money supply growth and or prices and thus even more inflation. Changes in the money supply or output are not difficult to measure.
question
Suppose the economy in Spain is below potential output and the country faces a recessionary gap of $120 Billion. If the mpe is 0.9, the Spanish Government should:
Correct A. increase government autonomous expenditures "G" by $12 Billion.
B. increase government autonomous expenditures "G" by $24 Billion.
C. increase government autonomous expenditures "G" by $60 Billion.
D. increase government autonomous expenditures "G" by $120 Billion.
answer
A
The Spanish Government should eliminate the recessionary gap by increasing autonomous expenditures by $12 billion ($120 billion divided by 10 (the multiplier) = $12 billion.
question
The short run Phillips Curve tells us:
A. what combinations of consumer goods and industrial goods are possible.
B. what combinations of inputs and outputs are possible.
C. what combinations of supply and demand are necessary to achieve equilibrium.
Correct D. the trade-off between unemployment and inflation.
answer
D
Please see the definition for the short-run Phillips Curve.
question
Which of the following best describes a policy which moves the economy to the left and up along a given short-run Phillips Curve?
A. A contractionary fiscal policy has been employed in an attempt to reduce inflationary pressures.
Correct B. An expansionary fiscal policy has been employed in an attempt to stimulate the economy and decrease unemployment.
C. A contractionary fiscal policy has been employed in an attempt to stimulate the economy and decrease unemployment.
D. An expansionary fiscal policy has been employed in an attempt to reduce inflationary pressures.
answer
B
Expansionary fiscal policy increases aggregate demand, aggregate expenditures, aggregate equilibrium income/output, which typically decreases unemployment, but also typically increases inflationary pressures. Therefore, we move up along an existing short-run Phillips Curve, as unemployment falls, inflation rises.
question
If the mpe = .75, equilibrium GDP is $200 billion less than the targeted or potential level of aggregate output or GDP, potential output can be attained by ___________ taxes _________ billion.
A. increasing; by $200
B. decreasing; by $200
Correct C. decreasing; by $50
D. increasing; by $50
answer
C
The multiplier is equal to 4 if the mpe is .75. So, increasing spending and/or reducing taxes will increase real GDP by a multiple of that initial expansionary fiscal policy prescription. In this case, to eliminate the recessionary gap, Government would decrease taxes by $50 billion x 4 = $200 billion in additional aggregate equilibrium real income/output.
question
Based on the long run Phillips Curve, we can conclude that inflation:
A. determines the economy's rate of unemployment.
B. is unrelated to expected inflation.
Correct C. plays no significant role in determining the economy's rate of unemployment.
D. is inversely related to expected inflation.
answer
C
In the long-run, unemployment equals the natural rate of unemployment regardless of the prevailing inflation rate. In the long-run, the supply of, and demand for, labor is unaffected by inflation.
question
An increase in the money supply typically causes a decrease in the interest rate, and an increase in investment spending "I".
True
Incorrect False
answer
True.
An increase in the money supply increases credit available to banks, which depresses interest rates and increases business investment.
question
Keynesians most likely believe that:
A. money supply increases are a necessary, but not a causal, link in the inflationary process.
Incorrect B. inflation is everywhere and always a monetary phenomenon.
C. people are often fooled into thinking an increase in nominal demand is actually an increase in real demand.
D. inflation is inevitable whenever government attempts to reduce unemployment below the natural rate of unemployment.
answer
A
Keynesians believe that the institutional structure of a market economy lead to inflation, and that increases in the money supply are necessary to make sure aggregate demand is maintained and be able to ensure people can still buy goods and services at those inflated, higher prices. The other responses are Classical responses to inflation.
question
There is no correlation between real and financial transactions.
Incorrect True
False
answer
False.
For every real transaction there is a financial transaction that mirrors it in a modern economy.
question
Expansionary Fiscal Policy typically increases the budget deficit or reduces the budget surplus.
Correct True
False
answer
True.
Expansionary Fiscal Policy increases government spending and/or reduces taxes. Both of these changes typically increase the budget deficit or reduce the budget surplus.
question
A dollar bill is an asset of the Federal Reserve Bank.
True
Correct False
answer
False.
A dollar bill is a liability of the Federal Reserve Bank.
question
Money must have inherent value to function as a medium of exchange.
True
Correct False
answer
False.
Money's value to function as a medium of exchange derives from social convention, not inherent value.
question
Economists believe the financial sector is important because it:
A. creates wealth.
Correct B. channels savings back into spending.
C. determines the distribution of income.
D. provides incentives to produce real assets.
answer
B
The financial sector's importance to macroeconomics is because of its role in transferring savings back into spending. All of the other responses are false. Wealth is created by the production of real assets. And although one can become wealthy playing the stock market. That wealth originates from the production of a good or service.
question
A contractionary fiscal policy would be counter-cyclical if it was enacted after:
A. aggregate equilibrium income/output rose above its potential income/output level.
Incorrect B. aggregate equilibrium income/output fell below its potential income/output level.
C. inflation declined.
D. unemployment increased.
answer
A
Counter-cyclical fiscal policy is designed to offset economic shocks that might otherwise create a business cycle where the economy may be below or above the secular growth trend or potential output/income. In this case, contractionary fiscal policy should be used to slow the economy down when income/output are past potential and the economy is overheating with unemployment really low and falling and inflation is fairly high and rising.
question
As a tool of monetary policy, changes in the required reserve ratio:
A. have little or no impact on the money supply, so the ratio is rarely changed.
Correct B. are extremely powerful, so the ratio changed only when significant changes in the money supply are required.
C. are very frequently used to make adjustments to the money supply.
D. are totally lame and bogus, but pretty cool!
answer
B
Changes in the reserve requirement, or required reserve ratio, are not used on a day to day basis, and are actually is used fairly infrequently, and only when significant changes in the money supply are required. And by the way, they are hardly lame and/or bogus, even though some might think so.
question
When you withdraw $2,000 from your bank account:
A. the bank's financial assets fall by $2,000 and your financial liabilities rise by $2,000.
B. the bank's financial liabilities fall by $2,000 and your financial assets rise by $2,000.
C. both your financial assets and the bank's financial assets rise by $2,000.
Correct D. the bank's financial liabilities fall by $2,000 and your financial assets do not rise at all.
answer
D
When you withdraw $2,000 the bank exchanges one financial asset (cash) for another (demand deposit) and reduces its liabilities by $2,000. It no longer has promised to pay you $2,000. You, one the other hand, have always been in possession of a financial asset. Even though it was in your account, you still technically owned a financial asset. As such, when you withdraw your $2,000, your financial assets do not change at all.
question
If the Fed printed too much money, money's relative price would _______________ and the money price of goods would _______________.
Correct A. fall; rise
B. rise; fall
C. fall; fall
D. rise; rise
answer
A
If the Fed printed too much money, the supply of money would shift to the right, lowering its price. A lower price of money means that more money would be required to buy the same amount of goods, and thus the money price of goods would rise (i.e. inflation and even hyperinflation if the money supply is really growing fast).
question
The measure of money that includes only the most liquid assets is:
A. time deposits.
B. M2.
C. M1.
Incorrect D. Treasury bonds.
answer
C
M1 is the most liquid, and thus can be exchanged for other assets most easily.
question
When the Fed buys bonds in the open market, this should:
Incorrect A. increase the Fed Funds Rate.
B. decrease the Fed Funds Rate.
C. increase the reserve requirement.
D. decrease the reserve requirement.
answer
B
An open market purchase of bonds injects excess reserves into the banking system, which should increase the supply of funds in the Federal funds market and reduce the Fed Funds Rate.
question
In 1990, Operation Desert Storm left Iraqi oil fields unable to export oil, leading to a rise in the price of oil and a rise in inflation during that year in the U.S. At the same time unemployment rose slightly. This inflation is best characterized as:
A. cost-push inflation.
Incorrect B. demand-pull inflation.
C. push-pull inflation.
D. negative inflation.
answer
A
The oil price shock provided significant cost pressures for firms, leading to cost-push inflation. It should be noted that for an ongoing inflation, the money supply must increase, leading to demand-pull inflationary pressures.
question
As the economy enters into a contraction in the business cycle, tax revenues decrease and transfer payments increase, causing the economy to:
Correct A. contract less than it would in the absence of these built-in automatic stabilizers.
B. contract more than it would in the absence of these built-in automatic stabilizers.
C. expand less than it would in the absence of these built-in automatic stabilizers.
D. expand more than it would in the absence of these built-in automatic stabilizers.
answer
A
Lower income and higher unemployment typically characterize a contraction in the business cycle. This lower income and higher unemployment reduce tax revenues and increase transfer payments (unemployment insurance), thus helping to maintain consumption and reduce the magnitude of the recession and the contractionary business cycle.
question
Suppose the total deposits in the Last Bank We Trust are $200,000, and $30,000 of the total deposit is set aside as reserves required by the Federal Reserve. Based on this information, the required reserve ratio is:
A. .15
B. .05
Incorrect C. .10
D. .25
answer
A
The required reserve ratio is required reserves divided by total bank deposits, or $30,000 / $200,000 = .15
question
Let's say the Fed expects an undesired decrease in aggregate expenditures this year. In order to offset that decrease, the Fed should:
A. increase the discount rate.
B. increase the required reserve ratio.
C. engage in open market purchases of government securities.
Incorrect D. engage in open market sales of government securities.
answer
C
The expected decrease in aggregate expenditures can be offset by expansionary monetary policy and to increase the money supply, which is for the Fed to engage in open market purchases of government securities. The other three options are examples of contractionary monetary policy.
question
All of the following are components of the Federal Reserve System except the:
A. twelve regional Federal Reserve Banks.
B. Federal Open Market Committee.
C. Comptroller of the Currency.
Incorrect D. Board of Governors.
answer
C
The Comptroller of the Currency is not related to the Federal Reserve. The other three are part of the Fed.
question
Classical economists believe that the best monetary policy is:
Incorrect A. allowing the money supply to grow at a faster rate whenever the economy enters into a recession.
B. following a fixed growth rate rule in the money supply.
C. counter-cyclical
D. pro-cyclical
answer
B
Classical economists believe that the short-run effects of discretionary monetary policy are difficult to determine and more than likely making mistakes and causing instability in the economy. They would prefer the Fed take a path with regard to monetary policy of one that adheres to a fixed growth rate rule in the supply of money, and not to deviate from that growth rate whatever happens in the economy.
question
If a deposit of $50 in the banking system can lead to a maximum expansion in bank deposits of $200, the required reserve ratio must be:
A. 10 percent.
Incorrect B. 20 percent.
C. 25 percent.
D. 40 percent.
answer
C
The ratio 200/50 = 4 gives the amount that can be created per dollar deposited. If the simple money multiplier is 4, the reserve ratio must be 25 percent ( 1/r=4 if r = .25 or 25%)
question
When the Fed raises the discount rate, this sends a signal to banks that:
Incorrect A. the Fed wants the money supply expanded.
B. the Fed wants the money supply tightened.
C. the Fed is about to raise the prime rate.
D. the Fed is about to lower the prime rate.
answer
B
An increase in the discount rate is a signal to banks that the Fed wants tighter credit conditions, and therefore wants to decrease or tighten the money supply. The Fed does not control the prime rate, banks do.
question
The short run Phillips Curve shifts to the left as expectations of inflation rise.
Incorrect True
False
answer
False.
The short run Phillips Curve shifts to the right as expectations of inflation rise, moving expectations of inflation closer (and eventually equal) to actual inflation.
question
Most monetary policy decisions are made by the:
Correct A. Federal Open Market Committee.
B. Federal Deposit Insurance Corporation.
C. Federal Advisory Council.
D. Bank of America.
answer
A
The FOMC or the Federal Open Market Committee is responsible for conducting/creating monetary policy in the U.S.
question
Which of the following statements is true?
A. Since the money supply excludes cash but includes checking account deposits, money is created whenever individuals deposit cash into a checking account.
Incorrect B. Banks are able to print dollar bills and add these to circulation whenever they extend loans.
C. Whenever banks create financial assets for themselves, they create financial liabilities for individuals, and those financial liabilities are considered money.
D. Whenever banks create financial liabilities for themselves, they create financial assets for individuals, and those financial assets are considered money.
answer
D
The core of the money creation process is that demand deposits (financial liabilities for banks and financial assets for individuals) are considered money.C
A purchase of bonds in the open market by the Fed will increase the money supply, causing interest rates to fall, thus causing private sector spending to increase and economic activity to increase as well.
question
If the Fed wants a looser monetary policy, it might:
A. sell bonds in the open market in order to stimulate spending and economic activity.
B. sell bonds in the open market in order to slow down spending and economic activity.
Correct C. buy bonds in the open market in order to stimulate spending and economic activity.
D. buy bonds in the open market in order to slow down spending and economic activity.
answer
C
A purchase of bonds in the open market by the Fed will increase the money supply, causing interest rates to fall, thus causing private sector spending to increase and economic activity to increase as well.
question
If the Fed Funds Rate is 8% and the Fed's target for the Fed Funds Rate is 6%, the Fed should:
A. do nothing and go golfing.
Incorrect B. sell bonds.
C. buy bonds.
D. none of the above.
answer
C
Though Ben Bernanke could use a little work on his golf game, the Fed would likely want to loosen monetary policy if the Fed Funds Rate is above its target. To do this, the Fed would use open market operations and buy bonds. This would increase the money supply and thus decrease short term interest rates such as the Fed Funds Rate, enough so that it would fall to 6%.
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