econ ch 16

9 May 2023
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38 test answers
question
Federal Reserve Notes in circulation are
answer
a liability as viewed by the Federal Reserve Banks.
question
The level of GDP, ceteris paribus, will tend to increase when
answer
the Federal Reserve buys government securities in the open market.
question
Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, the supply of money in the economy will
answer
rise by $500.
question
The interest rate that banks charge one another on overnight loans is called the
answer
federal funds rate.
question
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
answer
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
question
Beginning in 2008, the Fed was allowed to
answer
pay interest on excess reserves deposited at Fed banks.
question
Which of the following actions by the Fed most likely increase commercial bank lending?
answer
reducing the interest paid on excess reserves held at the Fed
question
The major purpose of the Federal Reserve buying government securities in open-market operations is to
answer
allow banks to increase their lending.
question
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for
answer
buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.
question
When the Fed sells bonds to the bank and the public, the expected result is that
answer
the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur.
question
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of
answer
$600 million, but by $800 million if the securities are purchased directly from commercial banks.
question
In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that
answer
banks held on to excess reserves and people chose to pay off loans rather than spend.
question
The prime interest rate
answer
is influenced by Fed policies that change the money supply.
question
In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed
answer
lowered the federal funds target rate.
question
The discount rate is the interest
answer
rate at which the Federal Reserve Banks lend to commercial banks.
question
If the Fed sells government securities to the general public in the open market,
answer
the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed.
question
When the Fed raises the interest rate paid on reserves, it discourages bank lending.
answer
true
question
A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.
answer
true
question
Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to
answer
hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.
question
An increase in the legal reserve ratio
answer
decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
question
What is one of the advantages of monetary policy over fiscal policy?
answer
the quickness with which it can be used
question
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
answer
a downsloping line or curve from left to right.
question
Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market
answer
increased and the Federal funds rate decreased.
question
Since the financial crisis of 2008, the main tool of expansionary monetary policy used by the Fed has been
answer
quantitative easing
question
The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.
answer
true
question
An increase in nominal GDP will
answer
increase the transactions demand and the total demand for money.
question
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the
answer
cyclical asymmetry of monetary policy.
question
The effects on aggregate demand of an open market purchase and a tax cut are similar.
answer
true
question
Which of the following tools of monetary policy has not been used since 1992?
answer
the reserve ratio
question
In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,
answer
an increase in the money supply will decrease the rate of interest.
question
If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when
answer
the demand for money increases.
question
The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.
answer
true
question
Before the financial crisis of 2008, if the Fed wanted to lower the Federal funds rate, it
answer
bought bonds from banks and the public.
question
The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the
answer
prime interest rate.
question
The Fed's normalization plan for monetary policy included
answer
raising the interest rate paid on excess reserves.
question
A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.
answer
false
question
After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?
answer
The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
question
If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in
answer
Bank A's excess reserves.
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question
Federal Reserve Notes in circulation are
answer
a liability as viewed by the Federal Reserve Banks.
question
The level of GDP, ceteris paribus, will tend to increase when
answer
the Federal Reserve buys government securities in the open market.
question
Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, the supply of money in the economy will
answer
rise by $500.
question
The interest rate that banks charge one another on overnight loans is called the
answer
federal funds rate.
question
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
answer
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
question
Beginning in 2008, the Fed was allowed to
answer
pay interest on excess reserves deposited at Fed banks.
question
Which of the following actions by the Fed most likely increase commercial bank lending?
answer
reducing the interest paid on excess reserves held at the Fed
question
The major purpose of the Federal Reserve buying government securities in open-market operations is to
answer
allow banks to increase their lending.
question
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for
answer
buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.
question
When the Fed sells bonds to the bank and the public, the expected result is that
answer
the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur.
question
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of
answer
$600 million, but by $800 million if the securities are purchased directly from commercial banks.
question
In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that
answer
banks held on to excess reserves and people chose to pay off loans rather than spend.
question
The prime interest rate
answer
is influenced by Fed policies that change the money supply.
question
In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed
answer
lowered the federal funds target rate.
question
The discount rate is the interest
answer
rate at which the Federal Reserve Banks lend to commercial banks.
question
If the Fed sells government securities to the general public in the open market,
answer
the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed.
question
When the Fed raises the interest rate paid on reserves, it discourages bank lending.
answer
true
question
A decrease in the nominal GDP, other things remaining the same, will decrease both the total demand for money and the equilibrium rate of interest in the economy.
answer
true
question
Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to
answer
hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.
question
An increase in the legal reserve ratio
answer
decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
question
What is one of the advantages of monetary policy over fiscal policy?
answer
the quickness with which it can be used
question
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
answer
a downsloping line or curve from left to right.
question
Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market
answer
increased and the Federal funds rate decreased.
question
Since the financial crisis of 2008, the main tool of expansionary monetary policy used by the Fed has been
answer
quantitative easing
question
The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.
answer
true
question
An increase in nominal GDP will
answer
increase the transactions demand and the total demand for money.
question
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the
answer
cyclical asymmetry of monetary policy.
question
The effects on aggregate demand of an open market purchase and a tax cut are similar.
answer
true
question
Which of the following tools of monetary policy has not been used since 1992?
answer
the reserve ratio
question
In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,
answer
an increase in the money supply will decrease the rate of interest.
question
If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when
answer
the demand for money increases.
question
The federal funds rate is the rate that banks charge other banks for overnight loans of excess reserves.
answer
true
question
Before the financial crisis of 2008, if the Fed wanted to lower the Federal funds rate, it
answer
bought bonds from banks and the public.
question
The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the
answer
prime interest rate.
question
The Fed's normalization plan for monetary policy included
answer
raising the interest rate paid on excess reserves.
question
A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.
answer
false
question
After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?
answer
The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
question
If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in
answer
Bank A's excess reserves.