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Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:


A) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million
B) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million
C) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million
D) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million

E) A) and B)
F) A) and C)

Correct Answer

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An increase in the money supply, ceteris paribus, usually:


A) Increases the interest rate and increases aggregate demand
B) Increases the interest rate and decreases aggregate demand
C) Decreases the interest rate and increases aggregate demand
D) Decreases the interest rate and decreases aggregate demand

E) A) and B)
F) A) and C)

Correct Answer

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Refer to the graph above, in which D<sub>t</sub> is the transactions demand for money, D<sub>m</sub> is the total demand for money, and S<sub>m</sub> is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown<sub>,</sub> then the asset demand for money will increase by: A) $75 B) $125 C) $200 D) $325 Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by:


A) $75
B) $125
C) $200
D) $325

E) A) and D)
F) A) and B)

Correct Answer

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According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Fed should:


A) Raise the real federal funds rate by one percentage point
B) Lower the real federal funds rate by one percentage point
C) Raise the real federal funds rate by half of a percentage point
D) Lower the real federal funds rate by half of a percentage point

E) All of the above
F) A) and B)

Correct Answer

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One feature of the second round of QE ("QE2") was that the Fed engaged in "forward commitment," by pre-announcing exactly the quantity of bonds it was going to buy and for how long the buying would last. This change in policy was intended to:


A) Give the Fed ample flexibility to change its policy
B) Stabilize the prices of bonds in the open market
C) Limit the duration of the easy monetary policy stance of the Fed
D) Enhance the banks' willingness to lend out their reserves

E) All of the above
F) B) and C)

Correct Answer

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Refer to the graphs above, in which the numbers in parentheses near the AD<sub>1</sub>, AD<sub>2</sub>, and AD<sub>3</sub> labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP? A) $50 B) $100 C) $150 D) $225 Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP?


A) $50
B) $100
C) $150
D) $225

E) B) and C)
F) None of the above

Correct Answer

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An expansionary monetary policy is less effective in influencing aggregate demand compared to a restrictive monetary policy.

A) True
B) False

Correct Answer

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Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP? A) Decrease aggregate demand from AD<sub>1</sub> to AD<sub>2</sub> B) Increase the money supply from $75 to $150 billion C) Increase interest rates from 4 to 8 percent D) Make no change in monetary policy Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?


A) Decrease aggregate demand from AD1 to AD2
B) Increase the money supply from $75 to $150 billion
C) Increase interest rates from 4 to 8 percent
D) Make no change in monetary policy

E) A) and B)
F) A) and C)

Correct Answer

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Holding money as an asset presents a risk of capital loss.

A) True
B) False

Correct Answer

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Which of the following statements is correct?


A) The Federal funds rate is derived based on the prime rate
B) The Federal funds rate is the rate banks charge their most creditworthy customers
C) The discount rate is the rate banks charge one another on overnight loans
D) The prime rate involves longer, more risky loans than the Federal funds rate

E) B) and D)
F) A) and B)

Correct Answer

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Which line in the graph above would best illustrate the asset demand for money curve? A) Line 1 B) Line 2 C) Line 3 D) Line 4 Which line in the graph above would best illustrate the asset demand for money curve?


A) Line 1
B) Line 2
C) Line 3
D) Line 4

E) A) and B)
F) All of the above

Correct Answer

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The Federal Reserve alters the amount of the nation's money supply by:


A) Reducing the liabilities of the banking system
B) Controlling the assets of the nation's largest banks
C) Minting coins and printing currency that is distributed to banks
D) Manipulating the size of excess reserves held by commercial banks

E) All of the above
F) C) and D)

Correct Answer

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If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:


A) The demand for money decreases
B) The demand for money increases
C) Investment demand decreases
D) The discount rate increases

E) B) and C)
F) B) and D)

Correct Answer

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The transactions demand for money is least likely to be a function of the:


A) Price level
B) Interest rate
C) Level of national income
D) Frequency of wage and salary payments

E) A) and B)
F) All of the above

Correct Answer

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Refer to the graphs above, in which the numbers in parentheses near the AD<sub>1</sub>, AD<sub>2</sub>, and AD<sub>3</sub> labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Q<sub>f</sub> in the economy, the Fed should try to: A) Increase aggregate demand by increasing the interest rate B) Decrease aggregate demand by increasing the interest rate C) Increase aggregate demand by decreasing the interest rate D) Make no change in the interest rate Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to:


A) Increase aggregate demand by increasing the interest rate
B) Decrease aggregate demand by increasing the interest rate
C) Increase aggregate demand by decreasing the interest rate
D) Make no change in the interest rate

E) A) and D)
F) B) and C)

Correct Answer

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The purpose of an expansionary monetary policy is to increase:


A) The GDP-gap
B) The inflation rate
C) Real GDP
D) Interest rates

E) None of the above
F) A) and C)

Correct Answer

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When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the Federal funds market:


A) Increases and the Federal funds rate decreases
B) Increases and the Federal funds rate increases
C) Decreases and the Federal funds rate decreases
D) Decreases and the Federal funds rate increases

E) None of the above
F) B) and C)

Correct Answer

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The effects on aggregate demand of an open market purchase and a tax cut are similar.

A) True
B) False

Correct Answer

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Other things equal, an increase in taxes on businesses will:


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

E) A) and D)
F) B) and D)

Correct Answer

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The interest rate that banks charge one another for the loan of excess reserves is the:


A) Prime interest rate
B) Federal funds rate
C) Discount rate
D) Interest on reserves

E) B) and C)
F) A) and C)

Correct Answer

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