Question 1

The ZIRP (zero interest rate policy)  of the Fed led to the so-called zero lower bound problem, which refers to the problem of:

Accepted Answer

A)   Having a very low level of employment with zero new jobs created
B)   Huge budget deficits leaving the government no more ability to spend
C)   Interest rates that can't go any lower, i.e. they cannot be driven down below zero
D)   Zero real-GDP growth due to very weak aggregate demandE) All of the above
F) A) and B)

Question 2

Refer to the graph above. If the equilibrium interest rate is 4 percent, the supply of money must be:

Accepted Answer

A)   $250 billion
B)   $200 billion
C)   $150 billion
D)   $100 billionE) B) and D)
F) A) and B)

Question 3

When the interest rate falls, the:

Accepted Answer

A)   Asset demand for money decreases
B)   Transactions demand for money increases
C)   Total amount of money demanded increases
D)   Total amount of money demanded decreasesE) All of the above
F) A) and D)

Question 4

The Fed can induce banks to increase their reserve holdings by:

Accepted Answer

A)   Increasing the discount rate
B)   Reducing the required reserve ratio
C)   Increasing the interest on reserves
D)   Selling securities in the open marketE) None of the above
F) B) and C)

Question 5

1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary full-employment level of real GDP? A)  Decrease the reserve ratio B)  Decrease the discount rate C)  Sell government securities in the open market D)  Make no change in monetary policy" class="answers-bank-image d-inline" rel="preload" > 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 Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary full-employment level of real GDP?

Accepted Answer

A)   Decrease the reserve ratio
B)   Decrease the discount rate
C)   Sell government securities in the open market
D)   Make no change in monetary policyE) All of the above
F) B) and D)

Question 6

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

Accepted Answer

A)   11 percent
B)   10 percent
C)   9 percent
D)   8 percentE) B) and D)
F) A) and D)

Question 7

The most recently-introduced tool of monetary policy is the:

Accepted Answer

A)   Open-market operation
B)   Discount rate
C)   Interest on reserves
D)   Reserve ratioE) A) and B)
F) C) and D)

Question 8

If the Fed buys government securities from commercial banks in the open market:

Accepted Answer

A)   The Fed gives the securities to the commercial banks and increases the banks' reserves
B)   The Fed gives the securities to the commercial banks decreases the banks' reserves
C)   Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
D)   Commercial banks give the securities to the Fed, and the Fed decreases the banks' reservesE) B) and C)
F) None of the above

Question 9

Among the worrisome consequences of the government's aggressive implementation of ZIRP and QE are the following, except:

Accepted Answer

A)   If and when ZIRP and QE end, the government could be quickly confronted with huge interest costs
B)   Savers are being punished by the very low returns on their savings
C)   Senior citizens are finding it easier to live off the earnings from their life-time investments
D)   Pension funds and retirement funds are finding it harder to keep their promises to their contributorsE) A) and D)
F) C) and D)

Question 10

If real GDP is 2% below potential GDP, and the inflation rate is 1%, then according to the Taylor rule, the Fed should make the real federal funds rate:

Accepted Answer

A)   Decrease by 1.5%
B)   Decrease by 3%
C)   Increase by 3%
D)   Decrease by 1%E) B) and C)
F) A) and D)

Question 11

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective?

Accepted Answer

A)   Selling government securities and raising the discount rate
B)   Selling government securities and raising the reserve ratio
C)   Buying government securities and raising the discount rate
D)   Buying government securities and lowering the reserve ratioE) A) and C)
F) B) and C)

Question 12

The effects of expansionary monetary policy are strengthened by a liquidity trap.

Accepted Answer

A) True 
 B)False

Question 13

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:

Accepted Answer

A)   More excess reserves
B)   Less excess reserves
C)   More required reserves
D)   Less required reservesE) A) and B)
F) A) and C)

Question 14

Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?

Accepted Answer

A)   $100 billion
B)   $150 billion
C)   $200 billion
D)   $250 billionE) A) and C)
F) A) and B)

Question 15

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

Accepted Answer

A) True 
 B)False

Question 16

Other things equal, an improvement in the expected rate of net profit would:

Accepted Answer

A)   Reduce the price level and unemployment
B)   Decrease the interest rate and cause aggregate demand to increase
C)   Increase consumption and net exports, causing aggregate demand to shift rightwards
D)   Increase investment spending, real GDP, and the price levelE) All of the above
F) A) and C)

Question 17

An interesting development that happened in late 2008, relating to the Fed and bank reserves, is that the Fed:

Accepted Answer

A)   Reduced the reserve ratio drastically
B)   Required banks to hold more excess reserves
C)   Started paying interest on the banks' reserves
D)   Gave back all the reserves to the banks to hold as vault cashE) None of the above
F) All of the above

Question 18

An increase in the money supply is likely to reduce:

Accepted Answer

A)   The general price level
B)   Nominal income
C)   Money demand
D)   Interest ratesE) C) and D)
F) All of the above

Question 19

If the Fed is targeting a lower federal funds rate, then it is pursuing a restrictive monetary policy.

Accepted Answer

A) True 
 B)False

Question 20

A consumer holds money to meet spending needs. This would be an example of the:

Accepted Answer

A)   Use of money as a measure of value
B)   Use of money as legal tender
C)   Transactions demand for money
D)   Asset demand for moneyE) None of the above
F) A) and D)

Exam 16: Interest Rates and Monetary Policy

A consumer holds money to meet spending needs. This would be an example of the:

Correct Answer
verified

The most recently-introduced tool of monetary policy is the:

Correct Answer
verified

The Fed can induce banks to increase their reserve holdings by:

Correct Answer
verified

If real GDP is 2% below potential GDP, and the inflation rate is 1%, then according to the Taylor rule, the Fed should make the real federal funds rate:

Correct Answer
verified

Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?

Correct Answer
verified

The ZIRP (zero interest rate policy) of the Fed led to the so-called zero lower bound problem, which refers to the problem of:

Correct Answer
verified

The effects of expansionary monetary policy are strengthened by a liquidity trap.

Correct Answer
verified

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

Correct Answer
verified

An increase in the money supply is likely to reduce:

Correct Answer
verified

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

Correct Answer
verified

Correct Answer
verified

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:

Correct Answer
verified

Other things equal, an improvement in the expected rate of net profit would:

Correct Answer
verified

An interesting development that happened in late 2008, relating to the Fed and bank reserves, is that the Fed:

Correct Answer
verified

When the interest rate falls, the:

Correct Answer
verified

If the Fed is targeting a lower federal funds rate, then it is pursuing a restrictive monetary policy.

Correct Answer
verified

Correct Answer
verified

Among the worrisome consequences of the government's aggressive implementation of ZIRP and QE are the following, except:

Correct Answer
verified

Refer to the graph above. If the equilibrium interest rate is 4 percent, the supply of money must be:

Correct Answer
verified

If the Fed buys government securities from commercial banks in the open market:

Correct Answer
verified

Exam 16: Interest Rates and Monetary Policy

A consumer holds money to meet spending needs. This would be an example of the:

Correct AnswerverifiedShow Answer

The most recently-introduced tool of monetary policy is the:

Correct AnswerverifiedShow Answer

The Fed can induce banks to increase their reserve holdings by:

Correct AnswerverifiedShow Answer

If real GDP is 2% below potential GDP, and the inflation rate is 1%, then according to the Taylor rule, the Fed should make the real federal funds rate:

Correct AnswerverifiedShow Answer

Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?

Correct AnswerverifiedShow Answer

The ZIRP (zero interest rate policy) of the Fed led to the so-called zero lower bound problem, which refers to the problem of:

Correct AnswerverifiedShow Answer

The effects of expansionary monetary policy are strengthened by a liquidity trap.

Correct AnswerverifiedShow Answer

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

Correct AnswerverifiedShow Answer

An increase in the money supply is likely to reduce:

Correct AnswerverifiedShow Answer

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:

Correct AnswerverifiedShow Answer

Other things equal, an improvement in the expected rate of net profit would:

Correct AnswerverifiedShow Answer

An interesting development that happened in late 2008, relating to the Fed and bank reserves, is that the Fed:

Correct AnswerverifiedShow Answer

When the interest rate falls, the:

Correct AnswerverifiedShow Answer

If the Fed is targeting a lower federal funds rate, then it is pursuing a restrictive monetary policy.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Among the worrisome consequences of the government's aggressive implementation of ZIRP and QE are the following, except:

Correct AnswerverifiedShow Answer

Refer to the graph above. If the equilibrium interest rate is 4 percent, the supply of money must be:

Correct AnswerverifiedShow Answer

If the Fed buys government securities from commercial banks in the open market:

Correct AnswerverifiedShow Answer

Correct Answer
verified

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