30) To change the federal funds rate, the Fed
A) tells banks how much to charge.
B) coordinates with banks on establishing the new rate.
C) increases or removes money from the stock market.
D) uses open market operations to change the quantity of reserves.
E) changes the income tax rate on interest income.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
31) In the short run, if the Fed wants to raise the federal funds rate, it
A) instructs large commercial banks to sell government securities in the open market.
B) instructs the New York Fed to sell government securities in the open market.
C) tells large commercial banks to raise their interest rates.
D) instructs the New York Fed to sell government securities in the foreign exchange
market.
E) instructs the New York Fed to buy government securities in the open market.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
32) By using open market operations, the Federal Reserve
A) adjusts the supply of reserves to keep the federal funds interest rate equal to its target.
B) adjusts the supply and demand of reserves to keep the federal funds interest rate equal
to its target.
C) adjusts the demand of reserves to keep bank rates in line with the federal funds rate
target.
D) controls banks’ demand for reserves, thereby keeping the federal funds rate equal to its
target.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
11
33) The higher the federal funds rate, the ________ the opportunity cost of holding reserves,
which ________ the incentive to economize on reserves.
A) higher; increases
B) higher; decreases
C) lower; increases
D) lower; does not change
E) lower; decreases
Skill: Level 4: Applying models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
34) Equilibrium in the market for bank reserves determines the
A) federal funds rate.
B) inlation rate.
C) price level.
D) 30-year Treasury bond rate.
E) exchange rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
35) If the Fed increases the quantity of reserves, a new equilibrium is reached by a
A) rightward shift of the demand for reserves curve.
B) movement down the demand for reserves curve.
C) leftward shift of the demand for reserves curve.
D) movement up the demand for reserves curve.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
12
36) In the market for bank reserves, if the federal funds rate target is higher than the
federal funds rate, the Fed will take action to ________ reserves.
A) decrease the supply of
B) increase the supply of
C) increase both the demand for and the supply of
D) increase the demand for
E) decrease the demand for
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
37) Maximum employment and moderate long-term interest rates are best achieved with
A) high and stable inlation rates.
B) high and variable inlation rates.
C) high real interest rates.
D) high short-term interest rates.
E) price stability.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
38) The operational goals the Fed uses for its monetary policy objectives are
A) the federal funds rate and the supply of reserves.
B) the demand for reserves and the supply of reserves.
C) the supply of reserves and the output gap.
D) the core inlation rate and the output gap.
E) the federal funds rate and the core inlation rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
13
39) Which of the following is the Fed’s monetary policy instrument?
A) the output gap
B) the core inlation rate
C) the federal funds rate
D) the supply of reserves
E) the demand for reserves
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
40) To lower the federal funds rate, the Fed conducts an open market ________ of securities
which ________.
A) sale; increases the demand for reserves
B) sale; increases the supply of reserves
C) purchase; increases the demand for reserves
D) purchase; decreases the demand for reserves
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
17.2 Monetary Policy Transmission
1) Steps in the transmission of monetary policy are
A) Congress increases government expenditures on goods and services, leading to an
increase in aggregate demand.
B) Congress increases the money supply, which lowers the interest rate, and leads to an
increase in aggregate demand.
C) the Federal Reserve increases government expenditures on goods and services, leading
to an increase in aggregate demand.
D) the Federal Reserve lowers the federal funds rate, which lowers the real interest rate,
and leads to an increase in aggregate demand.
E) Congress increases the budget deicit, which increases the money supply, which
increases aggregate supply.
Skill: Level 1: Deinition
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
14
2) Which of the following is NOT an efect from a change in the federal funds rate?
A) change in the real interest rate
B) change in investment
C) change in government expenditures
D) change in aggregate demand
E) change in the quantity of money
Skill: Level 1: Deinition
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
3) If the Fed buys U.S. government securities,
A) the federal funds rate will fall.
B) the federal funds rate will rise.
C) the discount rate will fall.
D) bank reserves will decrease.
E) the discount rate will rise.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
4) If the Fed sells U.S. government securities,
A) the federal funds rate rises.
B) the U.S. Treasury gains some revenue.
C) the U.S. Treasury loses some revenue.
D) banks’ reserves increase.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
15
5) If the Fed carries out an open market operation and buys U.S. government securities, the
federal funds rate ________ and the quantity of reserves ________.
A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; does not change
E) rises; decreases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
6) If the Fed carries out an open market operation and sells U.S. government securities, the
federal funds rate ________ and the quantity of reserves ________.
A) falls; increases
B) rises; increases
C) rises; does not change
D) falls; decreases
E) rises; decreases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
7) In an open market purchase, the Fed ________ government securities, which ________
bank reserves and ________ the federal funds rate.
A) buys; increases; raises
B) buys; decreases; raises
C) sells; increases; lowers
D) sells; decreases; lowers
E) buys; increases; lowers
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
16
8) If the Fed buys U.S. government securities from banks, the federal funds rate ________
and banks’ reserves ________.
A) falls; increase
B) rises; increase
C) does not change; increases
D) falls; decrease
E) rises; decrease
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
9) If the Fed sells U.S. government securities to banks, the federal funds rate ________ and
banks’ reserves ________.
A) falls; increase
B) rises; do not change
C) rises; increase
D) falls; decrease
E) rises; decrease
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
10) In the short run, to decrease the interest rate, the Federal Reserve ________ the quantity
of money by ________ government securities.
A) increases; selling
B) increases; buying
C) decreases; selling
D) decreases; buying
E) None of the above answers is correct because in the short run, the Federal Reserve
cannot change the interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
17
11) In order to raise the federal funds rate, the Fed ________ government securities in open
market operations, so that banks’ reserves ________ and the quantity of money ________.
A) buys; decrease; increases
B) sells; decrease; decreases
C) sells; increase; decreases
D) buys; increase; increases
E) buys; increase; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
12) In order to lower the federal funds rate, the Fed ________ government securities in open
market operations, so that banks’ reserves ________ and the quantity of money ________.
A) buys; decrease; increases
B) sells; decrease; decreases
C) sells; increase; decreases
D) buys; increase; increases
E) buys; decrease; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
13) When the Fed sells government securities, banks’ reserves ________, the quantity of
money ________, and the federal funds rate ________.
A) increase; increases; falls
B) decrease; decreases; rises
C) increase; decreases; rises
D) decrease; increases; falls
E) decrease; decreases; falls
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
18
14) When the Fed buys government securities, banks’ reserves ________, the quantity of
money ________, and the federal funds rate ________.
A) increase; increases; falls
B) decrease; decreases; rises
C) increase; decreases; rises
D) decrease; increases; falls
E) increase; increases; rises
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
15) The igure above shows the market for bank reserves in Futureland. If the Bank of
Futureland undertakes an open market purchase of government securities that changes the
quantity of reserves by $25 billion, then the federal funds rate will
A) rise to 8 percent a year.
B) remain at 6 percent a year.
C) fall to 4 percent a year.
D) change, but more information is needed to determine by how much.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
16) The igure above shows the market for bank reserves in Futureland. If the Bank of
Futureland undertakes an open market sale of government securities that changes the
quantity of reserves by $25 billion, then the federal funds rate will
A) rise to 6 percent a year.
19
B) remain at 4 percent a year.
C) fall to 4 percent a year.
D) change, but more information is needed to determine by how much.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
17) The igure above shows the market for bank reserves in Futureland. If the Bank of
Futureland lowers the target federal funds rate by 1 percentage point, the central bank will
conduct an open market ________ of government securities of ________ to ________ the supply
of reserves.
A) sale; $75 billion; decrease
B) purchase; $25 billion; decrease
C) sale; $25 billion; increase
D) purchase; $75 billion; increase
E) purchase; $25 billion; increase
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
18) If the Fed sells government securities, in the short run the nominal interest rate
________ and the real interest rate ________.
A) rises; rises
B) does not change; rises
C) falls; falls
D) rises; does not change
E) rises; falls
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
20