19) The Fed ________ inluence the real interest rate in the short run and ________ inluence
the real interest rate in the long run.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) might be able to; might be able to
Skill: Level 5: Critical thinking
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
20) A hike in the federal funds rate results in ________ in the real interest rate which leads
to a ________ in investment.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
E) a decrease; no change
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
21) In the short run, when the Fed raises the federal funds rate,
A) the real interest rate is unchanged so investment and consumption expenditure are not
changed.
B) the real interest rate temporarily increases, thereby decreasing investment and
consumption expenditure.
C) the real interest rate temporarily falls, thereby increasing investment and consumption
expenditure.
D) investment and consumption expenditure increase, thereby raising the real interest rate
temporarily.
E) the real interest rate temporarily increases, thereby decreasing investment and
increasing consumption expenditure.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
21
22) In the short run, when the Fed increases the nominal interest rate, the real interest
rate
A) temporarily rises.
B) permanently rises.
C) temporarily falls.
D) permanently falls.
E) does not change.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
23) In the short run, when the Fed increases the federal funds rate,
A) there is no efect on investment because investment depends on the real interest rate.
B) the real interest rate falls and investment increases.
C) the real interest rate rises and investment decreases.
D) the real interest rate is unafected but investment still decreases.
E) the real interest rate rises and investment does not change.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
24) When the Fed ________ the federal funds rate, the opportunity cost of irms’ investment
________ and so the quantity of investment ________.
A) decreases; rises; decreases
B) increases; rises; decreases
C) increases; rises; increases
D) decreases; falls; decreases
E) increases; falls; increases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
22
25) If the Fed lowers the federal funds rate, which of the following occurs?
A) Investment increases.
B) Consumption expenditure decreases.
C) The price of the dollar on the foreign exchange market increases.
D) Net exports decreases.
E) Government expenditures on goods and services increases.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
26) When the FOMC raises the federal funds rate, almost immediately ________, and a few
weeks later the ________.
A) short-term interest rates rise; quantity of money and supply of loanable funds decrease
B) long-term interest rates rise; quantity of money and supply of loanable funds decrease
C) short-term interest rates fall; quantity of money and supply of loanable funds decrease
D) long-term interest rates rise; quantity of money and supply of loanable funds increase
E) short-term interest rates fall; quantity of money and supply of loanable funds increase
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
27) Suppose the Fed raises the federal funds rate. Put the following changes in order in
which they occur, starting with the changes that take place almost immediately and ending
with the changes that may occur up to two years afterwards:
i. Short-term interest rates rise.
ii. Long-term interest rate rises.
iii. Aggregate demand decreases.
iv. Inlation rate decreases.
A) i-ii-iii-iv
B) ii-i-iii-iv
C) i-ii-iv-iii
D) i-iii-ii-iv
E) ii-i-iv-iii
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
23
28) Suppose the Federal Reserve lowers the federal funds rate. Put the following changes
in order in which they occur, starting with the changes that take place almost immediately
and ending with the changes that may occur up to a year afterwards:
i. Quantity of money increases.
ii. Quantity of reserves increases.
iii. Aggregate demand increases.
iv. The long-term real interest rate falls.
A) ii-i-iv-iii
B) i-ii-iv-iii
C) ii-i-iii-iv
D) i-ii-iii-iv
E) iii-iv-i-ii
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
29) The Fed raises the federal funds rate. Which of the following changes takes the longest
time before it occurs?
A) Short-term interest rates rise.
B) Exchange rate rises.
C) Quantity of money decreases.
D) Supply of loanable funds decreases.
E) Aggregate demand decreases.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
30) The Fed raises the federal funds rate. Which of the following changes occurs most
rapidly?
A) Exchange rate rises.
B) Consumption expenditure decreases.
C) Aggregate demand decreases.
D) Real GDP growth decreases.
E) Inlation rate decreases.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
24
31) In the long run, the real interest rate is determined by
A) Fed actions.
B) the expected inlation rate.
C) the nominal interest rate.
D) saving supply and investment demand.
E) the multiplier efect.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
32) Which of the following statements about the ripple efects of monetary policy is FALSE?
Monetary policy can
A) raise the federal funds rate, thereby decreasing the quantity of money, raising the real
interest rate, and decreasing investment.
B) lower the federal funds rate, thereby increasing the supply of loanable funds, and
lowering the exchange rate.
C) lower the federal funds rate, thereby lowering the real interest rate and increasing
aggregate demand.
D) raise the federal funds rate and shift the aggregate demand curve leftward.
E) raise the federal funds rate, thereby raising the real interest rate and increasing
potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
33) If the Federal Reserve lowers the Federal funds rate,
A) other short-term interest rates fall.
B) net exports decrease.
C) other short-term interest rates rise.
D) the price level falls.
E) Both answers A and C are correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
25
34) If the Fed raises the federal funds rate, which of the following happens?
A) net exports increase
B) the real interest rate falls
C) aggregate demand decreases
D) real GDP increases
E) the price level rises
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
35) The FOMC is concerned about inlation and has ________ the federal funds rate. Due to
substitution efects, other ________ interest rates will ________ almost immediately.
A) increased; short-term; increase
B) decreased; long-term; decrease
C) increased; long-term; increase
D) increased; short-term; decrease
E) decreased; short-term; decrease
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
36) If the Federal Reserve decreases the Federal funds rate, other short-term interest rates
________ and the exchange rate ________.
A) fall; falls
B) do not change; rises
C) fall; does not change
D) fall; rises
E) do not change; falls
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
26
37) A decrease in the federal funds rate
A) increases other short-term interest rates, decreases investment, and decreases
aggregate demand.
B) lowers the exchange rate, increases the supply of loanable funds, and increases
aggregate demand.
C) lowers other sort-term interest rate, raises the real interest rate, and increases
aggregate demand.
D) decreases the supply of loanable funds, raises the real interest rate, and decreases
aggregate demand.
E) decreases the demand for loanable funds, lowers the real interest rate, and decreases
aggregate demand.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
38) A fall in the federal funds rate leads to
A) a decrease in the quantity of money.
B) a rise in the real interest rate.
C) a decrease in investment.
D) a rise in the price level.
E) a decrease in real GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
39) If the Fed lowers the federal funds rate, which of the following will NOT happen?
A) the real interest rate falls
B) other short-term interest rates fall
C) aggregate demand increases
D) real GDP increases
E) the price level falls
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
27
40) When the Federal Reserve raises the federal funds rate, the quantity of reserves
________, the quantity of money ________, and the quantity of loans ________.
A) decreases; decreases; decreases
B) decreases; decreases; does not change
C) decreases; does not change; does not change
D) increases; increases; decreases
E) increases; increases; increases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
41) If the Fed is concerned about a possible recession, it ________ the federal funds rate,
which ________ the quantity of reserves and ________ the amount of bank loans.
A) raises; decreases; decreases
B) lowers; decreases; decreases
C) lowers; increases; decreases
D) raises; increases; increases
E) lowers; increases; increases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
42) The Fed is concerned about inlation. Its policy will ________ U.S. short-term interest
rates and, in the foreign exchange market, lead to the value of the U.S. dollar ________.
A) lower; rising
B) raise; rising
C) raise; not changing
D) lower; falling
E) lower; not changing
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
28
43) If the Fed is concerned about inlation, its actions ________ long-term interest rates so
that investment ________ and net exports ________.
A) lower; increases; increase
B) lower; increases; decrease
C) raise; decreases; decrease
D) lower; decreases; decrease
E) raise; increases; increase
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
44) When the Federal Reserve increases the federal funds rate, bank loans ________, the
supply of loanable funds ________, and the real interest rate ________.
A) decrease; decreases; rises
B) do not change; decreases; rises
C) increase; increases; falls
D) increase; increases; rises
E) decrease; does not change; rises
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
45) A change in monetary policy afects
A) consumption expenditure, government expenditures on goods and services, and net
exports.
B) consumption expenditure, investment, and net exports.
C) investment, government expenditures on goods and services, and net exports.
D) consumption expenditure, productivity, and net exports.
E) government expenditures on goods and services because it afects the government’s
budget balance.
Skill: Level 1: Deinition
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
29
46) When the Fed ________, the U.S. foreign exchange rate falls.
A) sells government securities
B) buys government securities
C) raises the interest rate
D) raises taxes on interest income
E) increases the size of the multiplier
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
47) Suppose monetary policy results in the exchange rate falling. As a result,
A) net exports decrease.
B) net exports increase.
C) exports decrease and imports decrease.
D) exports increase and imports increase.
E) exports do not change because they are autonomous and imports decrease.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
48) If the Fed increases interest rates, other things remaining the same, foreigners demand
________ dollars, thereby ________ the exchange rate.
A) more; increasing
B) more; decreasing
C) fewer; increasing
D) fewer; decreasing
E) the same number of; not afecting
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
30