978-1259723223 Test Bank TBChap036 Part 11

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C.

negative interest rates.

D. qualitative easing.

418.

Which of the following would not be a consequence of negative interest rates?

419.

One reason why Europeans continued to leave money in their bank deposits, despite

negative interest rates was

420.

What are two conflicting issues that the European central banks that experimented with

negative interest rates found that they eventually had to

balance?

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True / False Questions

421.

The transactions demand for money will decrease when income decreases, but it is not

much affected by interest rates.

422.

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

423.

There is an asset demand for money because households and business firms use money

as a store of value.

424.

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.

425.

If nominal GDP is $2,000 billion and the amount of money demanded for transactions

purposes is $500 billion, then on average each dollar will

be spent about four times a year.

426.

A bond with no expiration date is priced at $10,000 when the interest rate in the

economy is 6 percent. If the interest rate falls to 5.5 percent, then

this bond’s price would

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427.

The price of a bond with no expiration date is $1,000, and the fixed annual interest

payment is $100. If the price of the bond falls to $800, the

interest rate to a new buyer of

428.

The reserves of commercial banks are assets to commercial banks and liabilities of the

Federal Reserve System.

429.

One new element of the Fed’s open market operations is the use of government

securities as collateral for loans to banks and other financial

institutions.

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TRUE

430.

In a repo (or repurchase agreement), if the Fed buys securities from Firm A with an

agreement that Firm A will buy back the securities from the

Fed on the following day, then

the Fed is acting as the lender and Firm A the borrower.

431.

If the Fed does a reverse repo of bonds with banks, then the banks’ reserves will

increase.

432.

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

corporate customers.

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Blooms: Remember

Dif f i c u lty: 01 Easy

Learning Objective: 36-03 List and explain the goals and tools of monetary policy.

Test Bank: II

Topic: Tools of Monetary Policy

433.

The most frequently used instrument of the Federal Reserve System to control the

money supply is the required reserve ratio.

434.

If the Fed sells $10 million in government securities to commercial banks, the size of

the effect on the banks’ excess reserves is not the same as if

the Fed sold the securities to

the public instead.

435.

When commercial banks borrow from the Federal Reserve Banks, they decrease their

excess reserves and their money-creating potential.

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Topic: Tools of Monetary Policy

436.

The federal funds rate is the rate that banks charge other banks for overnight loans of

excess reserves.

437.

Before the financial crisis of 2008, expansionary monetary policy would have entailed

the Fed targeting a lower federal funds rate and using

open-market purchases to increase

bank reserves and cause the federal funds rate to hit its target.

438.

In traditional monetary policy, if the Fed targeted a lower federal funds rate, then it was

pursuing a restrictive monetary policy.

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439.

Expansionary monetary policy after 2008 consists mainly of quantitative easing (QE)

and massive bond purchases by the Fed to expand bank

reserves.

440.

The main goal of quantitative easing (QE) is to reduce the federal funds rate.

441.

When the Fed sells government securities in the open market, its intent is to try to

increase aggregate demand.

442.

An expansionary monetary policy increases the money supply, lowers interest rates,

and increases aggregate demand.

443.

If the monetary authority wished to rein in inflation, it would buy government securities

in the open market.

444.

In order to stimulate the economy and reduce unemployment, the Fed would

traditionally set a lower target for the federal funds rate.

445.

If the Fed seeks to maintain a fixed targeted interest rate, then it will have to increase

the money supply when the demand for money increases as

income increases.

446.

In traditional (before 2008) analysis, an autonomous increase in investment spending

when the economy is at full employment will cause the Fed

to seek a lower target for the

federal funds rate by buying securities in the open market.

447.

An expansionary monetary policy is less effective in influencing aggregate demand

compared to a restrictive monetary policy.

448.

Monetary policy, unlike fiscal policy, does not have any time lags.

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Blooms: Understand

D i f f i c u l t y : 02 Medium

Learning Objective: 36-06 Explain the effectiveness of monetary policy and its shortcomings.

Test Bank: II

Topic: Monetary Policy: Evaluation and Issues

449.

The major advantages of monetary policy include its flexibility, speed, and political

palatability.

450.

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

451.

The zero interest rate policy (ZIRP) presented a policy problem when the economy

remained weak, and that problem is known as the zero bound

problem.

452.

Quantitative easing (QE) differs from open-market purchases in that QE shrinks the

assets of the Fed, whereas open market purchases expand the

Fed’s assets.

453.

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

454.

It is inconceivable and impossible for a central bank to pursue a negative-interest rate

policy because interest rates simply cannot turn negative.