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CHAPTER 3
TRUE/FALSE QUESTIONS
securities.
just through interest rates.
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change reserve requirements, to devaluing the US$, and to change bank regulations.
likely increase the money supply.
interest rates to boost the economy.
body of the U.S. Federal Reserve System.
MULTIPLE-CHOICE QUESTIONS
a. banks withdraw currency from the Fed.
b. the Fed makes loans at the discount window.
c. the Fed sells securities on the open market.
d. the Fed buys securities on the open market.
a. reserve requirements decrease.
b. the public holds more cash.
c. reserve requirements increase.
d. monetary policy “tightens”.
a. the Fed Funds rate to rise.
b. planned inventory investment to fall.
c. depository institutions to lend more freely.
d. foreign investors to buy more T-Bills.
a. the rate of growth of the money supply.
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b. the relationship between the monetary base and the money supply.
c. the relationship between the money supply and economic activity.
d. all of the above.
a. the Fed makes fewer loans at its discount window.
b. the Fed sells securities on the open market.
c. the Fed raises reserve requirements.
d. all of the above.
a. is exclusively controlled by the Fed.
b. is smaller than the monetary base
c. excludes any interest-bearing deposits
d. none of the above.
a. discount rate
b. Regulation Q
c. open market operations
d. bank examination
a. decreases the monetary base.
b. increases the monetary base.
c. has no effect on monetary base.
d. always decreases another Federal Reserve Bank asset.
a. financial wealth decreases.
b. reserve requirements decrease.
c. interest rates increase.
d. credit availability decreases.
a. interest rates rise while inflation remains unchanged.
b. inflation decreases while interest rates remain unchanged.
c. reserve requirements rise.
d. any of the above
a. decrease in credit availability.
b. increasing interest rates.
c. decreased investment.
d. all of the above
a. expenditures to fall.
b. inflation expectations to fall.
c. an increase in the Fed Funds rate.
d. excess reserves to increase.
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a. the Fed Funds rate to rise.
b. planned inventory investment to fall.
c. depository institutions to lend more freely.
d. foreign investors to buy more T-Bills.
a. will increase domestic interest rates
b. will cause the exchange value of the dollar to increase.
c. will cause U.S. exports to increase.
d. will cause U.S. imports to increase.
a. inflationary expectations will rise.
b. government spending will decrease.
c. bank lending will decrease.
d. investment spending will fall.
a. wages increase and people expect prices to rise, too.
b. wages increase and people expect prices to be stable.
c. interest rates rise more than prices are expected to rise.
d. the money supply decreases.
a. increase domestic interest rates
b. cause the exchange value of the dollar to increase.
c. cause U.S. exports to decrease.
d. all of the above.
a. to lower interest rates.
b. to raise security prices.
c. to influence change consumption and investment spending.
d. to reduce government spending.
a. by affecting real spending directly.
b. by affecting real spending through the financial sector.
c. by changing interest rates and the cost of housing.
d. all of the above
interest rates.
a. money, increasing, decreasing
b. capital, increasing, decreasing
c. money, decreasing, increasing
d. mortgage, increasing, decreasing
a. liquidity effect
b. wealth effect
c. income effect
d. reactionary effect
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a. housing investment.
b. consumer durable investment.
c. inventory investment.
d. federal government budget outlays.
upon the value of the dollar in relation to other currencies?
a. increase
b. decrease
c. no effect
d. none of the preceding
a. consumption expenditures to rise.
b. investment spending to fall.
c. national income to fall.
d. government expenditures to rise.
a. currency in circulation
b. demand deposits
c. both
d. neither
a. Reg Q interest rate ceilings
b. consumer spending for durable goods and housing
c. net exports
d. business investment in real assets
a. changing the discount rate.
b. open market operations.
c. changes in reserve requirements.
d. changes in the Federal Funds rate.
a. decrease in the discount rate.
b. sale of securities by the Fed.
c. decrease in reserve requirements.
d. none of the above
a. replace the National Banking system
b. improve the payments system
c. establish more rigorous bank supervision
d. act as “lender of last resort”
a. monetary policy influences the real sector
b. changes in the money supply drive changes in interest rates
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c. changes in interest rates drive changes in the money supply
d. monetary policy does not influence the real sector
a. varies inversely with the money supply
b. varies directly with GDP
c. is not under the Fed’s exclusive control
d. all of the above
a. negligible
b. decisive
c. significant
d. insignificant
a. negligible
b. inevitable
c. limited
d. insignificant
a. to control the money supply
b. to safeguard the national payment system
c. to establish a more rigorous bank supervisory system
d. all of the above
a. a system for federal chartering of banks.
b. a system for controlling bank note issuance.
c. a source of liquidity for the banking system.
d. the beginning of demand deposit accounts.
I. Savings deposits
II. Checking deposits
III. Non-institutional money market mutual funds
IV. Eurodollars
V. Currency
VI. Time deposits
a. I, II, III, IV
b. II, V
c. I, V, VI
d. III, IV, VI
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a. Banks charge for loans to corporate customers
b. Banks charge to lend foreign exchange to customers
c. The Federal Reserve charges on loans to commercial banks
d. Banks charge each other on loans of excess reserves
a. Increase in bank lending
b. Increase in the money supply
c. An decrease in the discount rate
d. All above
ESSAY QUESTIONS
1. Explain how the Fed adjusts its balance sheet to increase or decrease the monetary base.
2. How does the Federal Reserve control the money supply by controlling the size of the monetary
base? Note the tools of monetary policy and how each can affect the monetary base and money
supply.
3. What should happen to consumption if the monetary base increases? Explain.
4. What exactly is the Fed Funds Rate, and why isn’t it considered a “tool of monetary policy?
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5. List and briefly describe the channels of transmission of monetary policy.
6. In 2010 and 2011, Federal Reserve announced quantitative easing’s, or QEs, which is to create
money for buying long-term U.S. Treasury bonds in the market. What is the impact of the QE on
security prices? How does the Fed expect the QEs to influence the economy?
Answer: