Chapter 10 – Monetary Policy
Chapter 10 Monetary Policy
Multiple Choice
1. The Federal Reserve came into existence in response to
A) the inflation of the Civil War.
B) the depression of the 1930’s.
C) the boom and bust nature of the late 19th and early 20th century.
D) a fear of a post-World War II depression.
2. Banks
A) create money because they are the ones that print it.
B) create money because they take deposits and make loans.
C) have no role in the money creation process and never have.
D) have no role in the money creation process, though they once did.
3. Through the taking of deposits and making loans banks
A) create more money that physically exists.
B) destroy money that would physically exist if they were not part of the process.
C) leave the system with exactly the same amount of money as physically exists.
D) have no role in the money creation process.
4. The monetary base includes
A) cash held by banks and by the public plus deposits at the Federal Reserve.
B) currency plus checkable accounts and travelers checks.
C) currency plus checkable accounts plus traveler’s checks plus small CDs and money
market accounts.
D) just cash held by the public.
5. M1 includes
A) cash held by banks and by the public plus deposits at the Federal Reserve.
B) currency plus checkable accounts and travelers checks.
C) currency plus checkable accounts plus travelers checks plus small CDs and money
market accounts.
D) just cash held by the public.
Chapter 10 – Monetary Policy
6. M2 includes
A) cash held by banks and by the public plus deposits at the Federal Reserve.
B) currency plus checkable accounts and travelers checks.
C) currency plus checkable accounts plus travelers checks plus small CDs and money
market accounts.
D) just cash held by the public.
7. Which monetary aggregate is the broadest
A) cash in the system.
B) the monetary base.
C) M1.
D) M2 .
8. Which monetary aggregate is the least broad
A) cash held by the public.
B) the monetary base.
C) M1.
D) M2.
9. The Federal Reserve governs U.S.
A) monetary policy.
B) discretionary fiscal policy.
C) nondiscretionary fiscal policy.
D) Supreme Court nominations.
10. Which of the following are goals for monetary policy?
A) Controlling world oil prices.
B) Preventing boom and bust cycles in the economy.
C) Monitoring corruption in the securities industry.
D) Controlling rents.
Chapter 10 – Monetary Policy
11. A monetary aggregate is
A) coin.
B) paper currency.
C) coin and paper currency.
D) a measure of the quantity of money in the economy.
12. M1 is the total amount of ________ in the economy.
A) coin
B) paper currency and coin
C) checking accounts, coin and paper currency
D) paper currency only
13. M2 is the total amount of _________ in the economy.
A) coin and paper currency
B) coin, paper currency, and savings accounts
C) coin, paper currency, savings accounts, and small CDs
D) coin, paper currency, savings accounts, small CDs, and large CDs
14. The Federal Funds Rate is the rate at which
A) the Federal Reserve lends money to the US government.
B) the Federal Reserve lends money to member banks.
C) banks lend money to the Federal Reserve.
D) banks lend to one another to meet reserve requirements.
15. The point of Open Market Operations is to
A) influence stock prices.
B) increase or decrease the money supply so as to influence interest rates.
C) increase or decrease the value of gold as to influence the value of foreign currency.
D) influence oil prices.
16. Open Market Operations refer to the buying and selling of
A) corporate equities.
B) gold.
C) government securities.
D) commodities.
Chapter 10 – Monetary Policy
17. If the Federal Reserve wished to increase interest rates using open market operations it would
A) buy US government securities.
B) sell US government securities.
C) buy gold.
D) buy corporate stocks.
18. If the Federal Reserve wished to decrease interest rates using open market operations it
would
A) buy U.S. government securities.
B) sell U.S. government securities.
C) buy gold.
D) buy corporate stocks.
19. Prior to 2003, the Federal Reserve charged the ______ when loaning money directly to
banks, and thereby, to signal its intentions.
A) discount rate
B) real interest rate
C) exchange rate
D) primary credit rate
20. When the Federal Reserve loans money to banks, the rate it charges banks with excellent
credit is the
A) real interest rate.
B) discount rate.
C) primary credit rate.
D) exchange rate.
21. If the reserve ratio is .05, the money multiplier can be as high
A) as 50.
B) as 20.
C) as 10.
D) as 5.
Chapter 10 – Monetary Policy
22. If the reserve ratio is .10, the money multiplier can be as high as
A) 50.
B) 20.
C) 10.
D) 5.
23. If the reserve ratio is .02, the money multiplier can be as high as
A) 50.
B) 20.
C) 10.
D) 5.
24. If the reserve ratio is .20, the money multiplier can be as high as
A) 50.
B) 20.
C) 10.
D) 5.
25. The amount of money that a bank must keep on reserve at the Federal Reserve the
A) reserve amount.
B) reserve ratio.
C) portfolio portion.
D) cash reserve portion.
26. The money multiplier can be as ____ as the reciprocal of the reserve ratio but is usually
____.
A) high; lower
B) high; constant
C) low; higher
D) low; constant
Chapter 10 – Monetary Policy
27. Banks with excellent credit can borrow ______ from the Federal Reserve.
A) $1,000,000 per year
B) $1,000,000 per day
C) only an amount equal to their deposits
D) an unlimited amount
28. To signal its intention to restrict credit availability, the Federal Reserve could
A) increases the discount rate.
B) pushes the discount rate below the Federal Funds rate.
C) keeps the discount rate equal to the Federal Funds rate.
D) reduces the discount rate by ¼ of a percentage point.
29. The primary credit rate refers to the rate at which
A) banks lend to one another to meet reserve requirements.
B) the Federal Reserve charges banks (with excellent credit) for loans.
C) banks lend to their best customers.
D) none of these options are correct.
30. The primary credit rate is
A) determined directly by the Federal Reserve.
B) determined by market forces but targeted by the Federal Reserve.
C) determined by market forces alone without Federal Reserve influence.
D) determined by Congress.
31. The Federal Funds rate is
A) directly determined by the Federal Reserve.
B) determined by market forces but targeted by the Federal Reserve.
C) determined by market forces alone without Federal Reserve influence.
D) determined by Congress.
Chapter 10 – Monetary Policy
32. The reserve ratio is
A) the percentage of every dollar deposited in a checking account that a bank must maintain
in reserves.
B) the percentage of every dollar deposited in a checking account that a bank may loan out.
C) the ratio of loans to available reserves.
D) the ratio of available reserves to loans made.
33. With a reserve ratio of 10%, the banking system can create ____ with each dollar of deposits.
A) $1
B) $2
C) $5
D) $10
34. The fact that you can use money to buy things is a result of which characteristic?
A) Its use as a medium of exchange.
B) The fact that it is a store of value.
C) The fact that it is a measure of value.
D) The fact that it is backed by gold.
35. The fact that you can use money to buy things well after the money is earned is a result of
which characteristic?
A) Its use as a medium of exchange.
B) The fact that it is a store of value.
C) The fact that it is a measure of value.
D) The fact that it is backed by gold.
36. The fact that you can use money to compare the value of one good to another is a result of
which characteristic?
A) Its use as a medium of exchange.
B) The fact that it is a store of value.
C) The fact that it is a measure of value.
D) The fact that it is backed by gold.
Chapter 10 – Monetary Policy
37. Money is useful because it serves as a
A) medium of exchange.
B) stimulus to the printing industry.
C) good memorial to national leaders.
D) never wears out.
38. Money is useful because it serves as a
A) store of value.
B) stimulus to the printing industry.
C) good memorial to national leaders.
D) never wears out.
39. The property of money that allows us not to worry about “using it before it spoils” is called
the
A) medium of exchange.
B) store of value.
C) creation of value.
D) security of value.
40. The institution that governs monetary policy is
A) the Congress.
B) the President.
C) the Treasury Department.
D) the Federal Reserve.
41. The Federal Reserve has
A) direct control over macroeconomic variables such as unemployment and inflation.
B) indirect influence over macroeconomic variables such as unemployment and inflation
through the use of intermediate targets.
C) no control or influence over any significant macroeconomic variables.
D) oversight on issues of the environment
Chapter 10 – Monetary Policy
42. The target for the Federal Reserve is
A) the Federal Funds rate though it has been a monetary aggregate.
B) and always has been a monetary aggregate.
C) and always has been the Federal Funds rate.
D) and always has been inflation.
43. The Federal Open Market Committee
A) decides what mortgage interest rates will be.
B) decides what the Federal Funds rate target will be.
C) submits recommendations on Federal Funds Rates to Congress.
D) submits recommendations on Federal Funds Rates to the President.
44. The ______ decides monetary policy
A) chairperson of the Federal Reserve Board
B) Federal Open Market Committee
C) President
D) Congress
45. The Federal Reserve’s long standing tools include
A) open market operations.
B) changing the level of the targeted interest rate.
C) changing the reserve ratio.
D) all of these options are correct.
46. The Federal Reserve’s long standing tools includes
A) open market operations.
B) tax rate changes.
C) government spending policies.
D) labor regulations.
Chapter 10 – Monetary Policy
47. The Federal Reserve’s long standing tools includes
A) tax rate changes.
B) changing the reserve ratio.
C) government spending policies.
D) labor regulations.
48. The Federal Reserve’s long standing tools includes
A) tax rate changes.
B) government spending policies.
C) changing the level of the targeted interest rate.
D) labor regulations.
49. The Federal Reserve expanded their traditional tools set in the 2007-2009 recession to
include
A) tax rate changes.
B) government spending policies.
C) labor regulations.
D) the purchase of long term Treasuries.
50. The Federal Reserve expanded their traditional tools set in the 2007-2009 recession to
include
A) tax rate changes.
B) government spending policies.
C) labor regulations.
D) the purchase of mortgage backed securities.
51. The Federal Reserve expanded their traditional tools set in the 2007-2009 recession to
include
A) tax rate changes.
B) government spending policies.
C) labor regulations.
D) the purchase of corporate paper.
Chapter 10 – Monetary Policy
52. When engaging in open market operations to stimulate the economy the Federal Reserve will
A) buy short term U.S. Treasuries.
B) sell short term U.S. Treasuries.
C) buy gold.
D) sell gold.
53. The transmission mechanism in monetary policy is the
A) decision making process.
B) name given to describe the easing of monetary policy.
C) manner in which a buying or selling of bonds ultimately impacts important
macroeconomic variables such as real GDP.
D) name given to describe the tightening of monetary policy.
54. When the Federal Reserve wishes to, in the short run, increase real GDP it
A) will increase the money supply by buying bonds.
B) will increase the money supply by selling bonds.
C) will decrease the money supply by selling bonds.
D) has no policy options that will accomplish this.
55. When the Federal Reserve wishes to, in the short run, decrease inflation it
A) will increase the money supply by buying bonds.
B) will increase the money supply by selling bonds.
C) will decrease the money supply by selling bonds.
D) has no policy options that will accomplish this.
56. When the Federal Reserve wishes to, in the long run, increase real GDP it
A) will increase the money supply by buying bonds.
B) will increase the money supply by selling bonds.
C) will decrease the money supply by selling bonds.
D) has no policy options that will accomplish this.
Chapter 10 – Monetary Policy
57. When the Federal Reserve wishes to, in the long run, decrease inflation it
A) will increase the money supply by buying bonds.
B) will increase the money supply by selling bonds.
C) will decrease the money supply by selling bonds.
D) has no policy options that will accomplish this.
58. Using the traditional tools of monetary policy the Federal Reserve has direct control over
_____ and through that an ability to impact ____.
A) monetary base; short term interest rates
B) long term interest rates; mortgage rates
C) mortgage rates; real GDP
D) unemployment; inflation
59. If the monetary base is directly controlled by the Federal Reserve the supply of overnight
money is
A) upward sloping.
B) downward sloping.
C) flat.
D) vertical.
60. If the Federal Reserve has indirect influence of the loanable funds (short term) interest rate,
the supply of those loanable funds is likely
A) upward sloping.
B) downward sloping.
C) flat.
D) vertical.
61. An increase in the monetary base (the supply of overnight money) will shift the
A) supply of loanable funds to the right.
B) supply of loanable funds to the left.
C) demand for loanable funds to the right.
D) demand for loanable funds to the left.
Chapter 10 – Monetary Policy
62. When the transmission mechanism breaks down macroeconomists call this the
A) liquidity trap.
B) crowding out.
C) crowding in.
D) debt ceiling.
63. The property of money that allows us to avoid finding a trading partner for all of our goods
(bartering) is called the
A) medium of exchange.
B) store of value.
C) creation of value.
D) security of value.
64. Between 2001 and 2003 the Federal Reserve cut interest rates 12 times. This is an example of
A) discretionary fiscal policy.
B) nondiscretionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.
65. Between 2004 and 2005 the Federal Reserve raised interest rates 11 times. This is an
example of
A) discretionary fiscal policy.
B) nondiscretionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.
66. Between 1999 and 2000 the Federal Reserve raised interest rates 5 times. This is an example
of
A) discretionary fiscal policy.
B) nondiscretionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.
Chapter 10 – Monetary Policy
67. Expansionary monetary policy would shift the
A) aggregate demand curve to the right.
B) aggregate demand curve to the left.
C) aggregate supply curve up and to the left.
D) aggregate supply curve down and to the right.
68. Contractionary monetary policy would shift the
A) aggregate demand curve to the right.
B) aggregate demand curve to the left.
C) aggregate supply curve up and to the left.
D) aggregate supply curve down and to the right.
69. A purchase of government debt as part of open market operations would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
70. A sale of government debt as part of open market operations would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
71. An increase in the target for the federal funds rate would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
72. An decrease in the target for the federal funds rate would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
Chapter 10 – Monetary Policy
73. An increase in the discount rate would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
74. An decrease in the discount rate would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
75. A reduction of the reserve ratio would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
76. An increase in the reserve ratio would be an example of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
77. If the Federal Reserve wished to engage in expansionary monetary policy it could
A) raise the primary credit rate.
B) purchase government debt.
C) raise the reserve ratio.
D) sell government debt.
78. If the Federal Reserve wished to engage in expansionary monetary policy it could
A) lower the primary credit rate.
B) sell government debt.
C) raise the reserve ratio.
D) raise the Federal Funds rate target.
Chapter 10 – Monetary Policy
79. If the Federal Reserve wished to engage in expansionary monetary policy it could
A) raise the primary credit rate.
B) lower the federal funds rate target.
C) raise the reserve ratio.
D) sell government debt.
80. If the Federal Reserve wished to engage in expansionary monetary policy it could
A) raise the primary credit rate.
B) sell government debt.
C) lower the reserve ratio.
D) raise the Federal Funds rate target.
81. If the Federal Reserve wished to engage in contractionary monetary policy it could
A) lower the primary credit rate.
B) purchase government debt.
C) lower the reserve ratio.
D) raise the Federal Funds rate target.
82. If the Federal Reserve wished to engage in contractionary monetary policy it could
A) increase the primary credit rate.
B) purchase government debt.
C) lower the reserve ratio.
D) lower the Federal Funds rate target.
83. If the Federal Reserve wished to engage in contractionary monetary policy it could
A) lower the primary credit rate.
B) raise the federal funds rate target.
C) lower the reserve ratio.
D) purchase government debt.
84. If the Federal Reserve wished to engage in contractionary monetary policy it could
A) increase the primary credit rate.
B) sell government debt.
C) increase the reserve ratio.
D) all of the above.
Chapter 10 – Monetary Policy
85. Which of the following would likely have the greatest effect on the banking system and their
ability to loan money?
A) A change in the target for the federal funds rate by .25 percentage points.
B) A change in the discount rate by .25 percentage points.
C) The purchase of $1,000,000 of federal debt.
D) A change in the reserve ratio by 5 percentage points.
86. During 2003 the Federal Reserve began to openly discuss deflation. Their comments
suggested they
A) were enthusiastic about the possibility.
B) were neutral about whether deflation would be a good thing.
C) knew it was something to watch because of the Japanese experience of the 1990s, but did
not alter policy significantly to combat it.
D) knew it would be a disaster, so they immediately cut the target federal funds rate by 5
percentage points to avoid the possibility.
87. From the early 1980’s through 2000 the Federal Reserve’s primary focus was on
A) ensuring rapid growth.
B) controlled inflation and stable growth.
C) stable employment through monetary expansion.
D) keeping gold prices stable.
88. One factor limiting the Federal Reserve’s ability to use monetary policy to stimulate the
economy is that the Federal Reserve has
A) no tools at its disposal to lower interest rates.
B) tools to lower interest rates, but they do not work at interest rates above 10%.
C) tools to lower interest rates, but they do not work at interest rates below 10%.
D) tools to lower interest rates, but they do not work at interest rates below 0%.
89. In 2003, the Federal Reserve had used its control over the federal funds rate to such a degree
that
A) the federal funds rate was the highest it had been in 15 years.
B) the federal funds rate was driven below zero.
C) the federal funds rate was the lowest it had been in 15 years.
D) Congress stripped the Federal Reserve of this authority.
Chapter 10 – Monetary Policy
90. If money is moved from a consumer checking account into a consumer savings account,
A) M1 and M2 both increase.
B) M1 increases and M2 decreases.
C) M1 decreases and M2 remains unchanged.
D) M1 and M2 both remain unchanged.
91. If money is moved from a consumer savings account into a consumer checking account,
A) M1 and M2 both decrease.
B) M1 increases and M2 remains unchanged.
C) M1 decreases and M2 increases.
D) M1 and M2 both increase.
92. Federal Reserve increases in the Federal Funds rate in 2005 had little immediate impact upon
the overheated housing market, because
A) long-term interest increased as short-term interest rates increased.
B) long-term interest rates and short-term interest rates do not always move in lockstep.
C) the yield curve became more steeply upward-sloping.
D) all of the options are correct.
93. The traditional tools of monetary policy
A) seek to influence an “intermediate” target variable.
B) directly impact the economy.
C) can only be utilized after obtaining the approval of Congress.
D) rely heavily upon changes in individual income tax rates.
94. If the Fed wants banks to have more money to lend, it can
A) raise its discount rate.
B) sell government securities.
C) raise the reserve ratio.
D) lower the reserve ratio.
Chapter 10 – Monetary Policy
95. The “monetary policy transmission mechanism” connects
A) individual income tax rates to aggregate demand.
B) individual income tax rates to aggregate supply.
C) short-term interest rates to aggregate demand.
D) open market purchases to the Fed’s balance sheet.
96. New tools of monetary policy created in 2008 included
A) restoration of individual income tax rates to their pre-2001 levels.
B) elimination of the requirement that banks hold reserves against deposits.
C) open market purchases and sales of short-term U.S. government securities.
D) Fed purchase of corporate paper and a new discount window for investment banks.
97. If interest rates near zero fail to stimulate borrowing, the economy is in a
A) money pit.
B) liquidity trap.
C) hyperinflation.
D) housing bubble.
98. The Constitution of the United States grants the power to “coin money and regulate the value
thereof” (which is interpreted to mean the power to engage in monetary policy) to
A) Congress.
B) the President.
C) the Federal Reserve.
D) the Treasury Department (through the U.S. Mint).
Chapter 10 – Monetary Policy
99. The Federal Reserve’s purchase of AIG stock was
A) an example of both the wisdom and problems associated with its political independence.
B) clearly unconstitutional.
C) a violation of the separation of powers.
D) none only after it had Congressional authorization.
100. The evidence is that central bank decision makers
A) should be elected.
B) should have Congress dictate their actions to them.
C) should be independent of and insulated from political pressures.
D) are corrupt.