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848 Miller Economics Today, 16th Edition
43) Suppose there is an increase in the money supply, but that people s demand for money balances
increases by a greater amount at the same time. The net effect would be
A) a lower price level in the long run.
B) no change in aggregate demand or aggregate supply.
C) an increase in aggregate demand due to the increase in the money supply, but a decrease
in aggregate supply due to the increase in the demand for money.
D) lower interest rates, greater real GDP, and a higher price level as aggregate demand
increases because of the indirect effect of the increase in the money supply.
44) The Fed should pursue simultaneous money supply and interest rate targets. Do you agree or
disagree? Explain.
16.7 The Way Fed Policy Is Currently Implemented
1) The interest rate that the Fed charges banks to borrow funds from the Fed is the
A) discount rate. B) federal funds rate.
C) money market rate. D) nominal interest rate.
2) One of the tools of monetary policy is to change the discount rate. Since 2003
A) the Fed has not changed the discount rate.
B) the Fed has pegged the discount rate to the reserve requirement.
C) the Fed has kept the discount rate a fixed amount above the federal funds rate.
D) the Fed has kept the federal funds rate one percentage point above the discount rate.
3) The tools of monetary policy are
A) open market operations, differential between the discount rate and the federal funds rate,
and tax rates.
B) open market operations, government spending, and the required reserve ratio.
C) open market operations, differential between the discount rate and the federal funds rate,
and the required reserve ratio.
D) government spending, tax rates, and the required reserve ratio.
4) To change the rate of growth of the money supply, the Fed can do all but which one of the
following?
A) Engage in open market operations
B) Change the discount rate
C) Shift the demand for money curve by changing the interest rate
D) Change the required reserve ratio.
5) Typically, increasing the difference between the discount and federal funds rates causes
A) an increase in market interest rates. B) no change in interest rates.
C) a boom in the economy. D) high corporate profits.
6) Changes in which of the following will cause changes in the equilibrium federal funds rate?
A) the demand for excess reserves by banks
B) the demand for required reserves by banks
C) the supply of reserves created through past open market operations
D) all of the above
7) A open market purchase of government securities by the Fed will cause which of the following?
A) a reduction in the federal funds rate
B) an increase in the amount of excess reserves that banks will wish to hold
C) an increase in the equilibrium quantity of reserves
D) all of the above
8) In the market for bank reserves, the supply of reserves is
A) an upward sloping curve. B) a downward sloping curve.
C) a horizontal curve. D) none of the above.
9) If the Fed raises the interest rate paid on excess reserves while holding the federal funds rate
unchanged, then banks will
A) lend more reserves in the federal funds market and keep more excess reserves.
B) lend fewer reserves in the federal funds market and keep more excess reserves.
C) not keep excess reserves or lend reserves in the federal funds market.
D) not react to it.
10) Other things being equal, if the Fed raises the interest rate paid on excess reserves,
A) the supply of reserves in the federal funds market will increase.
B) the supply of reserves in the federal funds market will decrease.
C)
b
oth the demand for reserves and the supply of reserves in the federal funds market will
increase.
D)
b
oth the demand for reserves and the supply of reserves in the federal funds market will
decrease.
11) Since October 2008, Congress has granted the Fed an authority to
A) charge banks interest on both required reserves and excess reserves.
B) pay banks interest on both required reserves and excess reserves.
C) charge banks interest on required reserves but pay them interest on excess reserves.
D) charge banks interest on excess reserves but pay them interest on required reserves.
12) In the market for bank reserves, a reduction in the required reserve ratio will cause
A) a reduction in the federal funds rate.
B) an increase in the equilibrium quantity of reserves.
C) a reduction in the demand for reserves.
D) all of the above.
13) The opportunity cost of holding excess reserves is equal to
A) the discount rate.
B) the federal funds rate.
C) the federal funds rate minus the discount rate.
D) none of the above.
14) An open market sale of government securities by the Fed will cause which of the following?
A) an increase in the federal funds rate
B) an increase in the equilibrium quantity of reserves
C) all of the above
D) none of the above
15) An open market sale of government securities by the Fed will cause which of the following?
A) an excess quantity of reserves supplied and an increase in the federal funds rate
B) an excess quantity of reserves supplied and a reduction in the federal funds rate
C) an excess quantity of reserves demanded and an increase in the federal funds rate
D) an excess quantity of reserves demanded and a reduction in the federal funds rate
16) An open market purchase of government securities by the Fed will cause which of the
following?
A) an excess quantity of reserves supplied and an increase in the federal funds rate
B) an excess quantity of reserves supplied and a reduction in the federal funds rate
C) an excess quantity of reserves demanded and an increase in the federal funds rate
D) an excess quantity of reserves demanded and a reduction in the federal funds rate
17) The rate at which banks can borrow excess reserves from other banks is equal to
A) the discount rate.
B) the required reserve ratio.
C) the interest rate paid on reserves held with the Fed.
D) none of the above.
18) In the market for bank reserves, the supply of reserves is
A) an upward sloping curve. B) a downward sloping curve.
C) a vertical curve. D) none of the above.
19) In the market for bank reserves, an increase in the required reserve ratio will cause
A) an increase in the federal funds rate. B) an increase in the quantity of reserves.
C) a reduction in the demand for reserves. D) all of the above.
20) What happens when the Fed aims to change interest rates?
A) It asks Congress to legislate new interest rates.
B) It buys or sells government bonds on the open market to achieve the desired rate.
C) It buys or sells dollars on the foreign exchange market to achieve the desired rate.
D) It announces a new discount interest rate.
21) The federal funds rate is
A) the interest rate paid on reserves held with the Fed.
B) the interest rate at which banks can borrow excess reserves from other banks.
C) the interest rate on bonds issued by the federal government.
D) none of the above.
22) The incentive of holding excess reserves is equal to
A) the discount rate.
B) the federal funds rate.
C) the interest rate earned on excess reserves.
D) none of the above.
23) The rate at which banks can borrow excess reserves from other banks is equal to
A) the discount rate.
B) the federal funds rate.
C) the interest rate paid on reserves held with the Fed.
D) the treasury bill rate.
24) The interest rate that the Fed charges banks to borrow funds from the Fed is the
A) discount rate. B) federal funds rate.
C) money market rate. D) nominal interest rate.
25) In the market for bank reserves, the supply of reserves is
A) an upward sloping curve. B) a downward sloping curve.
C) a vertical curve. D) a horizontal curve.
26) In the market for bank reserves, an open market purchase by the Fed will cause
A) a reduction in the federal funds rate. B) an increase in the quantity of reserves.
C) an increase in the supply of reserves. D) all of the above.
27) In the market for bank reserves, an open market sale by the Fed will cause
A) an increase in the federal funds rate. B) a reduction in the quantity of reserves.
C) a reduction in the supply of reserves. D) all of the above.
28) Which of the following is NOT part of the FOMC directive?
A) It lays out the FOMC s general economic objectives.
B) It establishes short term federal funds rate objectives.
C) It specifies target ranges for money supply growth.
D) It specifies who the chair of the Fed is.
29) What is the maximum number of voting members of the FOMC?
A) 4 B) 7 C) 11 D) 12
30) The Trading Desk s open market operations
A) are confined within a one hour interval each weekday morning.
B) are confined within a six hour interval each weekday morning.
C) occur throughout each day.
D) occur once a week.
31) The official Federal Reserve strategy for implementing its monetary policy objectives is spelled
out in the
A) Federal Reserve Board (FRB) Decree.
B) Federal Reserve Bank Cooperative (FRBC) Proposal.
C) Federal Advisory Committee (FAC) Statement.
D) Federal Open Market Committee (FOMC) Directive.
32) The office of the Federal Reserve Bank of New York charged with implementing Federal
Reserve open market policy actions is known as the
A) Open Market Coordination Office. B) Open Market Cooperation Office.
C) Response Desk. D) Trading Desk.
33) Which of the following institutions within the Federal Reserve System determines how many
government securities the Fed should buy or sell on a given day?
A) the Board of Governors.
B) Federal Advisory Committee.
C) the Federal Reserve Bank of Chicago s Board of Trade.
D) the Federal Reserve Bank of New York s Trading Desk.
34) Which of the following policy tools is directly controlled by the Trading Desk at the Federal
Reserve Bank of New York?
A) the spread between the discount rate and the federal funds rate
B) the spread between the federal funds rate and the interest rate on banks required reserves
C) the required reserve ratio
D) open market sales and purchases
35) Under the Fed s current interest rate targeting approach to monetary policy, if the demand for
federal funds by depository institutions increases today, then, other things being equal,
A) the market federal funds rate decreases, and the Fed s Trading Desk responds by selling
bonds.
B) the market federal funds rate increases, and the Fed s Trading Desk responds by buying
bonds.
C) the market federal funds rate decreases, and the Fed s Trading Desk responds by buying
bonds.
D) the market federal funds rate increases, and the Fed s Trading Desk responds by selling
bonds.
36) It is the responsibility of the Trading Desk at the Federal Reserve Bank of New York to
implement policies in the form of
A) changes in the spread between the federal funds rate and the discount rate that are
consistent with rules established by the twelve Federal Reserve bank presidents.
B) variations in reserve requirements that are consistent with the announcements by the
Chair of the Fed s Board of Governors.
C) changes in foreign exchange rates that are consistent with policies established by the
Secretary of the Treasury.
D)
b
uying or selling government securities that are consistent with the FOMC Directive.
37) Operations of the Trading Desk of the Federal Reserve Bank of New York are typically
conducted
A) no more often than once per month.
B) once a year.
C) no more often than once per week.
D) within a one hour period during each day.
38) In addition to open market operations and the required reserve ratio, another tool of monetary
policy available to the Fed is
A) fiscal policy.
B) tax rates and the progressivity of the income tax system.
C) government spending and various transfer payment programs.
D) the difference between the discount rate and the federal funds rate.
39) If the Fed thought the economy was experiencing a recessionary gap, and it wanted to correct
this gap, it would
A) sell bonds.
B) lower the differential between the discount rate and the federal funds rate.
C) raise the reserve requirement.
D) increase aggregate supply.
40) Suppose the economy is in long run and short run equilibrium. The Fed changes its policy by
raising the difference between the discount rate and the federal funds rate. In the long run we
would expect to observe
A) a lower price level. B) a higher price level.
C) a lower real national income. D) a higher real national income.
16.8 Selecting the Federal Funds Rate Target
1) The neutral federal funds rate is
A) the federal funds rate that will result in the growth rate of GDP being equal to its potential
rate of growth.
B) the nominal federal funds rate minus inflation.
C) the real federal funds rate plus inflation.
D) the federal funds rate consistent with zero inflation.
2) Suppose the actual federal funds rate is greater than the neutral federal funds rate. Given this
information, we would expect that
A) the rate of growth of real GDP will be less than its potential rate of growth.
B) the rate of growth of real GDP will be greater than its potential rate of growth.
C) the rate of growth of real GDP will be equal to its potential rate of growth.
D) the rate of growth of real GDP may be above or below its potential rate of growth.
3) Suppose the neutral federal funds rate is equal to 5%. If the actual federal funds rate is 3.5%, we
would expect that
A) the rate of growth of real GDP will be less than its potential rate of growth.
B) the rate of growth of real GDP will be greater than its potential rate of growth.
C) the rate of growth of real GDP will be equal to its potential rate of growth.
D) the rate of growth of real GDP may be above or below its potential rate of growth.
4) Which of the following is NOT a basis for the Taylor rule guideline for how the Federal Reserve
should set its target value for the federal funds rate?
A) an estimated long run real interest rate
B) the current deviation of the actual inflation rate from the Fed s inflation objective
C) the present deviation of the actual unemployment rate from the Fed s unemployment
objective
D) the gap between actual real GDP and a measure of potential real GDP
5) Suppose that the Fed has decided to utilize the Taylor rule to implement monetary policy. If the
actual federal funds rate target is presently below the level specified by the Taylor rule and has
been lower then this level for several weeks, then this would be a signal that
A) monetary policy is very expansionary.
B) monetary policy is very contractionary.
C) the Fed should halt efforts to target the money supply.
D) the Fed should switch to targeting the money supply instead of the federal funds rate.
6) Suppose the actual equilibrium federal funds rate is less than the neutral federal funds rate.
Given this information, we would expect that
A) real GDP will grow at a rate greater than the potential real GDP growth rate.
B) real GDP will grow at a rate less than the potential real GDP growth rate.
C) real GDP will grow at a rate equal to the potential real GDP growth rate.
D) the inflation rate will tend to fall.
7) Suppose the actual equilibrium federal funds rate is above the rate implied by a particular
inflation goal. In this situation, the Taylor rule implies that
A) fiscal policy is contractionary. B) fiscal policy is expansionary.
C) monetary policy is expansionary. D) monetary policy is contractionary.
8) For the United States, the neutral federal funds rate has
A) varied over time. B)
b
een roughly constant over time.
C) increased over time. D) decreased over time.
9) If the actual federal funds rate is less than the neutral federal funds rate, we would expect that
A) the rate of growth of real GDP will be less than its potential rate of growth.
B) the rate of growth of real GDP will be greater than its potential rate of growth.
C) the rate of growth of real GDP will be equal to its potential rate of growth.
D) the rate of growth of real GDP may be above or below its potential rate of growth.
10) Suppose the actual equilibrium federal funds rate is greater than the neutral federal funds rate.
Given this information, we would expect that
A) real GDP will grow at a rate greater than the potential real GDP growth rate.
B) real GDP will grow at a rate less than the potential real GDP growth rate.
C) real GDP will grow at a rate equal to the potential real GDP growth rate.
D) the inflation rate will tend to increase.
11) A reduction in the rate of growth of potential real GDP will
A) cause the neutral federal funds rate to decrease.
B) cause the neutral federal funds rate to increase.
C) have no effect on the neutral federal funds rate.
D) have an ambiguous effect on the neutral federal funds rate.
12) According to the Taylor rule, the Fed will set the federal funds rate target based on which of the
following?
A) an estimated long run real interest rate
B) the current deviation of the actual inflation rate from the Fed s inflation objective
C) the proportionate gap between actual real GDP and a measure of potential real GDP
D) all of the above
13) Which Federal Reserve Bank now regularly tracks target levels for the federal funds rate
predicted by a basic Taylor rule equation?
A) Boston B) Chicago C) New York D) St. Louis
14) Suppose the actual equilibrium federal funds rate is below the rate implied by a particular
inflation goal. In this situation, the Taylor rule implies that
A) fiscal policy is contractionary. B) fiscal policy is expansionary.
C) monetary policy is expansionary. D) monetary policy is contractionary.
15) Between 2003 and 2008, the actual federal funds rate
A) tended to be lower than the rates predicted by the Taylor rule.
B) tended to higher than the rates predicted by the Taylor rule.
C) followed closely the rates predicted by the Taylor rule.
D) moved in directions opposite to the rates predicted by the Taylor rule.
16) Suppose the actual federal funds rate is below the rate implied by a particular inflation goal. In
this situation, the Taylor rule implies that
A) monetary policy is expansionary.
B) monetary policy is contractionary.
C) monetary policy is neither expansionary or contractionary.
D) fiscal policy is contractionary.
17) Suppose the actual federal funds rate is above the rate implied by a particular inflation goal. In
this situation, the Taylor rule implies that
A) monetary policy is expansionary.
B) monetary policy is contractionary.
C) monetary policy is neither expansionary or contractionary.
D) fiscal policy is expansionary.
18) Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal.
In this situation, the Taylor rule implies that
A) monetary policy will tend to produce that inflation rate.
B) monetary policy is contractionary.
C) monetary policy is expansionary.
D) fiscal policy will result in a balanced budget.
19) The Taylor rule implies that the Fed should set the federal funds target based on which of the
following?
A) an estimated long run real interest rate
B) the current deviation of the actual inflation rate from the Fed s inflation objective
C) the proportionate gap between actual real GDP and a measure of potential real GDP
D) all of the above
20) Changes in which of the following would most likely NOT affect the neutral federal funds rate?
A) the money supply B) potential real GDP
C) technology D) aggregate supply shocks
21) The value of the neutral federal funds rate in the United States
A) has consistently risen over time.
B) has consistently decreased over time.
C) is determined by the Federal Reserve.
D) depends on the speed at which the economy s long run aggregate supply increases over
time.
22) An increase in the rate of growth of potential real GDP will
A) cause the neutral federal funds rate to decrease.
B) cause the neutral federal funds rate to increase.
C) have no effect on the neutral federal funds rate.
D) have an ambiguous effect on the neutral federal funds rate.
Question Status: Previous Edition
16.9 Appendix E: Increasing the Money Supply
1) According to Keynes, the impact of an increase in the money supply is
A) a lower interest rate and a larger growth in real GDP.
B) a lower interest rate and a smaller growth in real GDP.
C) a higher interest rate and a larger growth in real GDP.
D) a higher interest rate and a smaller growth in real GDP.
2) According to Keynes, the effect on planned real investment spending resulting from the
interest rate impact of an increase in the money supply
A) impacts the economy through the multiplier.
B) impacts the economy by increasing the value of the U.S. dollar.
C) impacts the economy by reducing the deficit.
D) does not impact the economy.
16.10 Appendix E: Decreasing the Money Supply
1) According to Keynes, the impact of a decrease in the money supply is a
A) lower interest rate and larger growth in real GDP.
B) lower interest rate and smaller growth in real GDP.
C) higher interest rate and larger growth in real GDP.
D) higher interest rate and smaller growth in real GDP.
2) According to Keynes, contractionary monetary policy
A) impacts the economy by an amount smaller than the change in investment.
B) impacts the economy by an amount larger than the change in investment.
C) will have no impact on the equilibrium nominal GDP.
D) will have no impact on the equilibrium real GDP.
3) According to Keynes, the effect on planned real investment spending resulting from the
interest rate impact of a decrease in the money supply
A) impacts the economy through the multiplier.
B) impacts the economy by reducing the value of the U.S. dollar.
C) impacts the economy by increasing the deficit.
D) does not impact the economy.
Chapter 16 Domestic and International Dimensions of Monetary Policy 865
16.11 Appendix E: Arguments Against Monetary Policy
1) According to traditional Keynesians, monetary policy is ineffective in affecting the economy
during a recession because
A) an increase in the money supply will have little impact on interest rates.
B) an increase in the money supply will only lead to higher interest rates.
C) an increase in the money supply will only lead to lower investment spending.
D) an increase in the money supply will raise the amount of government debt.
2) According to traditional Keynesians, when the central bank increases the money supply during
a recession
A) people will spend all of the money on goods and services.
B) people will borrow more from banks.
C) people will keep most of it in their bank accounts.
D) people will refuse to use the money.
3) According to traditional Keynesians, monetary policy as a tool to fight a recession
A) has an uncertain effect on the economy, depending on the direction of fiscal policy.
B) is very effective because interest rates will fall immediately.
C) is ineffective because interest rates will not fall.
D) cannot be determined because traditional Keynesians do not consider monetary policy at
all.
