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Chapter 16 - Interest Rates and Monetary Policy
139. An interesting development that happened in late 2008, relating to the Fed and bank
reserves, is that the Fed:
140. Which of the following is considered a limitation of monetary policy?
141. Assume the Fed creates excess reserves in the banking system by buying government
bonds, but banks do not make more loans because economic conditions are bad. This situation
is a problem of:
Chapter 16 - Interest Rates and Monetary Policy
142. Monetary policy actions by the Fed are:
143. The use of monetary policy to address a problem of recession or inflation is:
144. Inflation targeting refers to the:
Chapter 16 - Interest Rates and Monetary Policy
145. In the recent financial and economic crises, the economy fell into a so-called liquidity
trap, which means that:
146. In response to the mortgage default crisis that began in 2007, the Fed took the following
actions, except:
147. In the Great Recession that started in 2007, economic policy in the U.S. turned forcefully
toward fiscal policy because of the following reasons, except:
Chapter 16 - Interest Rates and Monetary Policy
148. Other things equal, an improvement in the expected rate of net profit would:
149. Other things equal, an appreciation of the U.S. dollar would:
150. Other things equal, an increase in taxes on businesses will:
Chapter 16 - Interest Rates and Monetary Policy
151. Other things equal, an increase in consumer wealth will:
152. If consumers and businesses are especially pessimistic, as in the Great Recession of
2007-2009, and do not want to borrow money from banks, then the use of an expansionary
money policy is likened to:
153. The transactions demand for money will decrease when income decreases, but it is not
affected by interest rates.
Chapter 16 - Interest Rates and Monetary Policy
154. Holding money as an asset presents a risk of capital loss.
155. There is an asset demand for money because households and business firms use money
as a store of value.
156. 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.
157. 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.
Chapter 16 - Interest Rates and Monetary Policy
158. A bond with no expiration date is priced at $10,000 when the interest rate in the
economy is 6%. If the interest rate falls to 5.5%, then this bond's price should decrease.
159. 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 the
bond is now 20 percent.
160. The reserves of commercial banks are an asset to commercial banks and a liability of the
Federal Reserve System.
161. The discount rate is the interest rate at which commercial banks lend to their best
corporate customers.
Chapter 16 - Interest Rates and Monetary Policy
162. The most frequently used instrument of the Federal Reserve System to control the money
supply is the required reserve ratio.
163. 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.
164. When commercial banks borrow from the Federal Reserve Banks, they decrease their
excess reserves and their money-creating potential.
165. The Federal funds rate is the rate that banks charge other banks for overnight loans of
excess reserves.
Chapter 16 - Interest Rates and Monetary Policy
166. If the Fed seeks to maintain a fixed targeted interest rate, then it will have to increase
money supply when the demand for money increases as income increases.
167. If the Fed is targeting a lower federal funds rate, then it is pursuing a restrictive monetary
policy.
168. Aggregate demand tends to be increased when the Fed sells government securities in the
open market.
169. An expansionary monetary policy increases the money supply, lowers interest rates, and
increases aggregate demand.
Chapter 16 - Interest Rates and Monetary Policy
170. If the monetary authority wishes to rein in inflation, it would buy government securities
in the open market.
171. In order to stimulate the economy and reduce unemployment, then the Fed will set a
lower target for the federal funds rate.
172. In the cause-effect chain of monetary policy an increase in investment will cause the Fed
so seek a lower target for the federal funds rate by buying securities in the open market.
173. The Fed's term auction facility is a recently introduced policy tool in response to the
mortgage default crisis which started in 2007.
Chapter 16 - Interest Rates and Monetary Policy
174. An expansionary monetary policy is less effective in influencing aggregate demand
compared to a restrictive monetary policy.
175. Monetary policy, unlike fiscal policy, does not have any time lags.
176. The major advantages of monetary policy include its flexibility, speed, and political
palatability.
177. The effects of expansionary monetary policy are strengthened by a liquidity trap.
Chapter 16 - Interest Rates and Monetary Policy
178. The effects on aggregate demand of an open market purchase and a tax cut are similar.
