B. The discount rate
C. A change in reserve requirements
D. Margin requirements
116. The Fed generally announces what it is doing with monetary policy in terms of a target for:
A. discount rate.
B. reserve requirement.
C. federal funds rate.
D. monetary base.
117. An increase in the federal funds rate could be caused by:
A. an open market purchase of government securities.
B. an increase in the reserve requirement.
C. a cut in the discount rate.
D. an increase in the excess reserves of the banking system.
118. A reduction in the federal funds rate could be caused by an:
A. open market sale of government securities.
B. increase in the reserve requirement.
C. increase in the discount rate.
D. increase in the excess reserves of the banking system.
119. A reduction in the federal funds rate could be caused by:
A. lower than expected bank deposits.
B. higher than expected bank reserves.
C. higher than expected loan demand.
D. higher than expected withdrawals.
120. An increase in the federal funds rate could be caused by:
A. higher than expected bank deposits.
B. higher than expected bank reserves.
C. lower than expected loan demand.
D. higher than expected withdrawals.
121. To achieve its target when the federal funds rate is above the target range, the Fed should:
A. follow expansionary policy.
B. follow contractionary policy.
C. buy foreign currency.
D. do nothing.
122. To achieve its target when the federal funds rate is below the Fed’s target range, the Fed
should:
A. follow expansionary policy.
B. follow contractionary policy.
C. print money.
D. do nothing.
123. To target a rate that is higher than the current interest rate, the Fed can:
A. purchase government securities to reduce reserves.
B. purchase government securities to increase reserves.
C. sell government securities to reduce reserves.
D. sell government securities to increase reserves.
124. To achieve its target when the federal funds rate is above the target range, the Fed could:
A. buy bonds.
B. sell bonds.
C. increase the reserve requirement.
D. increase the discount rate.
125. To achieve its target when the federal funds rate is below the target range, the Fed could:
A. buy bonds.
B. reduce the reserve requirement.
C. increase the reserve requirement.
D. cut the discount rate.
126. If the Fed wants a tighter monetary policy, it might:
A. sell government securities to increase the federal funds rate.
B. sell government securities to reduce the federal funds rate.
C. buy government securities to increase the federal funds rate.
D. buy government securities to reduce the federal funds rate.
127. If the Fed wants to implement expansionary monetary policy, it might:
A. sell government securities to increase the federal funds rate.
B. sell government securities to reduce the federal funds rate.
C. buy government securities to increase the federal funds rate.
D. buy government securities to reduce the federal funds rate.
128. When the Fed raised interest rates between 2004 and 2007, the Federal Reserve:
A. bought U.S. government securities, thereby creating and supplying additional federal funds.
B. sold U.S. government securities, thereby contracting the amount of funds available to the
federal funds market.
C. sped up the clearing of checks to make more funds available to banks.
D. encouraged banks to loan out funds to ease their reserve requirements and thus lower the
demand for federal funds.
129. If banks are short of reserves, the Fed funds rate will:
A. increase.
B. decrease.
C. stay the same.
D. rise or fall; it cannot be determined with the information given.
130. If the federal funds rate rises above the Fed’s target range, the Fed could take:
A. a defensive action and sell government bonds.
B. a defensive action and buy government bonds.
C. an offensive action and sell government bonds.
D. an offensive action and buy government bonds.
131. If the federal funds rate falls below the Fed’s target range, the Fed could take:
A. a defensive action and sell government bonds.
B. a defensive action and buy government bonds.
C. an offensive action and sell government bonds.
D. an offensive action and buy government bonds.
132. Suppose the federal funds rate is 5 percent. If the Fed decides to increase the target for the
federal funds rate from 5 percent to 6 percent, it could take:
A. a defensive action and raise reserve requirements.
B. a defensive action and reduce reserve requirements.
C. an offensive action and raise reserve requirements.
D. an offensive action and reduce reserve requirements.
133. Suppose the federal funds rate is 5 percent. If the Fed decides to decrease the target for the
federal funds rate from 5 percent to 4 percent, it could take:
A. a defensive action and raise reserve requirements.
B. a defensive action and reduce reserve requirements.
C. an offensive action and raise reserve requirements.
D. an offensive action and reduce reserve requirements.
134. In 2008, the Fed followed an expansionary monetary policy, which was evident by the:
A. decrease in the federal funds rate from 4 percent in January to 0.25 percent in December.
B. increase in the federal funds rate from 0.25 percent in January to 4 percent in December.
C. decrease in the repo rate from 4 percent in January to 0.25 percent in December.
D. increase in the discount rate and decrease in the Fed fund rate by the same amount.
135. The federal funds rate increased from 2.5 percent in February 2005 to 5.26 in February
2007. This change in the federal funds rate clearly indicates that during this period the Fed
followed a(n):
A. expansionary fiscal policy.
B. contractionary fiscal policy.
C. expansionary monetary policy.
D. contractionary monetary policy.
136. When the Fed sells bonds, the Fed:
A. reduces the reserves and the federal funds rate increases.
B. increases the reserves and the federal funds rate decreases.
C. reduces the reserves and the federal funds rate decreases.
D. increases the reserves and the federal funds rate increases.
137. When the Fed purchases bonds, the Fed:
A. reduces the reserves and the federal funds rate increases.
B. increases the reserves and the federal funds rate decreases.
C. reduces the reserves and the federal funds rate decreases.
D. increases the reserves and the federal funds rate increases.
138. If the actual federal funds rate is 7 percent and the Fed’s target federal funds rate is 8
percent, the Fed is most likely to adopt which of the following policies?
A. A sale of government bonds
B. A purchase of government bonds
C. A reduction in the reserve requirement
D. A more expansionary monetary policy
139. If the actual federal funds rate is 9 percent and the Fed’s target federal funds rate is 8
percent, the Fed is most likely to adopt which of the following policies?
A. A sale of government bonds
B. An increase in the discount rate
C. A reduction in the reserve requirement
D. A more contractionary monetary policy
140. The Fed can conduct monetary policy in all the following ways except:
A. changing the reserve requirement.
B. changing the discount rate.
C. executing open market operations.
D. running deficits.
141. Which of the following is a Fed tool?
A. Interest rate spreads
B. Discount rate
C. Stock prices
D. Federal funds rate
142. Which of the following monetary policies reduces aggregate demand and output?
A. A cut in the federal funds rate
B. An open market sale of government securities
C. A cut in the discount rate
D. A cut in the reserve requirement
143. Which of the following monetary policies raises aggregate demand and output?
A. An open market sale of government securities
B. An increase in the federal funds rate
C. An increase in the discount rate
D. A cut in the reserve requirement
144. Which of the following monetary policies reduces aggregate demand and output?
A. A cut in the federal funds rate
B. An open market purchase of government securities
C. An increase in the discount rate
D. A cut in the required reserve ratio
145. In the fall of 2008, the Federal Reserve reduced its target for the federal funds rate
dramatically. The Fed likely made this decision because it believed:
A. savers are not being given enough encouragement to save.
B. unemployment was too low and needed to be boosted.
C. inflation might become a problem and was moving to head it off.
D. there was threat of a recession and was trying to stimulate the economy.
146. During the latter half of 2004 and the beginning of 2007, the Fed adopted a policy that
consistently increased the federal funds rate. The most likely goal of this policy was to:
A. decrease inflation by decreasing aggregate demand.
B. decrease inflation by increasing aggregate demand.
C. increase output by decreasing aggregate demand.
D. increase output by increasing aggregate demand.
147. Suppose that investment is not very responsive to interest rates, so that a sizable increase in
interest rates has only a minor effect on investment. In this case, monetary policy would have:
A. no effect on output.
B. a modest effect on output.
C. a substantial effect on output.
D. a massive effect on output.
148. Suppose that investment is very responsive to interest rates, so that even a small change in
interest rates has a substantial effect on investment. In this case, expansionary monetary policy
that results in a modest drop in interest rates will:
A. not increase output.
B. increase output only slightly.
C. increase output significantly.
D. decrease output sharply.
149. According to the AS/AD model, if the economy is in a recession and the Fed wants to
increase output and employment, it should:
A. act to increase the money supply.
B. act to decrease the money supply.
C. raise interest rates.
D. raise reserve requirements.
150. During a recession, policy makers who use the AS/AD model would probably recommend
an open market:
A. sale of government securities that reduces interest rates.
B. purchase of government securities that reduces interest rates.
C. sale of government securities that raises interest rates.
D. purchase of government securities that raises interest rates.
151. During an inflationary period, policy makers who use the AS/AD model would probably
recommend an open market:
A. sale of government securities that reduces interest rates.
B. purchase of government securities that reduces interest rates.
C. sale of government securities that raises interest rates.
D. purchase of government securities that raises interest rates.
152. The defensive and offensive actions of the Fed differ because offensive actions are
designed to:
A. tighten monetary policy and defensive actions are designed to ease monetary policy.
B. ease monetary policy and defensive actions are designed to tighten monetary policy.
C. change the current monetary policy while defensive actions are designed to reinforce the
current monetary policy.
D. reinforce the current monetary policy while defensive actions are designed to change the
current monetary policy.
153. The Fed took action in late 2008 to significantly decrease the federal funds rate. This action
is are best considered:
A. an offensive action.
B. a defensive action.
C. both offensive and defensive actions.
D. neither offensive nor defensive actions.
154. If individuals suddenly increase their withdrawals from the banking system, the federal
funds rate should:
A. increase as bank reserves decline.
B. decrease as bank reserves decline.
C. increase as bank reserves increase.
D. decrease as bank reserves increase.
155. If the demand for bank loans suddenly declines, a defensive action on the part of the Fed to
keep the federal funds rate constant would take the form of open market bond:
A. sales that would prevent the federal funds rate from increasing.
B. sales that would prevent the federal funds rate from decreasing.
C. purchases that would prevent the federal funds rate from increasing.
D. purchases that would prevent the federal funds rate from decreasing.
156. Just prior to the year 2000, the Fed was concerned that people would make larger than
normal bank withdrawals out of fear of what was called the “Y2K computer bug.” The Fed
feared that this might disrupt the banking system. The Fed wanted to use a defensive action to
prevent any such disruption. This would take the form of open market bond:
A. sales that would prevent the federal funds rate from increasing.
B. sales that would prevent the federal funds rate from decreasing.
C. purchases that would prevent the federal funds rate from increasing.
D. purchases that would prevent the federal funds rate from decreasing.
157. One of the ultimate Fed’s targets is:
A. the Fed funds rate.
B. the reserve requirement.
C. stable prices.
D. the Taylor rule.
158. Which of the following is an operating target for the Fed?
A. Sustainable growth
B. Federal funds rate
C. Stable prices
D. Stock prices
159. Many economists argue that the Fed contributed to the housing bubble by:
A. passing laws that allowed financial institutions to create credit default swaps.
B. paying interest on bank reserves.
C. keeping the Fed funds rate lower than what the Taylor rule predicts.
D. buying mortgage-backed securities for foreclosed homes.
160. The predictions of Fed behavior provided by the Taylor rule are:
A. never accurate.
B. seldom accurate.
C. reasonably accurate.
D. extremely accurate.