d.
will probably cause inflation if the economy is at potential GDP.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
136. If the price level rises, what will happen to the demand for reserves?
a.
It will shift outward.
b.
It will shift inward.
c.
It will remain unchanged.
d.
It depends on what happens to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
137. What will happen to the demand for reserves if real GDP increases?
a.
It will shift outward.
b.
It will shift inward.
c.
It will remain unchanged.
d.
It depends on what happens to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
138. If interest rates increase, what will happen to the demand for reserves?
a.
It will shift outward.
b.
It will shift inward.
c.
Nothing, the economy will move to a new quantity demanded.
d.
It depends on what happens to prices.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
139. The reserve demand schedule is drawn on a graph that has the quantity of reserves on the horizontal axis and
a.
the price level is on the vertical axis.
b.
the federal funds rate is on the vertical axis.
c.
the price of bonds is on the vertical axis.
d.
income is on the vertical axis.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
140. Reserves demanded varies
a.
b.
c.
d.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
141. The quantity of reserves demanded decreases as the federal funds rate rises because
a.
people want more liquid assets as the federal funds rate rises.
b.
the price of bonds rise as the federal funds rate rises.
c.
the opportunity cost of holding excess reserves increases as the federal funds rate rises.
d.
people want more money to invest as the federal funds rate rises.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
142. The demand for reserves increases as the price level rises because
a.
people want money to buy goods that will appreciate with inflation.
b.
people need more money to finance transactions.
c.
the opportunity cost of holding money increases.
d.
higher prices reduce the value of dollar assets.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
143. Interest rates declined in 2007. What happened to bond prices during this time?
a.
They were unchanged.
b.
They increased.
c.
They decreased.
d.
Not enough data to answer.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
144. If the Fed’s open market operations expand the money supply, one can expect
a.
a decrease in excess reserves.
b.
bond prices to rise.
c.
interest rates to rise.
d.
open market sales of T-bills.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
145. As a knowledgeable investor in 2007, you should have realized that as interest rates fell, bond prices would
a.
also fall.
b.
rise.
c.
become more volatile, like stock prices.
d.
fall but not by as much as stock prices.
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
146. Stock prices fell throughout much of 2007 and 2008 and many investors decided to switch their funds into the bond
market. What only about 30 percent of surveyed investors knew was that as bond prices rise, interest rates
a.
fall in reaction to the increased demand for bonds.
b.
fall in reaction to the decreased demand for bonds.
c.
rise in reaction to the increased demand for bonds.
d.
rise in reaction to the decreased demand for bonds.
a
Difficult
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
147. An open market purchase of T-bonds by the Fed causes the money supply to
a.
fall and bond prices to fall.
b.
rise and bond prices to fall.
c.
rise and bond prices to rise.
d.
fall and bond prices to rise.
c
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
148. An open market sale of T-bonds by the Fed causes the money supply to
a.
fall and bond prices to fall.
b.
rise and bond prices to fall.
c.
rise and bond prices to rise.
d.
fall and bond prices to rise.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
149. If the Fed buys more bonds from the public, and increases the price it is willing to pay for the bonds, what will
happen to interest rates?
a.
They will rise.
b.
They will fall.
c.
They will remain unchanged.
d.
The relationship between bond prices and interest rates is unclear.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
150. If the Fed decides to buy T-bills, it increases the demand for T-bills. How will this affect the price of T-bills and the
interest rate?
a.
T-bill prices fall and interest rates fall.
b.
T-bill prices rise and interest rates rise.
c.
T-bill prices rise and interest rates fall.
d.
T-bill prices fall and interest rates rise.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
151. If the Fed decides to sell T-bills, it increases the supply of T-bills. How will this affect the price of T-bills and the
interest rate?
a.
T-bill prices fall and interest rates fall.
b.
T-bill prices rise and interest rates rise.
c.
T-bill prices rise and interest rates fall.
d.
T-bill prices fall and interest rates rise.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
152. How are Treasury bond prices affected when the interest rate falls?
a.
The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year,
so the price of the bond must decrease.
b.
The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year,
so the price of the bond must increase.
c.
The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year,
so the price of the bond must decrease.
d.
The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year,
so the price of the bond must increase.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
153. The quantity of reserves supplied increases as interest rates rise because
a.
the Treasury borrows more at higher interest rates.
b.
consumers don’t want to borrow as much so more money is left in banks.
c.
as interest rates rise, banks fear losses so they decrease lending.
d.
banks find it more profitable to loan out excess reserves to other banks.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
154. How are Treasury bond prices affected when the interest rate rises?
a.
The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year,
so the price of the bond must decrease.
b.
The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year,
so the price of the bond must increase.
c.
The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year,
so the price of the bond must decrease.
d.
The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year,
so the price of the bond must increase.
DISC: Monetary and fiscal policy
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
155. Bank lending and deposits tend to change as interest rates change. Can the Fed counteract this tendency?
a.
Yes, through its ability to affect the money supply.
b.
Yes, through its ability to change tax levels.
c.
No, the Fed is forbidden by the Constitution from intervening in the economy.
d.
No, the Fed almost always follows a passive monetary policy.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
156. Which of the following will cause movement along the reserve demand schedule?
a.
a change in the price level
b.
a change in real GDP
c.
a change in tax rates
d.
a change in interest rates
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Implementing Monetary Policy in Normal Times: Open Market Operations
157. At the time of its founding, which tool was thought to be the most useful for the Fed?
a.
changing the reserve requirement
b.
altering deposit interest rates
c.
lending to banks
d.
open market operations
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
158. The original goal of the Fed’s founders was to prevent the
a.
supply of money from increasing too rapidly.
b.
supply of money from decreasing during downturns.
c.
possibility of hyperinflation.
d.
possibility of interest rates falling too rapidly.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
159. The concept of “lender of last resort” is that when
a.
lending decreases, the Fed will be the last to resort to higher interest rates.
b.
borrowing increases, the Fed will be the last to increase lending.
c.
commercial banks are hesitant to lend, the Fed will step in and increase reserves.
d.
a borrower has tried everyone else, the Fed will lend directly to them.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Other Instruments of Monetary Policy
160. Discount rate policy is most often
a.
lowered when market rates rise.
b.
used to actively control the money supply.
c.
the Fed’s primary tool of monetary control.
d.
passively changed by the Fed to follow market rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
161. During the stock market crash of October 1987, the Fed
a.
raised the discount rate.
b.
raised reserve requirements.
c.
increased lending to member banks.
d.
sold government securities.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
162. If the Fed wants to reduce banks’ reserves, it can
a.
buy securities in the open market.
b.
lower the reserve ratio.
c.
lower the federal funds rate.
d.
raise the discount rate.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
163. If the Fed raises the discount rate, what will be the effect on the money supply?
a.
It will decrease the money supply.
b.
It will increase the money supply.
c.
No change in the money supply.
d.
Not enough data to give an answer.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
164. In its original role as “lender of last resort” the Fed was supposed to
a.
lend money to people in regions without banks.
b.
lend money to developing nations.
c.
keep the money supply from drying up during financial panics.
d.
provide mortgage lending to returning soldiers.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
165. The discount rate is the rate that the
a.
Treasury pays on savings bonds.
b.
Fed charges member banks.
c.
Fed charges on government securities.
d.
Fed charges the Treasury for sales of securities.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
166. Currently, in the United States, you can expect the discount rate to be
a.
used often to change the money supply.
b.
raised in periods of recession.
c.
fixed at the bank rate.
d.
adjusted to follow market rates of interest.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
167. If the Fed lends to member banks, what happens to reserves and the money supply?
a.
Reserves increase and the money supply decreases.
b.
Both increase.
c.
Reserves decrease and the money supply increases.
d.
Both decrease.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
168. If the Fed raises the discount rate, what happens to reserves and the money supply?
a.
Reserves increase and the money supply decreases.
b.
Both increase.
c.
Reserves decrease and the money supply increases.
d.
Both decrease.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
169. The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed
a.
acts when a majority of member banks agree on policy and the banks rarely agree.
b.
earns interest on discounting and cannot afford to lose the revenue.
c.
does not know how banks will respond to discount rate changes.
d.
has been directed by Congress to set the discount rate at a permanent level.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
170. If the Fed decreases the discount rate, what happens to reserves and the money supply?
a.
Reserves increase and the money supply decreases.
b.
Both increase.
c.
Reserves decrease and the money supply increases.
d.
Both decrease.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
171. If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what would happen to the money
supply?
a.
It would decrease.
b.
It would increase.
c.
It would remain unchanged.
d.
It depends on the value of interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
172. Assume that the banking system has $200 billion in reserves. There are no excess reserves in the system. If the
reserve requirement is decreased from 10 percent to 8 percent, what will happen to the level of excess reserves in the
system?
a.
There will be a deficiency of $40 billion in reserves.
b.
There will be a deficiency of $20 billion in reserves.
c.
There will be $20 billion in excess reserves.
d.
There will be $40 billion in excess reserves.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Other Instruments of Monetary Policy
173. Assume that the Fed lowers the required reserve ratio. How will this affect the money supply?
a.
It would decrease.
b.
It would increase.
c.
It would remain unchanged.
d.
It depends on the value of interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
174. When the Fed wishes to decrease the money supply it can
a.
ask people to buy more bonds.
b.
turn additional funds over to the Treasury.
c.
increase the required reserve ratio.
d.
decrease the required reserve ratio.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
175. Which one of the following policies might the Fed initiate if it wanted to increase the money supply?
a.
sell government securities
b.
increase the reserve requirement
c.
increase the discount rate
d.
decrease the reserve requirement
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy
176. A system that requires banks to keep 100 percent reserves
a.
would reduce the Fed’s ability to control the money supply.
b.
would undermine the effectiveness of reserve requirement changes.
c.
would increase the Fed’s ability to control the money supply.
d.
could be implemented with little change in bank policy.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Other Instruments of Monetary Policy