Book: Chapter 14

Question 1

appreciation of a currency

Answer 1

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Question 2

federal funds rate

Answer 2

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Question 3

open market purchases

Answer 3

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Question 4

depreciation of a currency

Answer 4

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Question 5

illiquid

Answer 5

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Question 6

open market sales

Answer 6

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Question 7

discount rate

Answer 7

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Question 8

liquidity demand for money

Answer 8

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Question 9

speculative demand for money

Answer 9

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Question 10

exchange rate

Answer 10

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Question 11

money market

Answer 11

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Question 12

transaction demand for money

Answer 12

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Question 13

federal funds market

Answer 13

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Question 14

open market operations

Answer 14

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Question 15

We measure the opportunity cost of holding money
with
.

Answer 15

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Question 16

Money demand will
(increase/decrease)
as prices rise

Answer 16

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Question 17

The principle of
suggests that the
demand for money should increase as prices increase.

Answer 17

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Question 18

The
demand for money arises because
individuals and businesses use money in ordinary
business.

Answer 18

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Question 19

Checking Account Interest Rates. During the
1980s, banks started to pay interest (at low rates) on
checking accounts for the first time. Given what you
know about opportunity costs, how would interest
paid on checking affect the demand for money?

Answer 19

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Question 20

Pegging Interest Rates. Suppose the Federal Reserve
wanted to fix, or “peg,” the level of interest rates at 6
percent per year. Using a simple demand-and-supply
graph, show how increases in money demand would
change the supply of money if the Federal Reserve
pursued the policy of this fixed interest rate. Use
your answer to explain this statement: “If the Federal
Reserve pegs interest rates, it loses control of the
money supply.”

Answer 20

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Question 21

An ATM Next to Your Apartment Building.
Suppose an ATM connected to your own bank is
installed right next to your apartment building.
a. How will this affect the average amount of currency
you carry around with you?
b. If you withdraw funds at your ATM only from your
checking account, will your action have any effect
on total money demand?

Answer 21

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Question 22

Flea Markets and the Demand for Money. People
often like to visit flea markets to look for unexpected
opportunities. Flea markets also typically use cash.
Explain why this is an example of the liquidity demand
for money.

Answer 22

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Question 23

To increase the supply of money, the Fed should

bonds.

Answer 23

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Question 24

Increasing reserve requirements
the
supply of money.

Answer 24

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Question 25

Banks trade reserves with one another in the

market.

Answer 25

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Question 26

Banks borrow from the Fed at the

rate.

Answer 26

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Question 27

Purchasing Long-Term Government Bonds. What
would happen to the supply of money if a central bank
purchased long-term government bonds held by the
public?

Answer 27

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Question 28

China’s Increase in Reserve Requirements. The
Chinese government purchased U.S. dollars in the
foreign exchange market with Chinese currency.
During the same period, the Chinese sharply raised
the reserve requirement on banks because they wanted
to prevent the money supply from expanding too
rapidly. Explain carefully how these two actions, taken
together, could keep the supply of money in China
from increasing.

Answer 28

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Question 29

Other Channels of Monetary Policy. Consider this
quote: “Monetary policy does not work simply through
lowering interest rates. Sometimes it can directly
affect particular credit markets in the economy.” Can
you give an example of actions that the Fed has taken
that fit this quotation? (Related to Application 1 on
page 299 .)

Answer 29

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Question 30

Interest rates typically fall in a recession because the
demand for money depends
on changes
in real income.

Answer 30

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Question 31

If interest rates are 9 percent per year, the price of a
bond that promises to pay $109 next year will be equal
to
.

Answer 31

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Question 32

Through its effect on money demand, an increase in
prices will
interest rates.

Answer 32

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Question 33

Open market purchases lead to rising bond prices and

interest rates.

Answer 33

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Question 34

Pricing a Bond. If a bond promises to pay $110 next
year and the interest rate is 5 percent per year:
a. What will the price of the bond be?
b. What will the new price of the bond be if the
interest rate falls to 3 percent?

Answer 34

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Question 35

Buy or Sell Bonds? If you strongly believed the
Federal Reserve was going to surprise the markets and
raise interest rates, would you want to buy bonds or
sell bonds?

Answer 35

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Question 36

Recessions and Interest Rates. The economy starts
to head into a recession. Using a graph of the money
market, show what happens to interest rates. What
happens to bond prices?

Answer 36

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Question 37

A Decrease in the Riskiness of the Stock Market. If
investors began to think the stock market is becoming
less risky, how will this belief affect the demand for
money? Would this more likely affect M1 or M2?

Answer 37

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Question 38

Quantitative Easing How does a policy of
quantita tive easing differ from conventional
open-market purchases?

Answer 38

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Question 39

When the Federal Reserve sells bonds on the open
market, it leads to
(higher/lower) levels
of investment and output in the economy.

Answer 39

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Question 40

To decrease the level of output, the Fed should
conduct an open-market
(sale/purchase)
of bonds.

Answer 40

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Question 41

An open-market purchase
the
supply  of  money, which
interest rates,
which 
investment, and finally results in
a(n)
in output.

Answer 41

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Question 42

An increase in the supply of money will

(appreciate/depreciate) a country’s currency.

Answer 42

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Question 43

Interest Rates, Durable Goods, and Nondurable
Goods. Refrigerators and clothing are to some extent
durable. Explain why the decision to purchase a
refrigerator is likely to be more sensitive to interest
rates than the decision to buy clothing.

Answer 43

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Question 44

Where Is Monetary Policy Stronger? In an open
economy, changes in monetary policy affect both
interest rates and exchange rates. Comparing the
United States and Switzerland, in which country
would monetary policy have a more significant effect
on GDP through changes in exchange rates?

Answer 44

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Question 45

Commodity Prices, the Dollar, and Monetary
Policy. Suppose the U.S. is a major source of demand
for world commodities and supplies of commodities
are limited. Describe how an expansionary monetary
policy could affect commodity prices, both through
a domestic and international channel. What would
be the relationship one would observe between the
value of the dollar and commodity prices following
a monetary expansion? (Related to Application 2 on
page 302 .)

Answer 45

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Question 46

(Inside/Outside) lags are shorter for the

Fed.

Answer 46

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Question 47

Experimental evidence shows us that individuals
perform
than committees in making
monetary policy decisions.

Answer 47

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Question 48

Long-term interest rates can be thought of as

of short-term rates.

Answer 48

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Question 49

The Fed directly controls long-term interest rates.

True/False

Answer 49

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Question 50

Open Economies and Outside Lags in Monetary
Policy. Research suggests that the effects of monetary
policy through interest rates, exchange rates, and net
exports are more rapid than the effects of monetary
policy on investment. As an economy becomes more
open, how will this change affect the outside lag in
monetary policy?

Answer 50

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Question 51

Asset Prices as a Guide to Monetary Policy? Some
central bankers have looked at asset prices, such as
prices of stocks, to guide monetary policy. The idea
is that if stock prices begin to rise, it might signal
future inflation or an overheated economy. Are there
any dangers to using the stock market as a guide to
monetary policy?

Answer 51

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Question 52

Rates on Two-Year Bonds and One-Year Bonds.
Suppose the interest rate on a two-year bond was
higher than the interest rate on a one-year bond.
What does the market believe will happen next year to
one-year interest rates?

Answer 52

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Question 53

International Influences on Fed Policy. As
international trade becomes more important,
monetary policy becomes more heavily influenced by developments in the foreign exchange markets.
Go to the Web page of the Federal Reserve (www.
federalreserve.gov) and read some recent speeches
given by Fed officials. Do international considerations
seem to affect policymakers in the United States
today?

Answer 53

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Question 54

Are Federal Reserve Chairmen Too Powerful?
Economic research has shown that the chairman
of the Federal Reserve is more powerful, relative
to other committee members, than the head of the
central bank in other countries. Fed chairpersons have
much more influence over actual decisions than other
members. Recall Professor Blinder’s findings that
committees make better decisions than individuals and
that leaders of groups, per se, do not matter for the
quality of decision making. Make an argument that
the tradition of a strong chairman in the United States
reduces the effectiveness of monetary policy. (Related
to Application 3 on page 306 .)

Answer 54

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Question 55

Making Future Predictions Explicit Recently the
members of the FOMC have been asked to make
predictions for future interest rates and then these
have been made public. What is the rationale for
this policy?

Answer 55

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