Economics Module 14

Question 1

What is the only way investors can earn an interest rate that is more than 5% on a 1-year bond that pays $1000 in one year?

Answer 1

Pay a price lower than $952.38 for the bond

Question 2

Imagine you are running a bank and you are deciding how much of your funds to deposit with the Fed. Your alternative to depositing funds with the Fed is to lend them to businesses and individuals. What are you likely to do if the Federal Reserve increases the interest rate that it pays on your deposits with them?

Answer 2

Increase reserves at the Fed and reduce loans

Question 3

Banks will hold substantial excess reserves when which of the following is true?

Answer 3

Loans to customers look unusually risky or if interest rates are low

Question 4

Which of the following will cause a $100 million purchase of bonds by the Federal Reserve to have the larger effect on real GDP?

Answer 4

An increase in the sensitivity of interest rates to changes in the money supply

Question 5

The tool most relied on by the Federal Reserve in conducting monetary policy is ____________.

Answer 5

open market operations

Question 6

If the required reserve ratio is 5 percent and banks always try to remain fully loaned out, what will be the effect of a Federal Reserve purchase of $10 billion of bonds?

Answer 6

An increase in the money supply of $200 billion

Question 7

The economy is suffering from too much unemployment. If the Federal Reserve were to use the discount rate to address this problem, what would it do to the discount rate?

Answer 7

Lower

Question 8

The economy is suffering from too much unemployment. If the Federal Reserve were to use the required reserve ratio to address this problem, what would it do to the required reserve ratio?

Answer 8

Lower

Question 9

If the Federal Reserve System is concerned that the economy is suffering from too much unemployment, will the Federal Reserve buy or sell bonds?

Answer 9

Buy

Question 10

Which of the following groups serve on the Federal Open Market Committee? Select all that apply.

Answer 10

a
All members of the Board of Governors
d
Five of the regional Federal Reserve Bank presidents

Question 11

The Federal Reserve System was set up to be a ______________ and politically ______________ institution.

Answer 11

decentralized; independent

Question 12

The most commonly used monetary policy instrument is _________.

Answer 12

the federal funds rate and open market operations

Question 13

When the federal reserve announces that it is increasing the federal funds rate, it is actually going to ___________.

Answer 13

sell bonds on the open market until the federal funds rate rises to the new target

Question 14

When the Federal Reserve announces that is increasing the federal funds rate, we would expect to see banks do which of the following?

Answer 14

Reduce their loans because they have fewer reserves due to the Fed’s open market sales

Question 15

Compare two situations:
Year 1. Real GDP increases, and at the same time, interest rates increase.
Year 2. Real GDP increases, and at the same time, interest rates decrease.
What is a possible explanation of the difference?

Answer 15

An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2.

Question 16

Assume that the economy is currently producing a level of real GDP above the full employment level of real GDP, and the government lowers taxes as part of a new economic policy. Which of the following monetary policies should the Federal Reserve undertake if it wants to encourage the economy to go to a full-employment level of output?

Answer 16

Raise the federal funds rate target

Question 17

A given amount of Fed bond purchases will be less effective if which of the following is true?

Answer 17

If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts.

Question 18

If the Federal Reserve wishes to minimize the fluctuations of interest rates, what will be the resulting effects on business cycles?

Answer 18

In response to an increase in spending, the money supply will be increased

Question 19

Which of the following make(s) the conduct of discretionary policy difficult? Select all that apply.

Answer 19

a
The Fed implements policy now that will affect the economy in the future
b
The Fed has to make forecasts about the future based on current data
c
The Fed is uncertain about how large the effect of a policy change will be

Question 20

Which of the following would weaken the argument for the use of discretionary monetary policy and strengthen the argument for rules?

Answer 20

The term length for Fed board members is shortened from 14 years to 2 years.

Question 21

The quantity theory of money supports which of the following conclusions?

Answer 21

A decrease in the money supply will cause prices to fall in the long run.

Question 22

The decrease in taxes leads to what adjustment in the short-run economy?

Answer 22

Lower taxes increase consumption spending in the economy, increasing aggregate demand.

Question 23

Which of the following are actions that the Federal Reserve could use to bring the economy back towards its long run equilibrium? Select all that apply.

Answer 23

b
Sell U.S. Treasury bonds.
c
Raise the discount rate.
e
Raise the required reserve ratio.

Question 24

Suppose that the Federal Reserve decides to use open market operations to bring the economy back towards equilibrium. What will they do, and with what goal in mind?

Answer 24

Sell U.S. Treasury bonds in order to decrease aggregate demand.

Question 25

Suppose that the Federal Reserve takes too long to respond to the effects of the tax cut, and the economy returns to the full employment level of GDP naturally, as described in chapter 23. Then after the economy is back at full employment, the Federal Reserve belatedly sells U.S. Treasury bonds. The short run effect of this action will be to _________ unemployment and to _________ real GDP. At the new short run equilibrium, real GDP will be ________ the full employment level of real GDP.

Answer 25

increase; decrease; below

Question 26

In the first headline starting this case, it is stated that the Federal Reserve (the Fed) may leave rates unchanged.
The Fed announced its satisfaction with current economic conditions and that it expected interest rates to remain constant for the foreseeable future. What does this mean for monetary policy?

Answer 26

The Fed will not be purchasing or selling bonds in the open market.

Question 27

In the second headline starting this case, it is stated that the Norwegian central bank may leave interest rates unchanged and then eventually raise interest rates. Suppose the Norwegian central bank announces a tightening of monetary policy as expected inflation passed 3.5 percent. Which of the following would likely happen if the Norges Bank adopts a ‘tighter’ monetary policy? The Norges Bank might:

Answer 27

sell bonds in the open market and raise the discount rate.

Question 28

In the third headline starting this case, a lower interest rate is suggested as a possibility.
Assume that the Open Market Operations Committee reported its concerns and announced a new lower target interest rate as unemployment increases to 5.5 percent. What would the Federal Reserve be doing as a result?

Answer 28

The Fed will be purchasing bonds in the open market.

Question 29

Suppose the goal is to increase interest rates. What will the Fed actually do to make that happen? The Fed will do which of the following?

Answer 29

Sell bonds in the open market and the price of bonds will decrease.

Question 30

Imagine the bond above displayed the following details:
$10,000
Matures: January 31, 2030
Interest of $200 payable June 30 and December 31 of each year.
Can you calculate the annual effective interest rate for this bond?

Answer 30

4%

Question 31

If the Fed is buying bonds, what happens to actual interest payments on those bonds?

Answer 31

Interest payments do not change.

Question 32

What does the Fed actually do if the Fed’s goal is to have interest rates remain the same in a situation where the economy is growing?

Answer 32

It continues buying bonds.

Question 33

If the economy is at full employment, inflation is 2%, and the GDP is growing at 2%, what should the approximate growth in the money supply be? Assume there are no changes in how we are using money.

Answer 33

4%

Question 34

What are the three main components of the Federal Reserve System?

Answer 34

a
Board of governors
c
Regional Federal Reserve Banks
f
Federal open market committee (FOMC)

Question 35

When bond prices rise, what happens to the interest rate (yield to maturity) on those bonds?

Answer 35

They fall

Question 36

When interest rates rise, what happens to bond prices?

Answer 36

They fall

Question 37

If the FOMC decides to increase the Federal Funds rate, it will:

Answer 37

Sell bonds on the open market.

Question 38

What likely happens to the amount of loans banks make when the Fed raises the interest rate on excess reserves?

Answer 38

They fall

Question 39

What likely happens to the money supply when the Fed lowers the interest rate on excess reserves?

Answer 39

It rises

Question 40

Assuming banks keep nearly zero excess reserves, what would happen to the money supply if the Fed increased the required reserve ratio?

Answer 40

It falls

Question 41

What likely happens to investment spending if the Fed does open market purchases?

Answer 41

It rises

Question 42

The Federal Reserve believes that inflation is or will be too high given the current stance of monetary policy. Which of the following would help the Fed achieve its goal of lower inflation? (Select all that apply)

Answer 42

c
Raise the interest rate on excess reserves.
d
Open market sales.
e
Increase the target for the Federal Funds rate.

Question 43

Which of the following are expansionary?

Answer 43

b
Open market purchases.
d
Lowering the IOER.

Question 44

The money supply is $10T and nominal GDP is $5T. What is velocity?

Answer 44

1/2