CHAPTER 14-15

The use of money and credit controls to achieve macroeconomic goals is:

Monetary policy.

Monetary policy involves the use of money and credit controls to:

Shift the aggregate demand curve.

The primary method for controlling the money supply in the United States is to limit the:

Volume of loans the banking system can make.

The Board of Governors consists of:

7 members, appointed for 14 year terms.

Members of the Board of Governors are:

Appointed by the president and confirmed by the Senate.

Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they:

Make their decisions based on economic, rather than political, considerations.

The current chairman of the Federal Reserve is:

Ben Bernanke.

Which of the following is responsible for buying and selling of government securities to influence reserves in the banking system?

The Federal Open Market Committee

All of the following are tools available to the Fed for controlling the money supply except:

Taxes.

The minimum amount of reserves a bank is required to hold is:

Required reserves.

Excess reserves are:

Bank reserves in excess of required reserves.

Which of the following represents the money multiplier?

1 ÷ (required reserve ratio)

Suppose all of the banks in the Federal Reserve System have $100 billion in transactions accounts, the required reserve ratio is 0.25, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.20, then the total lending capacity of the system is increased by:

$25 billion.

The federal funds rate is the interest rate charged when:

One bank lends to another bank.

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the:

Discount rate.

Discounting refers to the Fed’s practice of:

Lending reserves to private banks.

Which of the following is true about an increase in the discount rate?

It signals the Federal Reserve’s desire to restrain money growth

When a bank borrows money from the Federal Reserve:

Reserves increase for the bank.

By raising and lowering the discount rate, the Fed changes the:

Incentive for banks to borrow reserves.

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

Open market operations

When the Fed wishes to increase the reserves of the member banks, it:

Buys securities.

If the Fed wishes to increase the money supply it could:

Lower the discount rate.

In order to increase the money supply the Fed can:

Lower the reserve requirement, decrease the discount rate, or buy bonds.

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system. If the Open Market Committee buys $50 million of securities from the commercial banking system, then the total lending capacity for the system:

Increases by $500 million.

If the Fed buys $150 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually:

Increase by $3,000 billion.

____________ is the price paid for the use of money.

The interest rate

The choice to hold money in the form of cash:

Results in forgone interest.

Which of the following causes the opportunity cost of holding money in the form of cash to decrease?

Lower interest rates

The market demand curve for money is:

Downward sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates.

The money supply curve is:

Vertical since it’s not determined by the interest rate.

The equilibrium rate of interest is determined by:

Money demand and money supply.

Which of the following is true about the equilibrium rate of interest?

The Fed can change it by changing the money supply

The Fed can change the equilibrium rate of interest by changing:

Reserve requirements, the discount rate or through open market operations.

Ceteris paribus, if the Fed sells bonds through open market operations, the money:

Supply curve should shift leftward.

What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate?

Equilibrium interest rate should decrease, and equilibrium rate of investment should increase.

An increase in the money supply will:

Reduce interest rates and increase aggregate demand.

Which shift should occur if the Fed raises the discount rate?

The aggregate demand curve should shift leftward

The success of Fed intervention depends on how well:

Changes in long-term interest rates mirror changes in short-term interest rates.

Monetary stimulus will fail if:

Short-term interest rates are affected but long-term interest rates are not.

In which of the following situations is expansionary monetary policy most effective?

Banks are willing to lend excess reserves