Chapter 14 - Monetary Policy

Money is any commodity or token that is generally acceptable as a​ ______.

means of payment

Choose the correct statements.

1. Gum does not serve as money because it is not a good store of value.

2. Most people know the price of gum comma so it could serve as money because it is a unit of account.

3. Because most people buy gum comma it can be used as money because it is a useful tool in barter.

4. Gum does not serve as money because it is not generally accepted in exchange for goods and services.

Statements 1 and 4 are correct.

The main components of money in the United States today are​ ______.

currency and deposits at banks and other depository institutions

Goals of Monetary Policy

Maximum employment (attaining the maximum sustainable growth rate of potential GDP and keeping real GDP close to potential GDP) Stable prices (keeping inflation rate close to 0) Moderate long-term interest rates (keeping long-term nominal interest rates close to long-term real interest rate)

Money serves as a _____

medium of​ exchange, which means that it is generally accepted in exchange for goods and services

Choose the statement about money that is incorrect.

A.In the United States today comma money consists of currency and deposits at banks and other depository institutions

B.Deposits are money because they can be used to make payments

C.Inflation brings a rising value of money.Inflation brings a rising value of money.

D.Barter requires a double coincidence of wants

C

Currency consists of​ _____.

notes​ (dollar bills) and coins

M2 consists of​ _____ plus​ _____ and​ _____ deposits,​ _____, and other deposits.

​M1; savings​ deposits; small​ time; money market funds

The functions of depository institutions include all of the following except​ ______.

A. lowering the cost of borrowinglowering the cost of borrowing

B.lowering the cost of monitoring borrowerslowering the cost of monitoring borrowers

C.pooling riskpooling risk

D.providing credit ratings

D. providing credit ratings

A depository institution creates liquidity by​ ______.

borrowing short and lending​ long

Depository institutions pool risk because they use funds obtained from​ ______ depositors to make loans to​ ______ borrowers.

many; many

Depository institutions minimize the cost of monitoring borrowers by​ ______.

using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually

A depository institution takes deposits from​ ______ and earns most of its income by​ _______.

households and​ firms; making loans and buying securities that earn a higher interest rate than that paid to depositors

The deposits of the following three types of depository institutions make up the​ nation's money:​ ______.

commercial​ banks, thrift​ institutions, and money market mutual funds

Choose the statement that is incorrect.

A. Liquid assets can be sold and instantly converted into cash with virtually no risk of loss.

B. Liquid assets have a higher interest rate than securities.

C. Liquid assets include overnight loans made by one bank to other​ banks, U.S. government Treasury​ bills, and commercial bills.

D. Liquid assets are the​ banks' first line of defense if they need reserves.

B; liquid assets have a lower interest rate than securities because they have low risk

Reserves consist of the currency in the​ _____ plus the balance on its​ _____ account at​ _____.

bank's vaults;​ reserve; a Federal Reserve Bank

The federal funds rate is the​ _____ rate on​ _____ loans.

​interest; interbank

The central bank of the United States is the​ ______.

Federal Reserve System

A central bank performs all of the following functions except​ ______.

A. it is a public authority that regulates a nation's depository institutions

B. it provides general banking services for businesses and individual citizensprovides general banking services for businesses and individual citizens

C. it provides banking services to commercial banks provides banking services to commercial banks

D. it acts as a bank's bank

B

The Fed is the lender of last​ resort, which means​ _______.

if depository institutions are short of​ reserves, they can borrow from the Fed

Choose the correct statements.
1. The FOMC meets approximately every six weeks

2. Current chairman of the Fed is Alan Greenspan

3. The president of the San Francisco Fed is always a member of the FOMC

4. FOMC stands for Federal Open Market Committee

1 and 4

An open market purchase​ ______ the monetary base.
An open market sale​ ______ the monetary base.

increases decreases

Choose the statement that is incorrect

A. Upper A central bank is a public authority that regulates a nation's depository institutions.A central bank is a public authority that regulates a nation's depository institutions.
B. A central bank adjusts the quantity of money in circulation and influences interest rates.central bank adjusts the quantity of money in circulation and influences interest rates.
C. The largest commercial banks are known as central banks.largest commercial banks are known as central banks.
D. A central bank is a bank's bank.

C

The monetary base​ ______ and the​ Fed's assets​ ______.

The​ bank's total assets​ ______, its reserves​ ______.

decreases, decreases are the same; decrease

Suppose that banks' reserves at the Fedare ​$25 ​billion, Federal Reserve notes are ​$700 ​billion, and the quantity of coins is ​$30 billion.

Calculate the monetary base in the United Statesthe monetary base in the United States.

The monetary base in the US is 755 billion dollars

Suppose the Fed buys​ $50 million of government securities from the Bank of America.

The​ Fed's total assets​ ______ and its total liabilities​ ______.

The Bank of​ America's total assets​ ______ and its total liabilities​ ______.

increase by​ $50 million; increase by​ $50 million do not​ change; do not change

Choose the statement about the Fed that is incorrect.

A. There are 12 Federal Reserve banks and 12 Federal Reserve districts.
B. The Board of Governors has seven​ members, who each serve a​ 14-year term.
C. The policy decisions of the Federal Open Market Committee are implemented each month by a different Federal Reserve Bank.
D. The main​ policy-making organ of the Federal Reserve System is the Federal Open Market Committee.

C. The Federal Reserve Bank of New York occupies a special place in the Federal Reserve System because it implements the Fed's policy decisions in the financial markets

An open market operation is​ ______.

the purchase or sale of securities by the Federal Reserve System in the loanable funds market

The Federal Open Market Committee is the​ Fed's _____ committee.

main policy making

The required reserve ratio is the minimum percentage of​ _____ that​ _____ are required to hold as reserves.

​deposits; depository institutions

Banks create money by​ ______.

making loans

The quantity of money that the banking system can create is limited by​ _______.

the monetary​ base, desired​ reserves, and desired currency holdings

The money multiplier is the ratio of the change in the quantity of​ ______ to the change in the quantity of​ ______.

money; monetary base

Suppose an increase in the monetary base of ​$2​00,000 increases the quantity of money by ​$400,000.

Calculate the money multiplier.

Money multiplier is 2

The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio ​- the ratio of​ _____ to​ _____ that the​ _____ plan to hold.

​reserves; deposits; banks

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain ratio

currency; deposits

Excess reserves are a​ bank's _____ reserves minus its​ _____ reserves.

actual; desired

Who is responsible for U.S. monetary​ policy?

The​ ______ appoints the members and the Chairman of the Board of Governors of the Fed.

The​ ______ is responsible for the conduct of monetary policy.

President Fed

When the Fed lowers the federal funds to combat a recession, the quantity of money ______________

increases

If the quantity of money increases when the Fed lowers the federal funds, aggregate demand ___________ and price level ________

This means real GDP ___________ and unemployment rate ________

increases; rises increases; falls

The core inflation rate is the rate of increase in the​ ______.

core PCE deflator

The Fed regards the core PCE deflator as a better measure on which to focus than the CPI because​ ______.

it is less volatile than the total CPI inflation rate and the Fed believes that it provides a better indication of whether price stability is being achieved

The federal government gets funds to cover its budget deficit by

selling government securities

Financing the budget deficit __________

does NOT directly affect the Fed's purchases and sales of government securities

The Federal Reserve Act makes ____________ responsible for the conduct of monetary policy

Board of Governors

A monetary policy instrument is a variable that the​ _____ can directly control or closely target and that
influences​ _____ in desirable ways.

Fed; the economy

The federal funds rate is the interest rate at which banks can borrow and lend​ _____ in the​ _____ market.

reserves; federal funds

The​ Fed's monetary policy instrument is​ _______.

federal funds rate

Federal funds rate

the interest rate on overnight loans that banks make to each other

The main influences on the FOMC federal funds rate decision are​ _______.

inflation rate, the unemployment rate, and the output gap

When the Fed lowers the federal funds​ rate, it makes an open market __________

Other​ short-term interest rates and the exchange rate
___________

The quantity of money and the supply of loanable funds
___________

Thus, the long term real interest rate ___________ and the ________ real interest rate _______________ consumption expenditure and investment

The ___________ exchange rate makes U.S exports ___________ and imports __________. So net exports ____________

___________ interest rates _____________ aggregate expenditure

Aggregate demand __________, which ___________ real GDP and the price level, relative to what they would have been.

Real GDP growth and inflation ______________

purchase fall increase falls, lower, increases lower, cheaper, more costly; increase Lower, increase increases, increases speed up

When the Fed raises the federal funds​ rate, the U.S. interest rate differential​ ______, and, other things remaining the​ same, the U.S. dollar​ ______.

rises; appreciates

The​ Fed's actions influence real GDP by changing expenditure plans.

Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of consumption expenditure and the​ ______ is the amount of saving.

Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of investment and the​ ______ are net exports.

The monetary policy transmission process is almost immediate and its results are relatively easy to predict. True or False?

smaller; greater smaller; smaller False

The​ Fed's actions influence the inflation rate by changing expenditure plans.

The inflation rate rises when the Fed makes an open market​ ______.

The supply of money​ ______.

The interest rate __________

The supply of loanable funds and investment​ ______. Real GDP​ ______ and the price level rises.

purchase increases falls increases; increases

Inflation responds ____________________ after the change in the federal funds rate

between one and two years

The ripple effects of an FOMC decision to fight​ recession, in​ order, are:

1. The Fed lowers the federal funds target rate 2. The Fed buys securities in an open market operation 3.​ Short-term interest rates fall and the exchange rate falls 4. The quantity of money and supply of loanable funds increase 5. The​ long-term interest rate falls 6. Consumption​ expenditure, investment, and net exports increase 7. Aggregate demand increases 8. Real GDP growth and the inflation rate increase

The United States is experiencing low inflation and real GDP is less than potential GDP.

Describe the​ Fed's actions that will restore full employment.

The New York Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target.

The monetary base ______________. The supply of money __________ and the interest rate __________

The supply of loanable funds​ ______ and the​ long-term interest rate​ ______.

Investment​ ______, and aggregate demand​ ______ with a multiplier effect

purchase; lower increases; increases, falls increases; falls increases; increases

When the Fed fights​ recession, _______.

an increase in the supply of loanable funds lowers the​ long-term interest rate and increases investment

The United States economy is experiencing high inflation and real GDP is greater than potential GDP.

Describe the actions taken by the Fed to restore full employment.

The Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target.

The monetary base ____________ and the supply of money __________ and the interest rate ________

The supply of loanable funds ___________ and the long-term interest rate ________

Investment​ ______, and aggregate demand​ ______ with a multiplier effect.

Real GDP moves closer to potential GDP

sales; higher decreases; decreases; rises decreases; rises decreases; decreases

Chapter 14 - Monetary Policy - Subjecto.com

Chapter 14 – Monetary Policy

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Money is any commodity or token that is generally acceptable as a​ ______.

means of payment

Choose the correct statements.

1. Gum does not serve as money because it is not a good store of value.

2. Most people know the price of gum comma so it could serve as money because it is a unit of account.

3. Because most people buy gum comma it can be used as money because it is a useful tool in barter.

4. Gum does not serve as money because it is not generally accepted in exchange for goods and services.

Statements 1 and 4 are correct.

The main components of money in the United States today are​ ______.

currency and deposits at banks and other depository institutions

Goals of Monetary Policy

Maximum employment (attaining the maximum sustainable growth rate of potential GDP and keeping real GDP close to potential GDP) Stable prices (keeping inflation rate close to 0) Moderate long-term interest rates (keeping long-term nominal interest rates close to long-term real interest rate)

Money serves as a _____

medium of​ exchange, which means that it is generally accepted in exchange for goods and services

Choose the statement about money that is incorrect.

A.In the United States today comma money consists of currency and deposits at banks and other depository institutions

B.Deposits are money because they can be used to make payments

C.Inflation brings a rising value of money.Inflation brings a rising value of money.

D.Barter requires a double coincidence of wants

C

Currency consists of​ _____.

notes​ (dollar bills) and coins

M2 consists of​ _____ plus​ _____ and​ _____ deposits,​ _____, and other deposits.

​M1; savings​ deposits; small​ time; money market funds

The functions of depository institutions include all of the following except​ ______.

A. lowering the cost of borrowinglowering the cost of borrowing

B.lowering the cost of monitoring borrowerslowering the cost of monitoring borrowers

C.pooling riskpooling risk

D.providing credit ratings

D. providing credit ratings

A depository institution creates liquidity by​ ______.

borrowing short and lending​ long

Depository institutions pool risk because they use funds obtained from​ ______ depositors to make loans to​ ______ borrowers.

many; many

Depository institutions minimize the cost of monitoring borrowers by​ ______.

using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually

A depository institution takes deposits from​ ______ and earns most of its income by​ _______.

households and​ firms; making loans and buying securities that earn a higher interest rate than that paid to depositors

The deposits of the following three types of depository institutions make up the​ nation’s money:​ ______.

commercial​ banks, thrift​ institutions, and money market mutual funds

Choose the statement that is incorrect.

A. Liquid assets can be sold and instantly converted into cash with virtually no risk of loss.

B. Liquid assets have a higher interest rate than securities.

C. Liquid assets include overnight loans made by one bank to other​ banks, U.S. government Treasury​ bills, and commercial bills.

D. Liquid assets are the​ banks’ first line of defense if they need reserves.

B; liquid assets have a lower interest rate than securities because they have low risk

Reserves consist of the currency in the​ _____ plus the balance on its​ _____ account at​ _____.

bank’s vaults;​ reserve; a Federal Reserve Bank

The federal funds rate is the​ _____ rate on​ _____ loans.

​interest; interbank

The central bank of the United States is the​ ______.

Federal Reserve System

A central bank performs all of the following functions except​ ______.

A. it is a public authority that regulates a nation’s depository institutions

B. it provides general banking services for businesses and individual citizensprovides general banking services for businesses and individual citizens

C. it provides banking services to commercial banks provides banking services to commercial banks

D. it acts as a bank’s bank

B

The Fed is the lender of last​ resort, which means​ _______.

if depository institutions are short of​ reserves, they can borrow from the Fed

Choose the correct statements.
1. The FOMC meets approximately every six weeks

2. Current chairman of the Fed is Alan Greenspan

3. The president of the San Francisco Fed is always a member of the FOMC

4. FOMC stands for Federal Open Market Committee

1 and 4

An open market purchase​ ______ the monetary base.
An open market sale​ ______ the monetary base.

increases decreases

Choose the statement that is incorrect

A. Upper A central bank is a public authority that regulates a nation’s depository institutions.A central bank is a public authority that regulates a nation’s depository institutions.
B. A central bank adjusts the quantity of money in circulation and influences interest rates.central bank adjusts the quantity of money in circulation and influences interest rates.
C. The largest commercial banks are known as central banks.largest commercial banks are known as central banks.
D. A central bank is a bank’s bank.

C

The monetary base​ ______ and the​ Fed’s assets​ ______.

The​ bank’s total assets​ ______, its reserves​ ______.

decreases, decreases are the same; decrease

Suppose that banks’ reserves at the Fedare ​$25 ​billion, Federal Reserve notes are ​$700 ​billion, and the quantity of coins is ​$30 billion.

Calculate the monetary base in the United Statesthe monetary base in the United States.

The monetary base in the US is 755 billion dollars

Suppose the Fed buys​ $50 million of government securities from the Bank of America.

The​ Fed’s total assets​ ______ and its total liabilities​ ______.

The Bank of​ America’s total assets​ ______ and its total liabilities​ ______.

increase by​ $50 million; increase by​ $50 million do not​ change; do not change

Choose the statement about the Fed that is incorrect.

A. There are 12 Federal Reserve banks and 12 Federal Reserve districts.
B. The Board of Governors has seven​ members, who each serve a​ 14-year term.
C. The policy decisions of the Federal Open Market Committee are implemented each month by a different Federal Reserve Bank.
D. The main​ policy-making organ of the Federal Reserve System is the Federal Open Market Committee.

C. The Federal Reserve Bank of New York occupies a special place in the Federal Reserve System because it implements the Fed’s policy decisions in the financial markets

An open market operation is​ ______.

the purchase or sale of securities by the Federal Reserve System in the loanable funds market

The Federal Open Market Committee is the​ Fed’s _____ committee.

main policy making

The required reserve ratio is the minimum percentage of​ _____ that​ _____ are required to hold as reserves.

​deposits; depository institutions

Banks create money by​ ______.

making loans

The quantity of money that the banking system can create is limited by​ _______.

the monetary​ base, desired​ reserves, and desired currency holdings

The money multiplier is the ratio of the change in the quantity of​ ______ to the change in the quantity of​ ______.

money; monetary base

Suppose an increase in the monetary base of ​$2​00,000 increases the quantity of money by ​$400,000.

Calculate the money multiplier.

Money multiplier is 2

The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio ​- the ratio of​ _____ to​ _____ that the​ _____ plan to hold.

​reserves; deposits; banks

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain ratio

currency; deposits

Excess reserves are a​ bank’s _____ reserves minus its​ _____ reserves.

actual; desired

Who is responsible for U.S. monetary​ policy?

The​ ______ appoints the members and the Chairman of the Board of Governors of the Fed.

The​ ______ is responsible for the conduct of monetary policy.

President Fed

When the Fed lowers the federal funds to combat a recession, the quantity of money ______________

increases

If the quantity of money increases when the Fed lowers the federal funds, aggregate demand ___________ and price level ________

This means real GDP ___________ and unemployment rate ________

increases; rises increases; falls

The core inflation rate is the rate of increase in the​ ______.

core PCE deflator

The Fed regards the core PCE deflator as a better measure on which to focus than the CPI because​ ______.

it is less volatile than the total CPI inflation rate and the Fed believes that it provides a better indication of whether price stability is being achieved

The federal government gets funds to cover its budget deficit by

selling government securities

Financing the budget deficit __________

does NOT directly affect the Fed’s purchases and sales of government securities

The Federal Reserve Act makes ____________ responsible for the conduct of monetary policy

Board of Governors

A monetary policy instrument is a variable that the​ _____ can directly control or closely target and that
influences​ _____ in desirable ways.

Fed; the economy

The federal funds rate is the interest rate at which banks can borrow and lend​ _____ in the​ _____ market.

reserves; federal funds

The​ Fed’s monetary policy instrument is​ _______.

federal funds rate

Federal funds rate

the interest rate on overnight loans that banks make to each other

The main influences on the FOMC federal funds rate decision are​ _______.

inflation rate, the unemployment rate, and the output gap

When the Fed lowers the federal funds​ rate, it makes an open market __________

Other​ short-term interest rates and the exchange rate
___________

The quantity of money and the supply of loanable funds
___________

Thus, the long term real interest rate ___________ and the ________ real interest rate _______________ consumption expenditure and investment

The ___________ exchange rate makes U.S exports ___________ and imports __________. So net exports ____________

___________ interest rates _____________ aggregate expenditure

Aggregate demand __________, which ___________ real GDP and the price level, relative to what they would have been.

Real GDP growth and inflation ______________

purchase fall increase falls, lower, increases lower, cheaper, more costly; increase Lower, increase increases, increases speed up

When the Fed raises the federal funds​ rate, the U.S. interest rate differential​ ______, and, other things remaining the​ same, the U.S. dollar​ ______.

rises; appreciates

The​ Fed’s actions influence real GDP by changing expenditure plans.

Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of consumption expenditure and the​ ______ is the amount of saving.

Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of investment and the​ ______ are net exports.

The monetary policy transmission process is almost immediate and its results are relatively easy to predict. True or False?

smaller; greater smaller; smaller False

The​ Fed’s actions influence the inflation rate by changing expenditure plans.

The inflation rate rises when the Fed makes an open market​ ______.

The supply of money​ ______.

The interest rate __________

The supply of loanable funds and investment​ ______. Real GDP​ ______ and the price level rises.

purchase increases falls increases; increases

Inflation responds ____________________ after the change in the federal funds rate

between one and two years

The ripple effects of an FOMC decision to fight​ recession, in​ order, are:

1. The Fed lowers the federal funds target rate 2. The Fed buys securities in an open market operation 3.​ Short-term interest rates fall and the exchange rate falls 4. The quantity of money and supply of loanable funds increase 5. The​ long-term interest rate falls 6. Consumption​ expenditure, investment, and net exports increase 7. Aggregate demand increases 8. Real GDP growth and the inflation rate increase

The United States is experiencing low inflation and real GDP is less than potential GDP.

Describe the​ Fed’s actions that will restore full employment.

The New York Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target.

The monetary base ______________. The supply of money __________ and the interest rate __________

The supply of loanable funds​ ______ and the​ long-term interest rate​ ______.

Investment​ ______, and aggregate demand​ ______ with a multiplier effect

purchase; lower increases; increases, falls increases; falls increases; increases

When the Fed fights​ recession, _______.

an increase in the supply of loanable funds lowers the​ long-term interest rate and increases investment

The United States economy is experiencing high inflation and real GDP is greater than potential GDP.

Describe the actions taken by the Fed to restore full employment.

The Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target.

The monetary base ____________ and the supply of money __________ and the interest rate ________

The supply of loanable funds ___________ and the long-term interest rate ________

Investment​ ______, and aggregate demand​ ______ with a multiplier effect.

Real GDP moves closer to potential GDP

sales; higher decreases; decreases; rises decreases; rises decreases; decreases

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