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Exam 35: Interest Rates and Monetary Policy

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Question 91

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Between March 2001 and November 2002,the Fed reduced the federal funds rate from 5 percent to just above 1 percent.The Fed's purpose was to:

A) prevent rising inflation.
B) reduce the public debt.
C) promote recovery from recession.
D) strengthen the international value of the dollar.

E) None of the above
F) C) and D)

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Question 92

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According to the Taylor rule,if real GDP is 4 percent below potential GDP,the Fed should:

A) lower the federal funds rate by 2 percentage points.
B) lower the federal funds rate by 4 percentage points.
C) lower the federal funds rate by 8 percentage points.
D) do nothing,as the economy will correct itself.

E) A) and C)
F) B) and D)

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Question 93

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If,in the market for money,the quantity of money demanded exceeds the money supply,the interest rate will:

Assume the economy is operating at less than full employment.An expansionary monetary policy will cause interest rates to ________,which will ___________ investment spending.

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 200 \\300 \\500 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$1,100\\400\\\\\\\end{array}\end{array}$ Refer to the given data.Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy.To accomplish this,it could lower the reserve requirement from 20 percent to:

Operation Twist was aimed at lowering long-term interest rates.

An expansionary monetary policy is one that reduces the supply of money.

The asset demand for money varies inversely with the nominal GDP.

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

According to the Taylor rule:

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S.securities from the public,which deposits this amount into checking accounts.As a result of these transactions,the supply of money is:

As part of its zero interest rate policy (ZIRP) ,the Federal Reserve:

The prime interest rate and the federal funds rate normally change in opposite directions.

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves.

If the quantity of money demanded exceeds the quantity supplied:

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$ Refer to the given data.Suppose the Fed sold $10 billion of U.S.securities to the banks.This would:

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 200 \\300 \\500 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$1,000\\400\\\\\\\end{array}\end{array}$ Refer to the given data.Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation.To accomplish this,it could increase the reserve requirement from 20 percent to:

In recent years,the Federal Reserve has:

In economics,the expression "You can lead a horse to water,but you can't make it drink" illustrates the: