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| 1 | |
Answer the next question using the following data. All amounts are in billions of dollars.
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Suppose the reserve requirement is 20%. Further suppose the Federal Reserve Banks buy $5 billion in securities from the public, who deposits this amount into their checking accounts. As a result of these transactions, the supply of money will: |
| | A) | be unaffected, but the money-creating potential of the commercial banking system will increase by $25 billion |
| | B) | directly increase by $5 billion and the money-creating potential of the commercial banking system will increase by $20 billion |
| | C) | directly increase by $25 billion and the money-creating potential of the commercial banking system will increase by $125 billion |
| | D) | directly decrease by $5 billion and the money-creating potential of the commercial banking system will be unaffected |
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| 2 | |
If the current interest rate is below the equilibrium rate: |
| | A) | the money supply exceeds the quantity of money demanded |
| | B) | the money supply will increase and the interest rate will rise |
| | C) | the money supply will decrease and the interest rate will rise |
| | D) | the interest rate will rise and the quantity of money demanded will decrease |
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| 3 | |
An increase in the required reserve ratio will reduce both excess reserves and the size of the monetary multiplier. |
| | A) | True |
| | B) | False |
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| 4 | |
A decrease in the money supply will: |
| | A) | raise interest rates, reducing investment and GDP |
| | B) | raise interest rates, increasing investment and lowering GDP |
| | C) | reduce interest rates, increasing investment and GDP |
| | D) | reduce interest rates, reducing investment and GDP |
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| 5 | |
Fed purchases of bonds from the public will: |
| | A) | raise interest rates and increase aggregate demand |
| | B) | lower interest rates and increase aggregate demand |
| | C) | lower interest rates and decrease aggregate demand |
| | D) | raise interest rates and decrease aggregate demand |
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| 6 | |
Morton Bank goes to the Fed to borrow funds. The interest rate charged by the Fed is known as the: |
| | A) | prime rate |
| | B) | Federal funds rate |
| | C) | bond rate |
| | D) | discount rate |
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| 7 | |
If the Fed buys bonds from the public: |
| | A) | both the price of bonds and the interest rate received by bond holders will increase |
| | B) | both the price of bonds and the interest rate received by bond holders will decrease |
| | C) | the price of bonds will decrease and the interest rate received by bond holders will increase |
| | D) | the price of bonds will increase and the interest rate received by bond holders will decrease |
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| 8 | |
By targeting the Federal funds rate, the Fed: |
| | A) | can generally push the prime rate in the opposite direction |
| | B) | can generally push the prime rate in the same direction |
| | C) | has little control over other interest rates |
| | D) | can generally push investment in the same direction |
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| 9 | |
Suppose the interest rate is 10% and a particular bond is priced at $1000. If the interest rate falls to 8%, which of the following represents a possible price for the bond? |
| | A) | $1000 |
| | B) | $800 |
| | C) | $920 |
| | D) | $1080 |
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| 10 | |
Refer to the following:
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Suppose the interest rate is currently 6% and the Fed determines that investment of $40 is required to reach full employment GDP. To target this outcome, the Fed might: |
| | A) | sell bonds to the public |
| | B) | lower the discount rate |
| | C) | raise the reserve requirement |
| | D) | announce a restrictive monetary policy |
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