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Question 1 (Multiple Choice)
The discount rate is the rate of interest at which:

A) Federal Reserve Banks lend to commercial banks.
B) savings and loan associations lend to some builders.
C) Federal Reserve Banks lend to large corporations.
D) commercial banks lend to large corporations.

Correct Answer: A

Question 2 (Multiple Choice)
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

A) selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus.
B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.
C) buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus.
D) buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit.

Correct Answer: B

Question 3 (Multiple Choice)
In the United States monetary policy is the responsibility of the:

A) U.S. Treasury.
B) Department of Commerce.
C) Board of Governors of the Federal Reserve System.
D) U.S. Congress.

Correct Answer: C

Question 4 (Multiple Choice)
If the amount of money demanded exceeds the amount supplied, the:

A) demand-for-money curve will shift to the left.
B) money supply curve will shift to the right.
C) interest rate will rise.
D) interest rate will fall.

Correct Answer: C

Question 5 (Multiple Choice)
When a commercial bank borrows from a Federal Reserve Bank:

A) the supply of money automatically decreases.
B) it indicates that the commercial bank is unsound financially.
C) the commercial bank's lending ability is increased.
D) the commercial bank's reserves are reduced.

Correct Answer: C

Question 6 (True/False)
Other things equal, an easy money policy will shift the economy's aggregate demand curve to the right.

True
False

Correct Answer: true

Question 7 (True/False)
A tight money policy may be frustrated if the investment-demand curve shifts to the left.

True
False

Correct Answer: false

Question 8 (Multiple Choice)
An increase in the money supply will:

A) lower interest rates and lower the equilibrium GDP.
B) lower interest rates and increase the equilibrium GDP.
C) increase interest rates and increase the equilibrium GDP.
D) increase interest rates and lower the equilibrium GDP.

Correct Answer: B

Question 9 (Multiple Choice)
A tight money policy could be offset by:

A) a deterioration in the profit expectations of businesses.
B) a budget surplus.
C) a decline in the velocity of money.
D) an increase in the velocity of money.

Correct Answer: D

Question 10 (Multiple Choice)
Assume that the legal reserve ratio is 20 percent. Suppose that the FED sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the above transactions, reserves in the banking system will:

A) remain unchanged.
B) rise by $100.
C) fall by $100.
D) rise by $1000.

Correct Answer: A

Question 12 (Multiple Choice)
Open-market operations change:

A) the size of the monetary multiplier, but not commercial bank reserves.
B) commercial bank reserves, but not the size of the monetary multiplier.
C) neither commercial bank reserves nor the size of the monetary multiplier.
D) both commercial bank reserves and the size of the monetary multiplier.

Correct Answer: B

Question 13 (Multiple Choice)
Other things equal, an easy money policy will:

A) reduce net exports.
B) increase interest rates.
C) reduce the international value of the dollar.
D) reduce GDP.

Correct Answer: C

Question 14 (Multiple Choice)
One of the strengths of monetary policy relative to fiscal policy is that monetary policy:

A) can be implemented more quickly.
B) is subject to closer political scrutiny.
C) does not produce a net export effect.
D) entails a larger spending income multiplier effect on real GDP.

Correct Answer: A

Question 15 (True/False)
The job of the FED in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves.

True
False

Correct Answer: true

Question 16 (Multiple Choice)
Since 1980, U.S. monetary policy has been:

A) highly erratic, causing rising inflation and unemployment.
B) very successful in controlling inflation and promoting full employment.
C) partly responsible for the increase in the natural rate of unemployment.
D) of secondary importance to fiscal policy in stabilizing the economy.

Correct Answer: B

Question 17 (Multiple Choice)
Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply:

A) contracts and commercial bank reserves increase.
B) expands and commercial bank reserves decrease.
C) contracts and commercial bank reserves decrease.
D) expands and commercial bank reserves increase.

Correct Answer: D

Question 18 (Multiple Choice)
Generally, the prime interest rate:

A) moves in the opposite direction as the Federal funds rate.
B) remains constant over long periods of time.
C) is highly inflexible downward.
D) moves in the same direction as the Federal funds rate.

Correct Answer: D

Question 19 (Multiple Choice)
The Federal Funds rate is the rate of interest at which:

A) Federal Reserve Banks lend to commercial banks.
B) commercial banks lend reserves to other commercial banks.
C) Federal Reserve Banks lend to large corporations.
D) commercial banks lend to large corporations.

Correct Answer: B

Question 20 (Multiple Choice)
Upon which of the following industries is a tight money policy likely to be most effective?

A) furniture
B) clothing
C) food processing
D) residential construction

Correct Answer: D

Question 21 (Multiple Choice)
The Prime rate is the rate of interest at which:

A) Federal Reserve Banks lend to commercial banks.
B) savings and loan associations lend to some builders.
C) Federal Reserve Banks lend to large corporations.
D) commercial banks lend to large corporations.

Correct Answer: D

Question 22 (Multiple Choice)
Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:

A) $1,000.
B) $2,000.
C) $800.
D) $5,000.

Correct Answer: A

Question 23 (Multiple Choice)
Other things equal, which of the following would increase the Federal funds rate?

A) a decrease in loan demand in the Federal funds market
B) a decrease in the reserve ratio
C) Fed purchases of government securities from banks
D) a decline in excess reserves in the banking system

Correct Answer: D

Question 24 (Multiple Choice)
A commercial bank can add to its actual reserves by:

A) lending money to bank customers.
B) buying government securities from the public.
C) buying government securities from a Federal Reserve Bank.
D) borrowing from a Federal Reserve Bank.

Correct Answer: D

Question 25 (Multiple Choice)
Assume the economy is operating at less than full employment. An easy money policy will cause interest rates to ________. which will ___________ investment spending.

A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease

Correct Answer: B

Question 26 (Multiple Choice)
All else equal, when the Federal Reserve Banks engage in an easy money policy, the interest rates received on newly issued government bonds usually:

A) fall.
B) rise.
C) remain constant.
D) move in the same direction as the bonds' price.

Correct Answer: A

Question 27 (Multiple Choice)
Which of the following best describes the cause-effect chain of an easy money policy?

A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Correct Answer: D

Question 28 (Multiple Choice)
Other things equal, an increase in input prices will:

A) reduce aggregate supply and reduce real output.
B) increase the interest rate and lower the international value of the dollar.
C) increase aggregate supply and increase the price level.
D) increase net exports, increase investment, and reduce aggregate demand.

Correct Answer: A

Question 29 (Multiple Choice)
Other things equal, a depreciation of the U.S. dollar would:

A) increase the price of imported resources and decrease aggregate supply.
B) decrease net exports and aggregate demand.
C) increase consumption, investment, net export, and government spending.
D) decrease aggregate supply and decrease aggregate demand.

Correct Answer: A

Question 30 (True/False)
An easy money policy may be frustrated if the investment-demand curve shifts to the left.

True
False

Correct Answer: true