Friday, July 6, 2012

Monetary Policy Test II




QUESTIONS SIMILAR TO THOSE ON THE TEST WILL BE ANNOTATED WITH A ****


1****. The use of money and credit controls to achieve macroeconomic goals is:
A. Fiscal policy.
B. Monetary policy.
C. Supply-side policy.
D. Eclectic policy.



2. Which of the following serves as the central banker for private banks in the United States?
A. The 12 regional Federal Reserve banks.
B. The Executive Branch of government.
C. The Board of Governors of the Federal Reserve system.
D. The Federal Open Market committee.



3. Which of the following is responsible for clearing checks between private banks?
A. The 12 regional Federal Reserve banks.
B. The Executive Branch of government.
C. The Federal Reserve Board of Governors.
D. State banking commissions.



4. Which of the following is a service provided by the Federal Reserve system?
A. Insuring individuals' deposits.
B. Providing permission to open a national bank.
C. Clearing checks between private banks.
D. Regulating credit unions.



5. Which of the following is responsible for holding bank reserves?
A. The Federal Reserve Board of Governors.
B. The 12 regional Federal Reserve banks.
C. The Executive Branch of government.
D. The Fed chairman.



6. Most banks hold the bulk of their reserves in:
A. Their vault.
B. Gold at Fort Knox.
C. Reserve accounts at the regional Federal Reserve banks.
D. Foreign bank accounts.



7. Which of the following is responsible for providing currency and cash to banks?
A. The Legislative Branch of government.
B. Comptroller of the currency.
C. The Federal Reserve system.
D. The U.S. Treasury.



8. Suppose that Brian receives a check for $100 from a bank in Atlanta. He deposits the check in his account at his Baltimore bank. Brian's Baltimore bank will collect the $100 from the:
A. Atlanta bank.
B. Baltimore bank's regional Federal Reserve Bank.
C. The central Federal Reserve Bank in Washington.
D. Board of Governors.



9. The formulation of general Federal Reserve policy is the responsibility of the:
A. Federal Open Market Committee.
B. Board of Governors.
C. Federal Advisory Council.
D. Regional Federal Reserve banks.



10. Members of the Federal Reserve Board of Governors:
A. Are appointed to fourteen-year terms by the president of the United States.
B. Are relatively immune to short-term political pressures.
C. May not be reappointed after serving a full term.
D. All of the above.



11. Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they:
A. Have time to learn how the Fed operates.
B. Are more likely to make politically acceptable decisions.
C. Make their decisions based on economic, rather than political, considerations.
D. Have enough time to travel to all 12 regional banks.



12. Which of the following is the key-decision maker for monetary policy in the U.S.?
A. Twelve regional Federal Reserve banks.
B. The Executive Branch of government.
C. The Board of Governors of the Federal Reserve.
D. The Federal Open Market Committee.



13.**** Which of the following is not one of the monetary policy tools used by the Fed?
A. Expulsion from Fed membership.
B. Changing the reserve requirement.
C. Changing the discount rate.
D. Open-market operations.



14.**** If the Fed wishes to reduce the money supply, it could:
A. Raise the discount rate.
B. Sell securities on the open market.
C. Raise the minimum reserve ratio.
D. All of the above.



15.**** A change in the reserve requirement is the tool used least often by the Fed because:
A. It does not affect bank reserves.
B. It can cause abrupt changes in the money supply.
C. It does not affect the money multiplier.
D. It has no impact on the lending capacity of the banking system.



16.***** Suppose the banks in the Federal Reserve system have $1 billion in reserves, the minimum reserve ratio is 0.20, and there are no excess reserves in the system. Transaction accounts must be:
A. $5 million.
B. $200 million.
C. $1 billion.
D. $5 billion.



17. Suppose the banks in the Federal Reserve system have $2 billion in reserves, the minimum reserve ratio is 0.10, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.05, then the amount of excess reserves would be:
A. $1 billion.
B. $200 million.
C. $100 million.
D. - $2 billion.



18. Suppose the banks in the Federal Reserve system have $5 billion in reserves, the minimum reserve ratio is 0.20, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.25, then the amount of excess reserves would be:
A. +$250 million.
B. - $1.25 billion.
C. - $5 billion.
D. - $6.25 billion.



19. Suppose the banks in the Federal Reserve system have $5 billion in transactions accounts, the minimum reserve ratio is 0.20, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.25, then the amount of excess reserves would be:
A. - $250 million.
B. - $1.25 billion.
C. - $6.25 billion.
D. +$20 billion.



20. Suppose the banks in the Federal Reserve system have $10 billion in transactions accounts, the minimum reserve ratio is 0.10, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.05, then the amount of excess reserves would be:
A. $250 million.
B. $500 million.
C. $1 billion.
D. $50 million.



21. Suppose the banks in the Federal Reserve system have a total of $15 billion in transactions accounts, the minimum reserve ratio is 0.20, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.25, then loans in the system must be reduced by:
A. $15 billion.
B. $3.0 billion.
C. $1.0 billion.
D. $750 million.



22. Suppose the Federal Reserve system requires a minimum reserve ratio of 0.20 and there are no excess reserves in the system. Also suppose banks respond to each percentage point change in the discount rate by borrowing or lending $2 million in reserves from the Fed. If the Fed reduces the discount rate by 2 percentage points, then the potential for additional loans by the entire banking system changes by:
A. - $400,000.
B. +$10 million.
C. +$20 million.
D. - $20 million.



23. Suppose all of the banks in the Federal Reserve system have $20 billion in transactions accounts, the minimum reserve ratio is 0.10, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.05, then the potential for additional loans is increased by:
A. $250 million.
B. $500 million.
C. $1 billion.
D. $20 billion.



24. Suppose the banks in the Federal Reserve system have $90 billion in transactions accounts, the minimum reserve ratio is 0.15, and there are no excess reserves in the system. If the minimum reserve ratio is changed to 0.10, then the potential for additional loans is increased by:
A. $9.0 billion.
B. $13.5 billion.
C. $300 billion.
D. $45 billion.



25. Suppose the banks in the Federal Reserve system have total reserves of $5 billion, a minimum reserve ratio of 0.10, and there are no excess reserves in the system. If the Fed wishes to stimulate the economy by changing the money supply by $50 billion, it can best do so by:
A. Raising the discount rate enough to raise reserves by $5 billion.
B. Selling enough securities to banks to raise reserves by $5 billion.
C. Lowering the minimum reserve ratio from 0.10 to 0.05.
D. Buying securities in the amount of $50 billion.



26. Suppose that the banking system has total deposits of $20 billion, a reserve requirement of 20% and reserves of $4 billion. If the Fed lowers the reserve requirement to 10 percent, the money supply could potentially increase by as much as:
A. $20 billion.
B. $10 billion.
C. $40 billion.
D. $200 billion.



27. Which of the following is responsible for discounting?
A. The Legislative Branch of government.
B. Comptroller of the currency.
C. State banking commissions.
D. The Federal Reserve system.



28.**** If a bank does not have enough reserves, it can:
A. Buy securities on the open market.
B. Raise the interest rate it charges borrowers.
C. Borrow reserves from the discount window.
D. Make more loans.



29.**** The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the:
A. Federal funds rate.
B. Prime rate.
C. Discount rate.
D. Commercial paper rate.



30.**** An increase in the discount rate:
A. Reduces the cost of reserves borrowed from the Federal Reserve.
B. Signals the Federal Reserve's desire to restrain money growth.
C. Signals the Federal Reserve's desire to stimulate money growth.
D. Signals the Federal Reserve's eagerness to lend additional reserves.



31. Suppose the Federal Reserve system requires a minimum reserve ratio of 0.10 and there are no excess reserves in the system. Also suppose banks respond to each percentage point change in the discount rate by changing the amount of borrowing of reserves from the Fed by $40 million. If the Fed raises the discount rate by 3 percentage points, then the potential for additional loans changes by:
A. - $1.2 billion.
B. +$4 million.
C. +$12 million.
D. +$1.2 billion.



32.**** If the Fed wishes to increase the money supply it could:
A. Lower the discount rate.
B. Sell securities on the open market.
C. Raise the minimum reserve ratio.
D. All of the above.



33. Suppose the Federal Reserve system has a minimum reserve ratio of 0.20 and there are no excess reserves in the system. If the Open Market committee buys $10 million of securities from the commercial banking system, then the potential for additional loans changes by:
A. - $2 million.
B. +$2 million.
C. +$5 million.
D. +$50 million.



34. Suppose the Federal Reserve system requires a minimum reserve ratio of 0.15 and there are no excess reserves in the system. If the Open Market committee buys $45 million of securities from the commercial banking system, then excess reserves for the entire system change by:
A. - $300 million.
B. - $6.75 million.
C. +$6.75 million.
D. - $45 million.



35. ****When the Fed raises the discount rate, this policy initiative:
A. Raises the cost of borrowing reserves to member banks.
B. Is a signal that the Fed is moving toward a slower growth rate for the money supply.
C. Is a signal that the Fed is reluctant to lend reserves.
D. Does all of the above.



36. ****When the Fed raises the discount rate, this policy:
A. Raises the cost of borrowing from the Fed.
B. Is a signal that the Fed is moving toward a more restrictive monetary policy.
C. Is an indication that the Fed is concerned about inflation.
D. Does all of the above.



37. ****When the Fed reduces the discount rate, this policy:
A. Raises the cost of borrowing from the Fed.
B. Is a signal that the Fed is moving toward a more expansionary monetary policy.
C. Is an indication that the Fed is concerned about inflation.
D. Does all of the above.



38. ****When the Fed wishes to increase the excess reserves of the member banks, it:
A. Buys securities.
B. Raises the discount rate.
C. Raises the reserve requirement.
D. Sells securities.



39.**** Which of the following is responsible for the buying and selling of government securities to influence reserves in the banking system?
A. Twelve regional Federal Reserve banks.
B. The Executive Branch of government.
C. The Board of Governors of the Federal Reserve.
D. The Federal Open Market Committee.



40.**** If the Fed buys more bonds from the public:
A. The money supply will decrease and the aggregate demand curve will shift to the right.
B. The money supply will increase and the aggregate demand curve will shift to the right.
C. The money supply will increase and the aggregate demand curve will shift to the left.
D. The money supply will decrease and the aggregate demand curve will shift to the left.



41.**** If the Fed wanted to reduce the money supply, it could:
A. Lower the discount rate.
B. Decrease the minimum reserve ratio.
C. Sell bonds.
D. All of the above would reduce the money supply.



42.**** The policy lever most commonly used by the Fed is:
A. Changes in the discount rate.
B. Buying and selling securities.
C. Changes in the reserve requirement.
D. Foreign-exchange operations.



43.**** Suppose the Federal Reserve system has a minimum reserve ratio of 0.10 and there are no excess reserves in the system. If the Open Market committee sells $1 billion of securities to the commercial banking system, then the potential for additional loans changes by:
A. - $10 billion.
B. +$100 million.
C. +$10 billion.
D. - $1 billion.



44.**** Suppose that the Fed increases excess reserves in the banking system by $2 billion by buying $2 billion worth of bonds. Assuming the reserve requirement is 20 percent, the money supply could potentially increase by as much as:
A. $2 billion.
B. $10 billion.
C. $20 billion.
D. $400 million.



45.**** In a graph showing aggregate demand and aggregate supply, what shift should result if the Fed raised the reserve requirement?
A. The aggregate supply curve should shift leftward.
B. The aggregate supply curve should shift rightward.
C. The aggregate demand curve should shift leftward.
D. The aggregate demand curve should shift rightward.



46.**** In a graph showing aggregate demand and aggregate supply what shift would most likely result, ceteris paribus , if the Fed sells securities in its open-market operations?
A. The aggregate supply curve should shift leftward.
B. The aggregate supply curve should shift rightward.
C. The aggregate demand curve should shift leftward.
D. The aggregate demand curve should shift rightward.



47.**** An increase in aggregate demand could have been caused by:
A. Fiscal policy only.
B. An increase in the reserve requirement.
C. Expansionary monetary policy.
D. Fed sales of securities.



48.**** Expansionary monetary policy will:
A. Increase bank lending capacity.
B. Lower interest rates.
C. Encourage people to borrow and spend more money.
D. Do all of the above.



49. The monetarist aggregate supply curve is:
A. Upward sloping to the right.
B. Perfectly vertical at the natural rate of unemployment.
C. Flat (horizontal) until full employment is reached.
D. Flat (horizontal).



50.**** In a graph of aggregate supply and demand drawn under monetarist assumptions, which of the following would lead to a higher price level?
A. The Fed buys securities in the open market.
B. The Fed reduces the discount rate.
C. The Fed reduces the reserve requirement.
D. All of the above.



51.**** In a graph of aggregate supply and demand curves drawn under Keynesian assumptions, which of the following will result if the Fed buys securities in the open market and the economy is at less than full employment?
A. Aggregate demand will shift to the left and the unemployment rate will rise.
B. Aggregate demand will shift to the right and the unemployment rate will fall.
C. Aggregate demand will shift to the left and the price level will remain unchanged.
D. Aggregate demand will shift to the right and the price level will fall.



52.**** In a graph showing aggregate demand and aggregate supply drawn under monetarist assumptions, what should happen to the equilibrium price level and quantity of output if the Fed buys securities?
A. Equilibrium price level and equilibrium quantity should both go up.
B. Equilibrium price level should go up, and equilibrium quantity should go down.
C. Equilibrium price level should go down, and equilibrium quantity should go up.
D. Equilibrium price level should go up and equilibrium quantity should stay constant.



53. What is the shape of the aggregate supply curve according to Monetarists?
A. Horizontal until full employment is reached, and then it becomes vertical.
B. Vertical.
C. Horizontal at all production levels.
D. First horizontal, then upward sloping, and finally vertical.



54.**** Given monetarist assumptions about the shape of the aggregate supply curve, which of the following would most likely result if the Fed pursues expansionary monetary policy?
A. The equilibrium price level and output would both increase.
B. The equilibrium price level and output would both decrease.
C. The equilibrium price level would increase but output would stay the same.
D. The equilibrium output would increase but the price level would stay the same.



55.**** Given monetarist assumptions about the shape of the aggregate supply curve, which of the following would most likely result if the Fed pursues restrictive monetary policy?
A. The equilibrium price level and output would both increase.
B. The equilibrium price level and output would both decrease.
C. The equilibrium price level would decrease but output would stay the same.
D. The equilibrium output would decrease but the price level would stay the same.



56.**** According to the Keynesians, the aggregate supply curve is:
A. Horizontal until full employment is reached, and then it becomes vertical.
B. Vertical.
C. First horizontal, then upward sloping, and finally vertical.
D. Upward sloping.



57.**** Monetary policy is most effective against unemployment when lending capacity is:
A. Not fully utilized and aggregate supply is vertical.
B. Not fully utilized and aggregate supply is horizontal.
C. Fully utilized and aggregate supply is vertical.
D. Fully utilized and aggregate supply is horizontal.



58.**** Given Keynesian assumptions about the shape of the aggregate supply curve and an economy suffering a recession, which of the following would most likely result if the Fed pursues expansionary monetary policy?
A. The equilibrium price level and output would both increase.
B. The equilibrium price level and output would both decrease.
C. The equilibrium price level would increase but output would stay the same.
D. The equilibrium output would increase but the price level would stay the same until full employment is reached.



59.**** Given an upward sloping aggregate supply curve, which of the following is most likely to occur if the Fed sells securities in the open market, ceteris paribus?
A. Greater stagflation (higher inflation and higher unemployment).
B. Greater inflation and a movement toward full employment.
C. Lower average prices and movement toward full employment.
D. Lower average prices and more unemployment.



60. Given an upward sloping aggregate supply curve, attempts to lower unemployment through a change in monetary policy will aggravate current inflation as can be illustrated by a:
A. Leftward shift of aggregate supply.
B. Rightward shift of aggregate supply.
C. Leftward shift of aggregate demand.
D. Rightward shift of aggregate demand.



61. According to Keynes, an increase in the money supply will:
A. Always cause inflation.
B. Cause inflation if aggregate supply is upward sloping.
C. Cause inflation only if aggregate supply is horizontal.
D. Never cause inflation.



62. Given an upward sloping aggregate supply, what should eventually happen to the equilibrium average price level and quantity of output when the Fed sells securities in the open market to solve an inlationary problem, ceteris paribus ?
A. Equilibrium average price and output should both increase.
B. Equilibrium average price should increase, and equilibrium output should decrease.
C. Equilibrium average price should decrease, and equilibrium output should increase.
D. Equilibrium average price and output should both decrease.



63. Which of the following best describes the eclectic aggregate supply curve?
A. Horizontal until full employment is reached, and then it becomes vertical.
B. Vertical.
C. First horizontal, then upward sloping, and finally vertical.
D. Downward sloping.



64. An eclectic aggregate supply curve:
A. Is the supply-side counterpart to monetarist and Keynesian assumptions about the shape of the aggregate demand curve.
B. Combines elements of both monetarist and Keynesian assumptions about the shape of the aggregate supply curve.
C. Maintains a constant upward slope as the economy moves through the business cycle.
D. All of the above.



65. Given eclectic assumptions about the shape of the aggregate supply curve, which of the following would most likely result if the Fed pursues expansionary monetary policy?
A. The equilibrium price level and output would both increase.
B. The equilibrium price level and output would both decrease.
C. The equilibrium price level would increase but output would stay the same.
D. The equilibrium output would increase but the price level would stay the same.



66. Given an upward sloping aggregate supply curve, which of the following would most likely result if the Fed pursues restrictive monetary policy to solve an inflationary problem?
A. The equilibrium price level and output would both eventually percentincrease.
B. The equilibrium price level and output would both eventually decrease.
C. The equilibrium price level would decrease but output would stay the same.
D. The equilibrium output would decrease but the price level would stay the same.



67.**** The long-term rate of unemployment, determined by structural forces in labor and product markets, defines the:
A. Frictional rate of unemployment.
B. Natural rate of unemployment.
C. Seasonal rate of unemployment.
D. Cyclical rate of unemployment.



68.**** The natural rate of unemployment implies that in the long run:
A. The rate of unemployment can be permanently reduced by more expansionary monetary and fiscal policies.
B. The Federal Reserve can bring the economy to equilibrium by altering the money supply.
C. Monetary policy only affects the rate of inflation.
D. Discretionary monetary policy affects output.



69. The need for continual adjustment of the money supply to achieve macroeconomic goals would best be represented by:
A. Discretionary policy.
B. Fixed rules.
C. Restrictive policy.
D. Fiscal policy.



70. A vertical aggregate supply curve favors which of the following policies?
A. Discretionary policy.
B. Fixed rules.
C. The Fed's eclecticism.
D. Fiscal policy.



71. Which of the following policies takes into account the tendency of producers and workers to protect themselves against inflation by adjusting their prices and wages to changes in the money supply?
A. Discretionary policy.
B. Fixed rules.
C. The Fed's eclecticism.
D. Fiscal policy.



72. If the Fed experiences large lags and mistakes in monetary policy, which of the following policies would be more preferable?
A. Discretionary policy.
B. Fixed rules.
C. The Fed's eclecticism.
D. Fiscal policy.



73. The Fed's eclecticism reflects:
A. Changes in the targets that the Fed sets for adjusting monetary policy.
B. Fixed rules that are set for monetary growth rates.
C. Discretionary policy.
D. The targeting of interest rates as the primary goal to be achieved by monetary policy.



74. In making monetary policy the Fed currently:
A. Increases the money supply at a fixed rate each year.
B. Has adopted the monetarist view and "leans against the wind."
C. Focuses on interest rate targets.
D. Measures success by macro performance of the economy.



75.****
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


Considering only the information in Table 14.1, the total money supply (M1) is:
A. $300 billion.
B. $420 billion.
C. $480 billion.
D. $980 billion.



76.****
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


Based on the information in Table 14.1, the required reserve ratio is:
A. 20 percent.
B. 14 percent.
C. 6.5 percent.
D. 10 percent.



77.
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


If, in Table 14.1 the Fed changes the required reserve ratio to 10 percent, the system's loan capacity would:
A. Rise by $300 billion.
B. Fall by $120 billion.
C. Rise by $120 billion.
D. Fall by $300 billion.



78.
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


If the Fed wants to increase the system's loan capacity in Table 14.1 by $30 billion and the reserve requirement is 20 percent, it should:
A. Buy $6 billion in bonds from the public.
B. Sell $6 billion in bonds to the public.
C. Buy $7.5 billion in bonds from the public.
D. Buy $30 billion in bonds from the public.



79.
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


If the Fed sells $10 billion in bonds to the public, then the system's reserves in Table 14.1 would:
A. Fall by $10 billion.
B. Rise by $10 billion.
C. Rise by $2 billion.
D. Change, but the reserve ratio must be known to determine how much reserves change.



80.
Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.

Table 14.1 — Monetary data

ItemAmount
Cash held by public$120 billion
Transactions-account balances$300 billion
Required reserves$60 billion
Excess reserves$0 billion
Treasury bonds held by public$500 billion
R-1 Table 14-1


In Table 14.1, if the reserve requirement is 20 percent and the Fed sells $10 billion in bonds to the public, the banking system's capacity to make loans will:
A. Rise by $10 billion.
B. Fall by $8 billion.
C. Fall by $32 billion.
D. Fall by $50 billion.



81.
Figure 14.1

R-2 Fig 14-1


Using Figure 14.1, if the Federal Reserve increases the discount rate this indicates a desire to _______ the money supply and could cause a shift from _______.
A. Expand, AD-9*B1 to AD-9*B2 .
B. Expand, AS-9*B1 to AS-9*B2 .
C. Contract, AD-9*B2 to AD-9*B1 .
D. Contract, AS-9*B3 to AS-9*B2 .



82.****
Figure 14.1

R-2 Fig 14-1


Refer to Figure 14.1. Which of the following Fed actions is most likely to shift the aggregate demand curve from AD1 to AD2 ?
A. An increase in the discount rate.
B. A decrease in the reserve requirement.
C. The sale of bonds in the open market.
D. All of the above.



83.****
Figure 14.1

R-2 Fig 14-1


Refer to Figure 14.1. Suppose the Federal Reserve buys bonds in the open market. The money supply will _______ and cause a shift from _______.
A. Increase, AD1 to AD2 .
B. Increase, AS1 to AS2 .
C. Decrease, AD2 to AD1 .
D. Decrease, AS3 to AS2 .



84.*****
Figure 14.1

R-2 Fig 14-1


Refer to Figure 14.1. Suppose the Federal Reserve _______ bonds in the open market. The money supply will decrease and cause a shift from _______.
A. Buys, AD2 to AD1.
B. Buys, AS3 to AS2.
C. Sells, AD2 to AD1.
D. Sells, AS3 to AS2.



85.****
Figure 14.2

R-3 Fig 14-2


Using Figure 14.2, a shift in aggregate demand from AD1 to AD2 is most likely to cause:
A. An increase in real output and an increase in the price level.
B. An increase in real output, but no change in the price level.
C. An increase in the price level, but no change in real output.
D. A decrease in the price level, but no change in real output.



86.****
Figure 14.2

R-3 Fig 14-2


Using Figure 14.2, a shift in aggregate demand from AD3 to AD4 is most likely to cause:
A. An increase in real output and an increase in the price level.
B. An increase in real output, but no change in the price level.
C. An increase in the price level, but no change in real output.
D. A decrease in the price level, but no change in real output.



87.****
Figure 14.2

R-3 Fig 14-2


Using Figure 14.2, a shift in aggregate demand from AD4 to AD5 is most likely to cause:
A. An increase in real output and an increase in the price level.
B. An increase in real output, but no change in the price level.
C. An increase in the price level, but no change in real output.
D. A decrease in the price level, but no change in real output.



88.**** One HEADLINE article quoted the chief economist at the Deutsche Bank in Tokyo: "There's a tremendous liquidity (MONEY SUPPLY) squeeze out there . . . ". If so, then which of the following actions should the Japanese Central Bank take that would correct the liquidity squeeze?
A. Raise the discount rate.
B. Cut the reserve requirement.
C. Sell securities to private banks.
D. All of the above.



89.**** One HEADLINE article stated: ". . . the Bank of Japan today announced that it will slash by about 40 percent the amount of money that commercial banks must keep in reserve at the central bank." Which of the following has been lowered?
A. The federal funds rate.
B. The discount rate.
C. The reserve requirement.
D. The rate in the sale of open-market securities.



90. One HEADLINE article in the text has the title "Slowing Growth Leads Fed to Cut Interest Rates." The Fed has most likely:
A. Reduced the minimum reserve ratio.
B. Reduced the rate for purchasing securities in the open market.
C. Reduced the discount rate.
D. Raised the prime rate.



91. One HEADLINE article in the text has the title "Slowing Growth Leads Fed to Cut Interest Rates." In a graph showing aggregate demand and aggregate supply drawn under eclectic assumptions, what should happen to the equilibrium price level and quantity of output as a result of the Fed's action, ceteris paribus ?
A. The equilibrium price level and equilibrium quantity of output should both go up.
B. The equilibrium price level should go up, and equilibrium quantity of output should go down.
C. The equilibrium price level should go down, and equilibrium quantity of output should go up.
D. The equilibrium price level and equilibrium quantity of output should both go down.



92.**** One HEADLINE article in the text has the title "Italy Raises Interest Rates." Which of the following reasons would be consistent with this policy initiative of the Bank of Italy?
A. Concern about mounting unemployment.
B. Concern about current output exceeding desired spending.
C. Concern about the rise in the value of the currency.
D. Concern about inflationary pressures on the economy.



93.**** One HEADLINE article in the text has the title "Italy Raises Interest Rates." Which of the outcomes listed below would likely have occurred given this policy initiative?
A. The unemployment rates would fall.
B. The inflation rate would fall.
C. The federal funds rate would fall.
D. GDP would increase.



94. The Federal Reserve System's control over the money supply is the key mechanism of monetary policy.
A. True
B. False



95. Because Monetarists believe that output is sensitive to changes in the money supply, they recommend the use of money as a policy tool for stabilizing the economy.
A. True
B. False



96. The Federal Reserve Banks clear checks between private banks, hold bank reserves, provide currency, and make loans.
A. True
B. False



97. The Fed is not one bank but is actually twelve regional banks with central control located in Washington D.C.
A. True
B. False



98. The Board of Governors consists of seven members elected by the public every four years.
A. True
B. False



99. The Fed changes the reserve requirement by changing the discount rate.
A. True
B. False



100. The amount of required reserves is positively related to the dollar volume of transactions accounts on a bank's balance sheet.
A. True
B. False



101. Banks typically hold their required reserves in their vaults.
A. True
B. False



102. If the Fed wishes to increase the money supply, it can reduce the reserve requirement.
A. True
B. False



103. Profit-maximizing banks try to keep their excess reserves as high as possible.
A. True
B. False



104. When commercial banks borrow reserves from each other the process is called "discounting."
A. True
B. False



105. The discount rate is the principal mechanism for directly altering the reserves of the banking system.
A. True
B. False



106. By buying bonds, the Fed decreases the quantity of transactions deposits in the banking system and reduces the quantity of loans.
A. True
B. False



107. Monetary policy shifts the aggregate supply curve.
A. True
B. False



108. The effectiveness of monetary policy depends solely on its ability to shift aggregate demand.
A. True
B. False



109. Restrictive policy is most effective in reducing inflation when the aggregate supply curve is horizontal.
A. True
B. False



110. Keynesians believe a change in money supply cannot lower the unemployment rate.
A. True
B. False



111. Monetarists believe an increase in the money supply will raise total output in the long run.
A. True
B. False



112. Monetarists believe a reduction in taxes will leave real output unaffected in the long run.
A. True
B. False



113. Proponents of monetary policy based on fixed rules base their position on the assumption of a vertical aggregate supply curve.
A. True
B. False



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