ch14
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ch14

Course Number: BIOLOGY 1000, Fall 2011

College/University: St. John's

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ch14 Student: ___________________________________________________________________________ 1. Which of the following is often described as the most powerful person in the U.S. economy? A. The president of the United States. B. The Speaker of the House of Representatives. C. The chairman of the House Ways and Means Committee. D. The chairman of the Federal Reserve. 2. The use of money and credit controls to...

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___________________________________________________________________________ 1. Which ch14 Student: of the following is often described as the most powerful person in the U.S. economy? A. The president of the United States. B. The Speaker of the House of Representatives. C. The chairman of the House Ways and Means Committee. D. The chairman of the Federal Reserve. 2. The use of money and credit controls to change macroeconomic activity is known as: A. Fiscal policy. B. Monetary policy. C. Supply-side policy. D. Eclectic policy. 3. Monetary policy involves the use of money and credit controls to: A. Move the economy along the aggregate demand curve. B. Move the economy along the aggregate supply curve. C. Shift the aggregate demand curve. D. Shift the aggregate supply curve. 4. U.S. monetary policy relies on the: A. Federal Reserve System's control over taxes. B. Federal Reserve System's control over the money supply. C. President's control over the printing of money. D. President's control over interest rates. 5. 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 Fed Open Market Committee. 6. Checks are cleared between private banks by: A. The 12 regional Federal Reserve banks. B. The Executive Branch of government. C. The Federal Reserve Board of Governors. D. State banking commissions. 7. The 12 regional Fed banks do all of the following except: A. Clear checks between private banks. B. Lend money to individuals. C. Provide currency to banks. D. Hold bank reserves. 8. The 12 regional Fed banks do not: A. Provide loans to banks. B. Hold reserves for banks. C. Accept deposits from individuals. D. Provide currency to banks. 9. The twelve regional Federal Reserve banks are responsible for: A. Accepting deposits from nonbank businesses. B. Providing currency to other countries. C. Lending money to individuals. D. Lending reserves to private banks. 10. Suppose Alan receives a check for $300 from a bank in Dallas. He deposits the check in his account at his Baltimore bank. Which of the following is Alan's Baltimore bank likely to collect the $300 from? A. The Baltimore bank's regional Federal Reserve bank. B. The U.S. Treasury. C. The main Federal Reserve Bank in Washington, D.C. D. The Federal Reserve Board of Governors. 11. 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. 12. 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. 13. The key decision maker for general Federal Reserve policy is the: A. Federal Open Market Committee. B. Board of Governors. C. Federal Advisory Council. D. Regional Federal Reserve banks. 14. The key decision maker for U.S. monetary policy is: A. Congress. B. The president. C. The president's cabinet. D. The Board of Governors. 15. The Federal Reserve Board of Governors has: A. Seven members appointed by the president of the United States. B. Fourteen members appointed for seven-year terms by the president of the United States. C. Seven members elected by U.S. citizens. D. Fourteen members selected by the U.S. Senate. 16. The Board of Governors has ___ members, and they are appointed for ___ year terms. A. 10; 12 B. 7; 14 C. 14; 7 D. 12; 10 17. Which of the following is not true about the members of the Federal Reserve Board of Governors? A. They are appointed to fourteen-year terms by the president of the United States. B. They are relatively immune to short-term political pressures. C. They may not be reappointed after serving a full term. D. They each serve as chairman of the Board of Governors on a rotating basis. 18. 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. 19. Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term: A. In an effort to isolate the Fed from political pressures. B. So that Fed decisions will be based on political considerations. C. To give Congress better control over the money supply. D. In an effort to make the Fed responsive to voters. 20. Which of the following is true about the chairman of the Federal Reserve Board of Governors? A. The chairman is elected by the Fed regional bank presidents. B. The chairman serves a 21-year term. C. A new chairman is elected as soon as a new U.S. president takes office. D. The chairman can be reappointed for more than one term. 21. The chairman of the Federal Reserve Board of Governors: A. Is elected by U.S. voters. B. Will typically change following each presidential election. C. Serves a four-year term and can be reappointed. D. Is always closely tied to the same political party as the president. 22. All of the following are true about the basic money supply except: A. It includes credit card balances. B. It includes currency held by the public. C. It includes money kept in transactions accounts. D. It is known as M1. 23. The basic money supply: A. Is controlled by Congress and the U.S. Treasury. B. Includes savings accounts. C. Includes currency and transactions accounts. D. Includes money market mutual funds. 24. Which of the following is not a basic monetary policy tool used by the Fed? A. The discount rate. B. Reserve requirements. C. Open-market operations. D. The income tax rate. 25. Which of the following is not a basic monetary policy tool used by the Fed? A. Deposit insurance B. The reserve requirement C. The discount rate D. The sale and purchase of Treasury bonds 26. Which of the following is not a basic monetary policy tool used by the Fed? A. The discount rate. B. The reserve requirement. C. Taxes. D. Open-market operations. 27. Required reserves: A. Are equal to the required reserve ratio times total reserves. B. Are the minimum amount of reserves a bank is required to hold. C. Represent the dollars a bank can lend. D. Must be held in a bank's vault. 28. Required reserves: A. Must be held at the regional Fed bank. B. Represent the dollars that a bank can lend. C. Are the minimum amount of reserves a bank is required to hold. D. Are equal to total reserves minus expected reserves. 29. The reserve requirement: A. Is the most frequently used tool by the Fed. B. Changes required reserves but not excess reserves. C. Does not affect the lending capacity for a bank. D. Affects the level of bank reserves. 30. A change in the reserve requirement is the tool used least often by the Fed because it: A. Does not affect bank reserves. B. Can cause abrupt changes in the money supply. C. Does not affect the money multiplier. D. Has no impact on the lending capacity of the banking system. 31. Excess reserves are: A. Bank reserves in excess of required reserves. B. Legal reserves in excess of lending reserves. C. Transactions deposits plus traveler's checks. D. Total reserves plus deficient reserves. 32. Which of the following is not true about excess reserves? A. They change when the reserve requirement changes. B. They are equal to the required reserve ratio times transactions deposits. C. They are bank reserves beyond what the bank is required to hold. D. They represent the dollars an individual bank can lend. 33. A change in the reserve requirement affects: A. The money multiplier and excess reserves. B. Excess reserves and the discount rate. C. The discount rate and the federal funds rate. D. The money multiplier and the federal funds rate. 34. Ceteris paribus, if the Fed raises the reserve requirement, then: A. The money multiplier increases. B. The lending capacity of the banking system decreases. C. Excess reserves increase. D. Required reserves decrease. 35. Ceteris paribus, if the Fed reduces the reserve requirement, then: A. Total reserves increase. B. Total deposits decrease. C. The lending capacity of the banking system increases. D. The money multiplier decreases. 36. The money multiplier: A. Is equal to the required reserve ratio times transactions deposits. B. Gets larger as the required reserve ratio increases. C. Is the reciprocal of the required reserve ratio. D. Represents the lending capacity of an individual bank. 37. The money multiplier: A. Is the number of deposit dollars the banking system can create from $1 of excess reserves. B. Decreases as the required reserve ratio decreases. C. Is equal to excess reserves plus required reserves. D. Is equal to the required reserve ratio times transactions deposits. 38. Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.05, then excess reserves will increase by: A. $1 million. B. $20 million. C. $40 million. D. $2 billion. 39. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.20. Ceteris paribus, if the reserve requirement is increased to 0.25, then excess reserves will: A. Increase by $250 million. B. Increase by $50 million. C. Decrease by $250 million. D. Decrease by $50 million. 40. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is increased to 0.20, then excess reserves will: A. Increase by $100 million. B. Increase by $200 million. C. Decrease by $100 million. D. Decrease by $200 million. 41. Suppose the banks in the Federal Reserve System have $100 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.07, then excess reserves will increase by: A. $3 million. B. $7 million. C. $10 million. D. $700 billion. 42. The discount rate is the interest rate charged by: A. The Federal Reserve when it lends money to private banks. B. A private bank when it lends money to another private bank. C. A private bank when it lends money to commercial customers. D. A regional Fed bank when it lends money to another regional Fed bank. 43. The rate of interest banks charge each other for lending reserves is the: A. Federal funds rate. B. Discount rate. C. Money multiplier. D. Excess reserve rate. 44. Which of the following lends reserves to private banks? A. The Legislative Branch of government B. Comptroller of the Currency C. State banking commissions D. The Federal Reserve System 45. If a bank does not have enough reserves, it can: A. Buy bonds on the open market. B. Raise the interest rate it charges borrowers. C. Borrow reserves from the discount window. D. Make more loans. 46. Which of the following is not a possible source of last-minute reserves for a private bank? A. Selling bonds. B. Borrowing reserves from other banks. C. Raising the discount rate. D. Borrowing reserves from the Federal Reserve System. 47. By raising or lowering the _______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves. A. Reserve ratio B. Discount rate C. Money multiplier D. Yield 48. Ceteris paribus, if the Fed reduces the discount rate, then: A. The incentive to borrow funds increases. B. Required reserves decrease. C. The money multiplier increases. D. Total reserves decrease. 49. If the Fed wishes to increase the money supply it can: A. Raise the federal funds rate. B. Sell bonds on the open market. C. Decrease the discount rate. D. Increase the required reserve ratio. 50. Ceteris paribus, if the Fed raises the discount rate, then: A. The money multiplier decreases. B. The lending capacity of the banking system increases. C. Excess reserves decrease. D. The incentive to borrow reserves decreases. 51. If the Fed wishes to decrease the money supply it can: A. Raise the discount rate. B. Buy bonds on the open market. C. Decrease the required reserve ratio. D. Decrease the federal funds rate. 52. The policy lever most commonly used by the Fed is: A. Changes in the discount rate. B. Buying and selling bonds. C. Changes in the reserve requirement. D. Foreign-exchange operations. 53. The principal mechanism for directly changing the reserves of the banking system is: A. The discount rate. B. The reserve requirement. C. Open-market operations. D. The federal funds rate. 54. The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is referred to as: A. Open-market operations. B. Closed-market operations. C. Discounting. D. Expansionary fiscal policy. 55. The buying and selling of government bonds to influence reserves in the banking system is the responsibility of the: A. Twelve regional Federal Reserve banks. B. Executive Branch of the government. C. Board of Governors of the Federal Reserve. D. Federal Open Market Committee. 56. When the Fed makes bonds more or less attractive, it influences the: A. Open market decision. B. Money multiplier. C. Portfolio decision. D. Reserve decision. 57. If the Fed wants to increase bank reserves, it can: A. Buy bonds. B. Raise the discount rate. C. Raise the reserve requirement. D. Sell bonds. 58. If the Fed wants to increase bank reserves, it can: A. Raise the discount rate. B. Buy government bonds from the public. C. Increase the minimum reserve ratio. D. Decrease the money multiplier. 59. If the Fed wants to decrease bank reserves, it can: A. Increase the money multiplier. B. Decrease the discount rate. C. Sell government bonds. D. Decrease the minimum reserve ratio. 60. If the Fed wants to reduce bank reserves, it can: A. Raise the discount rate or buy bonds on the open market. B. Reduce the minimum reserve ratio or sell bonds on the open market. C. Raise the discount rate or sell bonds on the open market. D. Decrease the minimum reserve ratio or reduce the discount rate. 61. Aggregate demand is the: A. Total quantity of output demanded at alternative price levels. B. Total quantity of output demanded but only at full employment. C. Quantity of goods demanded by the largest corporations in the country. D. Quantity of new goods and services produced. 62. Which of the following cannot be used to shift aggregate demand? A. A change in government spending. B. A change in taxes. C. Monetary policy. D. A change in the price level. 63. Which of the following is not a monetary policy tool for shifting the aggregate demand curve? A. Open-market operations. B. Government spending. C. The discount rate. D. The reserve requirement. 64. Ceteris paribus, which of the following will occur if the Fed buys bonds through open-market operations? A. B. C. D. The aggregate supply curve should shift leftward. The aggregate supply curve should shift rightward. The aggregate demand curve should shift leftward. The aggregate demand curve should shift rightward. 65. Which of the following will cause an increase in aggregate demand? A. Restrictive fiscal policy. B. An increase in the reserve requirement. C. Expansionary monetary policy. D. The sale of bonds by the Fed. 66. If the Fed buys more bonds from the public, then the money supply will: A. Decrease and the aggregate demand curve will shift to the right. B. Increase and the aggregate demand curve will shift to the right. C. Increase and the aggregate demand curve will shift to the left. D. Decrease and the aggregate demand curve will shift to the left. 67. Expansionary monetary policy will: A. Reduce the lending capacity for banks. B. Raise interest rates. C. Encourage people to borrow more money. D. Reduce the equilibrium price level. 68. To increase the money supply the Fed can: A. Reduce the reserve requirement, reduce the discount rate, or sell bonds. B. Raise the reserve requirement, reduce the discount rate, or sell bonds. C. Reduce the reserve requirement, reduce the discount rate, or buy bonds. D. Raise the reserve requirement, raise the discount rate, or buy bonds. 69. Which of the following will occur if the Fed raises the reserve requirement, ceteris paribus? 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. 70. Which of the following will cause a decrease in aggregate demand? A. Restrictive monetary policy. B. A decrease in the reserve requirement. C. Expansionary monetary policy. D. The purchase of bonds by the Fed. 71. If the Fed sells more bonds to the public, then the money supply will: A. Decrease and the aggregate demand curve will shift to the right. B. Increase and the aggregate demand curve will shift to the right. C. Increase and the aggregate demand curve will shift to the left. D. Decrease and the aggregate demand curve will shift to the left. 72. Restrictive monetary policy will: A. Decrease the lending capacity for banks. B. Reduce interest rates. C. Cause a rightward shift of aggregate demand. D. Raise the equilibrium price level. 73. To decrease the money supply the Fed can: A. Reduce the reserve requirement, raise the discount rate, or sell bonds. B. Raise the reserve requirement, raise the discount rate, or sell bonds. C. Raise the reserve requirement, reduce the discount rate, or buy bonds. D. Raise the reserve requirement, raise the discount rate, or buy bonds. 74. When the Fed announces that it is raising the federal funds rate, this signals its intention to _______ bonds in the open market and _______ the money supply. A. Buy; reduce B. Buy; increase C. Sell; reduce D. Sell; increase 75. As the money supply increases, interest rates _______ and aggregate demand shifts to the _______. A. Increase; left B. Increase; right C. Decrease; left D. Decrease; right 76. When the Fed sells bonds in the open market, interest rates _______ and aggregate demand shifts to the _______. A. Rise; left B. Rise; right C. Fall; left D. Fall; right 77. The shape of the _____ curve determines the impact of an aggregate demand shift on prices and output. A. Marginal revenue B. Total cost C. Production possibilities D. Aggregate supply 78. The different shapes of the aggregate supply curve: A. Determine the level of reserves held by the banking system. B. Result in the Fed's need for total control of the money supply. C. Determine the impact of monetary policy on price level and output. D. Explain why the Fed must respond to market instability. 79. Given Keynesian assumptions about the shape of the aggregate supply curve and an economy suffering a recession, which of the following is most likely to occur if the Fed pursues expansionary monetary policy? A. The equilibrium price level and output will both increase until full employment is reached. B. The equilibrium price level and output will both decrease. C. The equilibrium price level will increase but output will stay the same. D. The equilibrium output will increase but the price level will stay the same until full employment is reached. 80. Using aggregate supply and demand curves drawn according to the Keynesian view, which of the following will occur if the Fed buys bonds in the open market and the economy is below 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. 81. According to the Keynesian view of aggregate supply, an increase in the money supply will: A. Always cause inflation. B. Cause inflation if the economy is at full employment. C. Cause inflation only if aggregate supply is horizontal. D. Never cause inflation. 82. According to the monetarist view, the aggregate supply curve is: A. Upward sloping to the right. B. Perfectly vertical at the natural rate of unemployment. C. Flat or horizontal until full employment is reached. D. Flat or horizontal at all levels of output. 83. According to the monetarist view, the aggregate supply curve is: A. Horizontal until full employment is reached and then it becomes vertical. B. Horizontal at all levels of output. C. Vertical at the natural rate of unemployment. D. First horizontal, then upward sloping, and finally vertical. 84. According to the aggregate supply drawn under the monetarist view, which of the following would lead to a higher price level? A. The purchase of bonds in the open market by the Fed. B. An increase in the discount rate. C. An increase in the reserve requirement. D. A decrease in the money multiplier. 85. Using the aggregate supply drawn under the monetarist view, what should happen to the equilibrium price level and quantity of output if the Fed buys bonds? A. Equilibrium price level and equilibrium output should both increase. B. Equilibrium price level should increase, and equilibrium output should decrease. C. Equilibrium price level should decrease, and equilibrium output should increase. D. Equilibrium price level should increase and equilibrium output should stay constant. 86. 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 at all output levels. C. First horizontal, then upward sloping, and finally vertical. D. Downward sloping. 87. An eclectic aggregate supply curve: A. Is the supply-side counterpart to monetarist and Keynesian assumptions about the shape of aggregate demand. B. Combines elements of the monetarist and Keynesian assumptions about the shape of aggregate supply. C. Maintains a constant upward slope as the economy moves through the business cycle. D. Is horizontal at all levels of output. 88. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed sells bonds in the open market, ceteris paribus? A. Greater inflation and more unemployment. B. Greater inflation and less unemployment. C. Lower average prices and less unemployment. D. Lower average prices and more unemployment. 89. Given an upward-sloping aggregate supply curve, attempts to reduce unemployment through monetary policy will aggravate current inflation as illustrated by a: A. Leftward shift of aggregate demand. B. Rightward shift of aggregate demand. C. Leftward shift of aggregate supply. D. Rightward shift of aggregate supply. 90. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed pursues restrictive monetary policy, ceteris paribus? A. The equilibrium price level and output will both decrease. B. The equilibrium price level and output will both increase. C. The equilibrium price level will decrease but output will stay the same. D. The equilibrium output will decrease but the price level will stay the same. 91. With an upward-sloping aggregate supply curve, tight monetary policy: A. Reduces aggregate demand and decreases inflationary pressures. B. Reduces aggregate demand and increases inflationary pressures. C. Raises aggregate demand and increases inflationary pressures. D. Raises aggregate demand and decreases inflationary pressures. 92. Which of the following policies supports the concept of continual adjustment of the money supply to achieve macroeconomic goals? A. Restrictive policy. B. Fixed rules. C. Discretionary policy. D. Fiscal policy. 93. A vertical aggregate supply curve favors which of the following policies? A. Discretionary policy B. Fiscal policy C. The Fed's eclecticism D. Fixed rules 94. Which of the following policies is supported by the idea that producers and workers will demand higher prices and wages when they see the money supply expanding? A. Discretionary policy B. Fixed rules C. The Fed's eclecticism D. Fiscal policy 95. Which of the following approaches should the Fed use if it experiences large lags and mistakes in monetary policy? A. Discretionary policy B. An eclectic approach C. Fixed rules D. Fiscal policy 96. The Fed's eclecticism reflects: A. A combination of flexible rules and limited discretion. B. Fixed rules that are set for monetary growth rates. C. Discretionary policy but not rules. D. The targeting of interest rates as the primary goal to be achieved by monetary policy. 97. Under Alan Greenspan, the Fed: A. Targeted interest rates only. B. Targeted the money supply only. C. Targeted the unemployment level. D. Used a mix of money-supply and interest-rate adjustments. Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet. Table 14.1Monetary data 98. Considering only the information in Table 14.1, the basic money supply is: A. $120 billion. B. $800 billion. C. $920 billion. D. $1 trillion. 99. Based on the information in Table 14.1, the required reserve ratio is: A. 8.7 percent. B. 10.0 percent. C. 13.3 percent. D. 66.7 percent. 100.In Table 14.1, if the Fed changes the required reserve ratio to 5 percent, the lending capacity of the banking system will eventually: A. Rise by $800 billion. B. Fall by $800 billion. C. Rise by $40 billion. D. Fall by $40 billion. 101.Based on the information in Table 14.1, the money multiplier is equal to: A. 1.5. B. 7.5. C. 10.0. D. 11.6. 102.In Table 14.1, the level of total reserves is equal to: A. $1 trillion. B. $920 billion. C. $880 billion. D. $80 billion. 103.Using the reserve requirement in Table 14.1, if the Fed sells $15 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $150 billion B. Rise; $113 billion C. Fall; $150 billion D. Fall; $113 billion 104.Using the reserve requirement in Table 14.1, if the Fed buys $25 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $25 billion B. Rise; $250 billion C. Fall; $25 billion D. Fall; $250 billion Use the following to answer questions 105-110: Answer the indicated questions on the basis of the information in Table 14.2. Each question is based on the original balance sheet. Table 14.2Monetary data 105.Considering only the information in Table 14.2, the basic money supply is: A. $260 billion. B. $600 billion. C. $660 billion. D. $900 billion. 106.Based on the information in Table 14.2, the required reserve ratio is: A. 30 percent. B. 20 percent. C. 15 percent. D. 10 percent. 107.In Table 14.2, if the Fed changes the required reserve ratio to 25 percent, the lending capacity of the banking system will eventually: A. Rise by $160 billion. B. Fall by $160 billion. C. Rise by $40 billion. D. Fall by $40 billion. 108.Based on the information in Table 14.2, the money multiplier is equal to: A. 10.0. B. 6.7. C. 5.0. D. 3.3. 109.In Table 14.2, the level of total reserves is equal to: A. $60 billion. B. $260 billion. C. $460 billion. D. $660 billion. 110.Using the reserve requirement in Table 14.2, if the Fed buys $20 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $20 billion B. Rise; $133 billion C. Fall; $20 billion D. Fall; $133 billion Use the following to answer questions 111-114: Figure 14.1 111.Using Figure 14.1, ceteris paribus, if the Federal Reserve increases the discount rate, this indicates a desire to _______ the money supply and will cause a shift from _______. A. Expand; AD1 to AD2 B. Expand; AS1 to AS2 C. Contract; AD2 to AD1 D. Contract; AS3 to AS2 112.Refer to Figure 14.1. Ceteris paribus, which of the following Fed actions will 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 by the Fed. D. A decrease in the money multiplier. 113.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 114.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; AD1 to AD2 B. Buys; AS2 to AS3 C. Sells; AD2 to AD1 D. Sells; AS2 to AS3 Use the following to answer questions 115-117: Figure 14.2 115.Using Figure 14.2, a shift in aggregate demand from AD1 to AD2 will cause, ceteris paribus: 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 price level, but no change in real output. D. A decrease in the price level, but no change in real output. 116.Using Figure 14.2, a shift in aggregate demand from AD3 to AD4 will cause, ceteris paribus: 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. 117.Using Figure 14.2, a shift in aggregate demand from AD4 to AD5 will cause, ceteris paribus: 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. 118.One HEADLINE article in the text is titled "Fed cuts key interest rate half-point to 1 percent." Which of the following is the Fed trying to accomplish as a result of this action? A. A leftward shift of aggregate demand. B. A rightward shift of aggregate demand. C. A leftward shift of aggregate supply. D. A rightward shift of aggregate supply. 119.One HEADLINE article in the text has the title "Fed cuts key interest rate half-point to 1 percent." Assuming the economy is in the upward sloping portion of the eclectic aggregate supply curve, what should happen to the price level and output as a result of the Fed's action, ceteris paribus? A. The equilibrium price level and equilibrium output should both increase. B. The equilibrium price level should increase and equilibrium output should decrease. C. The equilibrium price level should decrease and equilibrium output should increase. D. The equilibrium price level and equilibrium output should both decrease. 120.One HEADLINE article in the text has the title "Fed cuts key interest rate half-point to 1 percent." The Fed has most likely reduced the: A. Discount rate. B. Rate for purchasing bonds in the open market. C. Prime lending rate. D. Rate for foreign exchange. 121.Monetary policy involves the use of money and credit controls to impact the macroeconomy. True False 122.Monetary policy involves the use of federal government spending to change the money supply. True False 123.The Federal Reserve banks accept deposits from individuals and banks. True False 124.The Federal Reserve banks clear checks between private banks, hold bank reserves, provide currency for banks, and make loans to private banks. True False 125.The Board of Governors consists of seven members elected by the public every four years. True False 126.Members of the Federal Reserve Board of Governors are appointed to 14-year terms to provide a level of isolation from political influence. True False 127.The Board of Governors of the Federal Reserve System is the key decision maker for monetary policy. True False 128.Congress and the president are the key decision makers for U.S. monetary policy. True False 129.The reserve requirement is the tool used least frequently by the Fed because it can cause abrupt changes in the money supply. True False 130.By changing the reserve requirement the Fed can change the level of bank reserves and the lending capacity of the banking system. True False 131.Ceteris paribus, the amount of required reserves decreases when the dollar volume of transactions accounts increases. True False 132.For a given amount of total reserves, a decrease in required reserves causes an increase in excess reserves. True False 133.A decrease in the reserve requirement will cause a decrease in the money multiplier. True False 134.Profit-maximizing banks try to keep their excess reserves as high as possible. True False 135.The interest rate private banks charge each other for lending reserves is called the federal funds rate. True False 136.If the Fed wants to increase the money supply, it should increase the discount rate. True False 137.One of the portfolio choices people must make is whether to deposit idle funds in a bank or purchase government bonds. True False 138.Open-market operations are the tool used least frequently by the Fed to alter the reserves of the banking system. True False 139.By buying bonds, the Fed decreases the quantity of reserves in the banking system and decreases the money supply. True False 140.When the Fed sells bonds, the quantity of reserves in the banking system declines and the money supply decreases. True False 141.When the Fed sells bonds, bank reserves increase. True False 142.Both monetary policy and fiscal policy shift the aggregate demand curve. True False 143.Keynesians believe a change in the money supply cannot lower the unemployment rate. True False 144.Discretionary policy calls for continual adjustments to the money supply and is associated with the monetarist perspective. True False 145.Proponents of monetary policy based on fixed rules base their position on the assumption of a vertical aggregate supply curve. True False 146.What is monetary policy and why is the monetary policy lever important? 147.Briefly explain the theory of advocates of "discretionary: monetary policy and the theory of the advocates of "fixed rules" policy. 148.Discuss the effects of the money supply when the Fed sells bonds in the open market. ch14 Key 1. Which of the following is often described as the most powerful person in the U.S. economy? A. The president of the United States. B. The Speaker of the House of Representatives. C. The chairman of the House Ways and Means Committee. D. The chairman of the Federal Reserve. The chairman is the head of the government agency that controls the nation's money supply. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #1 Topic: The Federal Reserve System 2. The use of money and credit controls to change macroeconomic activity is known as: A. Fiscal policy. B. Monetary policy. C. Supply-side policy. D. Eclectic policy. Monetary policy affects how the government controls the amount of money in the economy; and studies how the money supply affects macroeconomic outcomes. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #2 Topic: The Federal Reserve System 3. Monetary policy involves the use of money and credit controls to: A. Move the economy along the aggregate demand curve. B. Move the economy along the aggregate supply curve. C. Shift the aggregate demand curve. D. Shift the aggregate supply curve. By changing the money supply and/or interest rates, monetary policy seeks to shift aggregate demand. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #3 Topic: The Federal Reserve System 4. U.S. monetary policy relies on the: A. Federal Reserve System's control over taxes. B. Federal Reserve System's control over the money supply. C. President's control over the printing of money. D. President's control over interest rates. The Federal Reserve is the government agency that controls the nation's money supply. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #4 Topic: The Federal Reserve System 5. 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 Fed Open Market Committee. Each of the 12 Federal Reserve banks acts as a central banker for the private banks in its region. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #5 Topic: The Federal Reserve System 6. Checks are cleared between private banks by: A. The 12 regional Federal Reserve banks. B. The Executive Branch of government. C. The Federal Reserve Board of Governors. D. State banking commissions. The clearinghouse service is an important feature of the Federal Reserve System. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #6 Topic: The Federal Reserve System 7. The 12 regional Fed banks do all of the following except: A. Clear checks between private banks. B. Lend money to individuals. C. Provide currency to banks. D. Hold bank reserves. The Fed Banks act as a central bank for private banks, not for individuals. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #7 Topic: The Federal Reserve System 8. The 12 regional Fed banks do not: A. Provide loans to banks. B. Hold reserves for banks. C. Accept deposits from individuals. D. Provide currency to banks. The Fed Banks act as a central bank for private banks, not for individuals. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #8 Topic: The Federal Reserve System 9. The twelve regional Federal Reserve banks are responsible for: A. Accepting deposits from nonbank businesses. B. Providing currency to other countries. C. Lending money to individuals. D. Lending reserves to private banks. The Federal Reserve banks may loan reserves to private banks. This practice is called discounting. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #9 Topic: The Federal Reserve System 10. Suppose Alan receives a check for $300 from a bank in Dallas. He deposits the check in his account at his Baltimore bank. Which of the following is Alan's Baltimore bank likely to collect the $300 from? A. B. C. D. The Baltimore bank's regional Federal Reserve bank. The U.S. Treasury. The main Federal Reserve Bank in Washington, D.C. The Federal Reserve Board of Governors. The Federal Reserve Banks act as a clearinghouse for private banks. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #10 Topic: The Federal Reserve System 11. 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. Nearly all of the reserves from private banks are held in accounts at the regional Federal Reserve Bank. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #11 Topic: The Federal Reserve System 12. 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. Banks hold very little cash in their vaults, they turn to the Fed to meet sporadic cash demands. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #12 Topic: The Federal Reserve System 13. The key decision maker for general Federal Reserve policy is the: A. Federal Open Market Committee. B. Board of Governors. C. Federal Advisory Council. D. Regional Federal Reserve banks. The Board of Governors is at the top of the Federal Reserve System's organization chart. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #13 Topic: The Federal Reserve System 14. The key decision maker for U.S. monetary policy is: A. Congress. B. The president. C. The president's cabinet. D. The Board of Governors. The Board of Governors is the key decision maker for monetary policy. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #14 Topic: The Federal Reserve System 15. The Federal Reserve Board of Governors has: A. Seven members appointed by the president of the United States. B. Fourteen members appointed for seven-year terms by the president of the United States. C. Seven members elected by U.S. citizens. D. Fourteen members selected by the U.S. Senate. The seven members of the board are appointed by the president and confirmed by the U. S. Senate. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #15 Topic: The Federal Reserve System 16. The Board of Governors has ___ members, and they are appointed for ___ year terms. A. 10; 12 B. 7; 14 C. 14; 7 D. 12; 10 The board consists of 7 members appointed by the president and serve for 14 years. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #16 Topic: The Federal Reserve System 17. Which of the following is not true about the members of the Federal Reserve Board of Governors? A. They are appointed to fourteen-year terms by the president of the United States. B. They are relatively immune to short-term political pressures. C. They may not be reappointed after serving a full term. D. They each serve as chairman of the Board of Governors on a rotating basis. The chairman is appointed for four years, but may be reappointed for successive terms. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #17 Topic: The Federal Reserve System 18. 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. They are not beholden to any elected official and will hold office longer than any president. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #18 Topic: The Federal Reserve System 19. Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term: A. In an effort to isolate the Fed from political pressures. B. So that Fed decisions will be based on political considerations. C. To give Congress better control over the money supply. D. In an effort to make the Fed responsive to voters. The length of their term is intended to give the Fed governors a measure of political independence. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #19 Topic: The Federal Reserve System 20. Which of the following is true about the chairman of the Federal Reserve Board of Governors? A. The chairman is elected by the Fed regional bank presidents. B. The chairman serves a 21-year term. C. A new chairman is elected as soon as a new U.S. president takes office. D. The chairman can be reappointed for more than one term. The chairman may be reappointed for successive terms. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #20 Topic: The Federal Reserve System 21. The chairman of the Federal Reserve Board of Governors: A. Is elected by U.S. voters. B. Will typically change following each presidential election. C. Serves a four-year term and can be reappointed. D. Is always closely tied to the same political party as the president. The chairman is appointed for four years, and may be reappointed for successive terms. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #21 Topic: The Federal Reserve System 22. All of the following are true about the basic money supply except: A. It includes credit card balances. B. It includes currency held by the public. C. It includes money kept in transactions accounts. D. It is known as M1. The basic money supply includes currency held by the public, plus balances in transactions accounts. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #22 Topic: Monetary Tools 23. The basic money supply: A. Is controlled by Congress and the U.S. Treasury. B. Includes savings accounts. C. Includes currency and transactions accounts. D. Includes money market mutual funds. The basic money supply includes currency held by the public, plus balances in transactions accounts. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #23 Topic: Monetary Tools 24. Which of the following is not a basic monetary policy tool used by the Fed? A. The discount rate. B. Reserve requirements. C. Open-market operations. D. The income tax rate. The income tax rate is not regulated by the Fed. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #24 Topic: Monetary Tools 25. Which of the following is not a basic monetary policy tool used by the Fed? A. Deposit insurance B. The reserve requirement C. The discount rate D. The sale and purchase of Treasury bonds Deposit insurance is not a monetary policy that is regulated by the Fed. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #25 Topic: Monetary Tools 26. Which of the following is not a basic monetary policy tool used by the Fed? A. The discount rate. B. The reserve requirement. C. Taxes. D. Open-market operations. Taxes are controlled by Congress and not regulated by the Fed. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #26 Topic: Monetary Tools 27. Required reserves: A. Are equal to the required reserve ratio times total reserves. B. Are the minimum amount of reserves a bank is required to hold. C. Represent the dollars a bank can lend. D. Must be held in a bank's vault. Banks must hold a minimum amount of deposits in reserve. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #27 Topic: Monetary Tools 28. Required reserves: A. Must be held at the regional Fed bank. B. Represent the dollars that a bank can lend. C. Are the minimum amount of reserves a bank is required to hold. D. Are equal to total reserves minus expected reserves. Banks must hold a minimum amount of deposits in reserve. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #28 Topic: Monetary Tools 29. The reserve requirement: A. Is the most frequently used tool by the Fed. B. Changes required reserves but not excess reserves. C. Does not affect the lending capacity for a bank. D. Affects the level of bank reserves. Reserve requirements have great power over the lending behavior of individual banks. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #29 Topic: Monetary Tools 30. A change in the reserve requirement is the tool used least often by the Fed because it: A. Does not affect bank reserves. B. Can cause abrupt changes in the money supply. C. Does not affect the money multiplier. D. Has no impact on the lending capacity of the banking system. A change in reserve requirements changes both the money multiplier and the level of excess reserves in the banking system. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #30 Topic: Monetary Tools 31. Excess reserves are: A. Bank reserves in excess of required reserves. B. Legal reserves in excess of lending reserves. C. Transactions deposits plus traveler's checks. D. Total reserves plus deficient reserves. Excess reserves are the difference between total reserves and the amount required by Fed rules. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #31 Topic: Monetary Tools 32. Which of the following is not true about excess reserves? A. They change when the reserve requirement changes. B. They are equal to the required reserve ratio times transactions deposits. C. They are bank reserves beyond what the bank is required to hold. D. They represent the dollars an individual bank can lend. Excess reserves are the difference between total reserves and the amount required by Fed rules. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #32 Topic: Monetary Tools 33. A change in the reserve requirement affects: A. The money multiplier and excess reserves. B. Excess reserves and the discount rate. C. The discount rate and the federal funds rate. D. The money multiplier and the federal funds rate. A change in reserve requirements may increase or decrease the money multiplier. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #33 Topic: Monetary Tools 34. Ceteris paribus, if the Fed raises the reserve requirement, then: A. The money multiplier increases. B. The lending capacity of the banking system decreases. C. Excess reserves increase. D. Required reserves decrease. Banks must hold more funds used for loans in reserve. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #34 Topic: Monetary Tools 35. Ceteris paribus, if the Fed reduces the reserve requirement, then: A. Total reserves increase. B. Total deposits decrease. C. The lending capacity of the banking system increases. D. The money multiplier decreases. Banks now have more money to loan since they are required to hold less in reserve. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #35 Topic: Monetary Tools 36. The money multiplier: A. Is equal to the required reserve ratio times transactions deposits. B. Gets larger as the required reserve ratio increases. C. Is the reciprocal of the required reserve ratio. D. Represents the lending capacity of an individual bank. The number of deposit (loan) dollars that the banking system can create from $1 of excess reserves; equal to 1 divided by required ratio. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #36 Topic: Monetary Tools 37. The money multiplier: A. Is the number of deposit dollars the banking system can create from $1 of excess reserves. B. Decreases as the required reserve ratio decreases. C. Is equal to excess reserves plus required reserves. D. Is equal to the required reserve ratio times transactions deposits. The number of deposit (loan) dollars that the banking system can create from $1 of excess reserves; equal to 1 divided by required ratio. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #37 Topic: Monetary Tools 38. Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.05, then excess reserves will increase by: A. $1 million. B. $20 million. C. $40 million. D. $2 billion. Reserve requirement equals Reserve Ratio multiplied by transaction accounts. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #38 Topic: Monetary Tools 39. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.20. Ceteris paribus, if the reserve requirement is increased to 0.25, then excess reserves will: A. Increase by $250 million. B. Increase by $50 million. C. Decrease by $250 million. D. Decrease by $50 million. Twenty percent of $1billion is 200,000,000. Twenty-five percent of $1billion is 250,000,000 therefore there is a decrease of 50 Million. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #39 Topic: Monetary Tools 40. Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is increased to 0.20, then excess reserves will: A. Increase by $100 million. B. Increase by $200 million. C. Decrease by $100 million. D. Decrease by $200 million. Ten percent of $1 billion is 100,000,000. Twenty percent of $1 billion is 200,000,000 therefore there is a decrease of 100 million. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #40 Topic: Monetary Tools 41. Suppose the banks in the Federal Reserve System have $100 million in transactions accounts and the reserve requirement is 0.10. Ceteris if paribus, the reserve requirement is decreased to 0.07, then excess reserves will increase by: A. $3 million. B. $7 million. C. $10 million. D. $700 billion. Ten percent of $100 million is 10,000,000. Seven percent of $100 million is 7,000,000 therefore there is a decrease of 3 million. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #41 Topic: Monetary Tools 42. The discount rate is the interest rate charged by: A. The Federal Reserve when it lends money to private banks. B. A private bank when it lends money to another private bank. C. A private bank when it lends money to commercial customers. D. A regional Fed bank when it lends money to another regional Fed bank. This is the interest rate the Fed charges for lending reserves to private banks. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #42 Topic: Monetary Tools 43. The rate of interest banks charge each other for lending reserves is the: A. Federal funds rate. B. Discount rate. C. Money multiplier. D. Excess reserve rate. Interbank borrowing is the federal funds market; and the interest rate banks charge each other is the federal funds rate. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #43 Topic: Monetary Tools 44. Which of the following lends reserves to private banks? A. The Legislative Branch of government B. Comptroller of the Currency C. State banking commissions D. The Federal Reserve System The Federal Reserve is the bank for private banks. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #44 Topic: Monetary Tools 45. If a bank does not have enough reserves, it can: A. Buy bonds on the open market. B. Raise the interest rate it charges borrowers. C. Borrow reserves from the discount window. D. Make more loans. If a bank finds itself short of reserves it may borrow money from the Fed's discount window. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #45 Topic: Monetary Tools 46. Which of the following is not a possible source of last-minute reserves for a private bank? A. Selling bonds. B. Borrowing reserves from other banks. C. Raising the discount rate. D. Borrowing reserves from the Federal Reserve System. Raising the discount rate is not a way banks can obtain funds to cover a temporary deficit in reserves. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #46 Topic: Monetary Tools 47. By raising or lowering the _______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves. A. Reserve ratio B. Discount rate C. Money multiplier D. Yield By raising or lowering the discount rate, the Fed changes the cost of money for banks and therewith the incentive to borrow reserves. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #47 Topic: Monetary Tools 48. Ceteris paribus, if the Fed reduces the discount rate, then: A. The incentive to borrow funds increases. B. Required reserves decrease. C. The money multiplier increases. D. Total reserves decrease. Low discount rates make it profitable for banks to borrow additional reserves and to exploit one's lending capacity to the fullest. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #48 Topic: Monetary Tools 49. If the Fed wishes to increase the money supply it can: A. Raise the federal funds rate. B. Sell bonds on the open market. C. Decrease the discount rate. D. Increase the required reserve ratio. Bank borrowing from the Fed will increase after the discount rate decreases, encouraging banks to make more loans. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #49 Topic: Monetary Tools 50. Ceteris paribus, if the Fed raises the discount rate, then: A. The money multiplier decreases. B. The lending capacity of the banking system increases. C. Excess reserves decrease. D. The incentive to borrow reserves decreases. At high discount rates, borrowing from the Fed is expensive. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #50 Topic: Monetary Tools 51. If the Fed wishes to decrease the money supply it can: A. Raise the discount rate. B. Buy bonds on the open market. C. Decrease the required reserve ratio. D. Decrease the federal funds rate. When the Fed raises the discount rate, it cost the banks more to borrow from the Fed, decreasing profits. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #51 Topic: Monetary Tools 52. The policy lever most commonly used by the Fed is: A. Changes in the discount rate. B. Buying and selling bonds. C. Changes in the reserve requirement. D. Foreign-exchange operations. If people hold more bonds and smaller bank balances, banks will have fewer reserves and less lending power. The Fed buys or sells bonds in order to alter the level of bank reserves. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-03 Schiller - Chapter 14 #52 Topic: Monetary Tools 53. The principal mechanism for directly changing the reserves of the banking system is: A. The discount rate. B. The reserve requirement. C. Open-market operations. D. The federal funds rate. The Fed purchases and sales of government bonds for the purpose of altering bank reserves. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-03 Schiller - Chapter 14 #53 Topic: Monetary Tools 54. The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is referred to as: A. Open-market operations. B. Closed-market operations. C. Discounting. D. Expansionary fiscal policy. The open-market operations entail the purchase and sale of government securities for the purpose of altering the flow of reserves into and out of the banking system. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-03 Schiller - Chapter 14 #54 Topic: Monetary Tools 55. The buying and selling of government bonds to influence reserves in the banking system is the responsibility of the: A. Twelve regional Federal Reserve banks. B. Executive Branch of the government. C. Board of Governors of the Federal Reserve. D. Federal Open Market Committee. The Federal Open Market Committee is a component of the Federal Reserve and is in charge with overseeing the nation's open market operations. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-03 Schiller - Chapter 14 #55 Topic: Monetary Tools 56. When the Fed makes bonds more or less attractive, it influences the: A. Open market decision. B. Money multiplier. C. Portfolio decision. D. Reserve decision. It induces people to move funds from banks to bond markets, or vice versa, thus altering the lending capacity of banks. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-03 Schiller - Chapter 14 #56 Topic: Monetary Tools 57. If the Fed wants to increase bank reserves, it can: A. Buy bonds. B. Raise the discount rate. C. Raise the reserve requirement. D. Sell bonds. If the Fed offers to pay high prices for bonds, people will sell some of their bonds to the Fed. They will deposit the proceeds into their bank accounts. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #57 Topic: Monetary Tools 58. If the Fed wants to increase bank reserves, it can: A. Raise the discount rate. B. Buy government bonds from the public. C. Increase the minimum reserve ratio. D. Decrease the money multiplier. The Fed buys or sells bonds in order to alter the level of bank reserves. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #58 Topic: Monetary Tools 59. If the Fed wants to decrease bank reserves, it can: A. Increase the money multiplier. B. Decrease the discount rate. C. Sell government bonds. D. Decrease the minimum reserve ratio. The Fed buys or sells bonds in order to alter the level of bank reserves. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #59 Topic: Monetary Tools 60. If the Fed wants to reduce bank reserves, it can: A. Raise the discount rate or buy bonds on the open market. B. Reduce the minimum reserve ratio or sell bonds on the open market. C. Raise the discount rate or sell bonds on the open market. D. Decrease the minimum reserve ratio or reduce the discount rate. The Fed buys or sells bonds in order to alter the level of bank reserves. By raising or lowering the discount rate, the Fed changes the cost of money for banks and therewith the incentive to borrow reserves. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #60 Topic: Monetary Tools 61. Aggregate demand is the: A. Total quantity of output demanded at alternative price levels. B. Total quantity of output demanded but only at full employment. C. Quantity of goods demanded by the largest corporations in the country. D. Quantity of new goods and services produced. Aggregate demand is the total quantity of output demanded at alternative price level in a given time period. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-05 Schiller - Chapter 14 #61 Topic: Shifting Aggregate Demand 62. Which of the following cannot be used to shift aggregate demand? A. A change in government spending. B. A change in taxes. C. Monetary policy. D. A change in the price level. Aggregate demand reflects total quantity of output demanded at alternative price levels, which in itself cannot cause a shift. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #62 Topic: Shifting Aggregate Demand 63. Which of the following is not a monetary policy tool for shifting the aggregate demand curve? A. Open-market operations. B. Government spending. C. The discount rate. D. The reserve requirement. Government spending does not cause a shift because it does not affect quantity of output demanded by individual consumers. Government spending is considered fiscal policy. AACSB: Analytic Blooms: Understand Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #63 Topic: Shifting Aggregate Demand 64. Ceteris paribus, which of the following will occur if the Fed buys bonds through 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. The Fed can increase money supply by buying bonds. If the Fed buys at a high price for bonds, consumers will have more money to spend on output. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #64 Topic: Shifting Aggregate Demand 65. Which of the following will cause an increase in aggregate demand? A. Restrictive fiscal policy. B. An increase in the reserve requirement. C. Expansionary monetary policy. D. The sale of bonds by the Fed. When the government increases its own spending, aggregate demand shifts to the right. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #65 Topic: Shifting Aggregate Demand 66. If the Fed buys more bonds from the public, then the money supply will: A. Decrease and the aggregate demand curve will shift to the right. B. Increase and the aggregate demand curve will shift to the right. C. Increase and the aggregate demand curve will shift to the left. D. Decrease and the aggregate demand curve will shift to the left. If the Fed buys at a high price for bonds, consumers will have more money to spend on output. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #66 Topic: Shifting Aggregate Demand 67. Expansionary monetary policy will: A. Reduce the lending capacity for banks. B. Raise interest rates. C. Encourage people to borrow more money. D. Reduce the equilibrium price level. By offering lower interest rates or easier approvals, the banks can encourage people to borrow and spend more money. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #67 Topic: Shifting Aggregate Demand 68. To increase the money supply the Fed can: A. Reduce the reserve requirement, reduce the discount rate, or sell bonds. B. Raise the reserve requirement, reduce the discount rate, or sell bonds. C. Reduce the reserve requirement, reduce the discount rate, or buy bonds. D. Raise the reserve requirement, raise the discount rate, or buy bonds. By reducing the reserve requirement, reducing the discount rate and buying bonds the Fed does what is needed to increase the money supply allowing consumers access to more loans. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #68 Topic: Shifting Aggregate Demand 69. Which of the following will occur if the Fed raises the reserve requirement, ceteris paribus? 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. If the Fed raises the reserve requirement, there are fewer funds for banks to loan to consumers. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #69 Topic: Shifting Aggregate Demand 70. Which of the following will cause a decrease in aggregate demand? A. Restrictive monetary policy. B. A decrease in the reserve requirement. C. Expansionary monetary policy. D. The purchase of bonds by the Fed. If the money supply is restricted, consumers have less ability to borrow, which will cause a decrease in aggregate demand. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #70 Topic: Shifting Aggregate Demand 71. If the Fed sells more bonds to the public, then the money supply will: A. Decrease and the aggregate demand curve will shift to the right. B. Increase and the aggregate demand curve will shift to the right. C. Increase and the aggregate demand curve will shift to the left. D. Decrease and the aggregate demand curve will shift to the left. By selling bonds, the Fed reduces bank reserves, therefore; the money supply is lower and less borrowing takes place. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #71 Topic: Shifting Aggregate Demand 72. Restrictive monetary policy will: A. Decrease the lending capacity for banks. B. Reduce interest rates. C. Cause a rightward shift of aggregate demand. D. Raise the equilibrium price level. Banks will not have the funds available to loan to consumers. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #72 Topic: Shifting Aggregate Demand 73. To decrease the money supply the Fed can: A. Reduce the reserve requirement, raise the discount rate, or sell bonds. B. Raise the reserve requirement, raise the discount rate, or sell bonds. C. Raise the reserve requirement, reduce the discount rate, or buy bonds. D. Raise the reserve requirement, raise the discount rate, or buy bonds. When the Fed raises the reserve requirement, raises the discount rate, or sell bonds there is a constraint of funds available to banks to loan. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #73 Topic: Shifting Aggregate Demand 74. When the Fed announces that it is raising the federal funds rate, this signals its intention to _______ bonds in the open market and _______ the money supply. A. Buy; reduce B. Buy; increase C. Sell; reduce D. Sell; increase Federal funds rate is the interest rate banks charge each other for reserves loans. By raising this rate and selling bonds the Fed is decreasing the money supply. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #74 Topic: Shifting Aggregate Demand 75. As the money supply increases, interest rates _______ and aggregate demand shifts to the _______. A. Increase; left B. Increase; right C. Decrease; left D. Decrease; right With more money to lend, banks must lower interest rates thus increasing consumer funds to borrow. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #75 Topic: Shifting Aggregate Demand 76. When the Fed sells bonds in the open market, interest rates _______ and aggregate demand shifts to the _______. A. Rise; left B. Rise; right C. Fall; left D. Fall; right The Fed will sell bonds at lower rates enticing consumers to purchase bonds instead of output. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #76 Topic: Shifting Aggregate Demand 77. The shape of the _____ curve determines the impact of an aggregate demand shift on prices and output. A. Marginal revenue B. Total cost C. Production possibilities D. Aggregate supply The aggregate demand curve reflects the various quantities of output that all market participants are willing and able to buy at alternative price levels. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #77 Topic: Price Versus Output Effects 78. The different shapes of the aggregate supply curve: A. Determine the level of reserves held by the banking system. B. Result in the Fed's need for total control of the money supply. C. Determine the impact of monetary policy on price level and output. D. Explain why the Fed must respond to market instability. The successful execution of monetary policy depends on aggregate demand responding to changes in the money supply. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #78 Topic: Price Versus Output Effects 79. Given Keynesian assumptions about the shape of the aggregate supply curve and an economy suffering a recession, which of the following is most likely to occur if the Fed pursues expansionary monetary policy? A. The equilibrium price level and output will both increase until full employment is reached. B. The equilibrium price level and output will both decrease. C. The equilibrium price level will increase but output will stay the same. D. The equilibrium output will increase but the price level will stay the same until full employment is reached. The horizontal aggregate supply curve creates an ideal setting for monetary policy. If the economy is in recession expansionary policy increases output but not price. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #79 Topic: Price Versus Output Effects 80. Using aggregate supply and demand curves drawn according to the Keynesian view, which of the following will occur if the Fed buys bonds in the open market and the economy is below 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. The rate of output responds fully and automatically to increases in demand until full employment is reached. This causes the aggregate demand curve to shift right and more people are employed. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #80 Topic: Price Versus Output Effects 81. According to the Keynesian view of aggregate supply, an increase in the money supply will: A. Always cause inflation. B. Cause inflation if the economy is at full employment. C. Cause inflation only if aggregate supply is horizontal. D. Never cause inflation. Expansionary monetary policy increased output to its full-employment level, and prices also rose. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #81 Topic: Price Versus Output Effects 82. According to the monetarist view, the aggregate supply curve is: A. Upward sloping to the right. B. Perfectly vertical at the natural rate of unemployment. C. Flat or horizontal until full employment is reached. D. Flat or horizontal at all levels of output. Monetarist regard aggregate supply as a fixed rate of output, positioned at the long-run "natural" rate of unemployment shown as a perfectly vertical line. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #82 Topic: Price Versus Output Effects 83. According to the monetarist view, the aggregate supply curve is: A. Horizontal until full employment is reached and then it becomes vertical. B. Horizontal at all levels of output. C. Vertical at the natural rate of unemployment. D. First horizontal, then upward sloping, and finally vertical. Monetarists regard aggregate supply as a fixed rate of output, positioned at the long-run "natural" rate of unemployment shown as a perfectly vertical line. AACSB: Analytic Blooms: Understand Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #83 Topic: Price Versus Output Effects 84. According to the aggregate supply drawn under the monetarist view, which of the following would lead to a higher price level? A. The purchase of bonds in the open market by the Fed. B. An increase in the discount rate. C. An increase in the reserve requirement. D. A decrease in the money multiplier. The purchase of bonds increases the money supply. Producers know that both prices and costs will rise when spending increases. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #84 Topic: Price Versus Output Effects 85. Using the aggregate supply drawn under the monetarist view, what should happen to the equilibrium price level and quantity of output if the Fed buys bonds? A. Equilibrium price level and equilibrium output should both increase. B. Equilibrium price level should increase, and equilibrium output should decrease. C. Equilibrium price level should decrease, and equilibrium output should increase. D. Equilibrium price level should increase and equilibrium output should stay constant. Rising prices will not create any new profit incentives for increasing output. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #85 Topic: Price Versus Output Effects 86. 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 at all output levels. C. First horizontal, then upward sloping, and finally vertical. D. Downward sloping. The eclectic view concedes that the AS curve may be horizontal at low levels of output and vertical at capacity. In the middle, the AS Curve is upward-sloping. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #86 Topic: Price Versus Output Effects 87. An eclectic aggregate supply curve: A. Is the supply-side counterpart to monetarist and Keynesian assumptions about the shape of aggregate demand. B. Combines elements of the monetarist and Keynesian assumptions about the shape of aggregate supply. C. Maintains a constant upward slope as the economy moves through the business cycle. D. Is horizontal at all levels of output. Eclectic view recognizes that the market behavior responds gradually and imperfectly to policy intervention. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #87 Topic: Price Versus Output Effects 88. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed sells bonds in the open market, ceteris paribus? A. Greater inflation and more unemployment. B. Greater inflation and less unemployment. C. Lower average prices and less unemployment. D. Lower average prices and more unemployment. If the Fed sells bonds investors will use funds to purchase bonds and not goods leading producers to lower price. Restrictive policy will cause some unemployment. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #88 Topic: Price Versus Output Effects 89. Given an upward-sloping aggregate supply curve, attempts to reduce unemployment through monetary policy will aggravate current inflation as illustrated by a: A. Leftward shift of aggregate demand. B. Rightward shift of aggregate demand. C. Leftward shift of aggregate supply. D. Rightward shift of aggregate supply. The expansion of monetary policy will increase output to its full-employment level. In the process prices will also rise and the economy suffers from inflation as it moves toward full employment. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #89 Topic: Price Versus Output Effects 90. Given an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed pursues restrictive monetary policy, ceteris paribus? A. The equilibrium price level and output will both decrease. B. The equilibrium price level and output will both increase. C. The equilibrium price level will decrease but output will stay the same. D. The equilibrium output will decrease but the price level will stay the same. Aggregate demand shifts to the left, leaving producers not choice but to lower price and decrease aggregate quantity supplied. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #90 Topic: Price Versus Output Effects 91. With an upward-sloping aggregate supply curve, tight monetary policy: A. Reduces aggregate demand and decreases inflationary pressures. B. Reduces aggregate demand and increases inflationary pressures. C. Raises aggregate demand and increases inflationary pressures. D. Raises aggregate demand and decreases inflationary pressures. An upward slopping supply curve reflects rising cost and an increase in output. By tightening the money supply, consumers are less likely to purchase products which have an effect on rising prices. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #91 Topic: Price Versus Output Effects 92. Which of the following policies supports the concept of continual adjustment of the money supply to achieve macroeconomic goals? A. Restrictive policy. B. Fixed rules. C. Discretionary policy. D. Fiscal policy. This view of market instability and the attendant need for active government intervention reflects the Keynesian perspective. Applied to monetary policy, it implies the need for continual adjustments to the money supply. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #92 Topic: Policy Perspectives 93. A vertical aggregate supply curve favors which of the following policies? A. Discretionary policy B. Fiscal policy C. The Fed's eclecticism D. Fixed rules To protect themselves against inflation, producers and workers will demand higher prices and wages whenever they see the money supply expanding. Such defensive behavior will push the AS curve into a vertical position. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #93 Topic: Policy Perspectives 94. Which of the following policies is supported by the idea that producers and workers will demand higher prices and wages when they see the money supply expanding? A. Discretionary policy B. Fixed rules C. The Fed's eclecticism D. Fiscal policy To protect themselves against inflation, producers and workers will demand higher prices and wages whenever they see the money supply expanding. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #94 Topic: Policy Perspectives 95. Which of the following approaches should the Fed use if it experiences large lags and mistakes in monetary policy? A. Discretionary policy B. An eclectic approach C. Fixed rules D. Fiscal policy Critics conclude that fixed rules for money-supply management are less prone to error. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #95 Topic: Policy Perspectives 96. The Fed's eclecticism reflects: A. A combination of flexible rules and limited discretion. B. Fixed rules that are set for monetary growth rates. C. Discretionary policy but not rules. D. The targeting of interest rates as the primary goal to be achieved by monetary policy. Instead of fixed rules for money-supply growth, the Fed's eclectic combination of flexible rules and limited discretion targets money-supply growth. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #96 Topic: Policy Perspectives 97. Under Alan Greenspan, the Fed: A. Targeted interest rates only. B. Targeted the money supply only. C. Targeted the unemployment level. D. Used a mix of money-supply and interest-rate adjustments. Alan Greenspan said the Fed could not be bound to any one theory but must instead use a mix of money-supply and interest-rate adjustments to attain desired macro outcomes. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #97 Topic: Policy Perspectives Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet. Table 14.1Monetary data Schiller - Chapter 14 98. Considering only the information in Table 14.1, the basic money supply is: A. $120 billion. B. $800 billion. C. $920 billion. D. $1 trillion. Cash held by public plus transaction accounts equals basic money supply. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #98 Topic: Policy Perspectives 99. Based on the information in Table 14.1, the required reserve ratio is: A. 8.7 percent. B. 10.0 percent. C. 13.3 percent. D. 66.7 percent. Required reserves divided by total deposits is equal to the reserve ratio. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #99 Topic: Policy Perspectives 100. In Table 14.1, if the Fed changes the required reserve ratio to 5 percent, the lending capacity of the banking system will eventually: A. Rise by $800 billion. B. Fall by $800 billion. C. Rise by $40 billion. D. Fall by $40 billion. New money multiplier minus old money multiplier equals change in money multiplier times required reserves. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #100 Topic: Policy Perspectives 101. Based on the information in Table 14.1, the money multiplier is equal to: A. 1.5. B. 7.5. C. 10.0. D. 11.6. One divided by reserve ratio equals money multiplier. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #101 Topic: Policy Perspectives 102. In Table 14.1, the level of total reserves is equal to: A. $1 trillion. B. $920 billion. C. $880 billion. D. $80 billion. Total Reserves equals Required reserves plus excess reserves. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #102 Topic: Policy Perspectives 103. Using the reserve requirement in Table 14.1, if the Fed sells $15 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $150 billion B. Rise; $113 billion C. Fall; $150 billion D. Fall; $113 billion Money multiplier times decrease in reserves equals decrease in lending capacity. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-03 Schiller - Chapter 14 #103 Topic: Policy Perspectives 104. Using the reserve requirement in Table 14.1, if the Fed buys $25 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $25 billion B. Rise; $250 billion C. Fall; $25 billion D. Fall; $250 billion Bonds times the money multiplier equals increase in lending capacity. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-03 Schiller - Chapter 14 #104 Topic: Policy Perspectives Use the following to answer questions 105-110: Answer the indicated questions on the basis of the information in Table 14.2. Each question is based on the original balance sheet. Table 14.2Monetary data Schiller - Chapter 14 105. Considering only the information in Table 14.2, the basic money supply is: A. $260 billion. B. $600 billion. C. $660 billion. D. $900 billion. Cash held by public plus Transaction account balances equals money supply. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #105 Topic: Policy Perspectives 106. Based on the information in Table 14.2, the required reserve ratio is: A. 30 percent. B. 20 percent. C. 15 percent. D. 10 percent. Required reserves divided by transaction account balances equals required reserve ratio. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #106 Topic: Policy Perspectives 107. In Table 14.2, if the Fed changes the required reserve ratio to 25 percent, the lending capacity of the banking system will eventually: A. Rise by $160 billion. B. Fall by $160 billion. C. Rise by $40 billion. D. Fall by $40 billion. New money multiplier minus old money multiplier equals change in money multiplier times required reserve. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #107 Topic: Policy Perspectives 108. Based on the information in Table 14.2, the money multiplier is equal to: A. 10.0. B. 6.7. C. 5.0. D. 3.3. Money multiplier is 1 divided by the reserve ratio. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #108 Topic: Policy Perspectives 109. In Table 14.2, the level of total reserves is equal to: A. $60 billion. B. $260 billion. C. $460 billion. D. $660 billion. Total Reserves equals Required reserves plus excess reserves. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #109 Topic: Policy Perspectives 110. Using the reserve requirement in Table 14.2, if the Fed buys $20 billion worth of bonds in the open market, the lending capacity of the banking system will _______ by approximately _______. A. Rise; $20 billion B. Rise; $133 billion C. Fall; $20 billion D. Fall; $133 billion Bonds multiplied by the money multiplier equals increase in lending capacity. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-03 Schiller - Chapter 14 #110 Topic: Policy Perspectives Use the following to answer questions 111-114: Figure 14.1 Schiller - Chapter 14 111. Using Figure 14.1, ceteris paribus, if the Federal Reserve increases the discount rate, this indicates a desire to _______ the money supply and will cause a shift from _______. A. Expand; AD1 to AD2 B. Expand; AS1 to AS2 C. Contract; AD2 to AD1 D. Contract; AS3 to AS2 An increase in the discount rate signals banks that they will be charged a higher rate of interest by the Fed when the Fed lends reserves to private banks. Banks will not want to borrow at higher rates. If banks have less to loan, consumers will be purchasing less. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #111 Topic: Policy Perspectives 112. Refer to Figure 14.1. Ceteris paribus, which of the following Fed actions will 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 by the Fed. D. A decrease in the money multiplier. When banks have to hold less in reserve, they have more money to loan to consumers who will use the money to purchase goods and service. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #112 Topic: Policy Perspectives 113. 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 When the Federal Reserve buys bonds from private investors, they purchase at a fairly high rate. The investors in return will place the money from the sell into transaction accounts that increases the money supply. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #113 Topic: Policy Perspectives 114. 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; AD1 to AD2 B. Buys; AS2 to AS3 C. Sells; AD2 to AD1 D. Sells; AS2 to AS3 Investors will use money from transaction accounts to buy the Federal Reserve bonds, decreasing the money supply and investors will have less money in transaction accounts used to purchase goods and services. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #114 Topic: Policy Perspectives Use the following to answer questions 115-117: Figure 14.2 Schiller - Chapter 14 115. Using Figure 14.2, a shift in aggregate demand from AD1 to AD2 will cause, ceteris paribus: 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 price level, but no change in real output. D. A decrease in the price level, but no change in real output. Price level is horizontal from the two points. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #115 Topic: Policy Perspectives 116. Using Figure 14.2, a shift in aggregate demand from AD3 to AD4 will cause, ceteris paribus: 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. This shift displays an upward slope in the change of price. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #116 Topic: Policy Perspectives 117. Using Figure 14.2, a shift in aggregate demand from AD4 to AD5 will cause, ceteris paribus: 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. The output displayed is identical, but price has increased. AACSB: Reflective Thinking Blooms: Apply Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #117 Topic: Policy Perspectives 118. One HEADLINE article in the text is titled "Fed cuts key interest rate half-point to 1 percent." Which of the following is the Fed trying to accomplish as a result of this action? A. A leftward shift of aggregate demand. B. A rightward shift of aggregate demand. C. A leftward shift of aggregate supply. D. A rightward shift of aggregate supply. The Fed hopes to revive the economy and stimulate aggregate demand. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #118 Topic: The Federal Reserve System 119. One HEADLINE article in the text has the title "Fed cuts key interest rate half-point to 1 percent." Assuming the economy is in the upward sloping portion of the eclectic aggregate supply curve, what should happen to the price level and output as a result of the Fed's action, ceteris paribus? A. The equilibrium price level and equilibrium output should both increase. B. The equilibrium price level should increase and equilibrium output should decrease. C. The equilibrium price level should decrease and equilibrium output should increase. D. The equilibrium price level and equilibrium output should both decrease. The Fed hopes to break the grip of the credit crisis and stimulate prices so producers will produce, and free up funds so consumers can borrow money. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #119 Topic: The Federal Reserve System 120. One HEADLINE article in the text has the title "Fed cuts key interest rate half-point to 1 percent." The Fed has most likely reduced the: A. Discount rate. B. Rate for purchasing bonds in the open market. C. Prime lending rate. D. Rate for foreign exchange. Discount rate is the interest rate the Fed charges to make direct loans to banks. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #120 Topic: The Federal Reserve System 121. Monetary policy involves the use of money and credit controls to impact the macroeconomy. TRUE The use of money and credit controls to influence macroeconomic activity. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #121 Topic: The Federal Reserve System 122. Monetary policy involves the use of federal government spending to change the money supply. FALSE The use of money and credit controls to influence macroeconomic activity. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #122 Topic: The Federal Reserve System 123. The Federal Reserve banks accept deposits from individuals and banks. FALSE The Federal Reserve bank accepts deposits from banks only. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #123 Topic: The Federal Reserve System 124. The Federal Reserve banks clear checks between private banks, hold bank reserves, provide currency for banks, and make loans to private banks. TRUE The Federal Reserve acts as a clearing house between private banks, and holds bank reserves. Also, since most banks do not keep large supplies of cash on hand the Fed provides banks with currency. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #124 Topic: The Federal Reserve System 125. The Board of Governors consists of seven members elected by the public every four years. FALSE The Board of Governors is appointed by the president of the U.S. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #125 Topic: The Federal Reserve System 126. Members of the Federal Reserve Board of Governors are appointed to 14-year terms to provide a level of isolation from political influence. TRUE The Board members will out last the term of the president. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #126 Topic: The Federal Reserve System 127. The Board of Governors of the Federal Reserve System is the key decision maker for monetary policy. TRUE The Board of Governors is the decision maker for monetary policy. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #127 Topic: The Federal Reserve System 128. Congress and the president are the key decision makers for U.S. monetary policy. FALSE The Board of Governors is the decision maker for monetary policy. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #128 Topic: The Federal Reserve System 129. The reserve requirement is the tool used least frequently by the Fed because it can cause abrupt changes in the money supply. TRUE By changing the reserve requirement, the Fed can directly alter the lending capacity of the banking system. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #129 Topic: Monetary Tools 130. By changing the reserve requirement the Fed can change the level of bank reserves and the lending capacity of the banking system. TRUE A change in the reserve requirement also increases the money multiplier, and affects how large or small an amount of reserves a bank must hold. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-04 Schiller - Chapter 14 #130 Topic: Monetary Tools 131. Ceteris paribus, the amount of required reserves decreases when the dollar volume of transactions accounts increases. FALSE Required reserves increase when the dollar volume of transaction accounts increase due to the bank having to hold reserves equal to required reserve ratio times transaction deposits. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #131 Topic: Monetary Tools 132. For a given amount of total reserves, a decrease in required reserves causes an increase in excess reserves. TRUE A decrease in required reserves frees funds or excess reserves so that banks may increase lending. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #132 Topic: Monetary Tools 133. A decrease in the reserve requirement will cause a decrease in the money multiplier. FALSE Lower reserve requirement increases the value of the money multiplier. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-02 Schiller - Chapter 14 #133 Topic: Monetary Tools 134. Profit-maximizing banks try to keep their excess reserves as high as possible. FALSE Banks profits increase when excess reserves are kept low. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #134 Topic: Monetary Tools 135. The interest rate private banks charge each other for lending reserves is called the federal funds rate. TRUE A bank that finds itself short of reserves can turn to other banks for help. The interest rate charged by the other bank is called the federal funds rate. AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 14-02 Schiller - Chapter 14 #135 Topic: Monetary Tools 136. If the Fed wants to increase the money supply, it should increase the discount rate. FALSE The Fed should lower the discount rate in order to give incentives to banks to loan money and increase the money supply. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-02 Schiller - Chapter 14 #136 Topic: Monetary Tools 137. One of the portfolio choices people must make is whether to deposit idle funds in a bank or purchase government bonds. TRUE Idle funds are also used to purchase stocks, build up savings account balances, and purchase bonds. These funds promise some additional income if invested correctly. AACSB: Analytic Blooms: Understand Difficulty: Hard Learning Objective: 14-03 Schiller - Chapter 14 #137 Topic: Monetary Tools 138. Open-market operations are the tool used least frequently by the Fed to alter the reserves of the banking system. FALSE Since reserves are the lifeblood of the banking system, open-market operations have an immediate and direct impact on lending capacity. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-03 Schiller - Chapter 14 #138 Topic: Monetary Tools 139. By buying bonds, the Fed decreases the quantity of reserves in the banking system and decreases the money supply. FALSE By buying bonds, the Fed actually increases bank reserves increasing the money supply. By offering to pay high prices for bonds, people will sell some of their bonds to the Fed, and deposit the proceeds into their individual bank accounts. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-03 Schiller - Chapter 14 #139 Topic: Monetary Tools 140. When the Fed sells bonds, the quantity of reserves in the banking system declines and the money supply decreases. TRUE When the Fed sells bonds it is attempting to entice investors to use their funds in their individual bank accounts and when they do, the Fed returns the funds to the investor's banks. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #140 Topic: Monetary Tools 141. When the Fed sells bonds, bank reserves increase. FALSE By selling bonds, the Fed reduces bank reserves. This is an attempt to slow the growth in the money supply. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-04 Schiller - Chapter 14 #141 Topic: Monetary Tools 142. Both monetary policy and fiscal policy shift the aggregate demand curve. TRUE Monetary policy tries to alter macro outcomes by managing the amount of money available in the economy. By changing the money supply and or interest rates, monetary policy seeks to shift aggregate demand. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #142 Topic: Shifting Aggregate Demand 143. Keynesians believe a change in the money supply cannot lower the unemployment rate. FALSE In the Keynesian model, the rate of output responds fully and automatically to increases in demand until full employment is reached. AACSB: Reflective Thinking Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #143 Topic: Price Versus Output Effects 144. Discretionary policy calls for continual adjustments to the money supply and is associated with the monetarist perspective. FALSE Discretionary policy, applied to monetary policy, implies the need for continual adjustments to the money supply but is not associated with the monetarist perspective. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #144 Topic: Policy Perspectives 145. Proponents of monetary policy based on fixed rules base their position on the assumption of a vertical aggregate supply curve. TRUE The argument here is that the quantity of goods produced is primarily dependent on production capacity, labor-market efficiency and other structural forces. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-05 Schiller - Chapter 14 #145 Topic: Policy Perspectives 146. What is monetary policy and why is the monetary policy lever important? The monetary policy is the use of money and credit controls to influence macroeconomic activity. Monetary policy tries to alter macro outcomes by managing the amount of money available in the economy. By changing the money supply and/or interest rates, monetary policy seeks to shift aggregate demand. AACSB: Analytic Blooms: Understand Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #146 Topic: Monetary Tools 147. Briefly explain the theory of advocates of "discretionary: monetary policy and the theory of the advocates of "fixed rules" policy. Advocates of discretionary monetary policy argue that the Fed should be free to counter market instability by changing the growth rate of the money supply. Advocates of fixed rules believe the Fed should simply keep the money supply growing at a constant rate. AACSB: Analytic Blooms: Analyze Difficulty: Hard Learning Objective: 14-05 Schiller - Chapter 14 #147 Topic: Price Versus Output Effects 148. Discuss the effects of the money supply when the Fed sells bonds in the open market. When the Fed sells a bond, money is paid to the Fed by the purchaser. This money is then kept by the Fed and is no longer part of the money supply because it is out of circulation. The money supply decreases. AACSB: Analytic Blooms: Analyze Difficulty: Medium Learning Objective: 14-01 Schiller - Chapter 14 #148 Topic: The Federal Reserve System ch14 Summary Category AACSB: Analytic AACSB: Reflective Thinking Blooms: Analyze Blooms: Apply Blooms: Remember Blooms: Understand Difficulty: Easy Difficulty: Hard Difficulty: Medium Learning Objective: 14-01 Learning Objective: 14-02 Learning Objective: 14-03 Learning Objective: 14-04 Learning Objective: 14-05 Schiller - Chapter 14 Topic: Monetary Tools Topic: Policy Perspectives Topic: Price Versus Output Effects Topic: Shifting Aggregate Demand Topic: The Federal Reserve System # of Questions 75 73 55 20 12 61 12 74 62 26 53 11 11 47 152 53 28 17 17 33

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