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CHAPTER 3 TRUE/FALSE QUESTIONS (F) 1. The monetary base exceeds the money supply. (T) 2. The cash-holding behavior of the public affects the monetary base. (T) 3. The Federal Reserve decreases the monetary base whenever it sells government securities. (T) 4. When reserve requirements are increased, interest rates should increase. (F) 5. If cash drains increase, the Fed may offset their effects with open market sales. (T) 6. The Fed substantially controls M1 by controlling total reserves of depository institutions. (T) 7. When the Fed sells an asset to the private sector, the monetary base declines. (T) 8. When a bank orders currency from the Fed, the monetary base does not change. (F) 9. A significant move by the Fed toward a “tight” money policy is likely to enhance exports. (T) 10. Housing investment is sensitive to changes in interest rates. (T) 11. Decreasing interest rates increase financial wealth and encourage consumer spending. (F) 12. An increase in the money supply should ultimately cause security prices to decrease. (T) 13. Restrictive monetary policy in the United States may slow down net exports and GNP. (T) 14. Monetarists think changing the money supply impacts economic units directly rather than just through interest rates. (F) 15. Increasing interest rates increase wealth of spending limits and encourage spending. (F) 16. Easy monetary policy strengthens the dollar. (T) 17. A prolonged “tight” monetary policy can be associated with falling bond prices. (F) 18. Stable employment is one of the objectives of monetary policy. (F) 19. There is definitely a tradeoff between stable prices and full employment. (T) 20. Unexpected high levels of inflation aid debtors at the expense of lenders. (T) 21. An increase in Federal Reserve float increases the monetary base. (T) 22. Cash drains decrease the monetary base, but not the money supply. (F) 23. The Fed exclusively controls the money supply. (T) 24. Interest rates and the money supply tend to vary inversely, at least in the short term. (F) 25. Real investment is encouraged by rising interest rates. (T) 26. Monetary policy first affects financial markets and institutions, then the real economy. 31
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(F) 27. Transaction deposits, such as DDAs, expand when the Fed sells securities. (F) 28. When the Fed increases the Fed Funds Rate, financial institutions “go to the Window”. (F) 29. Monetary policy only works in the short term. (F) 30. Monetary policy only works in the long term. (T) 31. “Cash drains” are an example of a “technical factor”. (T) 32. Reserve requirements are not useful for “fine tuning.” (F) 33. The Fed is powerless against “technical factors”. (F) 34. High stock prices are a goal of monetary policy. (T)
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