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ECO 2315: Principle of Macroeconomics Department of Finance and Economics, Texas State University Review Questions for Chapter 15 Spring 2018

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Monetary policy refers to the actions the A) President and Congress take to manage the money supply and interest rates to pursue their economic objectives. B) Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. C) Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. D) President and Congress take to manage government spending and taxes to pursue their economic objectives.

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2) The Federal Reserve System's four monetary policy goals are A) price stability, low government budget deficits, low current account deficits, and low rate of bank failures. B) low government budget deficits, low current account deficits, high employment, and a high foreign exchange value of the dollar. C) price stability, high employment, economic growth, and stability of financial markets and institutions. D) low rate of bank failures, high reserve ratios, price stability, and economic growth.

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3) The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was A) increasing economic growth. B) a low current account deficit. C) fighting inflation. D) increasing regulation of commercial banks. E) increasing employment.

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4) Monetary policy refers to the actions the Federal Reserve takes to manage A) the money supply and interest rates to pursue its economic objectives. B) government spending and income tax rates to pursue its economic objectives. C) the money supply and income tax rates to pursue its economic objectives. D) income tax rates and interest rates to pursue its economic objectives.

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5) The money demand curve has a A) positive slope because an increase in the price level increases the quantity of money demanded. B) positive slope because an increase in the interest rate increases the quantity of money demanded. C) negative slope because an increase in the price level decreases the quantity of money demanded. D) negative slope because an increase in the interest rate decreases the quantity of money demanded.

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6) An increase in the interest rate A) increases the percentage yield of holding money. B) decreases the opportunity cost of holding money. C) increases the opportunity cost of holding money. D) decreases the percentage yield of holding money.

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7) An increase in the interest rate causes A) a movement down along the money demand curve. B) the money demand curve to shift to the right. C) the money demand curve to shift to the left. D) a movement up along the money demand curve.

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8) Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to A) not change. B) increase. C) decrease. D) increase if the economy is in a recession.

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9) Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should A) not change. B) increase, then decrease. C) decrease. D) increase.

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10) Which of the following will lead to a decrease in the equilibrium interest rate in the economy? A) a decrease in GDP B) an increase in the reserve requirement C) a sale of government securities by the Fed D) an increase in the discount rate E) an increase in the price level

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11) When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have A) the amount of money that they want to hold. B) to sell Treasury bills. C) less money than they want to hold. D) more money than they want to hold.

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Figure 15-1

12) Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1

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to Money demand2 if A) B) C) D)

the price level decreased. the Federal Reserve sold Treasury securities. real GDP increased. the interest rate increased.

13) Refer to Figure 15-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if A) B) C) D)

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real GDP decreased. the Federal Reserve sold Treasury securities. the price level increased. the interest rate decreased.

14) Which of the following is true? A) The money market model is essentially a model that determines the short-term real rate of interest. B) The money market model is essentially a model that determines the short-term nominal rate of interest. C) The loanable funds model is essentially a model that determines the short-term real rate of interest. D) The loanable funds model is essentially a model that determines the long-term nominal rate of interest.

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Figure 15-2

15) Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by A) an open market sale of Treasury securities by the Federal Reserve. B) a decrease in the required reserve ratio by the Federal Reserve. C) an increase in the price level. D) a decrease in real GDP.

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Figure 15-3

16) Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 toMS2, at the interest rate of 3 percent households and firms will A) want to hold more money. C) buy Treasury bills.

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B) neither buy nor sell Treasury bills. D) sell Treasury bills.

17) The interest rate that banks charge other banks for overnight loans is the A) discount rate. B) prime rate. C) federal funds rate. D) Treasury bill rate.

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18) The Fed can increase the federal funds rate by A) buying Treasury bills, which increases bank reserves. B) selling Treasury bills, which increases bank reserves. C) selling Treasury bills, which decreases bank reserves. D) buying Treasury bills, which decreases bank reserves.

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19) If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run. A) reduce; lower B) reduce; raise C) increase; lower D) increase; raise

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Figure 15-7

20) Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from B) C to B. C) A toE. D) C to D . E) A toB. A) B to C.

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21) Refer to Figure 15-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from B) A toE. C) A toB. D) C to B. E) B to C. A) C to D .

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22) Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from B) C to D . C) A toB. D) E toA. E) B to A. A) C to B.

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23) Refer to Figure 15-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from B) B to C. C) A to B. D) C to B. E) C to D . A) B to D .

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24) Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from B) B to A. C) C to D . D) A toE. E) C to B. A) A toB.

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25) Which of the following describes what the Fed would do to pursue an expansionary monetary policy? A) use discount policy to raise the discount rate B) use open market operations to buy Treasury bills C) use open market operations to sell Treasury bills D) raise the reserve requirement

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26) Contractionary monetary policy on the part of the Fed results in A) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. B) an increase in the money supply, an increase in interest rates, and an increase in GDP. C) an increase in the money supply, a decrease in interest rates, and an increase in GDP. D) a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

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27) Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in A) oil prices. B) investment spending. C) income tax rates. D) business taxes.

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28) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply A) lowers the interest rate, and firms increase investment spending. B) raises the interest rate and consumers decrease spending on durable goods. C) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. D) causes people to spend more because they know prices will rise in the future.

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29) When the Fed embarked on a policy known as quantitative easing, they A) bought longer -term securities than are usually bought in open market operations. B) slowly lowered the federal funds rate target until it was equal to zero. C) opened up lending to primary dealers, commercial banks, and investment banks. D) reduced the required reserve ration by one -quarter point per month for 12 months.

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Answer Key Testname: REVIEWQS_CH15

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29)

B C C A D C D C D A D C C B A C C C A E D C D D B D B A A

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