chapter 33 review
Student:
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1. A consumer holds money to meet spending needs. This would be an example of the:
A) Use of money as a measure of value
B) Use of money as legal tender
C) Transactions demand for money
D) Asset demand for money
2. The transactions demand for money will shift to the:
A) Left when nominal GDP increases
B) Left when nominal GDP decreases
C) Right when nominal GDP decreases
D) Right when the interest rate increases
3. A decrease in the interest rate will cause a(n):
A) Increase in the transactions demand for money
B) Decrease in the transactions demand for money
C) Decrease in the amount of money held as an asset
D) Increase in the amount of money held as an asset
4. Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total
demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset
demand for money would be:
A) $125
B) $175
C) $200
D) $225
5. Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total
demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent
interest rate. If the money supply increases, then Sm2 will shift to:
A) Sm3 and the interest rate will be 4 percent
B) Sm3 and the interest rate will be 8 percent
C) Sm1 and the interest rate will be 8 percent
D) Sm1 and the interest rate will be 4 percent
6. When the interest rate falls, the:
A) Asset demand for money decreases
B) Transactions demand for money increases
C) Total amount of money demanded increases
D) Total amount of money demanded decreases
7. In which case would the quantity of money demanded by the public tend to increase by the
greatest amount?
A) The interest rate increases and nominal GDP increases
B) The interest rate increases and nominal GDP decreases
C) The interest rate decreases and nominal GDP decreases
D) The interest rate decreases and nominal GDP increases
8. Which of the following statements is true?
A) Bond prices and the interest rate are inversely related
B) A lower interest rate raises the opportunity cost of holding money
C) The supply of money is directly related to the interest rate
D) The total demand for money is directly related to the interest rate
9. The fundamental objective of monetary policy is to assist the economy in achieving:
A) A rapid pace of economic growth
B) A money supply which is based on the gold standard
C) A full-employment, noninflationary level of total output
D) A balanced-budget consistent with full-employment
10. The purchase and sale of government securities by the Fed is called:
A) Federal funds market
B) Open market operations
C) Money market transactions
D) Term auction facility
11. The interest rate that the Fed charges banks for loans to them through the traditional channel is
called:
A) Discount rate
B) Term auction rate
C) Federal funds rate
D) Reserve rate
12. The tools of monetary policy for altering the reserves of commercial banks are the:
A) Tax rate, transfer payments, and level of government spending
B) Consumer price index, inflation, and unemployment rate
C) Public debt, budget surplus, budget deficit, and interest rates
D) Discount rate, reserve ratio, open-market operations, and term auction facility
13. The Federal Reserve alters the amount of the nation's money supply by:
A) Reducing the liabilities of the banking system
B) Controlling the assets of the nation's largest banks
C) Minting coins and printing currency that is distributed to banks
D) Manipulating the size of excess reserves held by commercial banks
14. If the Fed buys government securities from commercial banks in the open market:
A) The Fed gives the securities to the commercial banks and increases the banks' reserves
B) The Fed gives the securities to the commercial banks and decreases the banks' reserves
C) Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
D) Commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves
15. If the Fed sells government securities to the public in the open market,:
A) The Fed gives the securities to the public; the public pays for the securities by writing checks that
when cleared will increase commercial bank reserves at the Fed
B) The Fed gives the securities to the public; the public pays for the securities by writing checks that
when cleared will decrease commercial bank reserves at the Fed
C) The public gives the securities to the Fed in exchange for a Fed check, which when deposited at
commercial banks will increase their reserves at the Fed
D) The public gives the securities to the Fed in exchange for a Fed check, which when deposited at
commercial banks will decrease their reserves at the Fed
16. Assume the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in
government securities to the public, the money supply will immediately:
A) Decrease by $120 million and the maximum money-lending potential of the commercial banking
system will decrease by $120 million
B) Decrease by $120 million and the maximum money-lending potential of the commercial banking
system will decrease by $480 million
C) Increase by $120 million and the maximum money-lending potential of the commercial banking
system will increase by $480 million
D) Increase because the securities are an asset to the commercial banks and a liability to the Federal
Reserve
17. Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in
government securities from the public, then the money supply will immediately:
A) Increase by $80 million, and the maximum money-lending potential of the commercial banking
system will increase by another $80 million
B) Increase by $80 million, but the maximum money-lending potential of the commercial banking
system will decrease by $80 million
C) Increase by $80 million, and the maximum money-lending potential of the commercial banking
system will increase by another $400 million
D) Increase by $80 million, and the maximum money-lending potential of the commercial banking
system will increase by another $320 million
18. Which of the following Fed actions increases the excess reserves of commercial banks?
A) Selling bonds to the public
B) Selling bonds to commercial banks
C) Increasing the discount rate
D) Lower the reserve ratio
19. The Federal Reserve could reduce the money supply by:
A) Selling government bonds in the open market
B) Buying government bonds in the open market
C) Operating the term auction facility
D) Reducing the discount rate
20. The major purpose of the Federal Reserve buying government securities in open market
operations is to:
A) Increase interest rates
B) Raise money for government spending
C) Reduce the excess reserves of banks
D) Allow banks to increase their lending
21. Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million
worth of government securities. If the securities are purchased from the public, then this action has
the potential to increase bank lending by a maximum of:
A) $600 million, and also by $600 million if the securities are purchased directly from commercial
banks
B) $800 million, and also by $800 million if the securities are purchased directly from commercial
banks
C) $600 million, but by $800 million if the securities are purchased directly from commercial banks
D) $800 million, but only by $600 million if the securities are purchased directly from commercial
banks
22. Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion
worth of government securities. If the securities are purchased from the public, this action has the
potential to increase money supply by a maximum of:
A) $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks
B) $14 billion, but by $16 billion if the securities are purchased directly from commercial banks
C) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks
D) $14 billion, and by $20 billion if the securities are purchased directly from commercial banks
23. Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial
banks and the reserve ratio is 20 percent, then the effect will be to reduce:
A) Excess reserves by $8 million
B) Excess reserves by $200 million
C) The potential money supply by $200 million
D) The potential money supply by $400 million
24. If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this
transaction is an increase in:
A) Money supply M1
B) Bank A's excess reserves
C) Bank A's liabilities
D) Bank A's required reserves
25. The most frequently used monetary device for achieving price stability is:
A) Open-market operations
B) The discount rate
C) The reserve ratio
D) The prime interest rate
26. Lowering the reserve ratio:
A) Increases the total reserves in the banking system
B) Also reduces the discount rate
C) Turns required reserves into excess reserves
D) Reduces the amount of excess reserves the banks keep
27. A television report states: "The Federal Reserve will lower the discount rate for the fourth time this
year." This report indicates that the Federal Reserve is most likely trying to:
A) Reduce inflation
B) Save the banking industry
C) Stimulate the economy
D) Improve the savings rate
28. The interest rate that banks charge one another for the loan of excess reserves is the:
A) Prime interest rate
B) Federal funds rate
C) Discount rate
D) Term auction rate
29. Refer to the above graphs, in which the numbers in parentheses near the AD1, AD2, and AD3
labels indicate the level of investment spending associated with each curve, respectively. All numbers
are in billions of dollars. The interest rate and the level of investment spending in the economy are at
point D on the investment demand curve. To achieve the long-run goal of a noninflationary
full-employment output Qf in the economy, the Fed should:
A) Decrease aggregate demand by increasing the interest rate from 2 to 4 percent
B) Decrease aggregate demand by increasing the interest rate from 4 to 6 percent
C) Increase aggregate demand by decreasing the interest rate from 4 to 2 percent
D) Increase the level of investment spending from $120 billion to $150 billion
30. Refer to the above graphs, in which the numbers in parentheses near the AD1, AD2, and AD3
labels indicate the level of investment spending associated with each curve, respectively. All numbers
are in billions of dollars. The interest rate and the level of investment spending in the economy are at
point B on the investment demand curve. To achieve the long-run goal of a noninflationary
full-employment output Qf in the economy, the Fed should:
A) Decrease the interest rate from 10 to 8 percent
B) Decrease the interest rate from 8 to 6 percent
C) Decrease the interest rate from 6 to 4 percent
D) Increase investment spending from $30 to $60 billion
31. In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes
in output and employment in the economy:
A) A decrease in aggregate demand will increase output
B) An increase in the money supply will decrease the rate of interest
C) A decrease in excess reserves will increase the money supply
D) A decrease in the rate of interest will decrease aggregate demand
32. The level of GDP, given ceteris paribus, will tend to increase when:
A) Reserve requirements are increased
B) There is an increase in the discount rate
C) The Federal Reserve buys government securities in the open market
D) The Federal Reserve sells government securities in the open market
33. The Federal Reserve can increase aggregate demand by:
A) Reducing the money supply
B) Reducing the discount rate
C) Raising the reserve requirement
D) Selling government securities in the open market
34. Which of the following is the most accurate description of events when monetary authorities
increase the size of commercial banks' excess reserves?
A) A fall in interest rates decreases the money supply, causing an increase in investment spending,
output, and employment
B) A rise in interest rates increases the money supply, causing a decrease in investment spending,
output, and employment
C) The money supply is decreased, which increases the interest rate, and causes investment
spending, output, and employment to decrease
D) The money supply is increased, which decreases the interest rate, and causes investment
spending, output, and employment to increase
35. Which of the following best describes what occurs when monetary authorities sell government
securities?
A) There is a decrease in the size of commercial banks' excess reserves, the money supply
increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP
B) There is a decrease in the size of commercial banks' excess reserves, the money supply
decreases, and the interest rates rise, thereby causing a decrease in investment spending and real
GDP
C) There is a decrease in the size of commercial banks' excess reserves, the money supply
decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP
D) There is an increase in the size of commercial bank reserves, the money supply increases, and
interest rates fall, thereby causing an increase in investment spending and real GDP
36. Refer to the above diagrams, in which the numbers in parentheses near the AD 1, AD2, and AD3
labels indicate the level of investment spending associated with each curve. All figures are in billions.
The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary
full-employment level of real GDP?
A) Increase the money supply from $75 to $150 billion
B) Increase the money supply from $150 to $225 billion
C) Decrease the money supply from $225 to $150 billion
D) Make no change in the money supply
37. Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3
labels indicate the level of investment spending associated with each curve. All figures are in billions.
The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate
demand curve AD3. What policy should the Fed pursue to achieve a noninflationary full-employment
level of real GDP?
A) Increase the money supply from $75 to $150 billion
B) Increase the money supply from $150 to $225 billion
C) Decrease the money supply from $225 to $150 billion
D) Make no change in the money supply
38. Refer to the above diagrams, in which the numbers in parentheses near the AD 1, AD2, and AD3
labels indicate the level of investment spending associated with each curve. All figures are in billions.
The economy is at point X on the investment demand curve. Given these conditions, what policy
should the Fed pursue to achieve a noninflationary full-employment level of real GDP?
A) Decrease aggregate demand from AD1 to AD2
B) Increase the money supply from $75 to $150 billion
C) Increase interest rates from 4 to 8 percent
D) Make no change in monetary policy
39. The major problem facing the economy is high unemployment and weak economic growth. The
inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase
the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve
that objective?
A) Selling government securities and raising the discount rate
B) Selling government securities and lowering the discount rate
C) Buying government securities and lowering the discount rate
D) Buying government securities and raising the reserve ratio
40. Suppose the economy is at full employment with a high inflation rate. Which combination of
government policies is most likely to reduce the inflation rate?
A) Buy government securities in the open market and increase taxes
B) Buy government securities in the open market and decrease taxes
C) Sell government securities in the open market and increase government spending
D) Sell government securities in the open market and decrease government spending
41. Suppose the economy is at full employment with a high inflation rate. Which combination of
government policies is least likely to reduce the inflation rate?
A) Buy government securities in the open market and increase taxes
B) Buy government securities in the open market and decrease taxes
C) Sell government securities in the open market and increase government spending
D) Sell government securities in the open market and decrease government spending
42. When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce:
A) The unemployment rate
B) The inflation rate
C) The target federal funds rate
D) The discount rate
43. Assume that the MPC is .75. If the Federal Reserve increases the money supply and investment
spending increases by $8 billion, then aggregate demand is likely to:
A) Increase by $6 billion
B) Increase by $8 billion
C) Increase by $32 billion
D) Decrease by $8 billion
44. Assume that the MPC is .80. If the Federal Reserve decreases the money supply, interest rates
rise, and investment spending falls by $10 billion, then aggregate demand is most likely to:
A) Increase by $10 billion
B) Decrease by $10 billion
C) Increase by $50 billion
D) Decrease by $50 billion
chapter 33 review Key
1. C
2. B
3. D
4. C
5. A
6. C
7. D
8. A
9. C
10. B
11. A
12. D
13. D
14. C
15. B
16. B
17. D
18. D
19. A
20. D
21. C
22. C
23. C
24. B
25. A
26. C
27. C
28. B
29. B
30. B
31. B
32. C
33. B
34. D
35. B
36. C
37. A
38. B
39. C
40. D
41. B
42. B
43. C
44. D