4.6 Monetary Policy Review

When a central bank sells securities in the open market, which of the following set of events is most likely to follow?

• An increase in the money supply, a decrease in interest rates, and an increase in AD

• An increase in the money supply, an increase in interest rates, and a decrease in AD

• An increase in interest rates, an increase in the government budget deficit, and a movement toward trade surplus

• A decrease in the money supply, an increase in interest rates, and a decrease in AD

• A decrease in the money supply, a decrease in interest rates, and a decrease in AD

If the Federal Reserve sells a significant amount of government securities in the open market, which of the following will occur?

• The total amount of loans made by commercial banks will decrease.

• The total amount of loans made by commercial banks will increase.

• The money supply will increase.

• Rates of interest will decrease.

• Rates of interest and amount of loans made by commercial banks will remain unchanged.

To counteract a recession, the Federal Reserve should

• raise the reserve requirement and the discount rate

• sell securities on the open market and raise the discount rate

• sell securities on the open market and lower the discount rate

• buy securities on the open market and raise the discount rate

• buy securities on the open market and lower the discount rate

Open market operations refer to which of the following activities?

• The buying and selling of stocks in the New York stock market

• The loans made by the Federal Reserve to member commercial banks 

• The buying and selling of government securities by the Federal Reserve

• The government's purchases and sales of municipal bonds

• The government's contribution to net exports

If the reserve requirement is 25 percent and banks hold no excess reserves, an open market sale of $400,000 of government securities by the Federal Reserve will 

• increase the money supply by up to $1.6 million

• decrease the money supply by up to $1.6 million

• increase the money by up to $300,000

• increase the money supply by up to $100,000

• decrease the money supply by up to $100,000

Which of the following government policies can reduce the rate of inflation in the short run?

• Providing investment tax credit for businesses

• Reducing personal income tax rates

• Selling bonds on the open market 

• Decreasing the reserve requirement

• Decreasing the discount rate

The purchase of bonds by the Federal Reserve will have the greatest effect on real gross domestic product if which of the following situations exist in the economy?

• The required reserve ratio is high, and the interest rate has a large effect on investment spending.

• The required reserve ration is high, and the interest rate has a small effect on investment spending.

• The required reserve ratio is low, and the interest rate has a large effect on investment spending.

• The required reserve ratio is low, and the marginal propensity to consume is low.

• The marginal propensity to consume is high, and the interest rate has a small effect on investment spending.

In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?

• Bond Prices - no change, Interest Rates - Increase

• Bond Prices - Increase, Interest Rates - Increase

• Bond Prices - Increase,  Interest Rates - Decrease

• Bond Prices - Decrease, Interest Rates - Increase

• Bond Prices - Decrease, Interest Rates - Decrease

The Federal Reserve can cause an increase in interest rates in an attempt to

• reduce inflation

• reduce cyclical unemployment

• reduce structural unemployment

• increase aggregate demand

• increase investment spending

Which of the following is a monetary policy action a central bank would implement to control inflation?

• Target a lower overnight interbank lending rate

• Sell government bonds to the public

• Lower the discount rate

• Lower the required reserve ratio

• Increase the monetary base