4.6 Monetary Policy

What is the name of the interest rate this bank will be charged for an overnight loan from the Federal Reserve?

• The IOER (interest rate on excess reserves)

• The discount rate

• The prime rate

• The Federal Funds rate

Which of the following interest rates is a central bank MOST LIKELY to target directly when using monetary policy?

• The home lending interest rate

• The long-term interest rate

• The overnight interbank lending rate

• The real interest rate

What happens when a central bank buys bonds in a limited reserves system?

• The demand for money decreases.

• The money supply decreases.

• The interest rate increases.

• Excess reserves increase.

As a result of an output gap, the unemployment rate in Hamsterville is lower than the natural rate of unemployment.

Which of the following is an open market operation that could be used to close the gap?

• Sell bonds

• Purchase bonds

• Increase the discount rate

• Increase government spending

The central bank in Hamsterville has bought $100 in bonds from a bank. The reserve requirement is 25%.

What is the maximum possible change in the money supply?

• The money supply increases by $200

• The money supply decreases by $100

• The money supply increases by $400

• The money supply increases by $100

The Central Bank of Montoya took a monetary policy action that resulted in the shift in aggregate demand indicated in the graph shown here.

Which of the following is a monetary policy action that the central bank most likely took to cause the change shown?

• Decrease government spending

• Sell bonds

• Increase taxes

• Decreasing the reserve ratio

If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur?

• The rate of saving will increase.

• Unemployment and inflation will both increase.

• Businesses will purchase more factories and equipment.

• The budget deficit will increase.

If a central bank increases its administered interest rates, it is most likely responding to which of the following?

• An appreciating domestic currency

• Rising unemployment

• Rising price levels

• Slow economic growth

If the central bank decreases administered interest rates, which of the following will occur?

• Consumption will decrease.

• The government will balance its budget.

• The money supply will decrease.

• The price of bonds will increase.

If the interest rate on short-term government bonds declined as a result of policy actions by a central bank, the central bank must have...

• decreased the amount of currency in circulation

• sold government bonds to commercial banks

• increased the discount rate on loans to commercial banks

• decreased its administered interest rates