Monetary Policy Review Quiz

Suppose the Federal Reserve buys $2000 worth of securities from the securities dealers on the open market. If the reserve requirement is 25 percent and the banks hold no excess reserves, what will happen to the total money supply?

• $8000

• $10,000

• $6000

• $17,000

• $9500

To reduce inflation, the Federal Reserve could

• expand the money supply in order to raise interest rates, which increase investment.

• expand the money supply in order to lower interest rates, which increases investment.

• contract the money supply in order to raise interest rates, which increases investment.

• contract the money supply in order to raise interest rates, which decreases investment.

• buy bonds and decrease the discount rate to encourage borrowing.

Which of the following is the most liquid monetary aggregate?

• M1

• M2

• Stocks

• Bonds

In the formula MV=PQ, PQ together stands for

• Price and Quantity

• Price and Quality

• Real GDP

• Real Output

• Nominal GDP

The reserve rate, the money supply, and interest rates are most likely to change in which of the following ways when the Federal Reserve sells bonds?

• Reserve Rate: Increase, Money Supply: Increase, Interest Rates: Increase

• Reserve Rate: Increase, Money Supply: Increase, Interest Rates: Decrease

• Reserve Rate: Decrease, Money Supply: Increase, Interest Rates: Decrease

• Reserve Rate: Increase, Money Supply: Decrease, Interest Rates: Increase

• Reserve Rate: Decrease, Money Supply: Decrease, Interest Rates: Decrease

Why is it a good thing that the American Dollar is considered an inconvertible fiat standard?

• The American Dollar is backed by gold and other natural resources.

• The American Dollar is backed by the US Treasury.

• The American Dollar is backed by faith and cannot be converted into anything else.

• The American Dollar cannot be changed easily due to politicians taken advantage of the money supply.

• The American Dollar is easily counterfeited and thus cannot be backed up by physical assets.

The Fed Funds Rate is the

• interest rate that the Federal Reserve changes banks to borrow short-term loans.

• interest rate that the US Treasury office changes banks to print more money.

• interest rate that the Federal Reserve changes itself to create money.

• interest rate that banks pay to other banks in order to borrow short-term loans.

• interest rate that you earn when you deposit your money into a high earning savings account.

If the Federal Reserve wanted to expand the economy by increasing the money supply, what would be the impact on price level and the unemployment rate in short run?

• price level would decrease and unemployment would decrease

• price level would remain unchanged and unemployment would decrease

• price level would increase and unemployment would decrease

• price level would increase and unemployment would increase

• price level would increase and unemployment would remain unchanged

Which of the following combinations of monetary policy actions would definitely cause a decrease in aggregate demand in short run?

• Decrease Discount Rate, Buy bonds Open Market Operations, decrease Reserve Requirement

• decrease Discount Rate, Sell bonds Open Market Operations, decrease Reserve Requirement

• increase Discount Rate, Buy bonds Open Market Operations, increase Reserve Requirement

• Increase Discount Rate, Sell bonds Open Market Operations, decrease Reserve Requirement

• Increase Discount Rate, Sell bonds Open Market Operations, increase Reserve Requirement

The reserve requirement is the

• Buying and selling of government securities to control the money supply.

• interest rate the Federal Reserve charges banks to borrow short-term loans.

• The percent of demand deposits each bank must keep on hand to meet demand.

• the percent of demand deposits each bank had over and above the amount set by the Federal Reserve.

• the percent of all assets held by the bank in order to meet demand deposits.