Monetary Policy and Money Market Quiz

What are the two main reasons people demand money?

• To buy luxury goods and to travel

• For transactions and to invest in stocks

• For transactions and preference for liquid assets

• To save for retirement and to pay taxes

How is liquidity defined in the context of assets?

• The risk associated with holding an asset

• The potential for an asset to appreciate in value

• The ease of converting an asset into cash

• The ability to earn interest on an asset

What happens to the demand for money when interest rates are high?

• Demand for money remains unchanged

• Demand for money increases

• Demand for money decreases

• Demand for money fluctuates randomly

Who is responsible for supplying money in the economy?

• Commercial banks

• The Treasury Department

• Private investors

• The Federal Reserve

What is the effect of increasing the money supply on interest rates?

• Interest rates remain the same

• Interest rates decrease

• Interest rates become volatile

• Interest rates increase

What is the reserve requirement?

• The percentage of loans banks must approve

• The amount banks must hold in reserves

• The interest rate charged by banks

• The total amount of money in circulation

How does the Federal Reserve use the discount rate to influence the money supply?

• By changing the amount of reserves banks must hold

• By setting the exchange rate for foreign currencies

• By adjusting the interest rate charged to banks for borrowing

• By buying and selling government bonds

What are open market operations?

• The process of setting interest rates

• The buying and selling of government treasuries

• The regulation of commercial banks

• The issuance of new currency

What happens to the money supply when the Federal Reserve buys bonds?

• The money supply decreases

• The money supply remains unchanged

• The money supply becomes unstable

• The money supply increases

What is the mnemonic to remember the effect of buying and selling bonds on the money supply?

• Buy high, sell low

• Buy low, sell high

• Buy big, sell small

• Buy small, sell big