Modules 27 and 31 Worksheet: Monetary Policy

Name: Class: Date: ID: A Modules 27 and 31 Worksheet: Monetary Policy Multiple Choice Identify the choice that best completes the statement or answers the question. 1. All of the following are responsibilities of the Fed EXCEPT: A. control the monetary base. B. set the reserve requirement. C. oversee and regulate the banking system. D. set the discount rate. E. mint bills and coins. 2. The major tools of monetary policy available to the Federal Reserve System include: A. reserve requirements, margin regulations, and moral suasion. B. reserve requirements, open-market operations, and the discount rate. C. open-market operations, margin regulations, and moral suasion. D. the discount rate, margin regulations, and moral suasion. E. tax collections, open-market operations and the discount rate. 3. The tool of monetary policy that involves the Fed's buying and selling of government bonds is: A. moral suasion. B. reserve requirements. C. the discount rate. D. open-market operations. E. setting government transfer payments. 4. If the Fed increases the discount rate: A. the money supply is likely to decrease. B. the money supply is likely to increase. C. the money supply is not likely to change. D. the federal funds rate must decrease. E. nominal interest rates will fall. 5. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: A. other member banks and borrow at the federal funds rate. B. Federal Reserve and borrow at the discount rate. C. open market and borrow money there. D. Congress to borrow funds. E. Federal Reserve and borrow at the prime rate. 6. Which of the following actions would allow banks to lend out more money? A. an increase in the required reserve ratio B. a decrease in the discount rate C. an increase in the federal funds rate D. an increase in the required reserve ratio coupled with an increase in the federal funds rate E. an open market sale of Treasury securities. 7. The discount rate is the interest rate the Fed charges on loans to: A. consumers. B. the federal government. C. state governments. D. banks. E. corporations. 1

8. To the money supply, the Fed could. A. increase; lower the reserve requirements B. decrease; lower the discount rate C. increase; raise the federal funds rate D. decrease; conduct open-market purchases E. increase; lower income taxes. 9. To decrease the money supply, the central bank could: A. lower the discount rate. B. make open-market sales. C. increase the discount rate. D. lower the federal funds rate spread. E. increase the 30-year mortgage rate. 10. If the Fed conducts an open-market purchase: A. bank reserves decrease and the money supply decreases. B. bank reserves increase and the money supply increases. C. bank reserves decrease and the money supply increases. D. bank reserves increase and the money supply decreases. E. bank reserves increase and the money supply does not change. 11. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will: A. increase by $10 million. B. increase by $8 million. C. decrease by $10 million. D. decrease by $50 million. E. increase by $50 million. 12. Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action? A. The money supply would stay the same. B. The money supply would decrease by $100 million. C. The money supply would increase by $100 million. D. The money supply would increase by more than $100 million. E. The money supply would increase, but by less than $100 million. 13. Suppose that the reserve ratio is 10% when the Fed buys $100,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, will be added to the money supply. A. $666,667 B. $111,111 C. $250,000 D. $1,000,000 E. $900,000 14. When banks borrow and lend reserves from each other, they are participating in the market. A. subprime mortgage B. long-term capital C. money D. federal funds E. foreign exchange 2

15. Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. If banks hold no excess reserves, then the reserve ratio is: A. 0.1. B. 0.5. C. 0.33. D. 0.2. E. 3. 16. Monetary policy attempts to affect the overall level of spending in the economy by changes in: A. taxes. B. taxes and spending. C. taxes and interest rates. D. interest rates and the quantity of money. E. imports and exports. 17. Monetary policy involves: A. changes in government spending. B. changes in government tax receipts. C. changes in the quantity of money. D. changes in tax rates. E. changes in import tariffs. Figure 31-1: Money Market I 18. Use the Money Market I Figure 31-1. If the money market is initially in equilibrium at point E and the central bank bonds, then the interest rate will: A. sells; move toward point H. B. sells; move toward point L. C. buys; remain at point E. D. sells; remain at point E. E. buys; move toward point H. 3

19. Use the Money Market I Figure 31-1. If the money market is initially in equilibrium at point E and the central bank bonds, then the interest rate will: A. buys; move toward point H. B. sells; move toward point L. C. buys; remain at point E. D. sells; remain at point E. E. buys; move toward point L. 20. A sale of bonds by the Fed: A. raises interest rates by increasing the money supply. B. raises interest rates by decreasing the money demand. C. lowers interest rates by reducing the money supply. D. lowers interest rates by increasing the money supply. E. raises interest rates by reducing the money supply. 21. Suppose the Fed buys bonds. We can expect this transaction to: A. decrease the money supply, increase bond prices, and decrease interest rates. B. increase the money supply, decrease bond prices, and decrease interest rates. C. increase the money supply, increase bond prices, and decrease interest rates. D. decrease the money supply, decrease bond prices, and increase interest rates. E. decrease the money supply, increase bond prices, and increase interest rates. Figure 31-2: Changes in the Money Supply 22. Use the Changes in the Money Supply Figure 31-2. If the supply of money shifts from S 1 to S 2, the Fed must have government bonds in the open market. A. sold B. bought C. issued new D. borrowed E. lent 23. Use the Changes in the Money Supply Figure 31-2. Fed policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that the government bonds. A. lowers; price of B. increases; interest rate on C. decreases; issuing of D. increases; supply of E. increases; demand for 4

24. According to the liquidity preference model, what will happen to the money supply curve, the equilibrium interest rate, and the equilibrium quantity of money, if the Fed buys Treasury bonds in an open market operation? A. Money Supply Curve shifts leftward, Interest Rate increases, Quantity of Money decreases B. Money Supply Curve shifts leftward, Interest Rate increases, Quantity of Money increases C. Money Supply Curve shifts leftward, Interest Rate decreases, Quantity of Money decreases D. Money Supply Curve shifts rightward, Interest Rate increases, Quantity of Money decreases E. Money Supply Curve shifts rightward, Interest Rate decreases, Quantity of Money increases 25. Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a(n) in the interest rate as the money shifts. A. decrease; supply; outward B. decrease; supply; inward C. decrease; demand; inward D. increase; demand; outward E. decrease; demand; outward 26. The Federal Reserve's Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to Treasury bills to the money curve. A. sell; decrease; demand B. sell; decrease; supply C. buy; decrease; supply D. buy; increase; demand E. sell; increase; supply 27. Other things equal, an increase in the interest rate leads to a: A. fall in investment and consumer spending. B. rise in investment and consumer spending. C. fall in investment spending and a rise in consumer spending. D. fall in consumer spending and a rise in investment spending. E. fall in consumer spending and no change in investment spending. 28. If the economy is suffering from a recessionary gap, the Fed should conduct policy by the money supply. A. expansionary monetary; decreasing B. expansionary monetary; increasing C. contractionary monetary; decreasing D. contractionary fiscal; increasing E. expansionary fiscal; increasing 5

29. Expansionary monetary policy: A. increases the money supply, interest rates, consumption, and investment. B. decreases the money supply, interest rates, consumption, and investment. C. increases the money supply, decreases interest rates, and increases consumption and investment. D. decreases the money supply, increases interest rates, and decreases consumption and investment. E. increases the money supply, decreases interest rates, and decreases consumption and investment. 30. Federal Reserve policy that lowers the interest rate is called because it. A. contractionary fiscal policy; aims at heading off inflation B. expansionary monetary policy; increases short-run aggregate supply C. contractionary monetary policy; reduces saving and increases consumption D. expansionary monetary policy; increases aggregate demand E. expansionary fiscal policy; increases aggregate demand 31. Expansionary monetary policy causes: A. a decrease in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. B. a decrease in interest rates, a decrease in planned investment spending, and an increase in equilibrium GDP. C. an increase in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. D. an increase in interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP. E. a decrease in interest rates, an increase in planned investment spending, and a decrease in equilibrium GDP. 32. If the economy is experiencing an inflationary gap, the Fed should conduct monetary policy to aggregate demand. A. contractionary; decrease B. contractionary; increase C. expansionary; decrease D. expansionary; increase E. expansionary; hold constant 33. Given an inflationary gap, the Fed will use monetary policy to real GDP and the price level. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. hold constant; decrease 34. Given an inflationary gap, the Fed will use monetary policy to interest rates and aggregate demand. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. increase; Hold constant 6

Figure 31-3: The Money Supply and Aggregate Demand 35. Use the The Money Supply and Aggregate Demand Figure 31-3. Panel (a) illustrates what happens when the Fed decides to the money supply and interest rates. A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase E. decrease; hold constant 36. Use the The Money Supply and Aggregate Demand Figure 31-3. Panel (b) illustrates what happens when the Fed decides to the money supply and interest rates. A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase E. increase; hold constant 37. Use the The Money Supply and Aggregate Demand Figure 31-3. Panel illustrates what happens when the Fed decides to government bonds and the money supply. A. (a); sell; increase B. (b); buy; increase C. (b); sell; decrease D. (a); buy; decrease E. (b); buy; decrease 38. Use the The Money Supply and Aggregate Demand Figure 31-3. If the economy is experiencing a recessionary gap, the Fed would government bonds, which would the money supply and interest rates. This is shown in Panel. A. sell; decrease; increase; (b) B. buy; decrease; decrease; (a) C. buy; increase; decrease; (a) D. sell; increase; decrease; (a) E. buy; increase; decrease; (b) 7

39. Use the The Money Supply and Aggregate Demand Figure 31-3. If the economy is experiencing an inflationary gap, the Fed would government bonds, which would the money supply and interest rates. This is shown in Panel. A. buy; increase; decrease; (a) B. sell; decrease; increase; (b) C. buy; decrease; increase; (b) D. sell; increase; increase; (b) E. buy; increase; decrease; (b) 40. Use the The Money Supply and Aggregate Demand Figure 31-3. If the Fed intended to encourage investment and expand the economy, it would government bonds, the money supply, and interest rates. This is shown in Panel. A. buy; increase; decrease; (a) B. sell; increase; decrease; (b) C. buy; decrease; decrease; (a) D. buy; increase; increase; (a) E. buy; increase; decrease; (b) Figure 31-5: Monetary Policy I 41. Use the Monetary Policy I Figure 31-5. If the money market is initially at E 1 and the central bank chooses to sell bonds, then: A. AD 2 will shift to the right, creating an inflationary gap. B. AD 2 may shift to AD 1, creating a recessionary gap. C. AD 1 may shift to AD 2, closing an existing recessionary gap. D. AD 1 will shift to the left, increasing an existing recessionary gap. E. AD 1 will shift to the left, increasing an existing inflationary gap. 8

42. Use the Monetary Policy I Figure 31-5. If the money market is initially at E 1 and the central bank chooses to buy bonds, then: A. AD 2 will shift to the right, creating an inflationary gap. B. AD 2 may shift to AD 1, creating a recessionary gap. C. AD 1 may shift to AD 2, closing an existing recessionary gap. D. AD 1 will shift to the left, increasing an existing recessionary gap. E. AD 2 will shift to the right, increasing an existing recessionary gap. 43. Use the Monetary Policy I Figure 31-5. If the money market is initially at E 2 and the central bank chooses to buy bonds, then: A. AD 2 will shift to the right, creating an inflationary gap. B. AD 2 may shift to AD 1, creating a recessionary gap. C. AD 1 may shift to AD 2, closing an existing recessionary gap. D. AD 1 will shift to the left, increasing an existing recessionary gap. E. AD 2 will shift to the right, creating a recessionary gap. 44. Use the Monetary Policy I Figure 31-5. If the money market is initially at E 2 and the central bank chooses to sell bonds, then: A. AD 2 will shift to the right, creating an inflationary gap. B. AD 2 may shift to AD 1, creating a recessionary gap. C. AD 1 may shift to AD 2, closing an existing recessionary gap. D. AD 1 will shift to the left, increasing an existing recessionary gap. E. AD 2 will shift to the right, creating a recessionary gap. Figure 31-6: Monetary Policy II 45. Use the Monetary Policy II Figure 31-6. Starting from short-run equilibrium at Y 2, to eliminate the inflationary gap, monetary policy should be: A. expansionary to fight high unemployment. B. contractionary to fight high unemployment. C. neutral to increase LRAS. D. balanced to fight high inflation. E. contractionary to fight high inflation. 9

46. Use the Monetary Policy II Figure 31-6. Starting from short-run equilibrium at Y 2, sound central bank policy would be: A. contractionary monetary policy to fight high inflation. B. expansionary monetary policy to fight high unemployment. C. neutral to increase LRAS. D. balanced to fight high inflation. E. contractionary monetary policy to fight high unemployment. Figure 31-9: Output Gap 47. Use the Output Gap Figure 31-9. Consider the figure provided. If the economy is producing Y 1, then it has: A. an inflationary gap, as actual real GDP exceeds potential real GDP and the Fed should use contractionary monetary policy. B. a recessionary gap, as potential real GDP exceeds actual real GDP and the Fed should use expansionary monetary policy. C. an inflationary gap, as potential real GDP exceeds actual real GDP and the Fed should use contractionary fiscal policy. D. a recessionary gap, as actual real GDP exceeds potential real GDP and the Fed should use expansionary fiscal policy. E. an inflationary gap, as potential real GDP exceeds actual real GDP and the Fed should use expansionary fiscal policy. 48. Use the Output Gap Figure 31-9. Consider the figure provided. If the economy is currently producing Y 2, then it has: A. a recessionary gap, as actual real GDP exceeds potential real GDP and the Fed should use expansionary fiscal policy. B. a recessionary gap, as potential real GDP exceeds actual real GDP and the Fed should use expansionary monetary policy. C. an inflationary gap, as actual real GDP exceeds potential real GDP and the Fed should use contractionary monetary policy. D. an inflationary gap, as potential real GDP exceeds actual real GDP and the Fed should use contractionary fiscal policy. E. a recessionary gap, as potential real GDP exceeds actual real GDP and the Fed should use contractionary monetary policy. 10

49. The Federal Reserve engaging in an open market purchase will: A. shift the money supply curve to the right. B. shift the money supply curve to the left. C. shift the money demand curve to the left. D. shift the money demand curve to the right. E. have no impact on the money market. 50. All else constant, contractionary monetary policy will, A. increase the interest rate and cause AD to shift right. B. increase the interest rate and cause AD to shift left. C. decrease the interest rate and cause AD to shift left. D. decrease the interest rate and cause AD to shift right. E. increase the interest rate and cause SRAS to shift left. 11

ID: A Modules 27 and 31 Worksheet: Monetary Policy Answer Section MULTIPLE CHOICE 1. ANS: E PTS: 1 DIF: M REF: Module 27 2. ANS: B PTS: 1 DIF: E REF: Module 27 3. ANS: D PTS: 1 DIF: E REF: Module 27 MSC: Definitional 4. ANS: A PTS: 1 DIF: M REF: Module 27 5. ANS: A PTS: 1 DIF: E REF: Module 27 6. ANS: B PTS: 1 DIF: E REF: Module 27 7. ANS: D PTS: 1 DIF: E REF: Module 27 8. ANS: A PTS: 1 DIF: M REF: Module 27 9. ANS: B PTS: 1 DIF: M REF: Module 27 10. ANS: B PTS: 1 DIF: M REF: Module 27 11. ANS: C PTS: 1 DIF: M REF: Module 27 12. ANS: D PTS: 1 DIF: E REF: Module 27 13. ANS: D PTS: 1 DIF: M REF: Module 27 14. ANS: D PTS: 1 DIF: E REF: Module 27 15. ANS: C PTS: 1 DIF: D REF: Module 27 MSC: Analytical Thinking 16. ANS: D PTS: 1 DIF: E REF: Module 31 17. ANS: C PTS: 1 DIF: E REF: Module 31 18. ANS: A PTS: 1 DIF: M REF: Module 31 19. ANS: E PTS: 1 DIF: M REF: Module 31 20. ANS: E PTS: 1 DIF: M REF: Module 31 1

ID: A 21. ANS: C PTS: 1 DIF: M REF: Module 31 22. ANS: B PTS: 1 DIF: M REF: Module 31 23. ANS: E PTS: 1 DIF: D REF: Module 31 MSC: Analytical Thinking 24. ANS: E PTS: 1 DIF: M REF: Module 31 25. ANS: A PTS: 1 DIF: M REF: Module 31 26. ANS: B PTS: 1 DIF: D REF: Module 31 27. ANS: A PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 28. ANS: B PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 29. ANS: C PTS: 1 DIF: M REF: Module 31 30. ANS: D PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 31. ANS: A PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 32. ANS: A PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 33. ANS: D PTS: 1 DIF: M REF: Module 31 34. ANS: B PTS: 1 DIF: M REF: Module 31 35. ANS: C PTS: 1 DIF: M REF: Module 31 36. ANS: D PTS: 1 DIF: M REF: Module 31 37. ANS: C PTS: 1 DIF: M REF: Module 31 38. ANS: C PTS: 1 DIF: D REF: Module 31 MSC: Analytical Thinking 39. ANS: B PTS: 1 DIF: D REF: Module 31 MSC: Analytical Thinking 40. ANS: A PTS: 1 DIF: D REF: Module 31 MSC: Analytical Thinking 41. ANS: D PTS: 1 DIF: M REF: Module 31 42. ANS: C PTS: 1 DIF: M REF: Module 31 43. ANS: A PTS: 1 DIF: M REF: Module 31 2

ID: A 44. ANS: B PTS: 1 DIF: M REF: Module 31 45. ANS: E PTS: 1 DIF: M REF: Module 31 46. ANS: A PTS: 1 DIF: M REF: Module 31 47. ANS: A PTS: 1 DIF: M REF: Module 31 48. ANS: B PTS: 1 DIF: M REF: Module 31 49. ANS: A PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 50. ANS: B PTS: 1 DIF: M REF: Module 31 MSC: Concept-Based 3