1. The desire to hold money for transactions purposes arises because:
A. receipts of income and expenditures are not perfectly synchronized.
B. people fear that prices will rise.
C. households want money on hand in case a good financial investment opportunity arises.
D. low interest rates reduce the opportunity cost of holding money.
2. The total demand for money curve will shift to the right as a result of:
A. an increase in nominal GDP.
B. an increase in the interest rate.
C. a decline in the interest rate.
D. a decline in nominal GDP.
3. The opportunity cost of holding money:
A. is zero because money is not an economic resource.
B. varies inversely with the interest rate.
C. varies directly with the interest rate.
D. varies inversely with the level of economic activity.
4. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?
A. loans to commercial banks
B. Federal Reserve Notes in circulation
C. Treasury deposits
D. reserves of commercial banks
5. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve.
B. a liability as viewed by the Federal Reserve.
C. neither an asset nor a liability as viewed by the Federal Reserve.
D. part of M1, but not of M2.
6. Which of the following will increase commercial bank reserves?
A. the purchase of government bonds in the open market by the Federal Reserve
B. an increase in the required reserve ratio
C. an increase in the discount rate
D. the sale of government bonds in the open market by the Federal Reserve Banks
7. In the United States monetary policy is the responsibility of the:
A. U.S. Treasury.
B. Department of Commerce.
C. Board of Governors of the Federal Reserve System.
D. U.S. Congress.
8. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
A. not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million.
B. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million.
C. directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million.
D. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.
9. Open-market operations refer to:
A. purchases of stocks in the New York Stock Exchange.
B. the purchase or sale of government securities by the Fed.
C. central bank lending to commercial banks.
D. the specifying of loan maximums on stock purchases.
10. An increase in the required reserve ratio:
A. increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.
11. The purpose of a restrictive monetary policy is to:
A. alleviate recessions.
B. raise interest rates and restrict the availability of bank credit.
C. increase aggregate demand and GDP.
D. increase investment spending.
12. The interest rate at which the Federal Reserve lend to commercial banks is called the:
A. prime rate.
B. short-term rate.
C. discount rate.
D. Federal funds rate.
13. Which of the following tools of monetary policy is considered the most important?
A. the discount rate
B. the reserve ratio
C. open market operations
D. the Federal funds rate
14. Which of the following will likely accompany an expansionary monetary policy?
A. a higher prime interest rate
B. a lower Federal funds rate
C. a higher discount rate
D. higher income tax rates
15. In the 1990s and early 2000s, Japan’s central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan’s experience is an illustration of:
A. the crowding-out effect.
B. “pulling on a string.”
C. the Taylor rule.
D. cyclical asymmetry.
Answers:
| 1. A | 2. A | 3. C | 4. A | 5. B | 6. A |
| 7. C | 8. D | 9. B | 10. B | 11. B | 12. C |
| 13. C | 14. B | 15. D |