Question

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1. When the Fed buys short-term Treasury securities, short-term interest rates:

a. fall.

b. rise.

c. could rise or fall.

d. stay the same.

2. Which is NOT a duty performed by the Federal Reserve System?

a. manage the nation's payment system

b. print money

c. regulate the U.S. banking system

d. maintain the bank account for the U.S. Treasury

3. If the Fed wants to decrease the money supply, it will:

a. buy government bonds.

b. lower the discount rate on lending.

c. set up the Term Auction Facility.

d. increase the rate of interest paid on reserves.

4. Because the United States has a fractional reserve banking system, banks hold:

a. less than 100% of deposits as reserves.

b. more than 100% of deposits as reserves.

c. 100% of deposits as reserves.

d. no currency in their vaults.

5. What reason do many people think explains why the Fed overstimulated the money supply in the 1970s?

a. because of a presidential dictate to do so

b. to induce a recession

c. because of the high unemployment associated with the oil crises

d. because it was trying to control inflation

6. What happens to GDP if the Fed is too responsive to changes in aggregate demand?

a. Volatility increases.

b. Volatility decreases.

c. GDP is difficult to influence in the short-run and the long-run.

d. It ends up being lower in all cases.

7. The problem associated with too much expansionary monetary policy is:

a. additional inflation.

b. additional unemployment.

c. higher interest rates.

d. reduced economic growth.

8. Monetary rules work best when:

a. the Fed loses control of the money supply.

b. interest rates are high.

c. money velocity is stable.

d. inflation expectations are high.

9. Disinflation is more painful when the central bank:

a. increases the rate of inflation.

b. runs out of money.

c. is credible.

d. is not credible.

10. When hit with a negative real shock, the Fed must pick a policy that chooses between:

a. a growth rate that's too low and an unemployment rate that's too high.

b. a growth rate that's too low and an inflation rate that's too high.

c. a growth rate that's too high and wages that are too low.

d. a growth rate that's too high and a savings rate that's too low.

11. In the AD–AS model, an increase in money growth will cause the growth rate of real GDP to increase in:

a. the short run only.

b. the long run only.

c. both the short run and the long run.

d. neither the short run nor the long run.

Answer 1

1. When the Fed buys short-term Treasury securities, short-term interest rates fall. Hence the correct answer is (A).

2. Printing money is not a duty performed by the Federal Reserve System. This is performed by the US Treasury. Hence the correct answer is (B).

3. If the Fed wants to decrease the money supply, it will increase the rate of interest paid on reserves so that the banks increase their reserves. Hence the correct answer is (D).

4. Because the United States has a fractional reserve banking system, banks hold less than 100% as reserves. Hence the correct answer is (A).

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