Purdue
University North Central
Economics
210
Review Questions Chapter 14
- Monetary Policy
(1) Members of the Federal Reserve Board of
Governors are appointed for one fourteen-year term so that they:
(a) have time to
learn how the Fed operates.
(b) are more likely
to make politically acceptable decisions.
(c) make decisions
based on economic, rather than political considerations.
(d) None of the above.
(2) Suppose the banks in the Federal Reserve
system have $5 billion in reserves, the required minimum
reserve ratio is 20 percent, and there are no excess reserves in the
system. If the minimum reserve ratio is
changed to 25 percent, then the amount of excess reserves would be:
(a) +$250
million.
(b) -$1.25 billion.
(c) -$5 billion.
(d) -$6.25 billion.
(3) Suppose the Federal Reserve System
requires a minimum required reserve ratio of 20 percent and there are no excess
reserves in the system. Also suppose
banks respond to each percentage point change in the discount rate by borrowing
or lending $2 million in reserves from the Fed.
If the Fed reduces the discount rate by 2 percentage points, then the
potential for additional loans by the entire banking system changes by:
(a) -$400,000.
(b) +$10 million.
(c) +$20 million.
(d) -$20 million.
(4) Suppose that the banking system has
total deposits of $20 billion, a minimum required reserve ratio of 20 percent,
and reserves of $4 billion. If the Fed
lowers the reserve requirement to 10 percent, the money supply could
potentially increase by as much as:
(a) $20 billion.
(b) $10 billion.
(c) $40 billion.
(d) $200 billion.
(5) The rate of interest charged by the
Federal Reserve for lending reserves to the commercial banking system is the:
(a) prime rate.
(b) discount rate.
(c) mortgage rate.
(d) interest rate
on government bonds.
(6) If the Fed wishes to increase the money
supply, it could:
(a) increase the
discount rate.
(b) buy securities
on the open market.
(c) raise the
minimum reserve ratio.
(d) All of the above.
(7) Suppose the Federal Reserve system has a minimum required reserve ratio of 20 percent,
and there are no excess reserves in the system.
If the Open Market Committee of the Fed. buys $10 million of securities from the commercial banking
system, then the potential for additional loans changes by:
(a) -$2 million.
(b) +$2 million.
(c) +$5 million.
(d) +$50 million.
(8) If the Fed wanted to reduce the money
supply, it could:
(a) lower the
discount rate.
(b) decrease the
minimum reserve ratio.
(c) sell securities
on the open market.
(d) All of the above.
Consider Figure 1 in answering Questions (9) and (10).
Figure
1
(9) In Figure 1, if the Federal Reserve system increases the discount rate, this indicates a desire
to _______ the money supply, and could cause a shift from _______.
(a) expand, AD(1)
to AD(2).
(b) expand, AS(1)
to AS(2).
(c) contract, AD(2)
to AD(1).
(d) contract, AS(3)
to AS(2).
(10) In Figure 1, which of the following Fed
actions is most likely to shift the aggregate demand curve from AD(1) to AD(2)?
(a) an increase in
the discount rate.
(b) a decrease in
the minimum reserve requirement.
(c) the sale of
securities on the open market.
(d) All of the above.
Consider Figure 2 in answering Questions (11) and (12).
Figure
2
(11) In Figure 2, a shift in aggregate demand
from AD(1) to AD(2) is most likely to cause:
(a) an increase in
real output and an increase in the price level.
(b) an increase in
real output, but no change in the price level.
(c) an increase in
the price level, but no change in real output.
(d) a decrease in
the price level, but no change in real output.
(12) In Figure 2, a shift in aggregate demand
from AD(3) to AD(4) is most likely to cause:
(a) an increase in
real output and an increase in the price level.
(b) an increase in
real output, but no change in the price level.
(c) an increase in
the price level, but no change in real output.
(d) a decrease in
the price level, but no change in real output.