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Assignment 11
1. Which of the following statements about inflation targeting is true?
a) The European Central Bank has adopted inflation targeting.
b) Inflation targeting decreases the perceived uncertainty from the central bank's course of
action.
c) Inflation targeting has not been adopted by the Fed.
d) A central bank that adopts inflation targeting is intrinsically dependent on fiscal policy.
e) All of these are false.
2. The Board of Governors of the Federal Reserve is
a)
b)
c)
d)
e)
elected by Congress, and each governor serves a ten-year term.
elected by Congress, and each governor serves a seven-year term.
elected by Congress, and each governor serves a four-year term.
appointed by the president, and each governor serves a seven-year term.
appointed by the president, and each governor serves a fourteen- year term.
3. Refer to the balance sheet above. If the Fed increased the reserve requirement from 10
percent to 25 percent, the money supply in the whole banking system could now potentially
a)
b)
c)
d)
e)
decrease by $272.5.
decrease by $7,875.
increase by $7,875.
decrease by $3,150.
increase by $3,150.
4. A restrictive monetary policy by the Fed will
a)
b)
c)
d)
e)
increase the price level.
increase the equilibrium quantity of money.
increase investment spending.
decrease the interest rate.
decrease equilibrium national income.
5. The federal funds rate is defined as the
a)
b)
c)
d)
e)
interest rate paid by government bonds.
interest rate charged by a bank that loans excess reserves to another bank.
interest rate paid by commercial banks to their best customers.
interest rate charged by the Fed when it lends to commercial banks.
interest rate paid on Social Security funds.
6. Refer to the figure above. Other things equal, if real GDP is equal to $900 billion, then
a) the money demand curve will be to the right of the one illustrated in the figure above.
b) the investment demand curve will be to the left of the one illustrated in the figure above.
c) the quantity of money demanded will be greater than $400 billion and can be illustrated
by an upward movement along the money demand curve.
d) the money demand curve will be to the left of the one shown in the figure above.
e) the quantity of money demanded will be less than $400 billion and can be illustrated by a
downward movement along the money demand curve.
7. Which of the following will not shift the money demand curve?
a)
b)
c)
d)
e)
A change in national output
A change in real income
A change in the interest rate
A change in wealth
A change in the price level
8. In the figure above, the lower equilibrium income level at Y2 will ultimately result in
a)
b)
c)
d)
e)
a leftward shift of the money demand curve.
a rightward shift of the money demand curve.
a leftward movement along the money demand curve
a rightward movement along the money demand curve.
a leftward shift of the money supply curve.
9. Refer to the figure above. Other things equal, if the interest rate is greater than 6 percent, then
a)
b)
c)
d)
e)
investment spending will be greater than $500 billion.
the money demand curve will shift downward to the left.
the equilibrium level of real GDP will increase.
the equilibrium price level will increase.
the equilibrium level of real GDP will decrease.
10. The body responsible for carrying out monetary policy in the United States is the
a)
b)
c)
d)
e)
Federal Advisory Council.
U.S. Congress.
Board of Governors of the Federal Reserve System.
U.S. Treasury.
board of district bank presidents.
11. Raising the reserve requirement will
a)
b)
c)
d)
e)
lower the discount rate.
increase excess reserves.
increase the money supply.
reduce the deposit expansion multiplier.
reduce interest rate ceilings.
12. To increase equilibrium national income, the Fed could
a)
b)
c)
d)
e)
purchase government bonds.
sell government bonds.
increase the reserve requirement.
increase the federal funds rate.
increase the discount rate.
13. The quantity of money demanded for speculative purposes is
a)
b)
c)
d)
e)
greater at high interest rates because people earn more from their financial assets.
greater at low interest rates because bond prices are high and are expected to fall.
greater at low interest rates because bond prices are low and are expected to rise.
smaller at low interest rates because bond prices are low and are expected to rise.
smaller at high interest rates because bond prices are high and are expected to rise.
14. According to the equation of exchange, if the money supply is $600 million, real GDP is
$2,100 million, and nominal GDP is $3,600 million, then the velocity of money is equal to
a)
b)
c)
d)
e)
6.0.
10.3
2.0.
3.5.
1.7.
15. A change in the interest rate does not affect the quantity of money supplied. This means that
a)
b)
c)
d)
e)
the money supply curve is vertical.
the money supply curve is horizontal.
the money demand curve is horizontal.
the money supply curve is negatively sloped.
the money demand curve is vertical.
16. If the U.S. dollar depreciates against the yen below the targeted exchange rate, the U.S.
Federal Reserve has to intervene in the foreign exchange market such that
a)
b)
c)
d)
e)
the supply of U.S. dollars rises.
the U.S. dollar is devalued.
U.S. exports to Japan fall.
the U.S. demand for yen rises.
the supply of U.S. dollars falls.
17. To reduce political pressures on the Federal Reserve Board of Governors, legislation
provided that
a)
b)
c)
d)
e)
a given president may elect the entire board.
the Federal Reserve district banks may elect the board.
only bankers are allowed to be appointed as board members.
Congress may elect a board member every five years.
one board member's term expires every second year.
18. The buying and selling of government bonds by the FOMC constitutes
a)
b)
c)
d)
e)
a change in the reserve requirement.
a federal funds adjustment.
a sterilization of the money supply.
an open market operation.
a discount rate adjustment.
19. If interest rates decrease,
a)
b)
c)
d)
e)
the quantity of money demanded will not change.
the quantity of money demanded will decrease.
the money demand function will shift to the left.
the money demand function will shift to the right.
the quantity of money demanded will increase.
20. Consider the foreign exchange market for dollars described in the figure above. Which of the
following would most likely cause equilibrium to change from point A to point D?
a)
b)
c)
d)
e)
An increase in British demand for U.S. exports
A decrease in U.S. demand for British goods and services
A decrease in the supply of British pounds on the foreign exchange market
An increase in U.S. demand for British goods and services
An increase in the supply of dollars on the foreign exchange market
Essay Questions
1. Suppose the U.S. Federal Reserve wants to decrease the value of the U.S. dollar against the
Japanese yen. How should it intervene in the foreign exchange market to accomplish this?
2. Describe the quantity theory of money, defining each variable. Explain how changes in the
money supply can affect real GDP and the price level. Under what circumstances could an
increase in the money supply have no effect on nominal GDP?