B. decrease by $200 million. b. Where do you suppose the Fed gets the cash, to do this ? In order to maintain price stability, the Federal Reserve has decided to engage in monetary restraint. We develop a model of price formation in a dealership market where monitoring of the information flow requires costly effort. Bob, a college student looking for summer work. \end{array} a. increase the supply of bonds, thus driving up the interest rate. When the Federal Reserve makes an open market purchase, the Fed: buys securities from banks and the public, which will decrease tha. While those goals were articulated in 1977, 2 the approach and tools used to implement those objectives have changed over time. D. The money multiplier decreases. The aggregate demand curve should shift rightward. \text{French import duty} & \text{20\\\%}\\ When the Federal Reserve increases the money supply, ceteris paribus, the money supply curve will shift to the right, as illustrated in the graph, then the interest rate in equilibrium will decreases. Of these, 43 were sold for $\$ 105,000$ each and two remain in finished goods inventory. By the end of the year, over $40 billion of wealth had vanished. This type of market is called: As the economy falls from the peak to the trough of the business cycle: Cyclical unemployment should increase and real GDP should decline. b. If they have it, does that mean it exists already ? If the Fed uses open-market operations, should it buy or sell government securities? An increase in the money supply and an increase in the int. If the Fed purchases $10 million in government securities, then wh. In response, people will a. sell bonds, thus driving up the interest rate. D. The collectio. Explain your reasoning. C. contractionary monetary policy by, An open market sale by the Fed A. increases the money supply, which leads to increased interest rates and a fall in investment spending. The money supply decreases. This problem has been solved! What is the reserve-deposit ratio? }\\ Is it mandatory for banks to buy gov't bonds during open-market operations by the Central Bank? \text{Total per category}&\text{?}&\text{?}&\text{? Find the taxable wages. c. the government increases spending and lowers taxes. raise the discount rate. If the Federal Reserve wants to decrease the money supply, it should: a. c. Fed sells bonds. All persons over age 16 who are either working for pay or actively seeking paid employment refers to: Who is an example of a part of the labor force? &\textbf{0-60 days}&\textbf{61-120 days}&\textbf{Over 120 days}\\ Tax on amount over $3,000 :3 percent. Conduct open market purchases. When the economy overheats, the government sometimes cools it down with higher taxes, spending reductions, and less money. c. In terms of pricing, which of the following is not true for a monopolist? When the Federal Reserve Bank buys US Treasury bonds on the open market, then _______. When the Fed buys government Securities in the open market (a) bank reserves increase (b) bank reserves decline (c) money supply increases but bank reserves remain unchanged (d) money supply declines but bank reserves remain unchanged. Now suppose the. b. sell government securities. The long-term real interest rate _____. Ceteris paribus, if the Fed raises the reserve requirement, then: The money multiplier increases. A. decrease, downward B. decrease, upward C. increase, downward D. increase, If inflation begins to rise rapidly, which step is the Federal Reserve likely to take? \text{Full manufacturing cost per chainsaw} & \text{\$175}\\ The Fed sells Treasury bills in the open market b. Patricia's nominal annual income in 2009 was $60,000. a. The Fed funds market is the market where banks a) buy and sell bonds to the Federal Reserve. Could the Federal Reserve continue to carry out open market operations? Consider the money multiplier and assume the, Suppose that the reserve requirement ratio is 4% and that the Fed uses open market operations (OMO) by BUYING $200 million worth of Treasury securities. In the money market, an excess demand of money will: A. increase the supply of bonds, increase bond prices, and decrease interest rates. If the Federal Reserve increases the discount rate: a. the federal funds rate must decrease. D. In open market operations, the Fed exchanges cash (money) for non-cash (bonds). b) borrow reserves from the public. How does it affect the money supply? What fiscal policy tools are used to shift the aggregate demand curve? 2. C. The value of the dollar will decrease in foreign exchange markets. B. If the Fed is using open-market operations, will it, Key Concept: Open market operations When the Fed buys government securities, it a. (Banks must hold more funds used for loans in reserve and there is a greater leakage as subsequent deposits will yield smaller excess reserves for banks receiving them.) Consider an expansionary open market operation. c. Increase the interest rate paid on ban, Which of the following describes what the Federal Reserve would do to pursue an expansionary monetary policy? Suppose the Federal Reserve buys government securities from the non-bank public. Assume that the Fed increases the monetary base by $1 billion when the reserve requirement is 1/7. If the Fed sells $29 million worth of government securities in an open market operation, then the money supply can: A. increase by $2.9 million. The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is: Ceteris paribus, based on the aggregate demand curve, if the price level _______ the quantity of real output _______ increases. e. raise the reserve requirement. If the number of dollars you receive every year is the same, but prices are rising, then your nominal income: Stays the same but your real income falls. Examples of money are: A. a check. c. commercial bank reserves will be unaffected. **Instructions** The Fed is most likely to do this by: A. purchasing government bonds from the public B. selling government bonds to the public C. selling government bonds to the treasury D. purchasi, Which of the following tends to reduce the effect of the expansionary open market operation on the money supply? a. The Federal Open Market Committee is responsible for: a) reducing the Fed's reliance on open market operations. According to macroeconomists, a goal for the economy is a: When the unemployment rate falls to the full-employment level: There is increased concern about inflation. c. Purchase government bonds on the open market. Decrease the price it asks for the bonds. c. They wil, If the Federal Reserve buys bonds on the open market then the money supply will a. increase causing a decrease in investment spending shifting aggregate demand to the right. Facility location decisions are significant for an organization because:? Suppose the Fed conducts $10 million open market purchase from Bank A. Money is functioning as a store of value if you: Put it in a savings account so you can buy a new car next summer. Suppose that the sellers of government securities deposit the checks drawn on th. Sell Treasury bonds, bills, or notes on the bond market. The current account deficit will increase. Bank A with total deposits of $100 million isfully loaned up. Get access to this video and our entire Q&A library, Monetary Policy & The Federal Reserve System. It forces them to modify their procedures. Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10. 16. The text describes the theoretical developments of the assignment rules regarding fiscal and monetary policies and the respective roles in macroeconomics stabilisation. d) decreases, so the money supply decreases. Ceteris paribus, based on the aggregate supply curve, if the price level _______ the quantity of real output _______ increases. d) borrow reserves from the Federal Reserve. B. fewer reserves and inc, Suppose you read in the paper that the Fed plans to reduce money supply. The change is negative it means that excess reserve falls by -100000000 or 100 million. \text{Income tax expense} \ldots & 100,000 \\ Ceteris paribus, an increase in _______ will cause an increase in ______. Suppose during the same period average prices in the economy rose by 150 percent.The paintings owner, relative to those who do not own paintings, experienced a: Lower real wealth as a result of the wealth effect. It transfers money from spenders to savers. The aggregate demand curve is downward sloping because, ceteris paribus: People are willing and able to buy more goods and services at lower average prices. Holding the deposits or reserves of commercial banks. d. The Federal Reserve sells bonds on the open market. Suppose the Federal Reserve conducts an open market purchase of $150 million government securities from the non-bank public. d. the average number of times per year a dollar is spent. $140,000 in checkable-deposit liabilities and $46,000 in reserves. lower reserve requirements.I and III onlyCurrently the Fed sets monetary policy by targetingthe Fed funds rate From October 1983 . When the Fed conducts open market operations, the Fed buys and sells government securities to: a. the private sector. The nominal interest rates falls. Which of the following is consistent with what Keynes believed? c. the money supply divided by nominal GDP. B ) bond yields will fall 2) A negative output gap indicates that A) nominal GDP is below real GDP. \text{Expenses:}\\ decreases, rises, If the Federal Reserve reduces interest rates, it wants: a. a) 0.25 b) 0, Suppose the reserve requirement for checking deposits is 10 percent and banks do not hold any excess reserves. d. the demand for money. D. Transaction demand for, To ease monetary policy to fight a recession, the Federal Reserve would ____. You'll get a detailed solution from a subject matter expert that helps you learn core concepts. a. increase, increase, sell b. increase, increase, buy c. decrease, decrease, buy d. decrease, If the Fed is following policies to reduce inflation, it is most likely to be: a. lowering interest rates b. raising the money supply c. lowering the money supply d. both lowering interest rates and, When the interest rate falls in the money market, the quantity of money demanded ______ and the quantity of money supplied _______. If the required reserve ratio is nine percent, what is the resulting change in checkable deposits (or the money supply) if we assume there are no. Also assume that banks do not hold excess reserves and there is no cash held by the public. Then, ceteris paribus, bank reserves _____ (increase, decrease, or do not change), currency in circulation _____ (increases, decreases, or does not change), and thus the monetary base will _____ (decrease or increase). b) increases the money supply and lowers interest rates. You can also use your keyboard to move the cards as follows: If you are logged in to your account, this website will remember which cards you know and don't know so that they c. the government increases spending and lowers taxes. If the Federal Reserve increases the nominal supply of money, all else equal: a. the demand for money increases. Suppose a market is dominated by three firms. An industry in which many firms produce similar products but each firm has significant brand loyalty is known as: Which of the following is characteristic of a perfectly competitive market? The total change in deposits (with no drains) would be$12,857 million = (1/0.07) $900 million If the Fed wishes to stimulate the economy, it could I. buy U.S. government securities.II. Your email address is only used to allow you to reset your password. C) Excess reserves increase. d. The money supply should increase when _ a. The difference between equilibrium output and full-employment output. Assume the reserve requirement is 5%. Causes an increase in the federal funds rate, c. Increases reserve holdings of the commercial banks, d. Lowers the cost of borrowing from the Fed, e. Leads to an increase in the interbank, According to the Taylor rule, the Federal Reserve lowers the real interest rate as the output gap ____ or the inflation rate ______. b. eachus, which of the following will occur if the Fed buys bonds through open-market operations? Banks now have more money to loan since they are required to hold less in reserve. a. mortgages; Bank of America b. government securities; New York Fed c. government securities; Federal Reserve Bank of Florida d. Mortgages; Federal Reserve. It improves aggregate demand, thus increasing the country's GDP. are the minimum amount of reserves a bank is required to hold. D) Required reserves decrease. b. the Federal Reserve buys bonds on the open market. B. the Fed is concerned about high unemployment rates. B. the sellers of such securities buy new securities in the open market and t. Assume there is no leakage from the banking system and that all commercial banks are loaned up. D. The value o, If the nominal interest rate were to increase, then: a. money demand decreases and the price level increases. Suppose the Federal Reserve Bank buys Treasury securities. a. decrease, downward b. decrease, upward c. increase, downw, When the Federal Reserve engages in a restrictive monetary policy, the price of marketable government bonds will ___, assuming all other factors influencing the bond market remain the same. Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities to banks. c. Decrease interest rates. Privacy Policy and The Federal Reserve (or Fed) often executes its policy by selling or buying U.S. government securities in the open market, which in turn influences the quantity of real money balances. Therefore the correct option is b: If the Federal Reserve increases the money supply, ceteris paribus, the rate of interest decreases. Discuss how an open market purchase of $50 million worth of bonds (or treasury bills) by the Fed would a, According to Orthodox monetary theory, when the FED buys a bond from the banking sector, this is an example of a) an open market purchase and contractionary monetary policy. A decrease in the reserve ratio will: a. c) increases government spending and/or cuts taxes. Money supply to decrease b. c. increase, down. b. a decrease in the demand for money. Michael Haines Change in Excess Reserve = -100000000. All rights reserved. The required reserve ratio is 16%. Assume that the reserve requirement is 20%. E. discount rate operations. \text{Total Expenses}&\text{\hspace{12pt}?}&\text{\hspace{12pt}? b. (a) Show how t. When the central bank sells government bonds does it do so by applying monetary policies such as expansionary and deflationary policies or do they sell them to specific buyers? a) Given the required reserve ratio, RR/D=0.10, the excess reserves to deposits ratio, ER/D=0.06, the currency to deposits ratio, Assume that any money lent by a bank is always deposited back in the banking system as a checkable deposit and that the required reserve ratio is 15%. The reserve requirement, the discount rate, and the sale and purchase of Treasury bonds. Which of the following lends reserves to private banks? Lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. b. the Open Market Desk at the Federal Reserve Board in Washington, D.C. c. the National Bureau of Economic, Suppose the Fed buys $10 billion of securities from the public and the public deposits the payment they receive from the Fed in their checking accounts at their commercial banks. What is meant by open market operations? a. b. increase the money supply. Is this an example of fiscal policy or monetary policy? \text{Variable manufacturing cost per chainsaw} & \text{\$100}\\ b) an open market sale and expansionary monetary policy. Currency circulation in the economy will increase since the non-bank public will have sold their securities. It also raises the reserve ratio. If the Fed wishes to increase the money supply it can: The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is referred to as: If the Fed wants to increase bank reserves, it can: If the Fed wants to reduce bank reserves, it can: Raise the discount rate or sell bonds on the open market. c) decreases government spending and/or raises taxes. Make sure you say increase or decrease/buy or sell. c-A forecast of a permanent demand increase shifts the investment line . If the Federal Reserve raises interest rates, it means the money supply starts to deplete. For the federal deficit to be lowered, a) the federal gov't must decrease its spending and increase net exports. Interest Rates / Real GDP a. In order to decrease the money supply, the Fed can. Is this part of expansionary or contractionary fiscal or monetary policy? b. it will be easier to obtain loans at commercial banks. c. Offer rat, 1. b. Suppose the Federal Reserve buys government securities from the nonbank public. the process of selling Fed-issued IOUs between banks. then the Fed. b. (a) increases because the resulting increase in the interest rate leads to a decrease in investment (b) increases because the resulting decrease in the interest rate leads to an increase in investment (, The Fed decreases the quantity of money. \text{French income tax rate on the French division's operating income} & \text{45\\\%}\\ A change in the reserve requirement is the tool used least often by the Fed because it: * Can cause abrupt changes in the money supply. A perfectly competitive firm currently sells 30,000 cartons of eggs at $1.25 each. Suppose the Federal Reserve undertakes an open market purchase of government bonds. d) Lowering the real interest rate. In a graph of the aggregate demand curve, an increase in investment by businesses is represented by a: Ceteris paribus, which of the following changes in the aggregate demand curve best characterizes a cutback in exports? b. an increase in the demand for money balances. The buying and selling of government securities by the Fed is known as: A. open market operations. If the economy is currently in monetary equilibrium, an increase in the money supply will a. Suppose government spending increases. Here are the answers with discussion for yesterday's quiz. b. increase the supply of bonds, thus driving down the interest ra, If the Fed begins to buy treasury bills to counter a recession, we would expect to see an increase in the a. demand for money. Enter the effect of this open-market operation on Bank A's T-account, assuming that the proceeds from the p. If the Federal Reserve wants to decrease the money supply, it should: A. conduct open market purchases. \text{Cost of Goods Sold}&\underline{\text{\hspace{19pt}85,250}}&\underline{\text{\hspace{19pt}85,250}}\\ What are some basic monetary policy tools used by the Fed? \text{Direct labor} \ldots & 800,000\\ \textbf{ELEGANT LINENS}\\ Make sure to remember your password. a) increases; decreases, b) decreases; increases, c) decreases; decreases, d) increases; increases. Fiscal policy should be used to shift the aggregate demand curve. When you've placed seven or more cards in the Don't know box, click "retry" to try those cards again. a. increase the supply of money by buying bonds b. increase the supply of money by selling bonds c. increase the demand for money by buying bonds d. increase the demand for mo, An increase in the money supply will cause interest rates to: a. rise b. fall c. remain unchanged. b. it buys Treasury securities, which decreases the money supply. Cause the money supply to increase, c. Not affect the money supply, d. Decrease the money multiplier. Assume that for an individual firm MC = AVC at $6 and MC = ATC at $10 and MC = price at $12 then the firm will be operating: The demand curve for the monopoly and the market are the same, it has no direct competitors, and it can use its market power to charge higher prices than a competitive firm. a. monetary base b. B. federal bond operations. Suppose Alan receives a check for $300 from a bank in Dallas, He deposits the check in his account at his Baltimore ban of the following is Alan's Baltimore bank likely to collect the $300 from? __ Money paid to stockholders from earnings of a corporation. When the Fed engages in open-market operations, the transactions are conducted by: a. the Open Market Desk at the Federal Reserve Bank of New York. \text{Bad Debt Expense}&\text{\hspace{12pt}?}&\text{\hspace{12pt}? The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. The new reserve requirement exemption amount and low reserve tranche will be effective for all depository institutions beginning January 1, 2022. C. increases the bond price and decreases the interes, When the Fed increases the money supply, a. people spend less because they have more money. b) an increase in the money supply and a decrease in the interest rate. B. taxes. If not, how will the Central Bank control inflation? \text{Net Credit Sales}&\text{\$\hspace{1pt}1,454,500}&\text{\$\hspace{1pt}1,454,500}\\ Look at the large card and try to recall what is on the other side. This situation is an example of: After quitting one job, some people with marketable skills find that it takes several months to find a new job. Price charged is always less than marginal revenue. Cause the money supply to decrease, b. If the Fed sells bonds: A.aggregate demand will increase. A. expands, higher, higher B. expands, higher, lower C. expands, lower, higher D. contracts, In the market for money, when the demand for funds increases, the interest rate _______ and the amount of money borrowed _______ . Why does an open market purchase of Treasury securities by the Federal Reserve increase bank reserves? The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is referred to as: Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they: Make their decisions based on economic, rather than political, considerations. Answer: Answer: B. d. decrease the discount rate. B. expansionary monetary policy by selling Treasury securities. b. the interest rate rises and this stimulates consumption spending. \textbf{Comparative Income Statements}\\ C) buying and selling of government s. In carrying out open market operations, the Federal Reserve usually buys and sells U.S. Treasury securities. b. increase the supply of bonds, thus driving down the interest rate. Sell government securities Ceteris paribus, if the Fed reduces the reserve requirement, then the lending capacity of the banking system increases Ceteris paribus, if the Fed reduces the discount rate, then the incentive to borrow funds increases A sale of treasury bills by the federal reserve _____ interest rates and _____ the money supply. An increase in the money supply, When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is: a) a decrease in the money supply and a decrease in the interest rate. b. the interest rate increases c. the Federal Reserve purchases bonds. c. means by which the Fed acts as the government's banker. C. excess reserves at commercial banks will increase. b. the money supply is likely to decrease. D. interest rates will increase. \text{U.S. income tax rate on the U.S. division's operating income} & \text{40\\\%}\\ "The federal bank can use open market operations as an instrument of monetary policy to manipulate interest rates and control supply of money." Aggregate demand will decrease or shift to the left. b. money demand increases and the price level decreases. D. $100,000 in checkable-deposit liabilities and $30,000 in reserves. }\\ The result is imperfect monitoring, which creates profit opportunities for speculators, who do not act as dealers but simply \begin{array}{l r} d. an increase in the supply of bonds and a fal, When there is an excess supply of money: A. the Fed will decrease the money supply. b) borrow more from the Fed and lend less to the public. c. prices to increase by 2%. D. the buying and selling of stocks i, Suppose again that Third National Bank has reserves of $20,000 and check able deposits of $100,000. For best results enter two or more search terms. An increase in the money supply: A. lowers the interest rate, causing a decrease in investment and an increase in GDP B. lowers the interest rate, causing an increase in investment and a decrease in GDP C. lowers the interest rate, causing an increase in, If there is a negative supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action: a. lowers both inflation and unemployment. b. sell government securities. Ceteris paribus, if the Fed reduces the reserve requirement,thenMultiple Choicetotal reserves increase.the lending capacity of the banking system increases.total deposits decrease.the money multiplier decreases. View Answer. \end{array} Which action would the federal reserve rate take to expand the money supply and lower the equilibrium interest rate? C. where a bank borrows reserves or bo, Open market operations are a) buying and selling of Federal Reserve Notes in the open market. Within the Federal Reserve, the organizational body that is responsible for conducting open market operations (i.e., the buying and selling of government securities) is the (a) FOMC (b) Board of Governors (c) Board of Directors (d) Federal Reserve Ban, Which of the following is the basic economic policy function of the Federal Reserve Banks? Government bond operations. $$ A) increases; supply. An easing of monetary policy interest rates, which the demand for a currency and the fundamental value of the exchange rate. copyright 2003-2023 Homework.Study.com. d) setting interest r, Suppose the Federal Reserve sells $30 million worth of securities to a bank. The Fed's decision amounted to a shift to a more cautious period of inflation fighting. \text{Net Income (Loss)}&\text{\hspace{12pt}?}&\text{\hspace{12pt}? B. c. the money supply is likely to increase. Currency, transactions accounts, and traveler's checks. What can be used to shift aggregate demand? a) fall; rise b) rise; rise c) rise; fall d) fall; fall, If the Federal Reserve conducts expansionary money policy to expand the money supply, it is most likely to change nominal interest rates and output in which of the following ways? Assume that banks use all funds except required, 13. }\\ Ceteris paribus, if the reserve requirement is decreased to 0.05, then excess reserves will increase by: By raising or lowering the _______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves. b. If the rate of inflation is constant at 10 percent, in order to keep Patricia's real income constant, her nominal income in the year 2010 should be: The value of a painting, held as an asset, increased in value by 100 percent from 1970 -2010. The creation of a Federal Reserve System was recommended by. Consider an open market purchase by the Fed of $16 billion of Treasury bonds. Increase; depreciate c. Decrease; de, Under expansionary monetary policy, the Federal Reserve increases the money supply, allowing the banking system to make additional loans - which increases the money supply even more - resulting in higher economic growth. a. increase the nominal interest rate and increase output b. decrease the n. To reduce interest rates, the Fed buys $500 of T-bills which increases the money supply by $2000. b. foreign countries only. During the year, the company started and completed 45 motor homes at a cost of $\$ 55,000$ per unit. Suppose that the Fed purchases from bank B some bonds in the open market and that, before the sale of bonds, bank B had no excess reserves. The result is that people _____. a) Describe what initially happens to the reserves of bank B. b) If bank B does not want to hold excess reserves, w, Suppose that the Fed undertakes an open market purchase of $25,000,000 worth of securities from a bank. Hence C is the correct option. Makers, but perfectly competitive firms are price takers. \begin{array}{lcc} are in the same box the next time you log in. d. prices to remain constant. B. there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate. a. use open market operations to buy Treasury bills b. use open market operations to sell Treasury bills c. use discount policy to raise the disc. Calculate after-tax operating income earned by United States and French divisions from transferring 200,000 chainsaws (a) at full manufacturing cost per unit and (b) a market price of comparable imports. Monetary policy refers to the central bank's actions to the control of money supply in the economy. We start by assuming that there is no reserve requirement or lending by the Central Bank. c. When the Fed decreases the interest rate it p; The Great Depression was caused by a steep decline in the money supply when the stock market crashed in 1929. to send you a reset link. Compute the following for the current year: a. The Board of Governors has___ members, and they are appointed for ___year terms. Price falls to the level of minimum average total cost. The lender who forecloses will then end up with about $40,000. 1015. Which of the following is likely to cause a leftward shift in the aggregate supply curve, ceteris paribus? $$. If the Federal Reserve decreases money supply, then a) The money supply curve will shift up and interest rates will increase b) The money supply curve will shift up and interest rates will decrease. \end{array} b. Martin takes $150 out of his checking account and hides it in his house as cash. Which of the following is likely to occur if people reduce their spending because they are worried about an economic downturn, ceteris paribus?