chapter 14

1.  Monetary policy is performed by?


D.  Central Bank

The central bank is the Federal Reserve Bank in the US


2.  The availability of credit is directly affected by?


B.  Monetary policy

The use of montary policy affects the money supply.  The money supply affects the interest rate.  The interest rate affects the availability of credit.  Hence, monetary policy affects the availability of credit.


  3.  The chairman of the Federal Reserve’s Board of Governors is appointed by the Board of Governors?


B.  False
The president appoints the chairman of the FED for a term of four years.

4.  To increase the nation’s money supply, the FED could do which of the following?


D.  Lower the reserve ratio


5.  If a bond's price is $6,000 and its annual payment is $600, the interest rate is:


D.  10%

6.  An open market purchase by the Fed has a tendency to:


C.  Increase bond prices and decrease interest rates


7.  If the Fed sells government securities to commercial banks, then the reserves of the banking system will:


B.  Decrease

8.  Open market operations are the most common action the FED uses to change the money supply.

A.  True

9.  An increase in interest rates occurs when the money supply increases.

B.  False

10.  To increase the money supply the FED will buy bonds on the open market.

A.  True
showed that by the FED buying securities on the open market, the money supply increased, so by selling decurities to the banks, the money supply will decrease.


11.  Increasing the reserve requirement rate will


B.  Decrease the money supply

Increasing the reserve requirement rate, i.e, the reserve ratio, means the banks have to increase the reserves on hand. This means they can't loan out as much as before and may have to call in loans.

showed what happens when the reserve requirement increased, i.e., money supply decreased.

12.  Decreasing the discount rate will
A.  Increase the money supply

Decreasing the discount rate means the banks can borrow money from the FED at a lower interest rate which makes it more desireable to borrow money and loan it out.  Thus, the banks will borrow more funds and loan out the excess reserves which will tend to increase the money supply.

showed that by decreasing the discount rate the money supply increased, so be increasing the discount rate, the opposite will occur, i.e., the money supply will decrease.

13.  If the FED increases the reserve requirement, increases the discount rate, and sells government securities on the open market, the money supply will?


D.  Decrease

14.  If the money supply decreased by $5,000 and the reserve requirement rate is 20%, the FED probably:


C.  Sold government securities to the commercial banks worth $1,000
So, they would sell securities to the banks on the open market by $1,000 because the money multiplier is 5 since the reserve ratio is 20%, 1/.2 = 5. 5 times -$1,000 = -$5,000 change in the money supply.


15.  In an inflationary gap, if the Fed wanted to enact expansionary monetary policy it would:

D.  Not enact expansionary monetary policy


In an inflationary gap, the FED wouldn't use expensionary monetary supply, they would use contractionary monetary policy to reduce the inflationary trend.