Question 1

A credit crunch occurs when:

Accepted Answer

A)  interest rates decline.
B)  interest rates rise.
C)  creditors restrict the amount of loans they are willing to provide.
D)  the economy is strong.E) None of the above
F) A) and B)

Question 2

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are

Accepted Answer

A)  low and steady.
B)  low, but rising.
C)  very high, but declining slightly.
D)  very high and rising.E) All of the above
F) B) and C)

Question 3

Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:

Accepted Answer

A)  monetizes the debt.
B)  maintains a stable money supply.
C)  uses a tight-money policy.
D)  uses a loose-money policy.E) None of the above
F) A) and D)

Question 4

Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a high unemployment rate and could even ignite inflation.

Accepted Answer

A) True 
 B)False

Question 5

A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.

Accepted Answer

A)  leading
B)  coincident
C)  lagging
D)  none of the aboveE) B) and C)
F) None of the above C

Question 6

The ____ lag represents the time from when an economic problem exists until it is recognized.

Accepted Answer

A)  recognition
B)  adjustment
C)  implementation
D)  none of the aboveE) C) and D)
F) B) and D)

Question 7

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.

Accepted Answer

A)  7 percent; 10 percent
B)  4 percent; 6 percent
C)  7 percent; 9 percent
D)  1 percent; 3 percentE) A) and B)
F) B) and C)

Question 8

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects

Accepted Answer

A)  the crowding-out effect.
B)  dynamic open market operations.
C)  defensive open market operations.
D)  monetizing the debt.E) C) and D)
F) A) and B)

Question 9

The Fed is usually more willing to monetize the debt when inflation is relatively high.

Accepted Answer

A) True 
 B)False  False

Question 10

If the Fed attempts to reduce inflation, it would likely increase money supply growth.

Accepted Answer

A) True 
 B)False

Question 11

Inflation is commonly the result of a

Accepted Answer

A)  large budget deficit.
B)  high level of interest rates.
C)  high level of unemployment.
D)  high level of aggregate demand.E) A) and B)
F) All of the above

Question 12

When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

Accepted Answer

A)  increase; offsetting decreases
B)  increase; no offsetting decreases
C)  decrease; offsetting increases
D)  decrease; no offsetting increasesE) A) and D)
F) C) and D)

Question 13

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the

Accepted Answer

A)  recognition lag.
B)  implementation lag.
C)  impact lag.
D)  open-market lag.E) B) and D)
F) B) and C)

Question 14

____ serves as the most direct indicator of economic growth in the United States.

Accepted Answer

A)  Gross domestic product (GDP) 
B)  National income
C)  The unemployment rate
D)  The industrial production indexE) A) and B)
F) B) and C)

Question 15

Which of the following is true?

Accepted Answer

A)  Federal deficits require that the Fed purchase government securities.
B)  Federal deficits will always result in an increase in money supply.
C)  The Federal Reserve monetizes debt by selling securities which ultimately increases money supply.
D)  An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
E)  None of the above.F) C) and D)
G) B) and C)

Question 16

According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely

Accepted Answer

A)  a reduction in interest rates.
B)  an increase in interest rates.
C)  no effect on the interest rates.
D)  the impact on interest rates cannot be determined.E) A) and D)
F) B) and C)

Question 17

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

Accepted Answer

A)  increase; upward
B)  increase; downward
C)  decrease; downward
D)  decrease; upwardE) A) and B)
F) All of the above A

Question 18

The ____ indicators tend to occur before a business cycle.

Accepted Answer

A)  leading
B)  lagging
C)  coincident
D)  none of the aboveE) A) and D)
F) None of the above

Question 19

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.

Accepted Answer

A)  unfavorably; decreases
B)  unfavorably; increases
C)  favorably; increases
D)  Answer A and C are correct.E) A) and D)
F) B) and D)

Question 20

The relationship between the interest rate on loanable funds and the level of business investment is positive.

Accepted Answer

A) True 
 B)False

Exam 5: Monetary Policy

A credit crunch occurs when:

Correct AnswerverifiedShow Answer

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are

Correct AnswerverifiedShow Answer

Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:

Correct AnswerverifiedShow Answer

Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a high unemployment rate and could even ignite inflation.

Correct AnswerverifiedShow Answer

A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.

Correct AnswerverifiedC

The ____ lag represents the time from when an economic problem exists until it is recognized.

Correct AnswerverifiedShow Answer

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.

Correct AnswerverifiedShow Answer

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects

Correct AnswerverifiedShow Answer

The Fed is usually more willing to monetize the debt when inflation is relatively high.

Correct AnswerverifiedFalse

If the Fed attempts to reduce inflation, it would likely increase money supply growth.

Correct AnswerverifiedShow Answer

Inflation is commonly the result of a

Correct AnswerverifiedShow Answer

When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

Correct AnswerverifiedShow Answer

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the

Correct AnswerverifiedShow Answer

____ serves as the most direct indicator of economic growth in the United States.

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely

Correct AnswerverifiedShow Answer

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

Correct AnswerverifiedA

The ____ indicators tend to occur before a business cycle.

Correct AnswerverifiedShow Answer

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.

Correct AnswerverifiedShow Answer

The relationship between the interest rate on loanable funds and the level of business investment is positive.

Correct AnswerverifiedShow Answer

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C

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If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at . If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be .

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False

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When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _, and there are _ in the account balances of other financial institutions.

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Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to shortly thereafter which in turn places pressure on U.S. interest rates.

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A

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Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is affected when the Fed interest rates.

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