Rev. Q’s ( MS = DD + Currency of Public )

1. Rev. Q’s(MS=DD+CurrencyofPublic) 48.The 3 tools of monetary policy are open market operations, changes in RR, & (changes in T/changes in G/ changes in discount rate). 49. The main toolof the Fed in regulating the MS is(open-market operations/DR/RR). 50. When the Fed[$$] sells securities to thePUBLIC[T-bills], DD (don’t change/incr/decr) & banking system RR, ER & TR (incr/decr). 51. When the Fed[T-bills] buys securities from commercial banks[$$], DD (don’t change/increase/decrease) & ER and TR (increase/decrease). 52. When the commercial bankingsystem[$$] borrows from the Fed, DD (don’t change/increase/decrease) but ER & TR (incr/decr). 53. When commercial banks[$$] sell government securitiesto theFed[T-bills], DD (don’t change/incr/decr) but their ER & TR (do not change/incr/decr). 54. When the PUBLIC[T-bills] buys securities from the Fed[$$], DD (don’t change/incr/decr) and RR, ER, & TR of banks (don’t change/incr/decr). 55. When a commercial bankgets a loan fromthe Fed, their lending ability(incr/decr). 56. Assume that the RR is 25% & theThunder Bank borrows $100,000 from the Fed., commercial bank ERs are increased $________. PMC in the banking system are increased by $_______. TMS can be as much as $________. 57. The (margin requirement/discount rate) specifies the size of the down payment on stock purchases. 58. If the Fed were to increase the RR [10% to 20%] we would expect (higher/lower) interest rates, a (reduced/expanded) GDP and (appreciation/depreciation) of the dollar. [less “C”, “Ig”, & “Xn”] 100,000 400,000 400,000

2. 59. When the RR is increased [10% to 50%], the ER of member banks are (increased/decreased)and the monetary multiplier is (incr/decr). 60. Assume the RR is 25% and the Fed buys $4 M of bonds from the public. The MS is increased by ($3/$4/) million and the PMC is increased by ($16/$12) M. Potential TMS is ($3/$4/$12/$16) M. 61. When the Fed lends to commercial banks, this is called the (Fed Funds Rate/discount rate) and when commercial banks make loans to one another, this is the (Fed Funds Rate/ Discount Rate). 62. The Keynesian cause-effect chain of aneasy money policy would be to (buy/sell) bonds; which would (increase/decrease) the MS, which would(lower/raise) interest rates & (incr/decr) Ig, “C”, Xn, & Y. 63. If the Fedwere to buy government securitiesin the open market, we would anticipate(lower/higher) interest rates, an (expanded/contracted) GDP, and (appreciation/depreciation) of the dollar. 64. If the Fedwere reducing demand-pull inflation, the proper policies would be (lower/raise) the discount rate, (lower/raise) the RR and ((buy/sell) government bonds. 65. Monetary policyis thought to be more effective in (controlling inflation/ fighting depressions) andfiscal is more effective(controlling inflation/ fighting depressions). 66.The “net export effect” of an “easy” money policy (strengthens/ weakens) that policy, while the “net export effect” of “expansionary” fiscal policy (strengthens/weakens) that policy. [impact of interest rates] Rev. Q’s

3. Rev. Q’s AD3 DI MS2 MS1 MS3 I=$70 AD2 AD1 AS 9% 6% 3% 0 9% 6% 3% 0 I=$60 I=$50] PL3 PL2 PL1 Dm YRY* YI $50$60 $100120140 $70 RDO QID Money Market Investment Demand 67. If AD is AD3, what must the Fed do to get to AD2(FE GDP [Y*])? (increase/decrease) the MS from ($120/$140) to ($100/$120). 68. If the MS is MS1, & the goal of the Fed is FE GDP[Y*], they should (increase/decrease) the MS from ($100/$120) to ($120/$140). 69. Which of the following would shift the MS curve from MS3to MS2? (buying/selling) bonds. 70. If the MS is MS2 and the goal of the Fed is FE GDP of Y*, they should (increase/decrease/don’t change) the Ms.

4. Rev. Q’s 71. An easy money policy will (apprec/deprec) the dollar & (incr/decr) U.S. Xn. A tight money policy will (apprec/deprec) the dollar & (incr/decr) U.S. Xn. 72. If the economy were in a severe recession, proper monetary policy would call for (lowering/raising) the discount rate, (lowering/raising) the RR, & (buying/selling) bonds. Proper fiscal policy would be to (incr/decr) “G” & (incr/decr) “T”, both of which would result in a bugetary (deficit/surplus).

5. Review Q's AD3 DI MS2 MS1 MS3 I=$70 AD2 AD1 AS 9% 6% 3% 0 9% 6% 3% 0 I=$60 I=$50] PL3 PL2 PL1 Dm YRY* YI $50$60 $100120140 $70 RDO QID Money Market Investment Demand 15. If the goal is F.E., & theinterest rate is9%, a(an) (recess/ inflat) gap exists, the Fed should (incr/decr) the in. rate. 16. If the interest rate is 3%, a(an) (recess/inflat) gap exists, the Fed should (increase/decrease) the interest rate. 17. If the interest rate is 6%,the Fed should (incr/decr/do nothing) to the interest rate. 18. To reduce inflation,the Fed should (lower, lower, buy/raise, raise, sell) 19. To get out ofa recession, the Fed should (lower, lower, buy/raise, raise, sell)

6. Money and the Fed 1. (61%)In theKeynesian model, an expansionary monetary policywill lead to a. lower real interest rates and more investment b. lower real interest rates and lower prices c. higher real interest rates and lower prices d. higher real interest rates and higher real income e. higher nominal interest rates and more investment Monetary Questions From 2000 AP Exam 2. (58%) Which of the following will most likely occur in an economy if more money is demanded than is supplied? a. the amount of investment spending will increase. d. interest rates will decrease b. the demand curve for money will shift to the left e. interest rates will increase. c. the demand curve for money will shift to the right. 3. (64%) When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for what purposes? a. transactions c. speculation (asset) b. unforeseen expenditures d. illiquidity When interest rates are too low, people will hold more asset (speculation) money. They don’t want to tie their money into interest rate bearing assets (like CDs & bonds) getting low returns. They will hold the speculative money until interest rates go back up. Money Creation 4. (80%) If on receiving a checking deposit of $300 a bank’s ER increased by $255, the RRmust be: a. 5% b. 15% c. 25% d. 35% e. 45%

7. 5. (62%) The money-creating ability of the banking systemwill be less than the maximum amount indicated by the money multiplier when a. interest rates are high b. the velocity of money is rising c. people hold a portion of their money in the form of currency d. the unemployment rate is low 6. (71%) RR is 20%. If a bank initially has no ER and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50,000 7. (86%) RR is 15% and that bank receives a new DD of $200. Which of the following will most likely occur in the bank’s balance sheet? Liabilities(DD)Required Reserves a. increase by $200 increase by $170 b. increase by $200 increase by $30 c. increase by $200 no change d. decrease by $200 decrease by $30 e. decrease by $200 decrease by $170 The Fed and Monetary Policy 8. (89%) The Federal Reserve can increase the money supply by a. selling gold reserves to the banks b. selling foreign currency holdings c. buying government bonds on the open market d. borrowing reserves from foreign governments

8. 9. (73%) An increase in the money supply is most likely to have which of the followingshort-run effects on real interest rates and real output? Real Interest RatesReal Output a. decrease decrease b. decrease increase c. increase decrease d. increase no change e. no change increase 10. (81%) Under which of the following conditions would a restrictive (contractionary) monetary policy be most appropriate? a. high inflation d. low interest rates b. high unemployment e. a budget deficit c. full employment with stable prices 11. (82%) The Fed can change the U.S. money supply by changing the a. number of banks in operation d. prime rate b. velocity of money e. discount rate c. price level 12. (*30%) If the money stock decreases but nominal GDP remains constant, which of the following has occurred? a. income velocity of money has increased. d. price level has decreased. b. income velocity of money has decreased. e. real output has decreased. c. price level has increased.

9. 13. (54%) Policy-makers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions? Monetary PolicyFiscal Policy a. sell bonds reduce taxes b. sell bonds raise taxes c. no change raise taxes d. buy bonds reduce spending e. buy bonds no change 14. (76%) Open market operations refer to which of the following activities? a. the buying and selling of stocks in the New York stock Market b. the loans made by the Fed to member commercial banks c. the buying and selling of government securities by the Federal Reserve d. the government’s purchases and sales of municipal bonds e. the government’s contribution to net exports 15. (58%) An open market sale of bonds by theFed willmost likelychange the money supply, the interest rate, and the value of the U.S. dollar in which of the following ways? Money SupplyInterest RateValue of the Dollar a. increase decrease decrease b. increase decrease increase c. decrease decrease decrease d. decrease increase increase e. decrease increase decrease Buying bonds will increase MS & decrease the interest rate, increasing Ig. Reducing T would cause a deficit, resulting in G borrowing and higher interest rates. Raising T or reducing G would result in job losses, resulting in negative profit expectations, reducing Ig [LR growth].

10. 16. (82%)Commercial banks can create money by a. transferring depositors’ accounts at the Fed for conversion to cash b. buying Treasury bills from the Federal Reserve c. sending vault cash to the Fed d. maintaining a 100% reserve requirement e. lending excess reserves to customers 17. (65%) If the RR is 20%, the existence of $100 worth of ER in the banking system can lead to a maximum expansion of the money supply equal to a. $20 b. $100 c. $300 d. $500 e. $750 18. (71%) If the Fed lowers the RR, which of the following would most likely occur? a. Imports will rise, decreasing the trade deficit. b. The rate of saving will increase. c. Unemployment and inflation will both increase. d. Businesses will purchase more factories and equipment. e. The budget deficit will increase. 19. (61%) If the public’s desire to hold money as currency increases, what will the impact be on the banking system? a. Banks would be more able to reduce unemployment. b. Banks would be more able to decrease AS. c. Banks would be less able to decrease AS. d. Banks would be more able to expand credit. e. Banks would be less able to expand credit 1995 AP Exam 5x$100=$500 More MS means lower I.R. & more Ig Holding currency means less ER & higher I.R.

11. 20. (86%) Which of the combinations is most likely to cure a severe recession? Open-Market OperationsTaxesGov. Spending a. Buy securities Increase Decrease b. Buy securities Decrease Increase c. Buy securities Decrease Decrease d. Sell securities Decrease Decrease e. Sell securities Increase Increase 21. (61%) The demand for money increases whennational income increasesbecause a. spending on goods and services increases d. the MS increases b. interest rates increase e. the budget deficit increases c. the public becomes more optimistic about the future 22. (76%) Suppose the RR is 20% and a single bank with no ER receives a $100 DD from a new customer. The bank now has excess reserves equal to a. $20 b. $80 c. $100 d. $400 e. $500 23. (45%) Which of the following is most likely to increase if the public decides to increase its holding of currency? a. the interest rate d. Employment b. The price level e. The reserve requirement c. Disposable personal income 24. (47%) During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate? a. Equal increases in government expenditure and taxes b. An increase in government expenditure only c. An increase in transfer payments d. An increase in the reserve requirement e. Purchase of government securities by the Fed Holding MS; banks have less; higher I.R.

12. 25. (73%) Which of the following monetary and fiscal policy combinations would most likely result in a decrease in AD? Discount RateOpen-Market OperationsGov. Spending a. Lower Buy bonds Increase b. Lower Buy bonds Decrease c. Raise Sell bonds Increase d. Raise Buy bonds Increase e. Raise Sell bonds Decrease 26. (35%) Under which of the following circumstances would increasing the MS be most effective in increasing real GDP? Interest RatesEmploymentBusiness Optimism a. High Full High b. High Less than full High c. Low Full High d. Low Full Low e. Low Less than full Low 27. (57%) According to both monetarists and Keynesians, which of the following happens when the Fed reduces the discount rate? a. The demand for money decreases and market interest rates decrease. b. The demand for money increases and market interest rates increase. c. The supply of money increases and market interest rates decrease. d. The supply of money increases and market interest rates increase. e. Both the demand for money and the MS increase and market interest rates increase. 28. (79%) All of the following are components of the MS in the U.S. EXCEPT a. paper money b. gold bullion c. checkable deposits d. coins e. demand deposits

13. 29. (47%) If theFed undertakes a policy to reduce interest rates, international capital flows(financial capital like CDs, bonds)will be affected in which of the following ways? a. Long-run capital outflows from the U.S. will decrease. b. Long-run capital inflows to the U.S. will increase. c. Short-run capital outflows from the U.S. will decrease. d. Short-run capital inflows to the U.S. will decrease. e. Short-run capital inflows to the U.S. will not change. 30. (73%) If the Fedwishes to use monetary policy to reinforce Congress’ fiscal policy changes, it should a. increase the MS when government spending is increased b. increase the MS when government spending is decreased c. decrease the Ms when government spending is increased d. increase interest rates when government spending is increased e. decrease interest rates when government spending is decreased Lower U.S. interest rates will result in fewer capital inflows This would keep the interest rate from going up.