Monetary Policy Multiple Choice Practice

1. Expansionary monetary policy: A. increases the money supply, interest rates, consumption, and investment. B. decreases the money supply, interest rates, consumption, and investment. C. increases the money supply, decreases interest rates, and increases consumption and investment. D. decreases the money supply, increases interest rates, and decreases consumption and investment. E. increases the money supply, decreases interest rates, and decreases consumption and investment. 2. To close an inflationary gap using monetary policy, the Fed should ________ the money supply to ________ investment and consumer spending, and shift the aggregate demand curve to the ________. A. increase; increase; left B. decrease; decrease; left C. increase; increase; right D. decrease; decrease; right E. decrease; increase; right

3. Which of the following combinations of monetary policy actions would definitely cause an increase in aggregate demand? Discount Open Market Reserve Rate Operations Requirement A. Increase Sell Bonds Increase B. Increase Sell Bonds Decrease C. Increase Buy Bonds Increase D. Decrease Sell Bonds Decrease E. Decrease Buy Bonds Decrease 4. When we use money to buy groceries, money is playing the role of a: A. medium of exchange. B. reserve of wealth. C. unit of account. D. store of value. E. corporate bond.

5. Which of the following would be the initial effect of an individual making a $10,000 cash deposit in a bank? 6. Suppose a bank does NOT hold excess reserves and the reserve ratio is 20%. If Melanie deposits $1,000 of cash into her checking account and the bank lends $600 to Freda, the bank can lend an additional: A. $400. B. $200. C. $1,000. D. $5,000. E. $600. A. The money supply would rise by $10,000. B. The money supply would fall by $10,000. C. The money supply would not be affected by the deposit. D. The money supply would fall, but by less than the $10,000 deposit. E. The money supply would rise by more than $10,000.

Scenario 25-2: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. 7. Use Scenario 25-2. How much can the bank loan based on the $1,000 deposit? A. $1,000 B. $200 C. $800 D. $0 E. $900 8. Use Scenario 25-2. What is the maximum expansion in the money supply possible? B. $1,800 C. $4,000 D. $5,000 E. $10,000

9. If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the monetary base, the Fed would likely: A. increase the discount rate. B. increase the federal funds rate. C. increase the reserve requirement. D. sell U.S. Treasury bills in an open market operation. E. increase the tax on investment spending. 10. When the Federal Reserve would like to influence the interest rate banks charge each other to borrow money they will do which of the following? A. They will conduct open market operations to influence the discount rate. B. They will adjust the discount rate directly. C. They will adjust the reserve requirement directly. D. They will conduct open market operations to influence the federal funds rate. E. The fed does not influence the interest rates banks charge each other.