2.  Monetary policy- changes in the money supply to fight inflations or recessions.

3.  Open Market Operation  Discount Rate  Reserve Ratio

4.  The buying or selling of bonds to increase or decrease the money supply  Bond-fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities

6.  An interest rate that commercial banks need to pay when they borrow a short term loan from the Fed.

8.  The fraction of total deposits kept on reserve by the bank.  These reserves cannot be used or be given out to customers unless the Fed changes the required reserve.

9.  An expansionary policy is used to fight a recession  An expansionary monetary policy will increase the money supply.  An increase in money supply will cause the velocity of money to go faster.

10.  Open market operation ◦ The Fed buys bonds from banks. ◦ The addition in the money supply will circulate the economy.

11.  Interest Rate/Discount Rate ◦ Decrease in discount rate ◦ Increases excess reserves which expands money supply

12.  Required Reserve Ratio ◦ Decreasing the reserve ratio will ◦ Increases excess reserves

13.  A Contractionary policy is used to fight off an inflation.  Decreases the money supply

14.  Open Market Operation ◦ The Fed sells bonds to commercial banks to decrease the money supply. This happens because excess reserves drop.

15.  Discount rate ◦ Discount rate is increased to decrease excess reserves

16.  Reserve ratio ◦ Reserve Ratio is increased to lower excess reserves

17.  Inflation is an increase in the overall price level.  Unemployment is when labor is underutilized so production is not at its fullest.  Inflation and unemployment is seen as the output in an AS/AD graph

20.  Which is NOT a way that the Fed can affect the money supply?  A. A change in discount rate.  B. An open market operation.  C. A change in reserve ratio.  D. A change in tax rates.  E. Buying Treasury securities from commercial banks.  Correct Answer- C

21.  If the money supply increases, what happens in the money market? (Assuming money demand is downward sloping)  A. The nominal interest rates rises.  B. The nominal interest rates falls.  C. The nominal interest rate does not change.  D. Transaction demand for money falls.  E. Transaction demand for money rises.  Correct Answer-

22.  Which of the following is a predictable advantage of expansionary monetary policy in a recession?  A. Decreases aggregate demand so that the price level falls.  B. Increases aggregate demand, which increases real GDP and increases employment.  C. Increases unemployment, but low prices negate this effect.  D. It keeps interest rates high, which attracts foreign investment.  E. It boosts the value of the dollar in foreign currency markets.

23.  A likely cause of falling Treasury bond prices  A. might be expansionary monetary policy.  B. contractionary monetary policy.  C. a depreciating dollar.  D. fiscal policy designed to reduce the budget deficit.  E. a decrease in the money demand.  Correct Answer- B

24.  Expansionary monetary policy is designed  A. to lower the interest rate, increase private investment, increase aggregate demand, and increase domestic output.  B. lower the interest rate, increase private investment, increase aggregate demand, and increase the unemployment rate.  C. increase the interest rate, increase private investment, increase aggregate demand, and increase domestic output.  D. increase the interest rate, decrease private investment, increase aggregate demand, and increase domestic output.  E. increase the interest rate, decrease private investment, decrease aggregate demand, and decrease the price level.  Correct Answer- A