Central Bank and Nominal Interest Rate

Topics: Central bank, Monetary policy, Inflation Pages: 5 (603 words) Published: November 22, 2013
If the Fed is following a flat monetary policy rule, it will Answer

aggressively increase inflation if the interest rate exceeds the target interest rate.

aggressively increase interest rates if the inflation rate exceeds the target inflation rate.

only slightly increase inflation if the interest rate exceeds the target interest rate.

only slightly increase interest rates if the inflation rate exceeds the target inflation rate.

During the Christmas shopping season the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____. Answer



remain constant.

equal the real interest rates.

Which of the following would be expected to increase the U.S. demand for money? Answer

Competition among brokers forces down the commission charge for selling bonds or stocks.

The economy enters a recession.

Political instability increases dramatically in developing nations.

On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

The two main responsibilities of the Federal Reserve System are to _____ and to ______. Answer

apprehend counterfeiters; regulate the stock market

enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar

insure bank deposits; print currency

conduct monetary policy; oversee financial markets

A banking panic is an episode in which:

depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.

commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations.

commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate.

depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.

The _____ is the interest rate commercial banks pay to the Fed; the _____ is the interest rate commercial banks charge each other for short-term loans. Answer

federal funds rate; discount rate

discount rate; federal funds rate

nominal interest rate; real interest rate

nominal interest rate; prime rate of interest

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. Answer

increase; 3,133

increase; 4,100

increase; 4,667

increase; 2,667

 If the Federal Reserve sets a target nominal interest rate, it can: Answer

independently set a target money supply.

only set a money supply target that is consistent with the target nominal interest rate target.

simultaneously set any money supply target.

shift the money demand curve to the right.

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must _____ real interest rates in order to close the gap. Answer

recessionary; raise

recessionary lower

recessionary; not change

expansionary; raise

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment? Answer





The Federal Reserve's monetary policy rule provides information about: Answer

economywide money demand and the output gap.

economywide money demand and the long-run target for inflation.

the long-run target for inflation and how...
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