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The asset demand for money

varies inversely with the rate of interest

On a diagram where the interest rate and quantity of money demanded are shown on the vertical and horizontal axes respectively, the transactions demand for money can be represented by

a vertical line

An increase in nominal GDP increases the demand for money because

more money is needed to finance a larger volume of transactions

Other things equal, if the supply of money is reduced

bond prices will fall

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

and reserves of commercial banks both decrease

The Federal Reserve Banks buy government securities from the commercial banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase

The four main tools of monetary policy are

the discount rate, the reserve ratio, the term auction facility, and open-market operations

Open-market operations refer to

the purchase or sale of government securities by the Fed

The Federal Reserve System regulates the money supply primarily by

altering the reserves of commercial banks, largely through sales and purchases of government bonds

If the Fed were to reduce the legal reserve ratio, we would expect

lower interest rates, an expanded GDP, and a higher rate of inflation

The interest rate at which the Federal Reserve Banks lend to commercial banks is called

discount rate

Which of the following tools of monetary policy is flexible, and able to affect bank reserves quickly and by relatively specific amounts?

open-market operations

When the Fed auctions and loans reserves using the term auction facility, what determines the interest rate that will be charged for those reserves?

the interest rate of the lowest bidder, whose bid is accepted

Economists believe that use of the term auction facility:

will be limited to times of economic crisis when a quick injection of reserves will be helpful

Refer to the diagram for the Federal funds market. If the Fed wants to increase reserves from $200 billion to $300 billion it should:

buy bonds from banks and the public

If the Fed wants to lower the Federal funds rate, it should

buy government securities in the open market

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

a tax increase and an increase in the money supply

Monetary policy is expected to have its greatest impact on


The problem of cyclical asymmetry refers to the idea that

a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply

The liquidity trap refers to the situation where

the Fed adds excess reserves to the banking system, but it has a minimal positive effect on lending, investment, or aggregate demand

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