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