True/False
Indicate whether the
statement is true or false.
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1.
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The Federal Reserve has the power to issue money, but does not influence
interest rates.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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2.
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The Fed's control over interest rates, direct lending to financial
institutions, and other policy tools is called
a. | fiscal policy. | b. | monetary policy. | c. | discount
policy. | d. | margin controls. |
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3.
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One of the advantages of monetary policy over fiscal policy is that
a. | monetary policy must be approved by Congress, which prevents bad monetary policy from
taking effect. | b. | monetary policy does not produce inflation, whereas fiscal policy
does. | c. | the Fed can react more quickly than the legislature can. | d. | monetary policy
allows the Fed to limit government spending so that government budget deficits are
reduced. |
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4.
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If the Federal Reserve raises the federal funds rate, which one of the following
will not tend to happen as a result?
a. | Economic activity will decrease. | b. | Car loan and home mortgage rates will
rise. | c. | Businesses will find it easier to obtain funds to expand. | d. | Inflation will
decline. |
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5.
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Which of the following statements about monetary policy is true?
a. | Unlike fiscal policy, there is no delay between the Fed's enacting a policy and
the policy's effects. | b. | The Fed's policies tend to take effect
more quickly and with less political influence than fiscal policy. | c. | Monetary policy has
an equal impact on short-term and long-term interest rates. | d. | The Fed controls
most interest rates directly by telling banks and other financial institutions what interest rate
they must charge for common loans. |
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6.
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To produce financial stability, the Federal Reserve would want to
a. | increase the money supply during an economic boom and reduce the money supply during
a recession. | b. | raise the interest rate during a recession to prevent excessive borrowing and
increase income for struggling banks. | c. | sell bonds during a recession and buy bonds
during an economic boom. | d. | raise the money supply and cut interest rates
during a recession to stimulate spending. |
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7.
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Money can be used to buy goods and services, and is accepted in turn as payment.
This is the ________ use of money.
a. | medium of exchange | b. | store of value | c. | standard of
value | d. | inflationary |
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8.
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One potential problem with having private currencies—such as "Bank of
Sam" dollars and "Bank of Fred" dollars—is that it will be difficult for
individuals to
a. | compare Sam dollars to Fred dollars. | b. | trade Sam dollars for Fred
dollars. | c. | discourage both Sam and Fred from inflating their currencies. | d. | keep both Sam
dollars and Fred dollars in their wallets. |
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9.
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Reducing the fed funds rate can increase GDP in the short term because at lower
interest rates
a. | individuals and businesses will want to borrow and spend more. | b. | households will
attempt to save more. | c. | banks will earn greater profits on
loans. | d. | taxes are lower, which increases disposable income. |
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10.
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If a person uses money to buy a pair of shoes, money is functioning as
a. | a unit of account. | b. | a store of value. | c. | a medium of
exchange. | d. | none of the above |
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