1. When a bank makes a loan, which of the following occurs? (Check all that appl
ID: 1107348 • Letter: 1
Question
1. When a bank makes a loan, which of the following occurs? (Check all that apply.)
Note: In your answer, only consider the loan transaction itself. Don't think about other things that may happen later.
a. The bank loans out some of the money that has been deposited with it.
b. The total money supply increases.
c. The total money supply decreases.
d. The bank's assets increase.
e. The bank's assets decrease.
f. The bank's liabilities increase.
g. The bank's liabilities decrease.
2. When a central bank shifts monetary policy in an expansionary direction, which of the following does it do? (Check all that apply.)
a. Buys bonds.
b. Sells bonds.
c. Reduces the supply of reserves.
d. Increases the supply of reserves.
e. Raises reserve requirements.
f. Orders banks to reduce the interest rates they charge on loans.
g. Orders banks to increase the interest rates they charge on loans.
3. When a central bank shifts monetary policy in an contractionary direction, which of the following does it normally do? (Check all that apply.)
a. Buys bonds.
b. Sells bonds.
c. Reduces the supply of reserves.
d. Increases the supply of reserves.
e. Lowers reserve requirements.
f. Orders banks to reduce the interest rates they charge on loans.
g. Orders banks to increase the interest rates they charge on loans.
4. When the central bank loosens, or shifts policy in an expansionary direction, which of the following will normally happen? (Check all that apply.)
a. Market interest rates will rise.
b. Market interest rates will fall.
c. Banks will raise lending standards — rejecting more borrowers, requiring more collateral, etc.
d. Banks will lower lending standards — accepting more borrowers, requiring less collateral, etc.
e. The total amount of lending in the economy will increase.
f. The total amount of lending in the economy will decrease.
g. Asset prices will rise.
h. Asset prices will fall.
5. Monetary policy transmission sometimes breaks down; that is, a change in policy sometimes fails to produce the desired results on the economy. Suppose the central bank is trying to shift policy in an expansionary direction. Under what conditions could the central bank fail to get the results it wants? (check all that apply)
a. The policy interest rate is currently zero.
b. The shift in monetary policy is expected to be temporary.
c. The shift in monetary policy is expected to last for a long time.
d. Businesses see many opportunities for profitable investment.
e. Businesses see few opportunities for profitable investment.
f. When the policy interest rate, or federal funds rate, changes, market interest rates change by just as much.
g. When the policy interest rate, or federal funds rate, changes, market interest rates do not change very much.
h. Banks have more than enough reserves to make payments to other banks, so they do not need to borrow them.
i. Most banks do not have enough reserves to make payments to other banks, and need to borrow them instead.
6. Suppose the inflation rate has been close to the level desired by the central bank. Then there is an increase in inflation, to one point above the target level. If the central bank is following a standard policy rule (like the Taylor rule), what will it do in response? (choose one)
a. Reduce the policy interest rate by one point.
b. Reduce the interest rate by more than one point.
c. Reduce the interest rate by less than one point.
d. Leave the interest rate unchanged.
e. Increase the policy rate by one point.
f. Increase the policy interest rate by more than one point.
f. Increase the policy interest rate by less than one point.
7. During the 1980s, 1990s, and early 2000s the main tool of monetary policy was open-market operations, which were used to set the federal funds rate. But since 2008, the Fed has no longer this instrument. In two or three sentences or a paragraph, explain why open market operations and the federal funds rate are no longer useful tools for monetary policy.
Explanation / Answer
1. a. The bank loans out some of the money that has been deposited with it.
b. The total money supply increases.
e. The bank's assets decrease.
g. The bank's liabilities decrease.
2.a) buys bonds
Increases the supply of reserves.
f. Orders banks to reduce the interest rates they charge on loans
3.sells bonds
Decrease the supply of reserves
Orders banks to increase interest rates they charge of loans.
4.
b. Market interest rates will fall.
d. Banks will lower lending standards — accepting more borrowers, requiring less collateral, etc.
e. The total amount of lending in the economy will increase.
h. Asset prices will fall.
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