Interest Rates and Monetary policy

Chapter 16: Interest Rates and Monetary policy

1. Two reasons why people want to hold money are
   a. the _____________ demand for money and
   b. the _____________ demand for money
2. The market for money, interest rates, and bond prices
   Assume the Federal Reserve increases the supply of money.
   a. Draw a demand for and supply of money graph showing an increase in the money supply.
   b. The interest rate would ________.
   c. The amount of money balances held by the public would ________
   d. because the opportunity cost of holding money ________.
   e. Bond prices and interest rates are ________ related.
3. Monetary policy
   a. The Fed influences the nation’s money supply by changing the amount of _ _ _ _ _ V _ __ held by commercial banks.
   If the Fed wants to increase the reserves in the banking system, which tends to increase the money supply, indicate how the Fed should manipulate its instruments of monetary control.
   b.
   c.
   d.
   e.
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4. Expansionary monetary policy or easy money policy is considered appropriate countercyclical policy when
   a. The economy’s unemployment rate _____ the natural rate of unemployment
   b. and its real GDP _______ its potential real GDP.
5. If the Fed buys government bonds from the public, we would anticipate a(n):
   a. ___ in commercial bank demand deposits
   b. ___ in commercial bank reserves
   c. ___ in credit availability in the economy (more excess reserves)
   d. ___ in the money supply
   e. ___ in interest rates
   f. ___ in bond prices
   If interest rates change as indicated in (e), the anticipated impact on the economy would be to:
   g. ___ investment spending (IG), and through the multiplier effect
   h. ___ aggregate demand and real GDP
   If the Fed buys government bonds from the public, we would anticipate:
   i. ___ in the size of the money multiplier
   j. ___ in the size of the federal government’s debt
6. Both the Federal Reserve Banks and commercial banks buy and sell government securities, but for substantially different objectives.
   a. The Federal Reserve Banks buy and sell government securities to:
   b. Commercial banks buy and sell government securities to improve their liquidity (or having sufficient reserves on hand) and to:
   c. T F An open-market operation occurs when the public buys or sells government bonds.

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