SOLVED

21) For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the A) federal funds rate. B) Treasury bill rate. C) discount rate. D) prime rate. 22) The monetary policy target the Federal Reserve focuses primarily on today is A) the unemployment rate. B) M1. C) the inflation rate. D) the interest rate. E) M2. 23) The interest rate that banks charge other banks for overnight loans is the A) prime rate. B) discount rate. C) federal funds rate. D) Treasury bill rate. 24) Changes in the federal funds rate usually result in A) changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. B) changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. C) changes in both short-term and long-term interest rates with equal effect on both. D) no change in both short-term and long-term interest rates. 25) The Fed can increase the federal funds rate by A) selling Treasury bills, which increases bank reserves. B) buying Treasury bills, which increases bank reserves. C) selling Treasury bills, which decreases bank reserves. D) buying Treasury bills, which decreases bank reserves. 26) The Fed can directly lower the inflation rate. 27) The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates. 28) A monetary policy target is a variable that the Fed can affect directly, which then affects one or more of the Fed’s policy goals. 29) Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve. 30) Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve’s open market sale of Treasury securities. 31) Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply? 32) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.