Answers to Level 3,Test 2        United States Money and Monetary  System

1.  The difference between the interest rate on longer term and shorter term instruments has been suggested as a guide to monetary policy. Whereas short term interest rates are strongly influenced by the current setting of the policy instrument, longer term interest rates are influenced by expectations of future short-term interest rates and thus by the longer term effects of  what?

1. Monetary reserves.

2. Monetary policy on inflation and output.

2.  Foreign exchange rate movements are an important channel through which monetary policy affects the economy, and exchange rates tend to respond promptly to a change in the federal funds rate.

Interpreting the meaning of movements in exchange rates, however, can be difficult. A decline in the foreign exchange value of the dollar could indicate that monetary policy has become, or is expected to become, more accommodative, resulting in what?

1. Inflation risks

2. Deflation risks

3.  The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and what other factor?

1. moderate long term interest rates

2. moderate short term interest rates

4.  The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC sets the federal funds rate at a level it believes will foster financial and monetary conditions consistent with achieving its monetary policy objectives, and it adjusts that target in line with what events?

1. Changing prime rate

3.  Evolving economic developments

5.  If the Federal Reserve surprised market participants with a reduction in the federal funds rate, what would happen to short term interest rates?

1. Decline

2. Rise

6. Changes in monetary policy affect the exchange value of the dollar on currency markets. For example, if interest rates rise in the United States, yields on dollar assets will look more favorable which will lead to bidding up of the dollar on foreign exchange markets. This higher dollar will :

1. Lower the cost of imports to U.S.

2. Raise the cost of imports to U.S.

7  If long term interest rates decline then, all else being equal, returns on stocks will exceed returns on bonds and encourage investors to:

1. purchase stocks

2. Sell Stocks

8. The statutory goals of maximum employment and stable prices are easier to achieve if the public understands those goals and believes that the Federal Reserve will take effective measures to achieve them. For example, if the Federal Reserve responds to a negative demand shock to the economy with an aggressive easing of policy, businesses and consumers may believe that these actions will restore the economy to full employment. Therefore, they may be inclined to:

1. Increase spending

2.  Pull back on spending

9. The Federal Reserve publishes data on three monetary aggregates. The following details their principal components:

 M1 is composed of currency, traveler’s checks, Demand accounts, NOW and similar interest earning checking accounts. M2 is composed of M1 plus savings deposits and money market deposit accounts M3 is composed of M2 plus large time deposits, Institutional money market fund balances, repurchase agreements and eurodollars.

Therfore:

1. M2 is primarily held by households.

2. M2 is primarily held by businesses.  

3. M2 is primarily held by the government.

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