CLEP Macroeconomics chapter practice4 questions

15 The Federal Reserve and Monetary Policy

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 4

When a central bank buys government securities in the open market, that purchase initially

The central bank pays for the securities by crediting the seller's reserve account, so reserves rise the same day. Choice B reverses the flow. Choice A confuses who holds the debt with how much is outstanding, C treats a portfolio swap as a tax, and E hands a liquidity operation the power to move capacity.
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D. adds reserves to the banking system

The central bank pays for the securities by crediting the seller's reserve account, so reserves rise the same day. Choice B reverses the flow. Choice A confuses who holds the debt with how much is outstanding, C treats a portfolio swap as a tax, and E hands a liquidity operation the power to move capacity.

Question 2

Question 2 of 4

An open-market sale of government securities is generally classified

Selling securities pulls reserves out and pushes short-term rates up, which restrains borrowing and spending. Choice A reverses the direction and B hands the tool to the wrong authority. Choice C confuses a deliberate operation with a built-in budget response, and D denies a short-run effect the model does predict.
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E. as contractionary

Selling securities pulls reserves out and pushes short-term rates up, which restrains borrowing and spending. Choice A reverses the direction and B hands the tool to the wrong authority. Choice C confuses a deliberate operation with a built-in budget response, and D denies a short-run effect the model does predict.

Question 3

Question 3 of 4

A central bank lowers its policy interest rate. Which of the following follows in the standard transmission story?

Cheaper financing pulls forward investment and interest-sensitive consumer purchases, the first real link in the chain. Choice B reverses what a lower rate does to present values, and D contradicts the rate cut itself. Choice C sends demand the wrong way, and E lets a nominal change move capacity.
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A. Interest-sensitive spending increases.

Cheaper financing pulls forward investment and interest-sensitive consumer purchases, the first real link in the chain. Choice B reverses what a lower rate does to present values, and D contradicts the rate cut itself. Choice C sends demand the wrong way, and E lets a nominal change move capacity.

Question 4

Question 4 of 4

A cut in the required reserve ratio on checkable deposits

The multiplier is (1)/(r), so cutting r raises it and each dollar of reserves supports more deposits. Choice A inverts that arithmetic and B denies that the requirement binds lending at all. Choice D confuses the multiplier with the base, since the ratio changes no reserves, and E assigns a central-bank rule to the legislature.
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C. raises the deposit multiplier

The multiplier is (1)/(r), so cutting r raises it and each dollar of reserves supports more deposits. Choice A inverts that arithmetic and B denies that the requirement binds lending at all. Choice D confuses the multiplier with the base, since the ratio changes no reserves, and E assigns a central-bank rule to the legislature.

Quiz complete