C211 - Competency 4 - Study Guide
UPDATED ACTUAL Exam Questions and
CORECT Answers
What tools does the Federal Reserve have with regards to monetary control? - CORRECT
ANSWER - Federal Open Market Committee, OMOs (Open Market Operations), Sales of
Bonds
What are open market operations? - CORRECT ANSWER - When the Fed purchases and
sales US government bonds to commercial banks and general public
When the Fed buys bonds, what impact does this have on the money supply and aggregate
demand? - CORRECT ANSWER - After the purchase, these dollars are in the hands of the
public.
INCREASES the money supply
When the Fed sells bonds, what impact does this have on the money supply and aggregate
demand? - CORRECT ANSWER - After the sale, the dollars the federal government receives
for the bonds are out of the hands of the public. Thus, and open-market sale of bonds by the
federal government DECREASE the money supply Money Supply - goes DOWN
What is a discount rate? - CORRECT ANSWER - The interest rate bank pay when borrowing
from the Fed
When the Fed reduces the discount rate, what impact will this have on the money supply and the
aggregate demand? - CORRECT ANSWER - A lower discount rate encourages banks to
borrow from Fed, increasing the money supply
When the Fed increases the discount rate, what impact will this have on the money supply and
the aggregate demand? - CORRECT ANSWER - Higher discount rate discourages banks
from borrowing reserves from the Fed, decreasing money supply
, What is a reserve ratio? - CORRECT ANSWER - Amount of money banks set aside
What would the Fed need to do with the reserve ratio in order to increase the money supply and
aggregate demand in the economy? - CORRECT ANSWER - Decrease the reserve
requirements; therefore lowering the reserve ratio. Decreasing reserve ratio will increase money
supply
What would the Fed need to do with the reserve ratio in order to decrease the money supply and
aggregate demand in the economy? - CORRECT ANSWER - Increase the reserve
requirements; therefore, raising the reserve ratio Increasing the reserve ratio decreases money
supply
If the Fed uses monetary policy in a way that increases money supply, what effect will this have
on interest rates and aggregate demand (consider them separately)? - CORRECT ANSWER -
Interest rates lower and aggregate demand increase
If the government uses fiscal policy to increase government spending what impact will this have
on interest rates and aggregate demand? - CORRECT ANSWER - Raises interest rates and an
increase in aggregate demand
If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates
and aggregate demand? - CORRECT ANSWER - Raises interest rates and an increase in
aggregate demand Use to eliminate recessions and unemployment
Quantity of Demand (QD) - CORRECT ANSWER - how much a customer is willing to buy
(a point on demand curve) Will ONLY change based on price - Movement on graph along the
same curve
Demand - CORRECT ANSWER - the relationship between price and quantity of demand
shown in demand schedule and demand curve (entire demand curve)
UPDATED ACTUAL Exam Questions and
CORECT Answers
What tools does the Federal Reserve have with regards to monetary control? - CORRECT
ANSWER - Federal Open Market Committee, OMOs (Open Market Operations), Sales of
Bonds
What are open market operations? - CORRECT ANSWER - When the Fed purchases and
sales US government bonds to commercial banks and general public
When the Fed buys bonds, what impact does this have on the money supply and aggregate
demand? - CORRECT ANSWER - After the purchase, these dollars are in the hands of the
public.
INCREASES the money supply
When the Fed sells bonds, what impact does this have on the money supply and aggregate
demand? - CORRECT ANSWER - After the sale, the dollars the federal government receives
for the bonds are out of the hands of the public. Thus, and open-market sale of bonds by the
federal government DECREASE the money supply Money Supply - goes DOWN
What is a discount rate? - CORRECT ANSWER - The interest rate bank pay when borrowing
from the Fed
When the Fed reduces the discount rate, what impact will this have on the money supply and the
aggregate demand? - CORRECT ANSWER - A lower discount rate encourages banks to
borrow from Fed, increasing the money supply
When the Fed increases the discount rate, what impact will this have on the money supply and
the aggregate demand? - CORRECT ANSWER - Higher discount rate discourages banks
from borrowing reserves from the Fed, decreasing money supply
, What is a reserve ratio? - CORRECT ANSWER - Amount of money banks set aside
What would the Fed need to do with the reserve ratio in order to increase the money supply and
aggregate demand in the economy? - CORRECT ANSWER - Decrease the reserve
requirements; therefore lowering the reserve ratio. Decreasing reserve ratio will increase money
supply
What would the Fed need to do with the reserve ratio in order to decrease the money supply and
aggregate demand in the economy? - CORRECT ANSWER - Increase the reserve
requirements; therefore, raising the reserve ratio Increasing the reserve ratio decreases money
supply
If the Fed uses monetary policy in a way that increases money supply, what effect will this have
on interest rates and aggregate demand (consider them separately)? - CORRECT ANSWER -
Interest rates lower and aggregate demand increase
If the government uses fiscal policy to increase government spending what impact will this have
on interest rates and aggregate demand? - CORRECT ANSWER - Raises interest rates and an
increase in aggregate demand
If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates
and aggregate demand? - CORRECT ANSWER - Raises interest rates and an increase in
aggregate demand Use to eliminate recessions and unemployment
Quantity of Demand (QD) - CORRECT ANSWER - how much a customer is willing to buy
(a point on demand curve) Will ONLY change based on price - Movement on graph along the
same curve
Demand - CORRECT ANSWER - the relationship between price and quantity of demand
shown in demand schedule and demand curve (entire demand curve)
