Chapter 15
"The federal funds rate can sometimes be below the interest rate paid on reserves." Is this statement true, false, or uncertain? Explain your answer. A. True. This may happen because nonbank financial institutions, which cannot earn interest on reserves, participate in the federal funds market. B. False. Banks would prefer earning a risk-free interest rate rather than loaning excess reserves in the more risky federal funds market at an equivalent or lower rate. C. Uncertain. It depends on the stigma associated for a bank to borrow directly from the Fed.
A
Credit easing refers to: A. altering the composition of the Fed's balance sheet in order to improve the functioning of particular segments of the credit markets. B. asset sales that can raise interest rates for sellers in particular credit markets. C. providing liquidity to foreign borrowers. D. the reserves that become excess reserves instead of being loaned out.
A
The Fed's lender-of-last-resort function: A. creates a moral hazard problem. B. has proven to be ineffective. C. is no longer necessary due to FDIC insurance. D. cannot prevent runs by large depositors.
A
The Fed's open market operations normally involve only the purchase of government securities, particularly those that are shortminus−term. However, during the crisis, the Fed started new programs to purchase A. mortgage−backed securities and long−term Treasuries. B. commercial papers and short−term Treasuries. C. Treasury bills and Treasury notes. D. mortgage−backed securities and Treasury bills.
A
To lower the federal funds rate, the Fed would A. conduct an open market purchase. B. increase the reserve requirement. C. increase the discount rate. D. all of the above
A
What monetary policy tool does the Fed use to control the amount of nonborrowed reserves? A. open market operations B. discount lending C. reserve requirements D. interest on reserves
A
You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary policy? Why or why not? A. No. The Fed usually lowers the discount rate when market rates fall regardless of the direction of monetary policy. B. No. The Fed usually lowers the discount rate to signal contractionary policy. C. Yes. The Fed usually uses the discount rate to manipulate the money supply. D. Yes. The Fed usually uses the discount rate to signal the future of monetary policy.
A
____________ are intended to change the level of reserves and the monetary base. A. Dynamic open market operations B. Defensive open market operations C. Open market purchases D. Open market sales
A
The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the ________. A. Term Auction Facility B. Commercial Paper Funding Facility C. Primary Dealer Credit Facility D. Term Securities Lending Facility
A. Term Auction Facility
"The federal funds rate can sometimes be above the discount rate." Is this statement true, false, or uncertain? A. False. Once the federal funds rate reaches the discount rate, banks borrow directly from the Fed, preventing the federal funds rate from a further rise. B. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.
B
An open market sale will cause A. nonborrowed reserves to rise and the federal funds rate to fall B. nonborrowed reserves to fall and the federal funds rate to rise. C. borrowed reserves to fall and the federal funds rate to rise. D. borrowed reserves to rise and the federal funds rate to fall.
B
From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A. the Fed also increased the required reserve ratio B. most of it just flowed into holdings of excess reserve. C. the Fed also conducted open market sales. D. the discount loan decreased.
B
Open market purchases raise the ________, thereby increasing the _________. A. money multiplier; monetary base and reserves B. monetary base and reserves; money supply C. money base; money multiplier D. money multiplier; money supply
B
The federal funds interest rate is determined by the: A. equilibrium of supply and demand in the money market. B. equilibrium of supply and demand in the market for reserves. C. equilibrium of supply and demand in the bond market. D. FOMC.
B
The interest rate charged on overnight loans of reserves between banks is the A. discount rate. B. federal funds rate. C. prime rate. D. Treasury bill rate.
B
The Fed's most commonly used means of changing the money supply is: A. changing the discount rate B. open market operations C. changes in the Regulation Q ceiling D. changing reserve requirements
B
To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase A. Treasury bills and Treasury notes. B. mortgage-backed securities. C. long-term Treasuries. D. commercial papers.
B
Which of the following is a cost of Fed discount operations? A. The Fed has to pick and choose which banks receive discount loans, which banks dislike. B. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics. C. Banks have to pay back the discount loans at the discount rate, which costs money. D. There are no costs to discount operations because the discount loans have to be paid back.
B
Which of the following policy changes would be considered a conventional monetary policy change? A. Purchases of long-term securities to lower long-term interest rates. B. An open market sale of securities to increase the fed funds rate. C. Federal Reserve lending through the Term Auction Facility. D. Announcing a firm policy to conduct large scale open market purchases in the future.
B
Which of the following policy changes would be considered an unconventional monetary policy change? A. An open market sale of securities to increase the fed funds rate. B. Announcing a firm policy to conduct large scale open market purchases in the future. C. An decrease in reserve requirements to decrease the fed funds rate. D. An open market purchase of securities to decrease the fed funds rate.
B
"Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank panics." Why is this statement false? A. The Fed uses open market operations to inject liquidity. B. The Fed can change reserve requirements. C. The Fed uses discounting to keep bank failures from spreading. D. All of the above explain why the statement is incorrect.
C
The primary indicator of the Fed's stance on monetary policy is A. the growth rate of M2. B. the growth rate of the monetary base. C. the federal funds rate. D. the discount rate.
C
When the Fed increases reserve requirements, it reduces the money supply by causing: A. reserves to fall. B. the monetary base to fall. C. the money multiplier to fall. D. Both A and B are correct.
C
Which of the following forms is a conventional monetary policy tool: A. asset purchases B. commitment to future monetary policy actions. C. open market operations D. liquidity provision
C
Why is paying interest on reserves an important tool for the Federal Reserve to manage crises? A. It allows the Fed to increase the effective tax on deposits, thereby increasing economic efficiency. B. It allows the Fed to increase the money supply to support excessive demand for goods and services. C. It allows the Fed to increase its lending as much as it wants without reducing the federal funds rate. D. It allows for fluctuations in the federal funds rate, making monetary policy more flexible.
C
Why is the composition of the Fed's balance sheet a potentially important aspect of monetary policy during a crisis? A. A consistent composition of the Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future. B. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. C. The Fed can influence interest rates and provide more targeted liquidity. D. When the Fed provides liquidity to a particular segment of the credit market, it can freeze the market and hence decrease inflation.
C
By paying interest on reserves, the Fed is able to keep the federal funds rate A. equal to the interest rate on reserves B. at or below the interest rate on reserves C. equal to the discount rate D. at or above the interest rate on reserves
D
From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to A. an economic expansion. B. a huge expansion of the money supply. C. a high inflation. D. a huge increase in the monetary base.
D
Open market operations as a monetary policy tool have the advantage that: A. they occur at the initiative of the Fed. B. they are easily reversed if mistakes are made. C. they are flexible and precise. D. All of the above are correct.
D
The management of expectations is a strategy best defined by: A. lowering the market's expectations of future long-term interest rates by decreasing excess reserves. B. lowering the market's expectations of future short-term interest rates by paying interest on reserves. C. keeping the discount rate at zero for an extended period to lower the market's expectations of future long-term interest rates. D. keeping the federal funds rate at zero for an extended period to lower the market's expectations of future short-term interest rates.
D
The most important advantage of discount policy is that the Fed can use it to: A. control the money supply. B. punish banks that have deficient reserves. C. precisely control the monetary base. D. perform its role as lender of last resort.
D
There are two types of open market operations: __________ open market operations are intended to change the level of reserves and the monetary base, and __________ open market operations are intended to offset movements in other factors that affect the monetary base. A. Dynamic; static B. Defensive; dynamic C. Defensive; static D. Dynamic; defensive
D
When might conventional monetary policy not work? A. When there is too much inflation. B. When there is a recession. C. When central banks need interest-rate tools. D. When there is a zero-lower-bound problem.
D
Which of the following statements regarding reserve requirements is true? A. The Depository Institutions Deregulation and Monetary Control Act of 1980 provided a simpler scheme for setting reserve requirements. B. In 2011, required reserves on all checkable deposits were equal to zero for the first $10.7 million of the bank's checkable deposits. C. There is no need for depository institutions to hold reserves if the central bank does not require it D. Both A and B are correct E. All of the above are correct
D
Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than simply buying and selling securities outright? A. Repurchase agreements allow the Fed to easily adjust open market operations in response to daily conditions. B. Repurchase agreements are temporary open market purchases that can be reversed. C. They are effective in dealing with persistent shortages in reserves, and thus have a more permanent impact. D. Only A and B are correct. E. All of the above are correct.
D
____________ are intended to offset movements in other factors that affect reserves and the monetary base. A. Open market purchases B. Open market sales C. Dynamic open market operations D. Defensive open market operations
D
The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These tools involve: A. open market operations B. lending to banks C. reserve requirements D. Both A and C are correct E. All of the above are correct
E
What is the disadvantage of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound?
Quantitative easing may not actually have the effect of increasing economic activity
Because most open market operations are typically repurchase agreements, it is likely that the volume of defensive open market operations is______the volume of dynamic open market operations
greater than