EC311 Chapter 18

The ways the Fed can inject reserves into the banking system include: a. an increase in the size of the Fed's balance sheet through purchasing securities. b. increasing the discount rate. c. making loans to non-bank corporations. d. an increase in the size of the Fed's balance sheet through selling securities.

a. an increase in the size of the Fed's balance sheet through purchasing securities.

Reserve demand becomes horizontal at the IOER rate because: a. banks will not make loans at less than the IOER rate. b. banks must earn more than the IOER rate to lend. c. the reserve supply is always set by the Fed so that the federal funds rate is greater than the IOER rate. d. the IOER rate is the upper bound of the target federal funds rate

a. banks will not make loans at less than the IOER rate.

An increase in the federal funds rate should: a. cause mortgage rates to increase by less than the increase in the federal funds rate. b. have an inverse impact on mortgage rates. c. not impact mortgage rates since the federal funds rate is a very short-term rate. d. cause the mortgage rates to increase by more than the increase in the federal funds rate.

a. cause mortgage rates to increase by less than the increase in the federal funds rate.

The conventional policy tools available to the Fed include each of the following, except the: a. currency-to-deposit ratio. b. discount rate. c. target federal funds rate range. d. reserve requirement.

a. currency-to-deposit ratio.

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: a. increase the IOER. b. decrease the IOER. c. do nothing; the Fed will let the market work. d. increase the supply of reserves.

a. increase the IOER.

Discount lending ties into the Fed's function of: a. lender of last resort. b. open market operations. c. the government's bank. d. regulation of banking.

a. lender of last resort.

If the market federal funds rate were below the target rate, the response from the Fed would likely be to: a. raise the IOER rate. b. purchase U.S. Treasury securities. c. sell U.S. Treasury securities. d. raise the discount rate.

a. raise the IOER rate.

Reserves currently are so abundant that: a. the federal funds rate is not easily manipulated with open market operations. b. the Fed cannot affect the federal funds rate. c. the Fed prefers to target the discount rate. d. the IOER rate is ineffective.

a. the federal funds rate is not easily manipulated with open market operations.

The conventional tools of monetary policy include: a. the target federal funds rate range. b. the deposit rate. c. the currency-to-deposit ratio. d. both the deposit rate and the target federal funds rate range.

a. the target federal funds rate range.

The interest on excess reserves is: a. the upper bound of the federal funds target rate range. b. the lower bound of the federal funds target rate range. c. unrelated to the federal funds target rate range. d. the target federal funds rate.

a. the upper bound of the federal funds target rate range.

Which of the following statements is most correct if the Fed sees no need to engage in expansionary monetary policy? a. The Fed will likely shrink its balance sheet rapidly. b. Eventually, the Fed will shrink its balance sheet by letting securities it holds expire. c. It will be impossible for the Fed to shrink its balance sheet. d. The Fed is likely to increase the size of its balance sheet.

b. Eventually, the Fed will shrink its balance sheet by letting securities it holds expire.

Which of the following would be categorized as an unconventional monetary policy tool? a. The interest rate on excess reserves (IOER) b. Targeted asset purchases c. Federal funds rate target range d. Deposit rate

b. Targeted asset purchases

The market for reserves derives from the fact that: a. reserves pay a relatively high return. b. desired reserves don't always equal actual reserves. c. the Fed refuses to lend to banks. d. banks do not want excess reserves.

b. desired reserves don't always equal actual reserves.

When the Fed wants to tighten monetary policy, the staff of the Fed is likely to: a. increase discount loans. b. increases IOER. c. purchase U.S. Treasury Securities. d. sell U.S. Treasury Securities.

b. increases IOER.

The focus for most central banks today is: a. the quantity of M1. b. interest rates. c. the quantity of M2. d. controlling the size of the money multiplier.

b. interest rates.

The ECB now frequently uses _____ to inject reserves into the banking systems of countries that use the Euro. a. discount loans b. repurchase agreements c. an outright purchase of securities d. an outright sale of securities.

b. repurchase agreements

Federal funds loans are: a. secured loans between banks and the Fed. b. unsecured loans. c. collateralized loans between banks. d. guaranteed by the FDIC.

b. unsecured loans.

In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? a. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate. b. The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective. c. Before 2002 the Fed discouraged banks from borrowing and actually created volatility in the market for reserves. d. The Fed now controls the quantity of credit extended as well as its price.

c. Before 2002 the Fed discouraged banks from borrowing and actually created volatility in the market for reserves.

Which of the following statements is most correct? a. The FOMC sets the federal funds rate. b. The discount rate is the primary policy tool of the FOMC. c. The FOMC sets the target federal funds rate range. d. The difference between the target and actual federal funds rate is the dealer's spread.

c. The FOMC sets the target federal funds rate range.

The Fed can _____ in the economy. a. change interest rates, but not the supply of money b. change the supply of money, but not the interest rates c. change both interest rates and the supply of money d. change neither interest rates nor the supply of money

c. change both interest rates and the supply of money

Until 2008, the Fed could make the market federal funds rate equal the target rate by: a. mandating that all loans be transacted at the target rate. b. setting the discount rate below the federal funds rate. c. entering the federal funds market as a borrower or a lender. d. paying higher interest on reserves.

c. entering the federal funds market as a borrower or a lender.

The fact that there is a market for federal funds enables banks to: a. make fewer loans than they would otherwise. b. borrow more from the Fed. c. hold a lower level of excess reserves than they would otherwise hold. d. hold less in required reserves.

c. hold a lower level of excess reserves than they would otherwise hold.

Discount lending by the Fed: a. is the key component of monetary policy. b. is more important today than in years past. c. is usually small except in times of crisis. d. amounts to five billion dollars in volume during an average week.

c. is usually small except in times of crisis.

If the market federal funds rate were above the target rate, the response from the Fed would likely be to: a. purchase U.S. Treasury securities. b. sell U.S. Treasury securities. c. lower the IOER. d. lower the discount rate.

c. lower the IOER.

The daily reserve supply curve is: a. upward sloping. b. downward sloping. c. vertical. d. horizontal.

c. vertical.

Which of the following statements is most correct? a. The Fed can control the amount of reserves, but cannot control the monetary base. b. The Fed can control the make-up of the monetary base, but cannot affect the market interest rate. c. The Fed can control the size of the monetary base but not the price of its components. d. The Fed can control either the size of the monetary base or the price of its components.

d. The Fed can control either the size of the monetary base or the price of its components.

If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: a. a decrease in the market federal funds rate. b. a market federal funds rate that will equal the target rate. c. an increase in the market federal funds rate. d. nothing; reserve supply is so high that the market federal funds rate will be unchanged.

d. nothing; reserve supply is so high that the market federal funds rate will be unchanged.

If the current market federal funds rate is in the target rate range and the demand for reserves decreases, the likely response in the federal funds market will be: a. the market federal funds rate will decrease. b. the market federal funds rate will equal the target rate. c. the market federal funds rate will increase. d. nothing; the reserve supply is so high that the market federal funds rate will be unchanged.

d. nothing; the reserve supply is so high that the market federal funds rate will be unchanged.

The principle tool the Fed uses to keep the federal funds rate close to the target is: a. the required reserve rate. b. discount lending. c. open market operations. d. the IOER rate.

d. the IOER rate.

The Fed would use a reverse repo when they: a. want to temporarily increase the monetary base. b. forecast a permanent decrease in the demand for monetary base. c. forecast a permanent increase in the demand for monetary base. d. want to temporarily decrease the monetary base.

d. want to temporarily decrease the monetary base.