Ch.18 Money and Banking
Recent research by Fed researchers put the natural rate of interest at what level as of late 2018?
1/2 percent
How did the Federal Reserve change its discount lending practices in 2002?
Before 2002, the Fed discouraged banks from borrowing at the discount window and actually created volatility in the market for reserves
During the 1990s many countries developed a monetary policy framework that focused oninflation targeting. This is an example of policymakers focusing
Directly on an objective
Which one of the following would be categorized as an unconventional monetary policy tool?
Targeted asset purchases
Prior to the euro-area crisis, the ECB's deposit facility contained nearly all of the excessreserves in the Eurosystem's banks. What has changed this in recent years?
The deposit facility interest rate fell
Over the years, most monetary policy experts would agree with each of the followingstatements, except which one?
Transparency in policy making hinders accountability
Reserve demand becomes horizontal at the IOER rate because
banks will not make loans at less than the IOER rate
Within the European Central Bank, banks with excess reserves
can deposit them with the ECB and earn an interest rate below the target refinancing rate
The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it
cannot be quickly changed
The Fed can do which of the following in the economy?
change both interest rates and the supply of money
The types of loans the Fed makes consist of each of the following, except which one?
conditional credit
While GDP was once a key cyclical indicator, its usefulness has declined substantially for all of the following reasons except which one?
contains too much information
As of 2019, even though the ECB charges a fee for accepting excess reserves, banks have notswitched from holding reserves to holding cash in their vaults. Were they to make thatswitch, the policy impact of the negative deposit rate would become
contractionary
The key to the success of forward guidance as a monetary policy tool is
credibility
The conventional policy tools available to the Fed include each of the following, except which one?
currency-to-deposit ratio
The Fed can control
either the size of the monetary base or the price of its components
Until 2008, the Fed could make the market federal funds rate equal the target rate by
entering the federal funds market as a borrower or a lender
If the Fed sees no need to engage in expansionary monetary policy, then
eventually, the Fed will shrink its balance sheet by letting securities it holds expire
Quantitative easing is
expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target
Since the Great Recession in the United States, reserves have been so abundant that the
federal funds rate is not easily manipulated with open market operations
The Taylor rule allows the real long-term interest rate to
fluctuate with the natural rate of interest
Inflation targeting does all of the following, except which one?
hinder economic growth
Often, central banks that employ inflation targeting have a hierarchical mandate that means that
hitting the inflation target comes first, and everything else comes second
The fact that there is a market for federal funds enables banks to
hold a lower level of excess reserves than they would otherwise hold
When the Fed wants to tighten monetary policy, the staff of the Fed is likely to
increase IOER (interest rate on excess reserves)
If the demand for reserves remains constant and the market federal funds rate is below thetarget rate, the Fed would
increase the IOER (interest on excess reserves)
Use the following formula for the Taylor ruletarget federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap)to determine the change in the target federal funds rate for every one percent increase in therate of inflation. This will
increase the target federal funds rate by 1.5 percent and increase the real federal funds rate by 0.5 percent
In 1936, when the Fed doubled the reserve requirements, bank executives
increased excess reserves to the new proposed level in advance of the change in requirements
The primary monetary policy tool most used by central banks today is
interest rates
From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One sideeffect of this strategy was that
interest rates rose very high
Discount lending by the Fed
is usually small except in times of crisis
Discount lending is part of the Fed's function of
lender of last resort
If reserve demand is volatile, in order for the central bank to keep interest rates from beingvolatile, it must
let the quantity of reserves fluctuate
Unconventional monetary policy tools include all of the following, except which one?
reserve requirement
The FOMC
sets the target federal funds rate range
The European Central Bank's Marginal Lending Facility is used to provide
short-term loans at rates above the target refinancing rate
Primary credit extended by the Fed is
short-term, usually overnight loans
The Fed is reluctant to change the required reserve rate because
small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits
Forward guidance includes
statements today about policy targets in the future
Which of the following is a conventional tool of monetary policy?
target federal funds rate range
For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the
target refinancing rate
The principal tool the Fed uses to keep the federal funds rate close to the target is
the IOER (interest rate on excess reserves)
One way the Fed can inject reserves into the banking system is to increase
the size of the Fed's balance sheet through purchasing securities
The interest rate on excess reserves is
the upper bound of the federal funds target rate range
Consider the following graph. If the Fed increases the IOER from IOER Rate 0 to IOER Rate 1, they are implementing what type of policy?
tighter monetary controls where there is an increase in the rate at which banks are willing to lend
A good monetary policy instrument is
tightly linked to monetary policy objectives
Federal funds loans are
unsecured loans
The daily reserve supply curve is
vertical
Use the following formula for the Taylor rule to determine the target federal funds rate.target federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap) where the current rate of inflation is 5 percent, the natural rate of interest is 2 percent, thetarget rate of inflation is 2 percent, and output is 3 percent above its potential, the targetfederal funds rate is
10 percent
As of 2020, the largest expansion of the Fed's balance peaked in what year?
2015
The components of the formula for the Taylor rule include each of the following, except which one?
30-year U.S. Treasury bond rate
Use the following formula for the Taylor rule to determine the target federal funds rate.target federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap)where the current rate of inflation is 4 percent, natural rate of interest is 2 percent, target rate of inflation is 2 percent, and output is 3 percent above its potential, the target federal funds rate is
8.5 percent
The interest rate on primary credit extended by the Fed is
above the IOER
The interest rate the Fed charges for secondary credit is
above the primary discount rate
The Taylor rule is
an approximation that seeks to explain how the FOMC sets their target
Since 2012, what does the ECB frequently use to inject reserves into the banking systems ofcountries that use the euro?
an outright purchase of securities
The effective lower bound for nominal interest rates is
an unknown level below zero
Secondary credit provided by the Fed is designed for banks that
are in trouble and cannot obtain a loan from anyone else
Targeted asset purchases are
asset purchases that shift the composition of the Fed's balance sheet
The fact that, for most of its history, the Fed was reluctant to make discount loans
at times was a destabilizing force for financial markets
One key difference between reserve requirements for the Fed and the European Central Bank(ECB) is that the ECB's reserve requirements are
based on all of a bank's liabilities
Raising interest rates following the use of unconventional policy tools depends on
both the size and composition of the central bank's balance sheet and the toolbox available to the central bank
Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap) to determine what would happen if output in the economy were to fall by an additional one percent below potential. Then, the target federal funds rate would
decrease by 0.5 percent
Use the following formula for the Taylor ruletarget federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap)to determine what would happen if the inflation rate in the economy were to fall by 2 percentbelow the target inflation rate. Then, the target federal funds rate would
decrease by 3.0 percent
The market for reserves derives from the fact that
desired reserves do not always equal actual reserves
Which one of the following would not be considered an unconventional monetary policy tool?
discount rate
The European Central Bank's equivalent of the Fed's open market operations (OMO) is
dissimilar to the Fed's OMO in that the operations are conducted at all 19 of the National Central Banks simultaneously
For most of the Fed's history, the Fed
loaned reserves at an interest rate below the target federal funds rate
If the market federal funds rate were above the target rate, the response from the Fed wouldlikely be to
lower the IOER (interest rate on excess reserves)
Use the following formula for the Taylor ruletarget federal funds rate = natural rate of interest + current inflation + ½(inflation gap)+½(output gap)to determine the change in the target federal funds rate for every one percent decrease in therate of inflation. This will
lower the target federal funds rate by 1.5 percent
Unconventional policy tools are useful when
lowering the target interest rate to zero is not sufficient to stimulate the economy
The ECB's
marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks
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
no change; 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 that the market federal funds rate will
not change because the reserve supply is so high that the market federal funds rate will be unchanged
Today, reserve requirements are
not often used as a direct tool of monetary policy
The Fed will make a discount loan to a bank during a crisis
only if the bank is sound financially and can provide collateral for the loan
Seasonal credit provided by the Fed is not as common as it used to be because
other sources for long-term loans have developed for banks in these areas
The European equivalent of the U.S. market federal funds rate is called the
overnight cash rate
The measure for the actual rate of inflation used in the Taylor rule is the
personal consumption expenditure index
If the market federal funds rate were below the target rate, the response from the Fed would likely be to
raise the IOER (interest rate on excess reserves)
In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the
target would not have been politically acceptable
The FOMC
was less successful than the ECB at keeping the market rate closer to the target rate until the Fed began paying interest on reserves
