Chapter 15

Which of the following graphs best describes the situation​ above?

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The graph to the right shows an equilibrium in the market for reserves.

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The graph to the right shows a fall in the vertical section of the supply curve of reserves. The fall in the supply curve is caused​ by:

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Which of the following is a cost of Fed discount​ operations? A. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics. B. Banks have to pay back the discount loans at the discount​ rate, which costs money. C. The Fed has to pick and choose which banks receive discount​ loans, which banks dislike. D. There are no costs to discount operations because the discount loans have to be paid back.

A. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics.

​____________ are intended to change the level of reserves and the monetary base. A. Dynamic open market operations B. Open market purchases C. Defensive open market operations D. Open market sales

A. Dynamic open market operations

Following the global financial crisis in​ 2008, assets on the Federal​ Reserve's balance sheet increased​ dramatically, from approximately​ $800 billion at the end of 2007 to​ $3 trillion in 2011. Many of the assets held are​ longer-term securities acquired through various loan programs instituted as a result of the crisis. In this​ situation, how could reverse repos​ (matched sale-purchase​ transactions) help the Fed reduce its assets held in an orderly​ fashion, while reducing potential inflationary problems in the​ future? A. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance​ sheet, thus decreasing the money supply and raising​ short-term interest rates. B. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to further increase its balance​ sheet, thus increasing the money supply and lowering​ short-term interest rates. C. Reverse repos serve as dynamic open market operations that are intended to permanently reduce the Federal​ Reserve's balance​ sheet, thus limiting fluctuations in the money supply. D. In this​ situation, the Fed should engage in repurchase agreements​ (a repo) rather than reverse​ repos, as this would further expand reserves and the monetary base.

A. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance​ sheet, thus decreasing the money supply and raising​ short-term interest rates.

Using the supply and demand analysis of the market for​ reserves, determine what happens to the federal funds​ rate, borrowed​ reserves, and nonborrowed​ reserves, holding everything else​ constant, if: Banks expect an unusually large increase in withdrawals from checking deposit accounts in the future. A. The federal funds rate will increase and borrowed reserves will not change, or the federal funds rate will remain at the discount rate and borrowed reserves will increase. Nonborrowed reserves will not change. B. The federal funds rate will increase, but nonborrowed reserves and borrowed reserves will not change. C. The federal funds rate will increase, nonborrowed reserves will decrease, and borrowed reserves will not change. D. The federal funds rate will decrease comma but nonborrowed reserves and borrowed reserves will not change.

A. The federal funds rate will increase and borrowed reserves will not change, or the federal funds rate will remain at the discount rate and borrowed reserves will increase. Nonborrowed reserves will not change. #35 Part2 Screenshot CH15

Why was the Term Auction Facility​ (TAF) more widely used by financial institutions than the discount window during the global financial​ crisis? A. The interest rate on TAF loans was less than the discount rate. B. The interest rate on such loans was set by the​ Fed, so future changes were more predictable. C. The banks that were accessing these funds were well−known, which helped them to maintain good reputation. D. Using the TAF provided more tax deductions than using the discount window.

A. The interest rate on TAF loans was less than the discount rate.

​"The federal funds rate can sometimes be above the discount​ rate." Is this statement​ true, false, or​ uncertain? A. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. B. 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. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.

A. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma.

When might conventional monetary policy not​ work? A. When there is a​ zero-lower-bound problem. B. When central banks need​ interest-rate tools. C. When there is too much inflation. D. When there is a recession.

A. When there is a​ zero-lower-bound problem.

To lower the federal funds​ rate, the Fed would A. conduct an open market purchase. B. increase the discount rate. C. increase the reserve requirement. D. all of the above

A. conduct an open market purchase.

An open market operation by the Federal Reserve aimed at maintaining the level of reserves is called a A. defensive open market operation. B. ​longer-term refinancing operation. C. dynamic open market operation. D. reverse transaction.

A. defensive open market operation.

Which of the following policy changes would be considered an unconventional monetary policy​ change? A. An open market purchase of securities to decrease the fed funds rate. B. An decrease in reserve requirements to decrease the fed funds rate. C. An open market sale of securities to increase the fed funds rate. D. Announcing a firm policy to conduct large scale open market purchases in the future.

D. Announcing a firm policy to conduct large scale open market purchases in the future.

____________ are intended to offset movements in other factors that affect reserves and the monetary base. A. Dynamic open market operations B. Open market purchases C. Open market sales D. Defensive open market operations

D. Defensive open market operations

Identify the following monetary policy tools as either conventional or nonconventional.

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Compare the use of open market​ operations, loans to financial​ institutions, and changes in reserve requirements to control the money supply on the basis of the following​ criteria: flexibility,​ reversibility, effectiveness, and speed of implementation.

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The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from

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The graph to the right shows a rightward shift of the demand curve for reserves from

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Use the figure to the right and supply and demand analysis of the market for reserves to answer the following question. What would happen to the federal funds rate if it were What would happen to the federal funds rate if there was an increase in the amount of checkable deposits​ (holding everything else​ constant) and the federal funds rate was initially at the discount rate

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Suppose the demand for reserves is initially Upper R Subscript 0 Superscript dRd0 in the figure on the right. ​(Do not round your​ answers.) Nonborrowed reserves​ = ​$___________ billion.

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​"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. 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. B. True. This may happen because nonbank financial​ institutions, which cannot earn interest on​ reserves, participate in the federal funds market. C. Uncertain. It depends on the stigma associated for a bank to borrow directly from the Fed.

B. True. This may happen because nonbank financial​ institutions, which cannot earn interest on​ reserves, participate in the federal funds market.

An decrease in reserve requirements A. leaves nonborrowed reserves unchanged and increases the federal funds rate. B. leaves nonborrowed reserves unchanged and decreases the federal funds rate. C. decreases nonborrowed reserves and decreases the federal funds rate. D. increases nonborrowed reserves and increases the federal funds rate.

B. leaves nonborrowed reserves unchanged and decreases the federal funds rate.

Banking institutions in the European Monetary Union can borrow​ (against eligible​ collateral) overnight loans from national central banks at​ the: A. overnight cash rate B. marginal lending rate C. discount rate D. target financing rate

B. marginal lending rate

Open market sales shrink the​ ________, thereby decreasing the​ _________. A. money​ base; money multiplier B. monetary base and​ reserves; money supply C. money​ multiplier; monetary base and reserves D. money​ multiplier; money supply

B. monetary base and​ reserves; money supply

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. ​Defensive; dynamic B. ​Dynamic; defensive C. ​Dynamic; static D. ​Defensive; static

B. ​Dynamic; defensive

During the holiday season when the​ public's holdings of currency​ increase, what defensive open market operations typically​ occur? A. A matched​ sale-purchase transaction. B. A defensive open market sale. C. A defensive open market purchase. D. None of the above are correct.

C. A defensive open market purchase.

The​ Fed's most commonly used means of changing the money supply​ is: A. open market operations B. changing the discount rate C. changing reserve requirements D. changes in the Regulation Q ceiling

A. open market operations

What monetary policy tool does the Fed use to control the amount of nonborrowed​ reserves? A. open market operations B. reserve requirements C. discount lending D. interest on reserves

A. open market operations

The most important advantage of discount policy is that the Fed can use it​ to: A. perform its role as lender of last resort. B. precisely control the monetary base. C. punish banks that have deficient reserves. D. control the money supply.

A. perform its role as lender of last resort.

A decrease in the discount rate does not normally lead to an increase in borrowed reserves​ because: A. the equilibrium interest rate will still fall below the discount rate. B. a decrease in the discount rate usually leads to an increase in nonborrowed reserves. C. there is often a time lag between a decrease in the discount rate and the market reaction to it. D. setting the discount rate below the equilibrium rate is forbidden by​ law, since a clear arbitrage opportunity would exist.

A. the equilibrium interest rate will still fall below the discount rate.

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. Announcing a firm policy to conduct large scale open market purchases in the future. D. Federal Reserve lending through the Term Auction Facility.

B. An open market sale of securities to increase the fed funds rate.

​"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 can change reserve requirements. B. The Fed uses discounting to keep bank failures from spreading. C. The Fed uses open market operations to inject liquidity. D. All of the above explain why the statement is incorrect.

B. The Fed uses discounting to keep bank failures from spreading.

Because most open market operations are typically repurchase​ agreements, it is likely that the volume of defensive open market operations is ▼ greater than the same as less than the volume of dynamic open market operations.

greater than

If the Fed increases Ior ​enough, such that it will raise the intersection point with the vertical portion of reserve​ supply, then the equilibrium fed funds rate will ▼ increase not change decrease

increase

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. When the Fed provides liquidity to a particular segment of the credit​ market, it can freeze the market and hence decrease inflation. C. The Fed can influence interest rates and provide more targeted liquidity. D. 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.

Which of the following forms is a conventional monetary policy​ tool: A. commitment to future monetary policy actions. B. asset purchases C. open market operations D. liquidity provision

C. open market operations These nonconventional monetary policy tools take three​ forms: ​(1) liquidity​ provision, ​(2) asset​ purchases, ​(3) commitment to future monetary policy actions.

The​ zero-lower-bound problem: A. creates a negative shock to the economy. B. implies that nominal interest rates can be zero. C. is responsible for the recession of​ 2007-2009. D. occurs because people can always earn more from holding bonds than holding cash.

D. occurs because people can always earn more from holding bonds than holding cash.

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 above the interest rate on reserves C. equal to the discount rate D. at or below the interest rate on reserves

B. at or above the interest rate on reserves

If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed​ fall, what defensive open market operations will the manager of the open market desk​ undertake? A. A defensive open market purchase. B. A repurchase agreement. C. A defensive open market sale. D. None of the above are correct.

C. A defensive open market sale

​"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount​ rate." Is this statement​ true, false, or​ uncertain? Explain your answer. A. True. The Fed uses only the discount rate to adjust the amount of discount loans made. B. False. The Fed can also engage in open market operations. C. False. The Fed can also limit the amount of discount loans that an individual bank can have. D. Uncertain. It depends on whether the discount rate is set lower than the federal funds rate target.

C. False. The Fed can also limit the amount of discount loans that an individual bank can have.

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 bond market. C. equilibrium of supply and demand in the market for reserves. D. FOMC.

C. equilibrium of supply and demand in the market for reserves.

When the​ zero-lower-bound problem​ occurs, central banks can rely​ on: A. asset sales. B. qualitative easing. C. the liquidity provision. D. systemic adjustment.

C. the liquidity provision.

Open market operations as a monetary policy tool have the advantage​ that: A. they are easily reversed if mistakes are made. B. they occur at the initiative of the Fed. C. they are flexible and precise. D. All of the above are correct.

D. All of the above are correct.

Using the supply and demand analysis of the market for​ reserves, determine what happens to the federal funds​ rate, borrowed​ reserves, and nonborrowed​ reserves, holding everything else​ constant, if: The Fed raises the target federal funds rate. A. The federal funds rate will increase, nonborrowed reserves will decrease, and borrowed reserves will not change. B. The federal funds rate will increase, but nonborrowed reserves and borrowed reserves will not change. C. The federal funds rate will decrease, but nonborrowed reserves and borrowed reserves will not change. D. The federal funds rate and borrowed reserves will not change comma but nonborrowed reserves will decrease.

A. The federal funds rate will increase, nonborrowed reserves will decrease, and borrowed reserves will not change.

What is the advantage of quantitative easing as an alternative to conventional monetary policy when​ short-term interest rates are at the zero​ lower-bound? A. Banks hold the extra liquidity received from quantitative easing as excess reserves and hence decrease their risks. B. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion. C. Purchases of intermediate securities could further decrease the money supply and hence lead to an increase in borrowing.. D. Quantitative easing always causes an increase in economic activity through greater loans and monetary expansion.

B. Purchases of longer−term securities could reduce longer−term interest rates and hence lead to an expansion.

Credit easing refers​ to: A. asset sales that can raise interest rates for sellers in particular credit markets. B. altering the composition of the​ Fed's balance sheet in order to improve the functioning of particular segments of the credit markets. C. providing liquidity to foreign borrowers. D. the reserves that become excess reserves instead of being loaned out.

B. altering the composition of the​ Fed's balance sheet in order to improve the functioning of particular segments of the credit markets.

The​ Fed's lender-of-last-resort​ function: A. has proven to be ineffective. B. creates a moral hazard problem. C. is no longer necessary due to FDIC insurance. D. cannot prevent runs by large depositors.

B. creates a moral hazard problem.

An open market purchase will cause A. borrowed reserves to rise and the federal funds rate to fall. B. nonborrowed reserves to rise and the federal funds rate to fall. C. borrowed reserves to fall and the federal funds rate to rise. D. nonborrowed reserves to fall and the federal funds rate to rise.

B. nonborrowed reserves to rise and the federal funds rate to fall.

The management of expectations is a strategy best defined​ by: A. keeping the discount rate at zero for an extended period to lower the​ market's expectations of future​ long-term interest rates. B. lowering the​ market's expectations of future​ long-term interest rates by decreasing excess reserves. C. keeping the federal funds rate at zero for an extended period to lower the​ market's expectations of future​ short-term interest rates. D. lowering the​ market's expectations of future​ short-term interest rates by paying interest on reserves.

C. keeping the federal funds rate at zero for an extended period to lower the​ market's expectations of future​ short-term interest rates.

An decrease in reserve requirements A. increases nonborrowed reserves and increases the federal funds rate. B. leaves nonborrowed reserves unchanged and increases the federal funds rate. C. leaves nonborrowed reserves unchanged and decreases the federal funds rate. D. decreases nonborrowed reserves and decreases the federal funds rate.

C. leaves nonborrowed reserves unchanged and decreases the federal funds rate

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. the money multiplier to fall.

Which is NOT a type of open market​ operation? A. defensive open market operation. B. dynamic open market operation. C. ​longer-term refinancing operation. D. all are a type of open market operations.

C. ​longer-term refinancing operation.

What is the main advantage of an unconditional policy​ commitment? A. It does not really have any advantages over a conditional policy commitment. B. It represents a tacit commitment by the central bank, which determines the policy's stability and effectiveness. C. Such a commitment is expected to be abandoned and so it will have a large effect on long-term interest rates. D. It provides a significant amount of transparency and certainty for markets and households.

D. It provides a significant amount of transparency and certainty for markets and households.

Using the supply and demand analysis of the market for​ reserves, determine what happens to the federal funds​ rate, borrowed​ reserves, and nonborrowed​ reserves, holding everything else​ constant, if: The Fed reduces reserve requirements, and sterilizes this by conducting an open market sale of securities. Which of the following graphs best describes the situation​ above?

D. The federal funds rate and borrowed reserves will not change, but nonborrowed reserves will decrease. #35 Part3 Screenshot CH15

Using the supply and demand analysis of the market for​ reserves, determine what happens to the federal funds​ rate, borrowed​ reserves, and nonborrowed​ reserves, holding everything else​ constant, if: The Fed reduces reserve requirements.

D. The federal funds rate will decrease, but nonborrowed reserves and borrowed reserves will not change. #35 Part4 Screenshot CH15

By paying interest on​ reserves, the Fed is able to keep the federal funds rate A. at or below the interest rate on reserves B. equal to the interest rate on reserves C. equal to the discount rate D. at or above the interest rate on reserves

D. at or above the interest rate on reserves