Ch. 15

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Which of the following statements is correct?

The discount rate is generally above the federal funds rate.

Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor's rule following the recovery from the 2001 recession?

The federal funds rate was below that suggested by Taylor's rule.

The information lag facing the Fed is

The information lag facing the Fed is

Which of the following statements is correct?

The volume of defensive open market operations is much greater than the volume of dynamic open market operations.

Which of the following statements is correct?

The volume of open market operations is determined solely by the Fed.

How were open market operations conducted prior to 1935?

They were carried out by the district Federal Reserve banks.

An open market sale

decreases the price of Treasury securities and increases their yield.

The original Federal Reserve Act

did not specifically mention open market operations.

Which of the following is NOT considered to be a goal of monetary policy?

fair wages

Which of the following interest rates tends to fluctuate the most?

federal funds rate

The bursting of the housing bubble was a key factor in causing the severity of the

financial crisis of 2007-2009.

Intermediate targets are

financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.

John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be

frictionally unemployed.

The Fed's monetary policy tools

have allowed the Fed to achieve its monetary policy goals indirectly.

Traditionally, Fed policymakers have been ________ to use higher interest rates to head off potential asset bubbles ________.

hesitant; because it may cause a slowdown in the economy

Rates of inflation in the hundreds or thousands of percent per year are known as

hyperinflation.

Under which circumstance is the Fed most likely to carry out a defensive open market operation?

if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float

In the United States from 1981 to 1983, the money supply ________ and the inflation rate ________.

increased; decreased

All of the following arguments are made against inflation targeting EXCEPT

the Fed has little influence on inflation.

Increases in interest rates are often blamed on

the Fed.

Reserve requirements are set by

the Fed.

All of the following central banks took action to stimulate their economies following the 2007-2009 financial crisis and recession by implementing negative interest rates EXCEPT

the U.S. Federal Reserve.

According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT

yield curve.

By the time of the annual monetary policy conference in Jackson Hole, Wyoming in 2016,

the monetary base and the Fed's balance sheet remained very large, and the target for the federal funds rate had only slightly risen.

The output gap can best be described as

the percentage difference between real GDP and its potential.

Primary credit is only a backup source of funds for healthy banks since

the primary credit rate is set above the federal funds rate.

What was the approximate peak amount of borrowing from the Fed during the Financial Crisis of 2007-2009?

$1 trillion

When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on overnight reverse repurchase agreements at

0.25%.

When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on excess reserves at

0.50%.

Which of the following countries experienced hyperinflation during the 1920s?

Germany

In December 2008, the FOMC cut its target for the federal funds rate from 1% to a range from 0% to 0.25%, and it remained at this level for

7 years.

Which central bank has its exchange rate as a focus of its monetary policy?

Bank of Canada

Under which chair did the Fed implement the policy of inflation targeting?

Bernanke

Which of the following statements about the natural rate of unemployment is correct?

Currently, most economists think that the natural rate is about 5%.

Which of the following statements is NOT true?

Each Federal District Bank can charge a different discount rate.

Which of the following statements concerning seasonal credit is TRUE?

Improvements in credit markets have reduced the need for a seasonal credit facility.

Which of the following best describes a policy of inflation targeting?

It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession.

Which of the following statements accurately describes the Fed's control of discount policy?

It controls discount policy less completely than it controls open market operations.

Which of the following is NOT an accurate description of open market operations prior to 2008?

It involved buying and selling long-term securities.

Which of the following accurately describes the Fed's inflation target?

It seeks to maintain an average inflation rate of 2% per year.

Which of the following is an intermediate target?

M2

The Fed ended QE3 in

October 2014.

Which of the following statements is correct?

Open market purchases are expansionary and open market sales are contractionary.

What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities?

Operation Twist

When is the Fed likely to return to to using normal monetary policy procedures?

While the Fed may eventually return to normal monetary policy procedures, it is unlikely to do so in the near future.

The FOMC states its overall objectives for interest rates in

a policy directive.

All of the following are associated with rising inflation EXCEPT

a steady decrease in interest rates.

The Fed was created

after financial panics in the late 1800s and early 1900s.

In addition to the Fed, which other central bank pursued unusual monetary policy following the financial crisis of 2007-2009?

all of the above

A Federal Reserve repurchase agreement involves

an agreement by a dealer to buy back securities she has sold to the Fed.

If the account manager does NOT use a Federal Reserve reverse repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use

an outright purchase or sale.

Dynamic open market operations

are aimed at achieving changes in monetary policy.

Open market operations

are more flexible than other traditional policy tools.

Defensive open market transactions

are used to offset disturbances to the supply or demand for reserves.

In 2006, the Bank of Japan

began to scale back its expansionary policy, only to return to an expansionary policy following the financial crisis.

If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will

conduct an open market sale.

In order to increase its target for the federal funds rate, the Fed would normally

conduct open market sales.

Which of the Fed's three new policy tools connected with bank reserve accounts is the least important?

term deposit facility

An open market purchase

increases the monetary base.

An open market purchase

increases the price of Treasury securities and decreases their yield.

The ECB has emphasized what type of goal for monetary policy?

inflation targeting

The Fed's inability to instantaneously observe changes in inflation and economic growth result in

information lag.

In 2016, the Bank of Japan

instituted a negative interest rate on deposits it receives from Japanese banks, effectively requiring banks to pay the Bank of Japan for keeping their deposits.

Most economists believe that a zero rate of unemployment

is inconsistent with a well-functioning economy.

The Fed's goal of interest rate stability

is motivated by political pressure as well as by a desire for a stable saving and investment environment.

The Fed tends not to use discount policy as its principal tool in influencing the money supply since

it does not have as much control over discount loans as it has on open market operations.

If the Fed desired to reduce the federal funds rate

it would conduct an open market purchase, increasing reserve supply.

All of the following arguments are presented in favor of inflation targeting EXCEPT

it would reduce the lags inherent in monetary policy.

A falling dollar makes U.S. goods

less expensive abroad and increases the volume of U.S. exports.

Reserve requirements are changed

less frequently than open market operations are conducted and less frequently than the discount rate is changed.

The Open Market Trading Desk is

linked electronically to a group of private securities firms that the Fed has selected to participate in open market operations.

Interest rate fluctuations

make it difficult for households and firms to plan for the future.

Inflation is an economic problem because it

makes prices less useful as signals for resource allocation.

A consequence of the impact lag is that the Fed

might not be able to correct a mistaken policy soon enough.

A rising dollar makes U.S. goods

more expensive abroad and decreases the volume of U.S. exports.

The Fed can implement open market operations

more rapidly than either changes in the discount rate or changes in reserve requirements.

The third round of quantitative easing, announced in September 2012, was focused on purchases of

mortgage-backed securities.

How many times has the Fed changed reserve requirements since 1993?

never

How did Operation Twist affect the monetary base?

no change

When did the Fed first begin to use open market operations as a policy tool?

the 1920s

Because of the breakdown in the relationship between the growth of the money supply and inflation, since 1993, the Fed

no longer announces targets for M1 or M2.

Which of the following is an operating target?

nonborrowed reserves

During and after the financial crisis of 2007-2009, the Fed greatly increased the supply of reserves through three rounds of quantitative easing by

purchases of both long-term Treasury securities and mortgage-backed securities.

The Fed uses operating targets as well as intermediate targets because

the Fed controls intermediate targets only indirectly.

Congress established the FOMC because

of a lack of coordination among district banks in carrying out open market operations.

High employment spurs economic growth because high employment

often leads to high rates of investment.

During the financial crisis, the Fed introduced three new policy tools connected with bank reserve accounts. Which of the following is NOT one of those three new tools?

open market operations

Expansionary monetary policy consists of all of the following EXCEPT

open market sales.

How does the Open Market Trading Desk conduct its operations?

over-the-counter electronically with private securities dealers

How can the Fed reduce the implicit tax on banks resulting from reserve requirements?

paying interest on reserves

Primary dealers are those

permitted to trade directly with the Fed.

Which of the following is considered to be a goal of monetary policy?

price stability

When economists and policymakers refer to the Fed's dual mandate, they are referring to

price stability and maximum employment.

Discount loans available to healthy banks which can be used for any purpose are called

primary credit.

The Employment Act of 1946 codified the federal government's commitment to

promote high employment consistent with price stability.

If the Fed wished to decrease the money supply, it could

raise the interest rate it pays on reserves.

Depository institutions such as savings and loans have deposits with the Fed that ________, and financial institutions such as Fannie Mae have deposits with the fed that ________.

receive interest; do not receive interest

The bursting of the dot-com bubble contributed to the

recession of 2001.

When financial markets and institutions are NOT efficient in matching savers and borrowers

resources are lost.

A matched sale-purchase transaction is also known as a

reverse repo.

As a result of an open market purchase, bank reserves

rise and interest rates fall.

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as

seasonal credit.

Discount loans intended for banks that are NOT financially healthy are called

secondary credit.

In a matched sale-purchase transaction, the Fed

sells securities to a dealer and the dealer agrees to sell them back.

In the federal funds market diagram, a decrease in the required reserve ratio

shifts the demand curve for reserves to the left.

In the federal funds market diagram, an open market sale by the Fed

shifts the reserve supply curve to the left.

The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called

structural unemployment.

Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be

structurally unemployed.

The policy directive from the FOMC is carried out by

the account manager at the Federal Reserve Bank of New York.

The inflation gap can best be described as

the difference between inflation and its target.

One of the extraordinary policy actions taken by the Fed in response to the financial crisis of 2007-2009 was making huge asset purchases. These asset purchases greatly increased all of the following EXCEPT

the federal funds rate.

An important problem facing the Fed is that

the goals for economic growth and price stability may conflict in the short run.

The benchmark default-free interest rate of the financial system is generally considered to be

the interest rate on the 10-year Treasury note.

The discount window is

the means by which the Fed makes discount loans to banks.

The impact lag facing the Fed is

the time required for monetary policy changes to affect output, employment, and prices.

All of the following statements about secondary credit are true EXCEPT

they are temporary, short-term loans to satisfy seasonal requirements.

Since 1980, discount loans have been available

to all depository institutions.

What was the goal of Operation Twist?

to reduce long-term interest rates and increase short-term interest rates

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium

unemployment is at its natural rate

The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by

using targets to meet its goals.

The assumption that reserves are scarce

was accurate prior to the financial crisis of 2007-2009 but not following the crisis.

In 2016, savings rates in Japan, Germany, Denmark, Sweden, and Switzerland

were at their highest level since 1995, indicating that negative interest rates were not increasing consumer spending.


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