Chapter 10

1) The monetary base consists of A) currency in circulation and reserves. B) government securities held by the Fed and discount loans. C) government securities held by the Fed and currency in circulation. D) discount loans and reserves.

A

10) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently

A

14) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.

A

15) Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment.

A

17) When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.

A

19) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases. C) encouraging people to consume. D) all of the above. E) only A and C of the above.

A

2) If the Central Bank wants to expand reserves in the banking system, it will A) purchase government securities. B) raise the discount rate. C) sell government securities. D) raise reserve requirements.

A

21) An open market ________ leads to a(n) ________ of reserves and deposits in the banking system and hence to a(n) ________ of the monetary base and the money supply. A) sale; expansion; contraction B) purchase; expansion; contraction C) sale; expansion; expansion D) purchase; expansion; expansion

D

22) Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are A) open market operations. B) federal funds rate. C) required reserve ratio. D) reserve requirements.

D

4) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase

D

matched sale-purchase transaction

An arrangement whereby the Fed sells securities and the buyer agrees to sell them back to the Fed in the near future; sometimes called a reverse repo

marginal lending facility

The European Central Bank's standing lending facility in which banks can borrow (against eligible collateral) overnight loans from the national central bank at a rate 100 basis points above the target financing rate

target financing rate

The European Central Bank's target for the overnight cash rate, the interest rate for very-short-term interbank loans in the euro area

balance sheet

a list of assets and liabilities of a bank (or firm) that balances: total assets equal total liabilities plus capital

hierarchal mandate

a mandate for the central bank the puts the goal of price stability first, but as long as it is achieved other goals can be pursued

inflation targeting

a monetary policy strategy that involves public announcement of a medium-term numerical target for inflation

longer-term refinancing operations

a second category of open market operations by the European Central Bank that are similar to the Fed's outright purchase of securities

bubble

a situation in which the price of an asset differs from its fundamental market value

forward guidance

a strategy In which the Fed committed to keep the federal funds rate at zero for a long period of time in order to lower the market's expectations of future short-term interest rates, causing the long-term interest rate to fall

natural rate of unemployment

he rate of unemployment consistent with full employment at which the demand for labor equals the supply of labor

26) Inflation targeting involves A) a public announcement of medium-term numerical targets for inflation. B) increased accountability of the central bank for attaining its inflation objectives. C) an information-inclusive approach in which many variables are used in making decisions about monetary policy. D) all of the above.

A

6) The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government.

A

7) An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.

A

repurchase agreement (repo)

A form of loan in which the borrower simultaneously contracts to sell securities and contracts to repurchase them, either on demand or on a specified date

standing lending facility

A lending facility in which healthy banks are allowed to borrow all they want from a central bank

nominal anchor

A nominal variable such as the inflation rate, an exchange rate, or the money supply that monetary policy makers use to tie down the price level.

T-account

A simplified balance sheet with lines in the form of a T that lists only the changes that occur in a balance sheet starting from some initial balance sheet position

quantitative easing

Asset purchase programs that lead to an expansion of the Federal Reserve's balance sheet and the monetary base

11) If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a "pump" agreement. D) none of the above.

B

13) Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.

B

16) When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.

B

24) The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is A) the dynamic open market operations. B) the defensive open market operations. C) the reserve requirements. D) market equilibrium.

B

5) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase

B

reserves

Banks' holding of deposits in accounts with the Fed, plus currency that is physically held by banks (vault cash)

12) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently

C

18) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional rate of unemployment. B) structural rate of unemployment. C) natural rate of unemployment. D) ideal rate of unemployment.

C

20) Under inflation targeting, a central bank must pursue policies that A) keep the inflation rate at a target value of zero. B) keep the inflation rate at some specific target value. C) keep the inflation rate within a specific target range. D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value.

C

23) Which type of open market operation is intended to change the level of reserves? A) Defensive open market operations B) Reserve requirements C) Dynamic open market operations D) Market equilibrium

C

25) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy? A) High unemployment B) Instability in foreign exchange markets C) Interest-rate stability D) All of the above

C

3) If the Central Bank wants to lower the monetary base and the money supply, it will A) increase bank reserves. B) lower the discount rate. C) sell government securities. D) lower reserve requirements.

C

8) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation.

C

9) If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements.

C

primary dealers

Government securities dealers, operating out of private firms or commercial banks, with whom the Fed's open market desk trades

price stability

Low and stable inflation

main refinancing operations

Operations that involve weekly reverse transactions (purchase or sale of eligible assets under repurchase agreements or credit operations against eligible assets as collateral) that are reversed within two weeks and are the primary monetary policy tool of the European Central Bank

reverse transactions

Purchase or sale of eligible assets by the European Central Bank under repurchase agreements or credit operations against eligible assets as collateral that are reversed within two weeks

reserve requirements

Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed

required reserves

Reserves that are held to meet Fed requirements that a certain fraction of bank deposits be kept as reserves

zero-lower-bound problem

Situation in which the central bank is unable to lower the policy

open market operations

The buying and selling of government securities in the open market that affect both interest rates and the amount of reserves in the banking system

required reserve ratio

The fraction of deposits that the Fed requires to be kept as reserves

marginal lending rate

The interest rate charged by the European Central Bank for borrowing at its marginal lending facility

overnight cash rate

The interest rate for very-short-term interbank loans in the euro area.

potential output

The level of output that is produced at the natural rate of unemployment. (Also called natural rate of output.)

time-inconsistency problem

The problem that occurs when monetary policy makers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short run but lead to bad long-run outcomes

nonconventional monetary policy tools

Three non-interest-rate tools used to stimulate the economy: (1) liquidity provision, (2) asset purchases, and (3) commitment to future monetary policy actions

discount loans

a bank's borrowings from the federal reserve system (also known as advances)

dual mandate

a central bank mandate in which there are two equal objectives, price stability and maximal employment

defensive open market operations

open market operation intended to offset movements in other factors that affect reserves and the monetary base

dynamic open market operations

open market operations intended to change the level of reserves and the monetary base

lender of last resort

provider of reserves to financial institutions when no one else would provide them to prevent a financial crisis

macro prudential regulation

regulatory policy to affect what is happening in credit markets in the aggregate

excess reserves

reserves in excess of required reserves

deposit facility

the European Centra Bank's standing facility in which banks are paid a fixed interest rate 100 basis points below the target financing rate

credit easing

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

discount window

the federal reserve facility at which discount loans are made to banks

federal funds rate

the interest rate on overnight loans of deposits at the federal reserve

discount rate

the interest rate that the Federal Reserve charges banks on discount loans

conventional monetary policy tools

three tools of monetary policy--open market operations, discount lending, and reserve requirement--the federal reserve uses to control the money supply and interest rates