Econ 3/9/22
ON RRP
A supplementary tool which acts like a floor for the federal funds rate
The primary tool for adjusting the federal funds rate
Interest on reserve balances
The supplemental tool that sets a floor for the federal funds rate
ON RRP facility
What rate sets a floor for the federal funds rate?
ON RRP offering rate
To meet the requirements of the dual mandate, the Federal Reserve must promote which of the following?
Price stability and maximum employment
Interest on reserve balances
Primary tool for moving the federal funds rate within the target range
Discount rate
Serves as a ceiling for the federal funds rate transactions
What is the two-part monetary policy process?
The FOMC sets a target for the federal funds rate range, and the Fed uses its monetary policy tools to ensure interest rates are consistent with the target.
How does the discount rate serve as a ceiling for the federal funds rate?
Banks should not be willing to pay higher than the discount rate when they borrow funds.
Inflation fears grip the nation
Contractionary, they should raise federal funds target
The rate that sets a ceiling for the federal funds rate
Discount rate
open market operations
Ensures that reserves remain ample
Unemployment soars while inflation continues to fall
Expansionary, they should lower federal funds target
Which of the following is not an administered rate?
Federal funds rate
How are changes in the federal funds rate transmitted to consumers and businesses?
The federal funds rate influences short-term and long-term interest rates, which influences the decisions made by consumers and businesses.
How is the federal funds rate determined?
The federal funds rate is determined in the federal funds market.
How does the ON RRP facility supplement interest on reserves?
This facility allows some institutions that do not have access to the interest on reserve balances rate to deposit funds at the Fed and earn the ON RRP offering rate.
The primary purpose for open market operations is to
ensure that the supply of reserves remains ample and so intersects the horizontal portion of the demand curve.
If the economy was in a recession and employment fell short of the Fed's maximum employment goal, the Fed would likely
lower the target range for the federal funds rate and lower the administered rates (interest on reserve balances rate, ON RRP offering rate, and discount rate).
Once the FOMC lowers the target range for the federal funds rate, the Fed implements this policy change by
lowering all the administered rates (interest on reserve balances rate, ON RRP offering rate, and discount rate).
If the economy was at the Fed's maximum employment goal and inflation was well above the Fed's price stability goal for some time, the Fed would likely
raise the target range for the federal funds rate and raise the administered rates (interest on reserve balances rate, ON RRP offering rate, and discount rate).
Once the FOMC raises the target range for the federal funds rate, the Fed implements this policy change by
raising all the administered rates (interest on reserve balances rate, ON RRP offering rate, and discount rate).
Arbitrage
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
