Chapter 15

The Fed's lender-of-last-resort function

creates a moral hazard problem

The interest rate charged on overnight loans of reserves between banks is the

federal funds rate

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

has no effect on the federal funds rate

To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase

mortgage-backed securites

The quantity of reserves supplied equals

nonborrowed reserves plus borrowed reserves.

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.

open market operations; monetary base

The most important advantage of discount policy is that the Fed can use it to

perform its role as lender of last resort

The discount rate refers to the interest rate on

primary credit

Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

purchase; increase

Everything else held constant, in the market for reserves, when the federal funds rate is 0.5%, increasing the interest rate paid on excess reserves from 0.2% to 1%

raises the federal funds rate

The policy tool of changing reserve requirements is

rarely used

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.

sales decreases

If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is

2.0

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is

2.54

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

above; banks can monitor each other for credit risk

In the market for reserves, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

above; falls

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the excess reserve ratio to 200% causes the M1 money multiplier to ________, everything else held constant.

decrease from .73 to .61

Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.

decrease; decrease

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

decrease; temporarily

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called

defensive open market operations

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, a decrease in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________.

increase; increase

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.

increase; rise

If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________.

increases; remains unchanged

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

lower the short term interest rates

the opportunity cost of holding excess reserves is the federal funds rate

minus the interest rate paid on excess reserves

The purpose for a central bank to set negative interest rates on bank's deposit is to

stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank.