ECON CHAPTER 18

Discount lending is the Federal Reserve's primary tool in

eliminating bank panics and ensuring short-term stability.

According to the text, seasonal credit is used primarily to help

farmers.

Primary credit is extended to financially ________ banks at a rate ______ the interest rate on excess reserves.

sound; above

When the demand for reserves increases,

the Federal Reserve will increase the supply of reserves.

From 1979 to 1982 the Federal Reserve targeted __________; at other times, it targets __________.

the quantity of reserves; the federal funds rate

The market federal funds rate is determined ____________; the target federal funds rate is determined _____________.

in the market; by the Federal Reserve

Recently there has been a movement to eliminate

seasonal credit

Quantitative easing changes the ________ of the central bank's balance sheet; target asset purchases (TAP) changes the __________ of the central bank's balance sheet.

size; composition

Prior to the financial crisis, the FOMC's primary policy instrument was the

target federal funds rate.

For most of its history the Federal Reserve set the discount rate below the ____________ and borrowing from the Fed was __________.

target federal funds rate; low because of other disincentives

How does forward guidance influence inflation?

Lower long-term interest rates to affect private spending

The interest rate on primary credit is called the primary discount rate and is set at a spread

above the IOER rate.

When the central bank engages in quantitative easing,

adding to reserves will not change the federal funds rate.

Low, stable inflation is the primary goal of

inflation targeting.

A major difficulty with the use of quantitative easing is that

it is difficult to know the level of purchases required.

Overall, reserve requirements are a _______ tool of monetary policy mostly because their impact on deposits is _______.

poor; difficult to estimate

Which of the following is NOT true about exiting these types of unconventional policy?

- During exit the central bank will need to increase its asset holdings. - Exiting must cause inflation rates to rise. - The central bank will need to increase the supply of reserves to exit.

Which of the following is a conventional policy tool employed by the Fed?

- Interest rate on excess reserves - Target range for the federal funs rate - The rate on discount window loans

Consider and indicate which of the following is considered a conventional policy tool.

- Manipulating the interest rate on excess reserves - Changing the target federal funds rate - Altering the reserve requirement for commercial banks

Which of the following is NOT true when the central bank engages in quantitative easing?

- The central bank loses bonds on its balance sheet. - It increases aggregate reserves just shy of the level needed for the central bank's interest rate target. - The central bank's balance sheet will shrink.

Which of the following statements is NOT considered a major difficulty with the use of quantitative easing?

- The federal funds rate will go negative. - It has been overused throughout time. - It tends to decrease policymakers' credibility.

Forward guidance is

- the simplest unconventional approach a central bank can provide. - guidance today about policy target rates in the future.

When banks offer to pay a rate above the primary discount rate,

- they are signaling that they don't qualify for primary credit. - the are asking for secondary credit.

After the financial crisis of 2007 - 2009, why didn't the major financial intermediaries make new loans?

Banks and other intermediaries were weary after so many defaults.

Lending by Federal Reserve Banks to commercial banks is called ______.

Discount lending

Which of the following is not considered an unconventional policy tool?

Open market operations

Which of the following is not a feature of a good instrument of monetary policy?

Profitable for bank managers

What is a general explanation of the difference between quantitative easing (QE) and targeted asset purchases (TAP)?

QE increases the size of the central banks balance sheet; TAP shifts the composition of the balance sheet

Which of the following is the least effect policy tool at the Fed's disposal?

Reserve requirements

Primary credit - Secondary credit - Seasonal credit -

Very short-term loans to sound banks Loans for banks with longer-term problems buying time to work them out Loans mostly for agricultural banks

When the Fed alters the reserve requirement, it is employing

a conventional policy tool that alters the balances a commercial bank is required to hold.

When the Fed changes the interest rate on excess reserves, it is employing

a conventional policy tool that alters the rate paid by the Fed on bank reserves.

The demand for reserves curve is

downward-sloping until the market federal funds rate equals the deposit rate, then flat.

Successful inflation targeting promotes economic growth because,

everyone believes inflation will remain low.

In order for a bank to get a loan from the lender of last resort it must

have sufficient collateral to demonstrate its soundness.

There was a widespread belief that commercial banks would never lend reserves to other banks at negative nominal interest rates because they have the alternative of _______ instead.

holding cash

Which of the following is an unconventional policy tool employed by the Fed?

large purchases of risky assets

The "zero lower bound" implies that the _____ can never go below zero.

nominal interest rate

The Fed makes three types of loans: they are

primary credit seasonal credit secondary credit

When the target federal funds rate is at the effective lower bound,

quantitative easing may be a good policy choice.

Secondary credit is extended to relatively financially _________ banks at a rate ________ the primary discount rate.

unsound; above

After the financial crisis of 2007 - 2009, the Federal Reserve set the federal funds rate target at essentially zero. This extreme measure was __________ in ending the crisis because _________.

unsuccessful; major financial intermediaries were unwilling to make new loans after so many defaults