ECON308 Chapter 15
1) ________ 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. A) Open market operations; monetary base B) Open market operations; money multiplier C) Changes in reserve requirements; monetary base D) Changes in reserve requirements; money multiplier
Answer: A
10) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped.
Answer: A
18) If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain
Answer: A
21) Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: A
48) Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and its chairman A) Paul Volker. B) Alan Blinder. C) Arthur Burns. D) Alan Greenspan.
Answer: D
12) In the market for reserves, if the federal funds rate is above 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. A) sale decreases B) sale increases C) purchase increases D) purchase decreases
Answer: A
13) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant. A) increases; supply B) increases; demand C) decreases; supply D) decreases; demand
Answer: A
19) If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain
Answer: A
20) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) increase; defensive; inject B) decrease; defensive; inject C) increase; dynamic; inject D) decrease; dynamic; drain
Answer: A
26) Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate.
Answer: A
27) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: A
27) If the Fed wants to temporarily inject reserves into the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a reverse repurchase agreement. D) an open market sale.
Answer: A
32) Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Answer: A
33) After 2003, The Federal Reserve usually keeps the discount rate A) above the target federal funds rate. B) equal to the target federal funds rate. C) below the target federal funds rate. D) equal to zero.
Answer: A
35) Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the A) discount rate increases. B) discount rate decreases. C) federal funds rate rises. D) federal funds rate falls.
Answer: A
35) The discount rate is A) the interest rate the Fed charges on loans to banks. B) the price the Fed pays for government securities. C) the interest rate that banks charge their most preferred customers. D) the price banks pay the Fed for government securities.
Answer: A
41) The Fed prefers that so that A) banks borrow reserves from each other ; banks can monitor each other for credit risk. B) banks borrow reserves from each other; the Fed can monitor banks for credit risk. C) banks borrow reserves from the Fed; banks can monitor each other for credit risk. D) banks borrow reserves from the Fed; the Fed can monitor banks for credit risk.
Answer: A
42) The discount rate refers to the interest rate on A) primary credit. B) secondary credit. C) seasonal credit. D) federal funds.
Answer: A
43) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant. A) decreases; demand B) increases; demand C) increases; supply D) decreases; supply
Answer: A
44) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising
Answer: A
8) Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called A) defensive open market operations. B) dynamic open market operations. C) offensive open market operations. D) reactionary open market operations.
Answer: A
9) When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be A) defensive. B) offensive. C) dynamic. D) reactionary.
Answer: A
11) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston.
Answer: B
11) When the federal funds rate equals the discount rate A) the supply curve of reserves is vertical. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the demand curve for reserves is horizontal.
Answer: B
12) If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Answer: B
14) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; fall B) increases; fall C) increases; rise D) decreases; rise
Answer: B
14) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. A) decrease; sales B) decrease; purchases C) increase; sales D) increase; purchases
Answer: B
17) If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain
Answer: B
2) The primary indicator of the Fed's stance on monetary policy is A) the discount rate. B) the federal funds rate. C) the growth rate of the monetary base. D) the growth rate of M2.
Answer: B
21) If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain
Answer: B
45) The interest rate on seasonal credit equals A) the federal funds rate. B) the primary credit rate. C) the secondary credit rate. D) an average of the federal funds rate and rates on certificates of deposits.
Answer: D
22) Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: B
22) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) rise; defensive; drain B) fall; defensive; drain C) rise; dynamic; inject D) fall; dynamic; drain
Answer: B
23) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves. A) purchases; increase B) purchases; decrease C) sales; increase D) sales; decrease
Answer: B
25) Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate.
Answer: B
25) If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise
Answer: B
26) The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
Answer: B
28) Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate.
Answer: B
28) The Fed can offset the effects of an increase in float by engaging in A) a repurchase agreement. B) a matched sale-purchase transaction. C) an interest rate swap. D) an open market purchase.
Answer: B
3) Open market purchases ________ reserves and the monetary base thereby ________ the money supply. A) raise; lowering B) raise; raising C) lower; lowering D) lower; raising
Answer: B
30) Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Answer: B
31) Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate A) when the funds rate is below the discount rate. B) when the funds rate equals the discount rate. C) when the demand for federal funds intersects the vertical section of the reserve supply curve. D) when the demand for federal funds equals zero.
Answer: B
32) Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate A) when the funds rate is below the interest rate paid on excess reserves. B) when the funds rate equals the interest rate paid on excess reserves. C) when the funds rate is below the discount rate. D) when the funds rate equals the discount rate.
Answer: B
34) Discount policy affects the money supply by affecting the volume of ________ and the ________. A) excess reserves; monetary base B) borrowed reserves; monetary base C) excess reserves; money multiplier D) borrowed reserves; money multiplier
Answer: B
34) Everything else held constant, the vertical section of the supply curve of reserves is shortened when the A) discount rate increases. B) discount rate decreases. C) federal funds rate rises. D) federal funds rate falls.
Answer: B
37) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant. A) rise; decreases B) rise; increases C) decline; increases D) decline; decreases
Answer: B
37) The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows. A) secondary B) primary C) temporary D) seasonal
Answer: B
4) Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________. A) above, rises B) above, falls C) below, rises D) below, falls
Answer: B
40) 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 ________ for reserves and causes the federal funds interest rate to rise, everything else held constant. A) decreases; demand B) increases; demand C) increases; supply D) decreases; supply
Answer: B
44) The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. A) 50; below; 100 B) 100; above; 25 C) 100; below; 50 D) 50; above; 25
Answer: B
45) 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 ________. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease
Answer: B
49) A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that A) it was lowering the discount rate. B) it would provide discount loans to any bank that would make loans to the security industry. C) it stood ready to purchase common stocks to prevent a further slide in stock prices. D) it was raising the discount rate.
Answer: B
50) The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the A) Term Securities Lending Facility. B) Term Auction Facility. C) Primary Dealer Credit Facility. D) Commercial Paper Funding Facility.
Answer: B
9) The quantity of reserves supplied equals A) nonborrowed reserves minus borrowed reserves. B) nonborrowed reserves plus borrowed reserves. C) required reserves plus borrowed reserves. D) total reserves minus required reserves.
Answer: B
1) The interest rate charged on overnight loans of reserves between banks is the A) prime rate. B) discount rate. C) federal funds rate. D) Treasury bill rate.
Answer: C
10) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco.
Answer: C
13) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. A) decrease; sales B) decrease; purchases C) increase; sales D) increase; purchases
Answer: C
15) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. A) decrease; defensive; sales B) decrease; dynamic; purchases C) increase; defensive; sales D) increase; dynamic; purchases
Answer: C
16) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant. A) increases; supply B) increases; demand C) decreases; supply D) decreases; demand
Answer: C
16) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. A) decrease; defensive; sales B) decrease; dynamic; sales C) decrease; defensive; purchases D) increase; dynamic; purchases
Answer: C
18) In the market for reserves, a lower interest rate paid on excess reserves A) decreases the supply of reserves. B) increases the supply of reserves. C) decreases the effective floor for the federal funds rate. D) increases the effective floor for the federal funds rate.
Answer: C
19) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
2) Open market purchases raise the ________ thereby raising the ________. A) money multiplier; money supply B) money multiplier; monetary base C) monetary base; money supply D) monetary base; money multiplier
Answer: C
20) 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% A) lowers the federal funds rate. B) raises the federal funds rate C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
23) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
24) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
24) If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves. A) purchases; increase B) purchases; decrease C) sales; increase D) sales; decrease
Answer: C
29) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
29) 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
Answer: C
3) The quantity of reserves demanded equals A) required reserves plus borrowed reserves. B) excess reserves plus borrowed reserves. C) required reserves plus excess reserves. D) total reserves minus excess reserves.
Answer: C
30) Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
Answer: C
33) Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Answer: C
36) 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 for reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising
Answer: C
36) The most common type of discount lending that the Fed extends to banks is called A) seasonal credit. B) secondary credit. C) primary credit. D) installment credit.
Answer: C
38) The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems. A) seasonal credit; secondary credit; primary credit B) secondary credit; seasonal credit; primary credit C) primary credit; seasonal credit; secondary credit D) seasonal credit; primary credit; secondary credit
Answer: C
39) 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. A) decreases; fall B) increases; fall C) increases; rise D) decreases; rise
Answer: C
39) The discount rate is kept ________ the federal funds rate because the Fed prefers that A) below ; banks borrow reserves from each other. B) below; banks borrow reserves from the Fed. C) above; banks borrow reserves from each other. D) above; banks borrow reserves from the Fed.
Answer: C
4) Open market sales shrink ________ thereby lowering ________. A) the money multiplier; the money supply B) the money multiplier; reserves and the monetary base C) reserves and the monetary base; the money supply D) the money base; the money multiplier
Answer: C
40) The discount rate is kept ________ the federal funds rate because the Fed prefers that A) below ; banks can monitor each other for credit risk. B) below; the Fed can monitor banks for credit risk. C) above ; banks can monitor each other for credit risk. D) above; the Fed can monitor banks for credit risk.
Answer: C
42) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant. A) rise; lowering B) decline; raising C) decline; lowering D) rise; raising
Answer: C
43) The interest rate on secondary credit is set ________ basis points ________ the primary credit rate. A) 100; above B) 100; below C) 50; above D) 50; below
Answer: C
46) Suppose, at a given federal funds rate, there is an excess supply of 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 ________. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease
Answer: C
46) The Fed is considering eliminating A) primary credit lending. B) secondary credit lending. C) seasonal credit lending. D) its lender of last resort function.
Answer: C
47) At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender-of-last-resort. D) a regulator of bank holding companies.
Answer: C
5) Open market sales ________ reserves and the monetary base thereby ________ the money supply. A) raise; lowering B) raise; raising C) lower; lowering D) lower; raising
Answer: C
7) There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base. A) defensive; dynamic B) defensive; static C) dynamic; defensive D) dynamic; static
Answer: C
8) Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings? A) Paying interest reduces the effective tax on deposits. B) Paying interest will help in the implementation of monetary policy. C) Paying interest will help the Federal Reserve have more control of the amount of discount loans. D) Paying interest increases the capacity of the Fed's balance sheet which will make it easier to address financial crises.
Answer: C
15) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant. A) decreases; decrease B) increases; decrease C) increases; increase D) decreases; increase
Answer: D
17) In the market for reserves, a lower discount rate A) decreases the supply of reserves. B) increases the supply of reserves. C) lengthens the vertical section of the supply curve of reserves. D) shortens the vertical section of the supply curve of reserves.
Answer: D
31) Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Answer: D
38) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant. A) rise; lowering B) decline; raising C) decline; lowering D) rise; raising
Answer: D
41) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant. A) rise; decreases B) rise; increases C) decline; increases D) decline; decreases
Answer: D
5) The opportunity cost of holding excess reserves is the federal funds rate A) minus the discount rate. B) plus the discount rate. C) plus the interest rate paid on excess reserves. D) minus the interest rate paid on excess reserves.
Answer: D
51) The Fed's lender-of-last-resort function A) has proven to be ineffective. B) cannot prevent runs by large depositors. C) is no longer necessary due to FDIC insurance. D) creates a moral hazard problem
Answer: D
6) In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped.
Answer: D
6) The two types of open market operations are A) offensive and defensive. B) dynamic and reactionary. C) active and passive. D) dynamic and defensive.
Answer: D
7) When the federal funds rate equals the interest rate paid on excess reserves A) the supply curve of reserves is vertical. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the demand curve for reserves is horizontal.
Answer: D
49) State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."
Answer: False. If the interest rate paid on excess reserves is set below the federal funds rate, an increase in the interest rate paid on excess reserves will only cause an increase in the federal funds rate if the interest rate paid on excess reserves is increased above the original federal funds rate level. If the increase in the interest rate paid on excess reserves is such that the new rate is still below the federal funds rate, then the federal funds rate does not change, everything else held constant.
48) State whether the following statement is true or false AND explain why: "A decrease in the discount rate will always cause a decrease in the federal reserve funds rate."
Answer: False. Since the discount rate is set above the federal funds rate, a decrease in the discount rate will only cause a decrease in the federal funds rate if the discount rate is decreased below the original federal funds rate level. If the decrease in the discount rate is such that the new rate is still above the federal funds rate, then the federal funds rate does not change, everything else held constant.
47) Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier?
Answer: The three tools are open market operations, the purchase and sale of government securities; discount policy, controlling the price and quantity of discount loans to banks; and reserve requirements, setting the percentage of deposits that banks must hold in reserve. Open market operations and the discount rate affect the monetary base, and reserve requirements affect the money multiplier.
