Chapter 15

________ 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; money multiplier D) Changes in reserve requirements; monetary base

A) Open market operations; monetary base

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; the Fed can monitor banks for credit risk. D) banks borrow reserves from the Fed; banks can monitor each other for credit risk.

A) banks borrow reserves from each other ; banks can monitor each other for credit risk.

The Fed's lender-of-last-resort function A) creates a moral hazard problem. B) has proven to be ineffective. C) is no longer necessary due to FDIC insurance. D) cannot prevent runs by large depositors.

A) creates a moral hazard problem.

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) dynamic; defensive B) defensive; static C) defensive; dynamic D) dynamic; static

A) dynamic; defensive

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) has no effect on the federal funds rate. B) raises the federal funds rate. C) lowers the federal funds rate. D) has an indeterminate effect on the federal funds rate.

A) has no effect on the federal funds rate.

When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. A) increase; defensive; sales B) increase; dynamic; purchases C) decrease; defensive; sales D) decrease; dynamic; purchases

A) increase; defensive; sales

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; temporarily B) decrease; permanently C) decrease; temporarily D) increase; permanently

A) increase; temporarily

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) has no effect on the federal funds rate. C) raises the federal funds rate. D) has an indeterminate effect on the federal funds rate.

A) lowers the federal funds rate.

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) lowers the federal funds rate. B) increases the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate.

A) lowers the federal funds rate.

The opportunity cost of holding excess reserves is the federal funds rate A) minus the interest rate paid on excess reserves. B) plus the discount rate. C) plus the interest rate paid on excess reserves. D) minus the discount rate.

A) minus the interest rate paid on excess reserves.

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) negatively sloped. B) vertical. C) horizontal. D) positively sloped.

A) negatively sloped.

If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves. A) purchases; decrease B) sales; increase C) purchases; increase D) sales; decrease

A) purchases; decrease

When the federal funds rate equals the discount rate A) the supply curve of reserves is horizontal. B) the demand curve for reserves is horizontal. C) the supply curve of reserves is vertical. D) the demand curve for reserves is vertical.

A) the supply curve of reserves is horizontal.

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) San Francisco. B) New York. C) Boston. D) Chicago.

B) New York.

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

B) decrease; temporarily

In the market for reserves, a lower interest rate paid on excess reserves A) increases the supply of reserves. B) decreases the effective floor for the federal funds rate. C) decreases the supply of reserves. D) increases the effective floor for the federal funds rate

B) decreases the effective floor for the federal funds rate.

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) has no effect on the federal funds rate. C) lowers the federal funds rate. D) has an indeterminate effect on the federal funds rate

B) has no effect on the federal funds rate.

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) increases; lowering B) increases; raising C) decreases; raising D) decreases; lowering

B) increases; raising

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 an indeterminate effect on the federal funds rate. D) has no effect on the federal funds rate

B) raises the federal funds rate.

The discount rate is kept ________ the federal funds rate because the Fed prefers that A) above; banks borrow reserves from the Fed. B) below; banks borrow reserves from the Fed. C) above; banks borrow reserves from each other. D) below ; banks borrow reserves from each other.

C) above; banks borrow reserves from each other.

Discount policy affects the money supply by affecting the volume of ________ and the ________. A) borrowed reserves; money multiplier B) excess reserves; monetary base C) borrowed reserves; monetary base D) excess reserves; money multiplier

C) borrowed reserves; monetary base

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called A) offensive open market operations. B) dynamic open market operations. C) defensive open market operations. D) reactionary open market operations

C) defensive open market operations.

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) dynamic; sale B) defensive; sale C) defensive; purchase D) dynamic; purchase

C) defensive; purchase

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) decreases; demand B) decreases; supply C) increases; supply D) increases; demand

C) increases; supply

The quantity of reserves supplied equals A) required reserves plus borrowed reserves. B) nonborrowed reserves minus borrowed reserves. C) nonborrowed reserves plus borrowed reserves. D) total reserves minus required reserves.

C) nonborrowed reserves plus borrowed reserves.

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) sale; decrease C) purchase; increase D) purchase; decrease

C) purchase; increase

Open market sales shrink ________ thereby lowering ________. A) the money multiplier; reserves and the monetary base B) the money multiplier; the money supply C) reserves and the monetary base; the money supply D) the money base; the money multiplier

C) reserves and the monetary base; the money supply

In the market for reserves, a lower discount rate A) lengthens the vertical section of the supply curve of reserves. B) decreases the supply of reserves. C) shortens the vertical section of the supply curve of reserves. D) increases the supply of reserves.

C) shortens the vertical section of the supply curve of reserves.

The primary indicator of the Fed's stance on monetary policy is A) the discount rate. B) the growth rate of the monetary base. C) the federal funds rate. D) the growth rate of M2.

C) the federal funds rate.

At its inception, the Federal Reserve was intended to be A) a regulator of bank holding companies. B) the issuer of government debt. C) the Treasury's banker. D) a lender-of-last-resort.

D) a lender-of-last-resort.

The interest rate charged on overnight loans of reserves between banks is the A) Treasury bill rate. B) prime rate. C) discount rate. D) federal funds rate

D) 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% A) raises the federal funds rate B) has an indeterminate effect on the federal funds rate. C) lowers the federal funds rate. D) has no effect on the federal funds rate.

D) has no effect on the federal funds rate.

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) has an indeterminate effect of the federal funds rate. C) has no effect on the federal funds rate. D) lowers the federal funds rate.

D) lowers the federal funds rate.

When the federal funds rate equals the interest rate paid on excess reserves A) the demand curve for reserves is vertical. B) the supply curve of reserves is horizontal. C) the supply curve of reserves is vertical. D) the demand curve for reserves is horizontal.

D) the demand curve for reserves is horizontal.

The discount rate is A) the interest rate that banks charge their most preferred customers. B) the price banks pay the Fed for government securities. C) the price the Fed pays for government securities. D) the interest rate the Fed charges on loans to banks.

D) the interest rate the Fed charges on loans to banks.

In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) horizontal. B) negatively sloped. C) positively sloped. D) vertical.

D) vertical.