chapter 15

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 then-chairman Paul Volcker. Alan Blinder. Alan Greenspan. Arthur Burns.

Alan Greenspan.

Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted?

Dynamic open market operations are intended to change the level of reserves and the monetary base, while defensive open market operations are intended to offset movements in other factors that affect reserves and the monetary base. Dynamic is used to permanently change the monetary base and supply. Defensive operations are to offset float. The shifts into or out of the fed, and only temporary changes in currency. Repurchase agreements are typically done using defensive purchases. Reverse repos and matched sale purchase transactions are used to conduct defensive open market sales.

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?

Monetary policy tools consist of open market operations, the purchase and sale of government securities (including discount loans to banks and reserve requirements), and setting the percentage of deposits that a bank must hold in their reserves. Both the open market operations and the discount rate affect the monetary base, while the reserve requirements affect the money multiplier.

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. decreases; supply decreases; demand increases; supply increases; demand

decreases; demand

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. increases; increase increases; decrease decreases; increase decreases; decrease

decreases; increase

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

increase; temporarily

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 increases the federal funds rate. lowers the federal funds rate. has no effect on the federal funds rate. has an indeterminate effect on the federal funds rate.

increases the federal funds rate.

The quantity of reserves demanded equals excess reserves plus borrowed reserves. required reserves plus excess reserves. required reserves plus borrowed reserves. total reserves minus excess reserves.

required reserves plus excess reserves.

A decrease in ________ increases the money supply since it causes the ________ to rise. margin requirements; money multiplier reserve requirements; monetary base margin requirements; monetary base reserve requirements; money multiplier

reserve requirements; money multiplier

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. sale decreases purchase decreases purchase increases sale increases

sale decreases