Chapter 17 & 18

A central bank's balance sheet will categorize the following as liabilities: a. Currency b. Loans c. Securities d. Foreign exchange reserves

a

A liability of the central bank in functioning as the bankers' bank is: a. Accounts of commercial banks b. Securities c. Loans d. Currency

a

An increase in the federal funds rate should: a. Cause mortgage rates to increase by less than the increase in the federal funds rate b. Have an inverse impact on mortgage rates c. Not impact mortgage rates since the federal funds rate is a very short-term rate d. Cause the mortgage rates to increase by more than the increase in the federal funds rate

a

Discount lending ties into the Fed's function of: a. Lender of last resort b. Open market operations c. The government's bank d. Regulation of banking

a

For most of the Fed's history, the Fed: a. Lent reserves at an interest rate below the target federal funds rate b. Found banks would borrow from the Fed far more often than they would borrow in the federal funds market c. Was very lenient in making discount loans d. Tied the discount rate to the rate on Treasury securities

a

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would: a. Decrease by 3.0% b. Remain at 2.5% c. Decrease by 1.0% d. Increase by 1.0%

a

If the Federal Reserve is to be independent, the quantity of securities it purchases is determined by: a. The Federal Reserve itself b. Congress c. The amount the public does not want to purchase at the going price d. The Treasury

a

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be: a. The market federal funds rate will decrease b. The market federal funds rate will equal the target rate c. The market federal funds rate will increase d. Nothing; the Fed would act immediately and the market would not be affected

a

If the market federal funds rate were above the target rate, the response from the Fed would likely be to: a. Purchase U.S. Treasury securities b. Sell U.S. Treasury securities c. Lower the required reserve rate d. Lower the discount rate

a

Over the last few decades, central bankers have: a. Mostly abandoned intermediate targets b. Greatly increased their focus on intermediate targets c. Found that the links between the operating instruments and intermediate targets have become more stable d. Developed more intermediate targets

a

Suppose a European bank has excess reserves. It can either lend them or deposit them overnight in the ECB's Deposit Facility. Ignoring any question of risk, if the bank deposits the funds instead of lending them it must be true that the rate on the loan was less than the: a. ECB target refinancing rate less 100 basis points b. ECB target refinancing rate c. Minimum bid rate d. Minimum bid rate less 50 basis points

a

The European equivalent of the U.S.'s market federal funds rate is called the: a. Overnight cash rate b. Target refinancing rate c. European discount rate d. Overnight repurchase rate

a

The Taylor rule assumes the real long-term interest rate would be: a. Approximately 2.5% b. Zero c. Five percent less the inflation rate d. One percent

a

The fact that, for most of its history, the Fed was reluctant to make discount loans actually: a. At times was a destabilizing force for financial markets b. Proved to be a very stabilizing force for financial markets c. Pushed the discount rate above the target federal funds rate d. Resulted in banks in very strong financial shape as being the only ones borrowing from the Fed

a

The interest rate the Fed charges for secondary credit is: a. 50 basis points above the primary discount rate b. Below the market federal funds rate c. 100 basis points above the primary discount rate d. 50 basis points below the primary discount rate

a

The measure for the actual rate of inflation used in the Taylor rule is the: a. Personal Consumption Expenditure Index b. GDP deflator c. Consumer Price Index d. Producer Price Index

a

The reserve requirement is applied to two-week balances on: a. Transactions deposits b. Savings deposits c. Both transactions deposits and savings deposits d. Savings deposits and one-week balances on transactions deposits

a

The tools of monetary policy available to the Fed include each of the following, except the: a. Currency-to-deposit ratio b. Discount rate c. Target federal funds rate d. Reserve requirement

a

The tools of monetary policy include: a. The target federal funds rate b. The excess reserve rate c. The currency-to-deposit ratio d. Both the excess reserve rate and the target federal funds rate

a

The ways the Fed can inject reserves into the banking system include: a. An increase in the size of the Fed's balance sheet through purchasing securities b. Increasing the discount rate c. Making loans to non-bank corporations d. An increase in the size of the Fed's balance sheet through selling securities

a

Which of the following statements is true? a. The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks b. The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same c. The ECB's weekly auctions include only a few of the largest banks in Europe d. The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility

a

Within the European Central Bank, banks with excess reserves: a. Can deposit them with the ECB and earn an interest rate 100 basis points below the target refinancing rate b. Earn no interest on excess reserves, similar to the system in the U.S c. Must deposit the excess with the ECB's Deposit Facility d. None of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves

a

A central bank holds foreign exchange reserves primarily for: a. Diversification purposes b. Foreign exchange interventions c. Safekeeping d. Diversification and safekeeping

b

A central bank's balance sheet would categorize each of the following as liabilities, except: a. Currency b. Loans c. The government's account d. Accounts of the commercial banks

b

A good definition for intermediate targets of monetary policy would be: a. Instruments under the direct control of central bankers but one step removed from operational targets b. Instruments that are not under the direct control of the central banks but lie between operational instruments and objectives, c. The quantity or non-price targets of monetary policy d. The real goals of monetary policy

b

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers: a. Focusing exclusively on an intermediate target b. Bypassing intermediate targets and focusing directly on an objective c. Focusing on multiple numerical targets d. Developing a new intermediate target

b

Federal funds loans are: a. Secured loans between banks and the Fed b. Unsecured loans c. Collateralized loans between banks d. Guaranteed by the FDIC

b

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) if the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: a. 7% b. 9% c. 5% d. 4.5%

b

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: a. Increase the supply of reserves b. Decrease the supply of reserves c. Do nothing; the Fed will let the market work d. Alter the demand for reserves

b

In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the: a. Economy would have been better off b. Target would not have been politically acceptable c. Target would have been a federal funds rate of zero percent d. Inflation rate would have risen further

b

One of the reasons primary credit exists is to: a. Bail out banks which are in financial trouble b. Provide additional reserves when the open market staff's forecasts are off c. Provide banks with an available source for unsecured lending d. Provide banks with a low interest source for long-term capital

b

One outcome that would result if the Fed paid interest on reserves would be: a. Banks would hold less excess reserves b. The federal government's deficit would be larger (or surplus smaller) c. Banks would no longer hold excess reserves d. The target federal funds rate would have to be fixed at a constant rate

b

Seasonal credit provided by the Fed is not as common as it used to be because: a. There are fewer banks in seasonal areas b. Other sources for long-term loans have developed for banks in seasonal areas c. Seasonal credit has been replaced by secondary credit d. Seasonal credit is being replaced by primary credit

b

Secondary credit provided by the Fed is designed for: a. Banks who qualify for a lower interest than what is available under primary credit b. Banks that are in trouble and cannot obtain a loan from anyone else c. Banks that want to borrow without putting up collateral d. Foreign banks

b

The European equivalent of the Fed's open market operations (OMO) is: a. Very similar to the Fed's OMO in that they are highly centralized b. Dissimilar to the Fed's OMO in that the operations are conducted at all 13 of the National Central Banks simultaneously c. Similar to the Fed's OMO in that they accept only U.S. Treasury securities in their refinancing operations d. Dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities

b

The Fed will make a discount loan to a bank during a crisis: a. No matter what condition the bank is in b. Only if the bank is sound financially and can provide collateral for the loan c. But if the bank doesn't have collateral the interest rate is higher d. Only if the bank would fail without the loan

b

The Fed's temporary operations involve the use of: a. Discount loans b. Repurchase agreements c. An outright purchase of U.S. Treasury Securities d. An outright sale of U.S. Treasury Securities

b

The Taylor rule is: a. The monetary policy setting formula followed explicitly by the FOMC b. An approximation that seeks to explain how the FOMC sets their target c. An explicit tool used by the ECB but not the Fed d. A rule adopted by Congress to make the Fed's monetary policy more accountable to the public

b

The focus for most central banks today is: a. The quantity of M1 b. Interest rates c. The quantity of M2 d. Controlling the size of the money multiplier

b

The market for reserves derives from the fact that: a. Reserves pay a relatively high return b. Desired reserves don't always equal actual reserves c. The Fed refuses to lend to banks d. Banks do not want excess reserves

b

The types of loans the Fed makes consist of each of the following, except: a. Primary credit b. Conditional credit c. Seasonal credit d. Secondary credit

b

Which of the following features would characterize a good monetary policy instrument? a. Observable only to monetary policy officials b. Tightly linked to monetary policy objectives c. Controllable and rigid d. Difficult to change

b

Which of the following statement is most true regarding monetary policy tools? a. The required reserve rate is the most easily observable tool b. The central banks cannot set a quantity and a price tool simultaneously c. The federal funds rate is not the best tool because it fails the controllable test of a good monetary policy tool d. The Fed currently uses a quantity tool for monetary policy

b

Which of the following statements is most correct? a. The market federal funds rate equals the target federal funds rate b. Over the last 10 years the deviations between the target and market federal funds rate have decreased c. Over the last 10 years the deviations between the target and market federal funds rate have increased d. There doesn't appear to be any relationship at all between the target and market federal fund rates

b

Within the ECB, there is a minimum interest rate that can be charged on reserves; this is determined by: a. Law; it's a fixed rate b. The rate paid on excess reserves by the deposit facility c. The directors of the National Central Banks d. The executive committee of the ECB

b

A practical limitation of using the Taylor rule for setting the target federal funds rate would be that it: a. Makes monetary policy less transparent b. Makes monetary policymakers less accountable c. Requires better real-time data than is available d. Is difficult to calculate the target from the formula

c

Discount lending by the Fed: a. Is the key component of monetary policy b. Is more important today than in years past c. Is not as important today as it was in the past d. Amounts to five billion dollars in volume during an average week

c

Each of the following items would appear as assets on the central bank's balance sheet, except: a. Loans b. Securities c. Currency d. Foreign exchange reserves

c

For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the: a. European target discount rate b. European target federal funds rate c. Target refinancing rate d. London Inter-Bank Offer Rate

c

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: a. The inflation rate increased to over 18 percent in 1983 b. Many banks failed that otherwise may not have c. Interest rates rose very high d. Inflation remained high for most of the 1980's

c

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) Every one percent decrease in the rate of inflation will: a. Raise the target federal funds rate by 1.5% b. Lower the target federal funds rate by 0.5% c. Lower the target federal funds rate by 1.5% d. Raise the target federal funds rate by 0.5%

c

If each of the coefficients in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, this implies: a. That the Fed assumes that inflation and output are right on target b. That inflation and output are one half a percent off of their targets c. The Fed is giving equal weight to objectives of inflation and output d. That the Fed will not accept higher inflation unless unemployment falls by twice the inflation rate

c

If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: a. A decrease in the market federal funds rate b. A market federal funds rate that will equal the target rate c. An increase in the market federal funds rate d. Nothing; the Fed would act immediately and the market would not be affected

c

If the market federal funds rate were below the target rate, the response from the Fed would likely be to: a. Raise the required reserve rate b. Purchase U.S. Treasury securities c. Sell U.S. Treasury securities d. Raise the discount rate

c

In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? a. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate b. The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective c. Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves d. The Fed now controls the quantity of credit extended as well as its price

c

Most central banks, including the Fed and the ECB, provide discount loans at a rate: a. Equal to the target interest rate b. Below the target interest rate c. Above the target interest rate d. That is equal to the overnight interbank lending rate

c

One reason the target federal funds rate may not equal the actual federal funds rate is because: a. There is no way that the Fed could keep the actual rate at the target rate b. The target rate changes with the demand for reserves c. Attaining the target rate involves forecasting reserve demand and forecasts are subject to error d. None of the answers is correct; the target and the actual federal funds rates are always equal

c

Primary credit extended by the Fed is: a. For banks needing long-term loans to work out financial problems b. The highest interest rate loans offered by the Fed c. Short-term, usually overnight loans d. Loans offered at the prime interest rate for periods exceeding thirty days but less than one year

c

The European Central Bank's Marginal Lending Facility is used to provide: a. Short-term loans to banks at rates below the target refinancing rate b. Long-term loans to banks at rates above the target refinancing rate c. Short-term loans at rates above the target refinancing rate d. Long-term loans to banks at rates below the target refinancing rate

c

The Fed could make the market federal funds rate equal the target rate by: a. Mandating that all loans be transacted at the target rate b. Setting the discount rate below the federal funds rate cb. Entering the federal funds market as a borrower or a lender d. Paying higher interest on reserves

c

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system. The "channel" or "corridor" refers to the spread between the central bank's: a. Target interest rate and its deposit rate b. Target interest rate and its lending rate c. Lending rate and its deposit rate d. Target interest rate and the current interest rate

c

The components of the formula for the Taylor rule includes each of the following, except: a. The target federal funds rate b. The current inflation rate c. The 30-year U.S. Treasury bond rate d. The inflation gap

c

The daily reserve supply curve is: a. Upward sloping b. Downward sloping c. Vertical until the federal funds rate equals the discount rate; at that point it becomes horizontal d. Horizontal until the federal funds rate equals the discount rate; at that point it becomes vertical

c

The fact that there is a market for federal funds enables banks to: a. Make fewer loans than they would otherwise b. Borrow more from the Fed c. Hold a lower level of excess reserves than they would otherwise hold d. Hold less in required reserves

c

The interest rate on primary credit extended by the Fed is: a. The average of the prime interest rate charged by the ten largest banks in the nation b. 100 basis points below the target federal funds rate c. 100 basis points above the target federal funds rate d. Equal to the target federal funds rate

c

The main asset held by a central bank in its role as the Banker's Bank is: a. Foreign exchange reserves b. Currency c. Loans d. Securities

c

The main purpose of reserve requirements today is to: a. Decrease the demand for reserves b. Make sure depositors can withdraw currency on demand c. Enable the FOMC to keep the market federal funds rate closer to the target reserve rate d. Keep banks sound

c

The primary policy instrument of the Federal Open Market Committee (FOMC) is: a. The required reserve rate b. The discount rate c. The target federal funds rate d. The exchange rate

c

The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it: a. Is not controllable b. Is not observable c. Cannot be quickly changed d. The impact of changing it is unpredictable

c

The tool the Fed uses to keep the federal funds rate close to the target is: a. The required reserve rate b. Discount lending c. Open market operations d. They can set the rate by law

c

The use of lagged reserve accounting makes the demand for reserves: a. Highly unpredictable b. Constant c. More predictable d. Subject to daily changes by the Fed

c

The weekly refinancing by the European Central Bank (ECB) is most similar to the Fed's use of: a. The primary credit facility b. The secondary credit facility c. Repos d. The target federal funds rate

c

When the Fed forecasts a sustained increase in the demand for the monetary base, the staff of the Fed is likely to meet this demand through: a. Discount loans b. Repurchase agreements c. An outright purchase of U.S. Treasury Securities d. An outright sale of U.S. Treasury Securities

c

Which of the following statements is most correct? a. The FOMC is more successful at keeping the market rate closer to the target rate than the ECB b. The FOMC is more successful than the ECB at keeping the market rate within a 100 basis point band of the target rate c. The ECB has kept the market rate within a 100 basis point band of the target rate; the FOMC cannot make this claim d. The ECB seldom has the market rate within 100 basis points of the target rate

c

Which of the following statements is most correct? a. The FOMC sets the federal funds rate b. The discount rate is the primary policy tool of the FOMC c. The FOMC sets the target federal funds rate d. The difference between the target and actual federal funds rate is the dealer's spread

c

Which of the following statements is not correct? a. The current target of the FOMC is the federal funds rate b. If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate c. The Fed currently sets both an interest rate and a quantity target for monetary policy d. If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate

c

Which of the following would be classified as intermediate targets for U.S. monetary policy? a. M2 but not M1 b. The federal funds rate c. M1 and M2 d. M1 but not M2

c

Central banks that have a hierarchical mandate with inflation targeting basically are saying: a. Hitting the inflation target is the first priority after all other stated objectives are reached b. Hitting the inflation target is the only objective c. The inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers d. Hitting the inflation target comes first, everything else comes second

d

Discount lending today is primarily used for: a. Controlling reserves b. Providing short-term financial stability c. Preventing bank panics dc. Providing short-term financial stability and preventing bank panics

d

For the Federal Reserve's balance sheet, the asset listed Securities would include: a. Private and public debt b. Mainly U.S. Treasury and municipal bonds c. Bonds issued by commercial banks d. Only U.S. Treasury securities

d

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) Every one percent increase in the rate of inflation will: a. Increase the real federal funds rate by 1.5% b. Increase the target federal funds rate by 1.5% c. Increase the real federal funds rate by 0.5% d. Increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%

d

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would: a. Increase by 1.5% b. Decrease by 1.5% c. Remain at 2.5% d. Decrease by 0.5%

d

Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap) if the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: a. 6.5% b. 2.5% c. 3.5% d. 10.5%

d

If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must: a. Target the quantity of reserves b. Set targets for both interest rates and the quantity of reserves c. Not target the interest rates d. Let the quantity of reserves fluctuate

d

If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except: a. Making unsecured loans b. In essence paying interest on excess reserves c. Eliminating a lot of valuable information coming from the market d. Following the directives issued by Congress

d

Inflation targeting does all of the following except: a. Increase policymakers' credibility b. Increase policymakers' accountability c. Communicate policymakers' objectives clearly and openly d. Hinder economic growth

d

On a particular day, the actual federal funds rate can deviate from the target federal funds rate. This might be due to all of the following except: a. Unexpected changes in the demand for reserves b. The forecasts of the Fed's staff were in error c. There may have been more float in the banking system than anticipated d. Daily changes in the target rate

d

One key difference between the Fed and the European Central Bank (ECB) in their reserve requirements is that the: a. Reserve requirements of the ECB are at a much higher rate than the Fed's b. ECB's reserve requirements are more difficult for banks to predict c. Reserve requirement of the ECB are determined annually d. ECB pays interest on required reserves

d

Over the years most monetary policy experts would agree with each of the following statements, except: a. The reserve requirement is not useful as an operational instrument b. Central bank lending is necessary to ensure financial stability c. Short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output d. Transparency in policy making hinders accountability

d

The Fed is reluctant to change the required reserve rate because: a. Changes in the rate have a small impact on the actual quantity of money b. The money multiplier is not impacted by the required reserve rate c. The time lag between changing the required reserve rate and changes in the money supply can be too long d. Small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits

d

The Fed would use a reverse repo when: they a. Want to temporarily increase the monetary base b. Forecast a permanent decrease in the demand for monetary base c. Forecast a permanent increase in the demand for monetary base d. Want to temporarily decrease the monetary base

d

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system that involves setting: a a. Target interest rate only b. Target interest rate and a lending rate only c. Target interest rate and a deposit rate only d. Target interest rate, a lending rate, and a deposit rate

d

The collapse of the Thai currency, the baht, was partially due to: a. Inaction by the Federal Reserve b. The European Central Bank c. Information provided by the central bank of Thailand d. Information not provided by the central bank of Thailand

d

The constant term in the Taylor rule is usually equal to: a. The long-term risky real interest rate b. One percent point more than the long-term trend real growth rate of the economy c. The 30 day T-bill rate d. One percent point less than the long-term trend real growth rate of the economy

d

The interest rate on primary credit extended by the Fed is: a. The average of the prime interest rate charged by the ten largest banks in the nation b. 50 basis points below the target federal funds rate c. 200 basis points above the target federal funds rate d. 100 basis points above the target federal funds rate

d

To minimize the cost of holding reserves for small banks, the: a. Required reserve rate decreases as the amount of deposits increases b. Required reserve rate is constant c. Required reserve rate is not applied for transaction deposits less than $100 million d. First few million of transactions deposits are exempt from reserve requirements

d

Today, reserve requirements are: a. Set in a way that makes reserve demand highly unpredictable b. Changed whenever the target federal funds rate is changed c. Changed instead of making changes in the discount rate d. Really not a direct tool of monetary policy

d

Variables that can influence the Fed's forecast for reserves each day include forecasting the: a. Day's demand for mortgage loans b. Level of float in the banking system, but not the balance in the U.S. Treasury's account c. Balance of the U.S. Treasury's account, but not the float d. Level of float in the banking system and the balance of the U.S. Treasury's account

d

Which of the following statements is most correct? a. The Fed can control the amount of reserves, but cannot control the monetary base b. The Fed can control the make up of the monetary base, but cannot affect the market interest rate c. The Fed can control the size of the monetary base but not the price of its components d. The Fed can control either the size of the monetary base or the price of its components

d

Which of the following statements is not correct? a. The current target of the FOMC is the federal funds rate b. If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate c. If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate d. The Fed can target both the quantity of reserves and the federal funds rate simultaneously

d