ECON Lowdown: The Fed's New Monetary Policy Tools
When the FOMC conducts monetary policy, it sets the target range for the
federal funds rate.
Which of the following letters from the graph is the discount rate?
A
How does increasing the federal funds rate affect the economy?
A higher federal funds rate discourages consumer spending and reduces business investment.
Which of the following letters from the graph is the interest on reserve balances (IORB) rate?
B
Which of the following best describes how interest on reserve balances serves as a reservation rate?
Because it is a risk-free option, banks should not be willing to lend their funds for less than the interest on reserve balances rate.
Which of the following letters from the graph is the ON RRP offering rate?
D
Which monetary policy tool serves as a ceiling for the federal funds rate?
Discount rate
Which of the following letters from the graph indicates the line the Fed would shift using open market operations?
F
Which of the following best describes how arbitrage makes interest on reserves an effective tool?
If the federal funds rate falls far below the interest on reserve balances rate, banks will borrow at the federal funds rate and deposit the funds at the Fed to earn the interest on reserve balances rate and earn a profit. Many banks will seize on this opportunity, which will raise the federal funds rate.
Which of the following best describes the Fed's price stability goal?
Inflation that averages 2 percent over time
Which monetary policy tool is the primary tool the Fed uses to adjust the federal funds rate?
Interest on reserve balances (IORB)
Which of the following best describes how the FOMC conducts monetary policy to increase employment during a recession to achieve its maximum employment objective?
It decreases the target rate range for the federal funds rate.
Assume the economy starts to weaken, and the FOMC determines that employment is falling short of maximum employment. Which of the following would best describe an appropriate policy implementation?
Lower the interest on reserve balances rate, ON RRP offering rate, and discount rate.
What are the Fed's dual mandate goals?
Maximum employment and price stability
Which monetary policy tool is a supplementary tool that sets a floor for the federal funds rate?
ON RRP facility
Which monetary policy tool is the Federal Reserve using when it buys and sells government securities to ensure that the level of reserves remains ample?
Open market operations
Assume economic growth is very strong and the inflation rate rises above the Fed's price stability goal. Which of the following would best describe an appropriate policy implementation?
Raise the interest on reserve balances rate, ON RRP offering rate, and discount rate.