ECON330 Ch15

"The federal funds rate can sometimes be above the discount​ rate." Is this statement​ true, false, or​ uncertain? A. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. B. False. Once the federal funds rate reaches the discount​ rate, banks borrow directly from the​ Fed, preventing the federal funds rate from a further rise. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.

A

​"Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank​ panics." Why is this statement​ false? A. The Fed uses discounting to keep bank failures from spreading. B. The Fed can change reserve requirements. C. The Fed uses open market operations to inject liquidity. D. All of the above explain why the statement is incorrect.

A

​"The federal funds rate can sometimes be below the interest rate paid on​ reserves." Is this statement​ true, false, or​ uncertain? Explain your answer. A. True. This may happen because nonbank financial​ institutions, which cannot earn interest on​ reserves, participate in the federal funds market. B. False. Banks would prefer earning a​ risk-free interest rate rather than loaning excess reserves in the more risky federal funds market at an equivalent or lower rate. C. Uncertain. It depends on the stigma associated for a bank to borrow directly from the Fed.

A

Because most open market operations are typically repurchase​ agreements, it is likely that the volume of defensive open market operations is _________ the volume of dynamic open market operations.

Greater Than

Chart with R0d

Nonborrowed - 40 Borrowed - 0 Fed Rate - 5.5 Discount Rate - 6.5 Interest Rate - 4.5

The graph to the right shows a fall in the vertical section of the supply curve of reserves. The fall in the supply curve is caused​ by: A. a decrease in the discount rate. B. an increase in the discount rate. C. a decrease in the federal funds rate. D. an increase in the federal funds rate. E. an increase in reserve requirements.

A

The most important advantage of discount policy is that the Fed can use it​ to: A. perform its role as lender of last resort. B. control the money supply. C. precisely control the monetary base. D. punish banks that have deficient reserves.

A

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

A

The​ Fed's open market operations normally involve only the purchase of government​ securities, particularly those that are short−term. ​However, during the​ crisis, the Fed started new programs to purchase A. mortgage−backed securities and long−term Treasuries. B. commercial papers and short−term Treasuries. C. mortgage−backed securities and Treasury bills. D. Treasury bills and Treasury notes.

A

Which of the following forms is a conventional monetary policy​ tool: A. open market operations B. commitment to future monetary policy actions. C. asset purchases D. liquidity provision

A

Which of the following policy changes would be considered a conventional monetary policy​ change? A. An open market sale of securities to increase the fed funds rate. B. Federal Reserve lending through the Term Auction Facility. C. Announcing a firm policy to conduct large scale open market purchases in the future. D. Purchases of​ long-term securities to lower​ long-term interest rates.

A

From before the financial crisis began in September of 2007 to when the crisis was over at the end of​ 2009, amount of Federal Reserve assets​ rose, leading to A. a high inflation. B. a huge increase in the monetary base. C. a huge expansion of the money supply. D. an economic expansion.

B

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. Primary Dealer Credit Facility B. Term Auction Facility C. Term Securities Lending Facility D. Commercial Paper Funding Facility

B

The federal funds interest rate is determined by​ the: A. equilibrium of supply and demand in the money market. B. equilibrium of supply and demand in the market for reserves. C. equilibrium of supply and demand in the bond market. D. FOMC.

B

The management of expectations is a strategy best defined​ by: A. lowering the​ market's expectations of future​ long-term interest rates by decreasing excess reserves. B. keeping the federal funds rate at zero for an extended period to lower the​ market's expectations of future​ short-term interest rates. C. keeping the discount rate at zero for an extended period to lower the​ market's expectations of future​ long-term interest rates. D. lowering the​ market's expectations of future​ short-term interest rates by paying interest on reserves.

B

What monetary policy tool does the Fed use to control the amount of nonborrowed​ reserves? A. discount lending B. open market operations C. reserve requirements D. interest on reserves

B

When reserve demand is R0d in the figure on the​ right, borrowed reserves are A. ​$40 billion. B. ​$0. C. ​$1 billion. D. ​$41 billion.

B

Which of the following is a cost of Fed discount​ operations? A. The Fed has to pick and choose which banks receive discount​ loans, which banks dislike. B. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics. C. Banks have to pay back the discount loans at the discount​ rate, which costs money. D. There are no costs to discount operations because the discount loans have to be paid back.

B

Why is the composition of the​ Fed's balance sheet a potentially important aspect of monetary policy during a​ crisis? A. When the Fed provides liquidity to a particular segment of the credit​ market, it can freeze the market and hence decrease inflation. B. The Fed can influence interest rates and provide more targeted liquidity. C. Providing liquidity to financial organizations adds reserves to the general banking system and reduces risk. D. A consistent composition of the​ Fed's balance sheet provides transparency and certainty for markets and households in making decisions about the future.

B

____________ are intended to offset movements in other factors that affect reserves and the monetary base. A. Open market purchases B. Defensive open market operations C. Dynamic open market operations D. Open market sales

B

An open market sale will cause A. borrowed reserves to fall and the federal funds rate to rise. B. borrowed reserves to rise and the federal funds rate to fall. C. nonborrowed reserves to fall and the federal funds rate to rise. D. nonborrowed reserves to rise and the federal funds rate to fall.

C

Credit easing refers​ to: A. asset sales that can raise interest rates for sellers in particular credit markets. B. providing liquidity to foreign borrowers. C. altering the composition of the​ Fed's balance sheet in order to improve the functioning of particular segments of the credit markets. D. the reserves that become excess reserves instead of being loaned out.

C

From before the financial crisis began in September of 2007 to when the crisis was over at the end of​ 2009, the huge expansion in the​ Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A. the discount loan decreased. B. the Fed also conducted open market sales. C. most of it just flowed into holdings of excess reserve. D. the Fed also increased the required reserve ratio

C

Open market purchases raise the​ ________, thereby increasing the​ _________. A. money​ multiplier; money supply B. money​ base; money multiplier C. monetary base and​ reserves; money supply D. money​ multiplier; monetary base and reserves

C

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.

C

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

C

The rightward shift in reserve demand depicted in the figure on the right most likely resulted from A. a decrease in required reserves. B. an open market purchase. C. an increase in required reserves. D. an open market sale.

C

The​ Fed's most commonly used means of changing the money supply​ is: A. changing the discount rate B. changes in the Regulation Q ceiling C. open market operations D. changing reserve requirements

C

To lower interest rates on residential mortgages to stimulate the housing​ market, the Fed extended its open market operations to purchase A. Treasury bills and Treasury notes. B. commercial papers. C. ​mortgage-backed securities. D. ​long-term Treasuries.

C

To lower the federal funds​ rate, the Fed would A. increase the discount rate. B. increase the reserve requirement. C. conduct an open market purchase. D. all of the above

C

When might conventional monetary policy not​ work? A. When central banks need​ interest-rate tools. B. When there is a recession. C. When there is a​ zero-lower-bound problem. D. When there is too much inflation.

C

When the Fed increases reserve​ requirements, it reduces the money supply by​ causing: A. reserves to fall. B. the monetary base to fall. C. the money multiplier to fall. D. Both A and B are correct.

C

Which of the following policy changes would be considered an unconventional monetary policy​ change? A. An open market purchase of securities to decrease the fed funds rate. B. An open market sale of securities to increase the fed funds rate. C. Announcing a firm policy to conduct large scale open market purchases in the future. D. An decrease in reserve requirements to decrease the fed funds rate.

C

By paying interest on​ reserves, the Fed is able to keep the federal funds rate A. equal to the interest rate on reserves B. equal to the discount rate C. at or below the interest rate on reserves D. at or above the interest rate on reserves

D

Open market operations as a monetary policy tool have the advantage​ that: A. they are easily reversed if mistakes are made. B. they are flexible and precise. C. they occur at the initiative of the Fed. D. All of the above are correct.

D

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. ​Dynamic; static C. ​Defensive; static D. ​Dynamic; defensive

D

What is the advantage of quantitative easing as an alternative to conventional monetary policy when​ short-term interest rates are at the zero​ lower-bound? A. Purchases of intermediate securities could further decrease the money supply and hence lead to an increase in borrowing. B. Banks hold the extra liquidity received from quantitative easing as excess reserves and hence decrease their risks. C. Quantitative easing always causes an increase in economic activity through greater loans and monetary expansion. D. Purchases of longer minus term securities could reduce longer minus term interest rates and hence lead to an expansion.

D

When reserve demand is R1d in the figure on the​ right, borrowed reserves are A. ​$40 billion. B. ​$41 billion. C. ​$0. D. ​$1 billion.

D

Which of the following statements regarding reserve requirements is​ true? A. In​ 2011, required reserves on all checkable deposits were equal to zero for the first​ $10.7 million of the​ bank's checkable deposits. B. The Depository Institutions Deregulation and Monetary Control Act of 1980 provided a simpler scheme for setting reserve requirements. C. There is no need for depository institutions to hold reserves if the central bank does not require it D. Both A and B are correct E. All of the above are correct

D

Why are repurchase agreements used to conduct most​ short-term monetary policy​ operations, rather than simply buying and selling securities​ outright? A. Repurchase agreements are temporary open market purchases that can be reversed. B. Repurchase agreements allow the Fed to easily adjust open market operations in response to daily conditions. C. They are effective in dealing with persistent shortages in​ reserves, and thus have a more permanent impact. D. Only A and B are correct. E. All of the above are correct.

D

Why is paying interest on reserves an important tool for the Federal Reserve to manage​ crises? A. It allows the Fed to increase the effective tax on​ deposits, thereby increasing economic efficiency. B. It allows the Fed to increase the money supply to support excessive demand for goods and services. C. It allows for fluctuations in the federal funds​ rate, making monetary policy more flexible. D. It allows the Fed to increase its lending as much as it wants without reducing the federal funds rate.

D

You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary​ policy? Why or why​ not? A. No. The Fed usually lowers the discount rate to signal contractionary policy. B. Yes. The Fed usually uses the discount rate to manipulate the money supply. C. Yes. The Fed usually uses the discount rate to signal the future of monetary policy. D. No. The Fed usually lowers the discount rate when market rates fall regardless of the direction of monetary policy.

D

____________ are intended to change the level of reserves and the monetary base. A. Open market sales B. Open market purchases C. Defensive open market operations D. Dynamic open market operations

D

The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These tools​ involve: A. open market operations B. lending to banks C. reserve requirements D. Both A and C are correct E. All of the above are correct

E

Chart with R1d, R2d

Equal distance between B and C

Chart with i1ff = id

Stay at i1ff

Chart with i1ff, etc. #1

i2ff increase