Chapter 18

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

An increase in the size of the Fed's balance sheet through purchasing securities.

Quantitative easing is: a. statements today about policy targets in the future b. expansion of the demand for aggregate reserves to drive down the IOER. c. Expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. d. asset purchases that shift the composition of the Fed's balance sheet.

Expansion of the supply aggregate reserves beyond the amount needed to maintain the policy rate target.

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

The reserve requirement is not useful as an operational instrument.

The interest rate the Fed charges for secondary credit is: a. Below the market federal funds rate. b. Equal to the primary discount rate c. Above the primary discount rate d. Below the primary discount rate

Above the primary discount rate

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

Currency-to-deposit ratio

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

Desired reserves don't alway equal actual reserves.

The Taylor rule allows the real long-term interest rate to: a. Be one percent b. Be zero c. Be five percent less than the inflation rate d. Fluctuate with the natural rate of interest.

Fluctuate with the natural rate of interes.

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

Hinder economic growth

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

Hold a lower level of excess reserves than they would otherwise hold.

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

Interest rates

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

Lent reserves at an interest rate below the target federal funds rate

What is the Quantitative Theory of Money (QTM)

MV=Py In the long run if M increases by 10% then P will increase by 10%.

I = Nominal Interest rate R = Real interest rate Which does the gov't control

Nominal interest rate.

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

Purchase U.S. Treasury securities

When there is inflation in economy what does gov't do

Raise interest rate.

Unconventional monetary policy tools include all but: a. Targeted asset purchases b. Quantitative easing c. Reserve requirement d. Forward guidance

Reserve requirment

Which of the following would be categorized as an unconventional monetary policy tool? a. Federal funds rate target range b. The interest rate on excess reserves (IOER) c. Targeted asset purchases d. Deposit rate

Targeted asset purchases.

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

The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.

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

The FOMC sets the target federal funds rate range

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

The Fed can control either the size of the monetary base or the price of its components

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

The target federal funds rate range.

After the financial crisis of 2007 - 2009, the Federal Reserve set the federal funds rate target at essentially zero. This extreme measure was ____ in ending the crisis because ____. a. unsuccessful; inflation was already so high that interest rates should have been at higher levels. b. successful; even banks unwilling to lend will borrow at nea-zero rates c. successful; it gave major financial intermediaries confidence to start making loans again d. unsuccesful; major financial intermediaries were unwilling to make new loans after so many defaults.

Unsuccesful; major financial intermediaries were unwilling to make new loans after so many defaults.

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

lender of last resort