Money and Banking

Suppose the natural rate of interest in an economy is 4%. If current inflation is 3% while the inflation target is at 1% and there is an output gap of 1% as well, according to the Taylor rule, the target federal funds rate should be ______.

8.5% Natural rate of interest + Current inflation + 1/2(Inflation gap) + 1/2(Output gap). Therefore, the rate should be 4% + 3% + 1/2(3% - 1%) + 1/2(1%) = 8.5%.

Consider and indicate which of the following is considered a conventional policy tool.

Altering the reserve requirement for commercial banks Changing the target federal funds rate Manipulating the interest rate on excess reserves

After the financial crisis of 2007 - 2009, why didn't the major financial intermediaries make new loans?

Banks and other intermediaries were weary after so many defaults.

Which of the following is not true about American and European monetary policy?

Banks in the USA but not the EU can earn interest on reserves.

Banks with excess reserves can deposit them overnight in

ECB's deposit facility

Which of the following is NOT true about exiting these types of unconventional policy?

Exiting must cause inflation rates to rise. The central bank will need to increase the supply of reserves to exit. During exit the central bank will need to increase its asset holdings.

Exiting is a key issue with target asset purchases and quantitative easing. Which of the following is true about exiting these types of unconventional policy?

Increasing the interest rate paid on reserves may ease the transition.

Which of the following is NOT true when the central bank engages in quantitative easing?

It increases aggregate reserves just shy of the level needed for the central bank's interest rate target. The central bank's balance sheet will shrink. The central bank loses bonds on its balance sheet.

Describe the overnight reverse repo rate.

It is generally set at the bottom of the target rate. As of August 2019, it the rate is 10 points below the IOER.

Which of the following statements is NOT considered a major difficulty with the use of quantitative easing?

It tends to decrease policymakers' credibility. The federal funds rate will go negative. It has been overused throughout time.

How does forward guidance influence inflation?

Lower long-term interest rates to affect private spending

Which of the following is not considered an unconventional policy tool?

Open market operations

Which of the following is not a feature of a good instrument of monetary policy?

Profitable for bank managers

What is a general explanation of the difference between quantitative easing (QE) and targeted asset purchases (TAP)?

QE increases the size of the central banks balance sheet; TAP shifts the composition of the balance sheet

Which of the following is the least effect policy tool at the Fed's disposal?

Reserve requirements

Which of the following is a conventional policy tool employed by the Fed?

Target range for the federal funs rate Interest rate on excess reserves The rate on discount window loans

Which of the following is NOT accurate with respect to the Taylor rule?

The Taylor rule is particularly good at handling sudden shocks to the economy. We could replace the FOMC with the Taylor rule and have no difference in policy. The rate predicted by the Taylor rule is generally far from the actual target federal funds rate.

When the Fed alters the reserve requirement, it is employing

a conventional policy tool that alters the balances a commercial bank is required to hold.

When the Fed changes the interest rate on excess reserves, it is employing

a conventional policy tool that alters the rate paid by the Fed on bank reserves.

The interest rate on primary credit is called the primary discount rate and is set at a spread

above the IOER rate.

European banks can borrow from the European Central Bank at a rate _______ the target-refinancing rate and deposit excess reserves in the Deposit Facility at a rate _______ it.

above; below

When the central bank engages in quantitative easing,

adding to reserves will not change the federal funds rate.

A major difference between the European Central Bank's refinancing operations and the Federal Reserve's open market operations is that refinance operations

are done at all National Central Banks at the same time.

The rate of return at the ECB's deposit facility, is set

below the target refinancing rate. by the ECB Governing Council.

Lending by Federal Reserve Banks to commercial banks is called

discount lending

The Federal Reserve's primary tool in eliminating bank panics and ensuring short-term stability is

discount lending

Overall, the European Central Bank's monetary policies

do a good job of giving the ECB control over the short-term money market.

The demand for reserves curve is

downward-sloping until the market federal funds rate equals the deposit rate, then flat.

The Taylor rule implies that

each 2% increase in the output gap results in a 1% increase in the target federal funds rate.

Discount lending is the Federal Reserve's primary tool in

eliminating bank panics and ensuring short-term stability.

Successful inflation targeting promotes economic growth because,

everyone believes inflation will remain low.

According to the text, seasonal credit is used primarily to help

farmers

The European Central Bank ______ buys securities outright. Prior to 2012, it provided reserves to the banking system primarily through _________.

frequently; refinancing operations

The most common lenders in the federal funds rate market are

government-sponsred entities

In order for a bank to get a loan from the lender of last resort it must

have sufficient collateral to demonstrate its soundness.

The market federal funds rate is determined ____________; the target federal funds rate is determined _____________.

in the market; by the Federal Reserve

Low, stable inflation is the primary goal of

inflation targeting.

Determine which of the following statements is NOT a major difference between the European Central Bank's refinancing operations and the Federal Reserve's open market operations.

involve many fewer banks. are all shorter term than bonds involved in open market operations. are done only at one district bank.

A major difficulty with the use of quantitative easing is that

it is difficult to know the level of purchases required.

Which of the following is an unconventional policy tool employed by the Fed?

large purchases of risky assets

The ECB requires banks hold minimum reserves based on

liabilities

The European Central Bank's equivalent of the target federal funds rate is the

minimum bid rate.

The "zero lower bound" implies that the _____ can never go below zero.

nominal interest rate

Overall, reserve requirements are a _______ tool of monetary policy mostly because their impact on deposits is _______.

poor; difficult to estimate

The Fed makes three types of loans: they are

primary, secondary, seasonal.

When the target federal funds rate is at the effective lower bound,

quantitative easing may be a good policy choice.

Recently there has been a movement to eliminate

seasonal credit

Quantitative easing changes the ________ of the central bank's balance sheet; target asset purchases (TAP) changes the __________ of the central bank's balance sheet.

size; composition

Primary credit is extended to financially ________ banks at a rate ______ the interest rate on excess reserves.

sound; above

Prior to the financial crisis, the FOMC's primary policy instrument was the

target federal funds rate.

For most of its history the Federal Reserve set the discount rate below the ____________ and borrowing from the Fed was __________.

target federal funds rate; low because of other disincentives

When the demand for reserves increases,

the Federal Reserve will increase the supply of reserves.

The overnight cash rate is similar to

the market federal funds rate.

From 1979 to 1982 the Federal Reserve targeted __________; at other times, it targets __________.

the quantity of reserves; the federal funds rate

Overall, historical data indicates that

the rate predicted by the Taylor rule is generally close to the actual target federal funds rate.

Forward guidance is

the simplest unconventional approach a central bank can provide. guidance today about policy target rates in the future.

When banks offer to pay a rate above the primary discount rate,

they are signaling that they don't qualify for primary credit. the are asking for secondary credit.

Secondary credit is extended to relatively financially _________ banks at a rate ________ the primary discount rate.

unsound; above

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 _________.

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