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Economics of Money: Chapter 15

front 1

The interest rate charged on overnight loans of reserves between banks is the

  1. A) prime rate.
  2. B) discount rate.
  3. C) federal funds rate.
  4. D) Treasury bill rate.

back 1

Answer: C

front 2

The primary indicator of the Fed's stance on monetary policy is

  1. A) the discount rate.
  2. B) the federal funds rate.
  3. C) the growth rate of the monetary base.
  4. D) the growth rate of M2.

back 2

Answer: B

front 3

The quantity of reserves demanded equals

  1. A) required reserves plus borrowed reserves.
  2. B) excess reserves plus borrowed reserves.
  3. C) required reserves plus excess reserves.
  4. D) total reserves minus excess reserves.

back 3

Answer: C

front 4

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

  1. A) above, rises
  2. B) above, falls
  3. C) below, rises
  4. D) below, falls

back 4

Answer: B

front 5

The opportunity cost of holding excess reserves is the federal funds rate

  1. A) minus the discount rate.
  2. B) plus the discount rate.
  3. C) plus the interest rate paid on excess reserves.
  4. D) minus the interest rate paid on excess reserves.

back 5

Answer: D

front 6

In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is

  1. A) vertical.
  2. B) horizontal.
  3. C) positively sloped.
  4. D) negatively sloped.

back 6

Answer: D

front 7

When the federal funds rate equals the interest rate paid on excess reserves

  1. A) the supply curve of reserves is vertical.
  2. B) the supply curve of reserves is horizontal.
  3. C) the demand curve for reserves is vertical.
  4. D) the demand curve for reserves is horizontal.

back 7

Answer: D

front 8

The quantity of reserves supplied equals

  1. A) nonborrowed reserves minus borrowed reserves.
  2. B) nonborrowed reserves plus borrowed reserves.
  3. C) required reserves plus borrowed reserves.
  4. D) total reserves minus required reserves.

back 8

Answer: B

front 9

In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is

  1. A) vertical.
  2. B) horizontal.
  3. C) positively sloped.
  4. D) negatively sloped.

back 9

Answer: A

front 10

When the federal funds rate equals the discount rate

  1. A) the supply curve of reserves is vertical.
  2. B) the supply curve of reserves is horizontal.
  3. C) the demand curve for reserves is vertical.
  4. D) the demand curve for reserves is horizontal.

back 10

Answer: B

front 11

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.

  1. A) sale decreases
  2. B) sale increases
  3. C) purchase increases
  4. D) purchase decreases

back 11

Answer: A

front 12

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.

  1. A) increases; supply
  2. B) increases; demand
  3. C) decreases; supply
  4. D) decreases; demand

back 12

Answer: A

front 13

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

  1. A) decreases; fall
  2. B) increases; fall
  3. C) increases; rise
  4. D) decreases; rise

back 13

Answer: B

front 14

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant.

  1. A) decreases; decrease
  2. B) increases; decrease
  3. C) increases; increase
  4. D) decreases; increase

back 14

Answer: D

front 15

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

  1. A) increases; supply
  2. B) increases; demand
  3. C) decreases; supply
  4. D) decreases; demand

back 15

Answer: C

front 16

In the market for reserves, a lower discount rate

  1. A) decreases the supply of reserves.
  2. B) increases the supply of reserves.
  3. C) lengthens the vertical section of the supply curve of reserves.
  4. D) shortens the vertical section of the supply curve of reserves.

back 16

Answer: D

front 17

In the market for reserves, a lower interest rate paid on excess reserves

  1. A) decreases the supply of reserves.
  2. B) increases the supply of reserves.
  3. C) decreases the effective floor for the federal funds rate.
  4. D) increases the effective floor for the federal funds rate.

back 17

Answer: C

front 18

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 18

Answer: C

front 19

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 19

Answer: C

front 20

Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 20

Answer: A

front 21

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 21

Answer: B

front 22

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 22

Answer: C

front 23

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1%

  1. A) lowers the federal funds rate.
  2. B) raises the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 23

Answer: C

front 24

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect of the federal funds rate.

back 24

Answer: B

front 25

Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect of the federal funds rate.

back 25

Answer: A

front 26

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 26

Answer: A

front 27

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect of the federal funds rate.

back 27

Answer: B

front 28

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 28

Answer: C

front 29

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves

  1. A) increases the federal funds rate.
  2. B) lowers the federal funds rate.
  3. C) has no effect on the federal funds rate.
  4. D) has an indeterminate effect on the federal funds rate.

back 29

Answer: C

front 30

Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate

  1. A) when the funds rate is below the discount rate.
  2. B) when the funds rate equals the discount rate.
  3. C) when the demand for federal funds intersects the vertical section of the reserve supply curve.
  4. D) when the demand for federal funds equals zero.

back 30

Answer: B

front 31

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate

  1. A) when the funds rate is below the interest rate paid on excess reserves.
  2. B) when the funds rate equals the interest rate paid on excess reserves.
  3. C) when the funds rate is below the discount rate.
  4. D) when the funds rate equals the discount rate.

back 31

Answer: B

front 32

After 2003, The Federal Reserve usually keeps the discount rate

  1. A) above the target federal funds rate.
  2. B) equal to the target federal funds rate.
  3. C) below the target federal funds rate.
  4. D) equal to zero.

back 32

Answer: A

front 33

Everything else held constant, the vertical section of the supply curve of reserves is shortened when the

  1. A) discount rate increases.
  2. B) discount rate decreases.
  3. C) federal funds rate rises.
  4. D) federal funds rate falls.

back 33

Answer: B

front 34

Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the

  1. A) discount rate increases.
  2. B) discount rate decreases.
  3. C) federal funds rate rises.
  4. D) federal funds rate falls.

back 34

Answer: A

front 35

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.

  1. A) decreases; lowering
  2. B) increases; lowering
  3. C) increases; raising
  4. D) decreases; raising

back 35

Answer: C

front 36

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant.

  1. A) rise; decreases
  2. B) rise; increases
  3. C) decline; increases
  4. D) decline; decreases

back 36

Answer: B

front 37

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant.

  1. A) rise; lowering
  2. B) decline; raising
  3. C) decline; lowering
  4. D) rise; raising

back 37

Answer: D

front 38

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.

  1. A) decreases; fall
  2. B) increases; fall
  3. C) increases; rise
  4. D) decreases; rise

back 38

Answer: C

front 39

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise, everything else held constant.

  1. A) decreases; demand
  2. B) increases; demand
  3. C) increases; supply
  4. D) decreases; supply

back 39

Answer: B

front 40

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant.

  1. A) rise; decreases
  2. B) rise; increases
  3. C) decline; increases
  4. D) decline; decreases

back 40

Answer: D

front 41

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant.

  1. A) rise; lowering
  2. B) decline; raising
  3. C) decline; lowering
  4. D) rise; raising

back 41

Answer: C

front 42

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant.

  1. A) decreases; demand
  2. B) increases; demand
  3. C) increases; supply
  4. D) decreases; supply

back 42

Answer: A

front 43

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant.

  1. A) decreases; lowering
  2. B) increases; lowering
  3. C) increases; raising
  4. D) decreases; raising

back 43

Answer: A

front 44

Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

  1. A) sale; increase
  2. B) purchase; increase
  3. C) sale; decrease
  4. D) purchase; decrease

back 44

Answer: B

front 45

Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

  1. A) sale; increase
  2. B) purchase; increase
  3. C) sale; decrease
  4. D) purchase; decrease

back 45

Answer: C

front 46

Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier?

back 46

Answer: The three tools are open market operations, the purchase and sale of government securities; discount policy, controlling the price and quantity of discount loans to banks; and reserve requirements, setting the percentage of deposits that banks must hold in reserve. Open market operations and the discount rate affect the monetary base, and reserve requirements affect the money multiplier.

front 47

State whether the following statement is true or false AND explain why: "A decrease in the discount rate will always cause a decrease in the federal reserve funds rate."

back 47

Answer: False. Since the discount rate is set above the federal funds rate, a decrease in the discount rate will only cause a decrease in the federal funds rate if the discount rate is decreased below the original federal funds rate level. If the decrease in the discount rate is such that the new rate is still above the federal funds rate, then the federal funds rate does not change, everything else held constant.

front 48

State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."

back 48

Answer: False. If the interest rate paid on excess reserves is set below the federal funds rate, an increase in the interest rate paid on excess reserves will only cause an increase in the federal funds rate if the interest rate paid on excess reserves is increased above the original federal funds rate level. If the increase in the interest rate paid on excess reserves is such that the new rate is still below the federal funds rate, then the federal funds rate does not change, everything else held constant.

front 49

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.

  1. A) Open market operations; monetary base
  2. B) Open market operations; money multiplier
  3. C) Changes in reserve requirements; monetary base
  4. D) Changes in reserve requirements; money multiplier

back 49

Answer: A

front 50

Open market purchases raise the ________ thereby raising the ________.

  1. A) money multiplier; money supply
  2. B) money multiplier; monetary base
  3. C) monetary base; money supply
  4. D) monetary base; money multiplier

back 50

Answer: C

front 51

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

  1. A) raise; lowering
  2. B) raise; raising
  3. C) lower; lowering
  4. D) lower; raising

back 51

Answer: B

front 52

Open market sales shrink ________ thereby lowering ________.

  1. A) the money multiplier; the money supply
  2. B) the money multiplier; reserves and the monetary base
  3. C) reserves and the monetary base; the money supply
  4. D) the money base; the money multiplier

back 52

Answer: C

front 53

Open market sales ________ reserves and the monetary base thereby ________ the money supply.

  1. A) raise; lowering
  2. B) raise; raising
  3. C) lower; lowering
  4. D) lower; raising

back 53

Answer: C

front 54

The two types of open market operations are

  1. A) offensive and defensive.
  2. B) dynamic and reactionary.
  3. C) active and passive.
  4. D) dynamic and defensive.

Answer: D

back 54

Answer: D

front 55

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.

  1. A) defensive; dynamic
  2. B) defensive; static
  3. C) dynamic; defensive
  4. D) dynamic; static

back 55

Answer: C

front 56

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called

  1. A) defensive open market operations.
  2. B) dynamic open market operations.
  3. C) offensive open market operations.
  4. D) reactionary open market operations.

back 56

Answer: A

front 57

When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be

  1. A) defensive.
  2. B) offensive.
  3. C) dynamic.
  4. D) reactionary.

back 57

Answer: A

front 58

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

  1. A) Chicago.
  2. B) Boston.
  3. C) New York.
  4. D) San Francisco.

back 58

Answer: C

front 59

The actual execution of open market operations is done at

  1. A) the Board of Governors in Washington, D.C.
  2. B) the Federal Reserve Bank of New York.
  3. C) the Federal Reserve Bank of Philadelphia.
  4. D) the Federal Reserve Bank of Boston.

back 59

Answer: B

front 60

If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.

  1. A) defensive; sale
  2. B) defensive; purchase
  3. C) dynamic; sale
  4. D) dynamic; purchase

back 60

Answer: B

front 61

When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.

  1. A) decrease; sales
  2. B) decrease; purchases
  3. C) increase; sales
  4. D) increase; purchases

back 61

Answer: C

front 62

When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.

  1. A) decrease; sales
  2. B) decrease; purchases
  3. C) increase; sales
  4. D) increase; purchases

back 62

Answer: B

front 63

When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.

  1. A) decrease; defensive; sales
  2. B) decrease; dynamic; purchases
  3. C) increase; defensive; sales
  4. D) increase; dynamic; purchases

back 63

Answer: C

front 64

When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.

  1. A) decrease; defensive; sales
  2. B) decrease; dynamic; sales
  3. C) decrease; defensive; purchases
  4. D) increase; dynamic; purchases

back 64

Answer: C

front 65

If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) defensive; inject
  2. B) defensive; drain
  3. C) dynamic; inject
  4. D) dynamic; drain

back 65

Answer: B

front 66

If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) defensive; inject
  2. B) defensive; drain
  3. C) dynamic; inject
  4. D) dynamic; drain

back 66

Answer: A

front 67

If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) defensive; inject
  2. B) defensive; drain
  3. C) dynamic; inject
  4. D) dynamic; drain

back 67

Answer: A

front 68

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) increase; defensive; inject
  2. B) decrease; defensive; inject
  3. C) increase; dynamic; inject
  4. D) decrease; dynamic; drain

back 68

Answer: A

front 69

If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) defensive; inject
  2. B) defensive; drain
  3. C) dynamic; inject
  4. D) dynamic; drain

back 69

Answer: B

front 70

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

  1. A) rise; defensive; drain
  2. B) fall; defensive; drain
  3. C) rise; dynamic; inject
  4. D) fall; dynamic; drain

back 70

Answer: B

front 71

If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.

  1. A) purchases; increase
  2. B) purchases; decrease
  3. C) sales; increase
  4. D) sales; decrease

back 71

Answer: B

front 72

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.

  1. A) purchases; increase
  2. B) purchases; decrease
  3. C) sales; increase
  4. D) sales; decrease

back 72

Answer: C

front 73

If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.

  1. A) fall; fall
  2. B) fall; rise
  3. C) rise; fall
  4. D) rise; rise

back 73

Answer: B

front 74

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.

  1. A) increase; permanently
  2. B) increase; temporarily
  3. C) decrease; temporarily
  4. D) decrease; permanently

back 74

Answer: B

front 75

If the Fed wants to temporarily inject reserves into the banking system, it will engage in

  1. A) a repurchase agreement.
  2. B) a matched sale-purchase transaction.
  3. C) a reverse repurchase agreement.
  4. D) an open market sale.

back 75

Answer: A

front 76

The Fed can offset the effects of an increase in float by engaging in

  1. A) a repurchase agreement.
  2. B) a matched sale-purchase transaction.
  3. C) an interest rate swap.
  4. D) an open market purchase.

back 76

Answer: B

front 77

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

  1. A) increase; permanently
  2. B) increase; temporarily
  3. C) decrease; temporarily
  4. D) decrease; permanently

back 77

Answer: C

front 78

Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

  1. A) defensive; sale
  2. B) defensive; purchase
  3. C) dynamic; sale
  4. D) dynamic; purchase

back 78

Answer: B

front 79

Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

  1. A) defensive; sale
  2. B) defensive; purchase
  3. C) dynamic; sale
  4. D) dynamic; purchase

back 79

Answer: D

front 80

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

  1. A) defensive; sale
  2. B) defensive; purchase
  3. C) dynamic; sale
  4. D) dynamic; purchase

back 80

Answer: A

front 81

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

  1. A) defensive; sale
  2. B) defensive; purchase
  3. C) dynamic; sale
  4. D) dynamic; purchase

back 81

Answer: C

front 82

Discount policy affects the money supply by affecting the volume of ________ and the ________.

  1. A) excess reserves; monetary base
  2. B) borrowed reserves; monetary base
  3. C) excess reserves; money multiplier
  4. D) borrowed reserves; money multiplier

back 82

Answer: B

front 83

The discount rate is

  1. A) the interest rate the Fed charges on loans to banks.
  2. B) the price the Fed pays for government securities.
  3. C) the interest rate that banks charge their most preferred customers.
  4. D) the price banks pay the Fed for government securities.

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Answer: A

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The most common type of discount lending that the Fed extends to banks is called

  1. A) seasonal credit.
  2. B) secondary credit.
  3. C) primary credit.
  4. D) installment credit.

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Answer: C

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The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

  1. A) secondary
  2. B) primary
  3. C) temporary
  4. D) seasonal

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Answer: B

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The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.

  1. A) seasonal credit; secondary credit; primary credit
  2. B) secondary credit; seasonal credit; primary credit
  3. C) primary credit; seasonal credit; secondary credit
  4. D) seasonal credit; primary credit; secondary credit

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Answer: C

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The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

  1. A) below; banks borrow reserves from each other
  2. B) below; banks borrow reserves from the Fed
  3. C) above; banks borrow reserves from each other
  4. D) above; banks borrow reserves from the Fed

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Answer: C

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The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

  1. A) below; banks can monitor each other for credit risk
  2. B) below; the Fed can monitor banks for credit risk
  3. C) above; banks can monitor each other for credit risk
  4. D) above; the Fed can monitor banks for credit risk

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Answer: C

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The Fed prefers that ________ so that ________.

  1. A) banks borrow reserves from each other; banks can monitor each other for credit risk
  2. B) banks borrow reserves from each other; the Fed can monitor banks for credit risk
  3. C) banks borrow reserves from the Fed; banks can monitor each other for credit risk
  4. D) banks borrow reserves from the Fed; the Fed can monitor banks for credit risk

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Answer: A

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The discount rate refers to the interest rate on

  1. A) primary credit.
  2. B) secondary credit.
  3. C) seasonal credit.
  4. D) federal funds.

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Answer: A

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The interest rate on secondary credit is set ________ basis points ________ the primary credit rate.

  1. A) 100; above
  2. B) 100; below
  3. C) 50; above
  4. D) 50; below

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Answer: C

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The interest rate on seasonal credit equals

  1. A) the federal funds rate.
  2. B) the primary credit rate.
  3. C) the secondary credit rate.
  4. D) an average of the federal funds rate and rates on certificates of deposits.

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Answer: D

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The Fed is considering eliminating

  1. A) primary credit lending.
  2. B) secondary credit lending.
  3. C) seasonal credit lending.
  4. D) its lender of last resort function.

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Answer: C

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At its inception, the Federal Reserve was intended to be

  1. A) the Treasury's banker.
  2. B) the issuer of government debt.
  3. C) a lender-of-last-resort.
  4. D) a regulator of bank holding companies.

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Answer: C

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Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman

  1. A) Paul Volcker.
  2. B) Alan Blinder.
  3. C) Arthur Burns.
  4. D) Alan Greenspan.

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Answer: D

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A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that

  1. A) it was lowering the discount rate.
  2. B) it would provide discount loans to any bank that would make loans to the security industry.
  3. C) it stood ready to purchase common stocks to prevent a further slide in stock prices.
  4. D) it was raising the discount rate.

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Answer: B

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The Fed's lender-of-last-resort function

  1. A) has proven to be ineffective.
  2. B) cannot prevent runs by large depositors.
  3. C) is no longer necessary due to FDIC insurance.
  4. D) creates a moral hazard problem.

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Answer: D

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The most important advantage of discount policy is that the Fed can use it to

  1. A) precisely control the monetary base.
  2. B) perform its role as lender of last resort.
  3. C) control the money supply.
  4. D) punish banks that have deficient reserves.

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Answer: B

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An increase in ________ reduces the money supply since it causes the ________ to fall.

  1. A) reserve requirements; monetary base
  2. B) reserve requirements; money multiplier
  3. C) margin requirements; monetary base
  4. D) margin requirements; money multiplier

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Answer: B

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A decrease in ________ increases the money supply since it causes the ________ to rise.

  1. A) reserve requirements; monetary base
  2. B) reserve requirements; money multiplier
  3. C) margin requirements; monetary base
  4. D) margin requirements; money multiplier

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Answer: B

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The Federal Reserve has had the authority to vary reserve requirements since the

  1. A) 1920s.
  2. B) 1930s.
  3. C) 1940s.
  4. D) 1950s.

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Answer: B

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Since 1980, ________ are subject to reserve requirements.

  1. A) only commercial banks
  2. B) only the member institutions of the Federal Reserve
  3. C) only nationally chartered depository institutions
  4. D) all depository institutions

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Answer: D

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Funds held in ________ are subject to reserve requirements.

  1. A) all checkable deposits
  2. B) all checkable and time deposits
  3. C) all checkable, time, and money market fund deposits
  4. D) all time deposits

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Answer: A

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The policy tool of changing reserve requirements is

  1. A) the most widely used.
  2. B) the preferred tool from the bank's perspective.
  3. C) no longer used.
  4. D) still used, even with its disadvantages.

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Answer: C

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When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would

  1. A) increase the interest rate paid on excess reserves.
  2. B) increase discount rate.
  3. C) increase the required reserve ratio.
  4. D) conduct massive open market purchase.

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Answer: A

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Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted?

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Answer: Dynamic OMOs are used to permanently change the monetary base and money supply. Defensive operations are used to offset temporary changes in the monetary base and/or money supply. Defensive operations are used to offset float, shifts in Treasury balances into or out of the Fed, and temporary changes in currency. Defensive purchases are typically conducted by using repurchase agreements, while reverse repos or matched sale-purchase transactions are used to conduct defensive open market sales.

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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

  1. A) a huge increase in the monetary base.
  2. B) a huge expansion of the money supply.
  3. C) an economic expansion.
  4. D) a high inflation.

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Answer: A

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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

  1. A) most of it just flowed into holdings of excess reserve.
  2. B) the Fed also increased the required reserve ratio.
  3. C) the Fed also conducted open market sales.
  4. D) the discount loan decreased.

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Answer: A

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Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?

  1. A) open market operation
  2. B) discount policy
  3. C) required reserve ratio
  4. D) the Fed's liquidity provision

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Answer: D

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The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

  1. A) lower the long term interest rates.
  2. B) lower the short term interest rates.
  3. C) increase the long term interest rates.
  4. D) increase the short term interest rates.

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Answer: A

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The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points.

  1. A) 50; below; 100
  2. B) 100; above; 25
  3. C) 100; below; 50
  4. D) 50; above; 25

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Answer: B

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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

  1. A) Term Securities Lending Facility.
  2. B) Term Auction Facility.
  3. C) Primary Dealer Credit Facility.
  4. D) Commercial Paper Funding Facility.

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Answer: B

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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

  1. A) mortgage-backed securities and long-term Treasuries.
  2. B) mortgage-backed securities and Treasury bills.
  3. C) commercial papers and short-term Treasuries.
  4. D) Treasury bills and Treasury notes.

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Answer: A

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To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase

  1. A) mortgage-backed securities.
  2. B) commercial papers.
  3. C) long-term Treasuries.
  4. D) Treasury bills and Treasury notes.

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Answer: A

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To lower long-term interest rates, in 2010 the Fed started its new open market operation program to purchase

  1. A) mortgage-backed securities.
  2. B) commercial papers.
  3. C) long-term Treasuries.
  4. D) Treasury bills and Treasury notes.

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Answer: C

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Which of the following statements is an example of the Fed's conditional commitment policy?

  1. A) "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."
  2. B) "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
  3. C) "Policy accommodation can be removed at a pace that is likely to be measured."
  4. D) "The exceptionally low range for the federal funds rate will be appropriate at least as long as the

unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

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Answer: D

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Monetary Policy Tools of the European Central Bank

1) The European System of Central Banks signals the stance of its monetary policy by setting a target for the

  1. A) federal funds rate.
  2. B) overnight cash rate.
  3. C) lombard rate.
  4. D) reserve rate.

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Answer: B

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When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using

  1. A) dynamic open market operations.
  2. B) defensive open market operations.
  3. C) discount policy.
  4. D) reserve requirements.

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Answer: B

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When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using

  1. A) dynamic open market operations.
  2. B) defensive open market operations.
  3. C) discount policy.
  4. D) reserve requirements.

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Answer: A

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The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the

  1. A) federal funds rate.
  2. B) marginal lending rate.
  3. C) deposit facility rate.
  4. D) lombard rate.

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Answer: B

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The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit.

  1. A) does; does
  2. B) does; does not
  3. C) does not; does
  4. D) does not; does not

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Answer: A