Chap15 - Chapter 15 Test bank PDF

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holdings? C) Paying interest will help the Federal Reserve have more control of the amount of discount loans.

Chapter 15 Tools for Monetary Policy 15.1 The Market for Reserve and the Federal Funds Rate

11) The quantity of reserves supplied equals B) nonborrowed reserves plus borrowed reserves.

1) The Fed uses three policy tools to manipulate the money supply: ________, which affect reserves and the monetary base; changes in ________, which affect the monetary base; and changes in ________, which affect the money multiplier. B) open market operations; borrowed reserves; reserve requirements

12) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) vertical. 13) When the federal funds rate equals the discount rate B) the supply curve of reserves is horizontal.

2) The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the ________; changes in borrowed reserves, which affect the ________; and changes in reserve requirements, which affect the ________. C) monetary base; monetary base; money multiplier

14) 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. A) sale decreases

3) The interest rate charged on overnight loans of reserves between banks is the C) federal funds rate.

15) 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. A) increases; supply

4) The primary indicator of the Fed's stance on monetary policy is B) the federal funds rate. 5) The quantity of reserves demanded equals C) required reserves plus excess reserves.

16) 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. B) defensive; purchase

6) 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 ________. B) above, falls 7) The opportunity cost of holding excess reserves is the federal funds rate ________. D) minus the interest rate paid on excess reserves

17) 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. B) increases; fall

8) 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 ________. D) negatively sloped

18) 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. D) dynamic; purchase

9) When the federal funds rate equals the interest rate paid on excess reserves ________. D) the demand curve for reserves is horizontal 10) Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve 1

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

19) 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. D) decreases; increase

28) 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% B) raises the federal funds rate.

20) 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. A) defensive; sale

29) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6% C) has no effect on the federal funds rate. 30) 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% C) has no effect on the federal funds rate.

21) 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. C) dynamic; sale

31) Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate B) lowers the federal funds rate.

22) 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. C) decreases; supply

32) 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 A) increases the federal funds rate.

23) In the market for reserves, a lower discount rate D) shortens the vertical section of the supply curve of reserves.

33) 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 A) increases the federal funds rate.

24) In the market for reserves, a lower interest rate paid on excess reserves C) decreases the effective floor for the federal funds rate.

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

25) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% C) has no effect on the federal funds rate.

35) 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 C) has no effect on the federal funds rate.

26) 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% C) has no effect on the federal funds rate.

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36) 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 C) has no effect on the federal funds rate.

excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant. C) increases; rise 46) 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. B) increases; demand

37) Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate B) when the funds rate equals the discount rate. 38) Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate B) when the funds rate equals the interest rate paid on excess reserves.

47) 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. D) decline; decreases

39) The Federal Reserve usually keeps the discount rate A) above the target federal funds rate. 40) Everything else held constant, the vertical section of the supply curve of reserves is shortened when the B) discount rate decreases.

48) 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. C) decline; lowering

41) Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the A) discount rate increases. 42) 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. C) increases; raising

49) 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. A) decreases; demand

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 ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant. B) rise; increases

50) 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. A) decreases; lowering

44) 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. D) rise; raising

51) 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 ________. B) purchase; increase

45) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on 3

15.2 Open Market Operations

52) 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 ________. C) sale; decrease

1) ________ 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. A) Open market operations; monetary base 2) Open market purchases raise the ________ thereby raising the ________. C) monetary base; money supply

53) 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? 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. Ques Status: Previous Edition

3) Open market purchases ________ reserves and the monetary base thereby ________ the money supply. B) raise; raising 4) Open market sales shrink ________ thereby lowering ________. C) reserves and the monetary base; the money supply 5) Open market sales ________ reserves and the monetary base thereby ________ the money supply. C) lower; lowering

54) 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." 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. Ques Status: Previous Edition

6) The two types of open market operations are D) dynamic and defensive. 7) 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. C) dynamic; defensive 8) Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called A) defensive open market operations.

55) 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." 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.

9) 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 A) defensive. 10) 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 C) New York. 4

York Fed bank will likely conduct ________ open market operations to ________ reserves. A) increase; defensive; inject

11) The actual execution of open market operations is done at B) the Federal Reserve Bank of New York.

21) 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. B) defensive; drain

12) 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. B) defensive; purchase

22) 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. B) fall; defensive; drain

13) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. C) increase; sales

23) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves. B) purchases; decrease

14) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. B) decrease; purchases

24) If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves. C) sales; increase

15) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. C) increase; defensive; sales

25) 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 ________. B) fall; rise

16) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. C) decrease; defensive; purchases 17) 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. B) defensive; drain

26) The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. B) increase; temporarily

18) 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. A) defensive; inject

27) If the Fed wants to temporarily inject reserves into the banking system, it will engage in A) a repurchase agreement. 28) The Fed can offset the effects of an increase in float by engaging in B) a matched sale-purchase transaction.

19) 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. A) defensive; inject

29) The Federal Reserve will engage in a matched salepurchase transaction when it wants to ________ reserves ________ in the banking system. C) decrease; temporarily

20) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New 5

30) 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? 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 revers...