Deck 13: Central Banking and Monetary Policy: Exploring Tools and Strategies

Question 1

Reserves of the banking system are an important target of central bank policy because, left alone, bankers could increase the quantity of reserves available to them virtually without limit.

Answer 1

False

Question 2

The total quantity of reserves available to the banking system can be changed directly by central bank open-market operations.

Answer 2

True

Question 3

Discount window loans to depository institutions are neutral in their effects on the quantity of reserves available to the banking system; these loans neither increase nor decrease the total supply of reserves.

Answer 3

False

Question 4

Some of the Federal Reserve's policy tools have an impact on interest rates - for example, open market operations and loans from the discount window; however, some Fed policy tools do not affect interest rates - for example, reserve and margin requirements.

Question 5

A policy directive is issued to the press at the conclusion of each FOMC meeting for the purpose of keeping the public informed about Federal Reserve policy decisions.

Question 6

A straight or outright open-market transaction by the Fed produces a permanent change in the level of reserves held by depository institutions.

Question 7

A Federal Reserve reverse REPO temporarily increases the volume of funds available to a government securities dealer.

Question 8

The Federal Reserve refuses to pay interest on monies held on reserve.

Question 9

Defensive open-market operations, according to your text, generally result in rising interest rates and reduced availability of credit.

Question 10

The principal purpose of reserve requirements is to safeguard the public's deposits.

Question 11

Increased required reserves mandated by the Federal Reserve will tend to increase interest rates in the money market.

Question 12

If the Federal Reserve Board elects to lower reserve requirements depository institutions will be willing to make more loans at lower interest rates.

Question 13

A change in reserve requirements affects the total legal reserves available to the banking system.

Question 14

The so-called substitution effect argues that the Federal Reserve's discount rate causes money market rates to move in the opposite direction from the discount rate change.

Question 15

If the Federal Reserve receives and acts on a request from a foreign central bank to acquire securities from private dealers, this will result in a rise in total reserves of the U.S. banking system.

Question 16

When the Fed replaces maturing Treasury securities with new issues, security prices will tend to rise and interest rates will tend to fall.

Question 17

The U.S. Treasury buys and sells U.S. Treasury securities for foreign central banks.

Question 18

If bad weather slows the clearing of checks, there will be an increase in excess reserves.

Question 19

If the Fed increases the margin requirement, investors can borrow a larger percentage of the cost of a stock purchase.

Question 20

If the Fed sells securities to a nonbank dealer, interest rates will fall.

Question 21

Different central banks around the world emphasize different policy tools.

Question 22

The Bank of England imposes reserve requirements on private banks operating in Great Britain.

Question 23

The Bank of Canada uses deposit reserve requirements as its principal monetary policy tool today.

Question 24

The Bundesbank sets an official loan rate on its loans to banks and the sale of government bills.

Question 25

The Bank of Japan does not use security trading as a monetary policy tool.

Question 26

Reserve requirements are typically changed daily in order to keep the financial system on its toes.

Question 27

Central banks change their policy tools often in order to stay up to date.

Question 28

The principal immediate target of policy for most central banks consists of the volume of reserves available to the banking system.

Question 29

Recently, deposit reserve requirements have been enacted in Canada, New Zealand and the United Kingdom.

Question 30

Inflation exists when the average prices of goods and services in the economy is on the rise.

Question 31

The European Central Bank pays interest on required reserve balances whereas the Federal Reserve does not.

Question 32

The European Central Bank will conduct its open-market operations centrally, just like the U.S. Federal Reserve.

Question 33

The Federal Reserve determines the direction of interest rate changes and the level of interest rates in the nation's financial system.

Question 34

An increase in the deposits of foreign central banks held with the Federal Reserve banks results in a decline in the domestic banking system's reserves.

Question 35

The Federal Reserve can keep total reserves at roughly the level it desires.

Question 36

The heart of the monetary policy process is to estimate correctly the needed level of money in the economy.

Question 37

A decrease in any component of Reserve bank credit results in an increase in the reserves of depository institutions.

Question 38

A decrease in reserve-absorbing factors results in an increase in total legal reserves of the banking system.

Question 39

Frictional unemployment occurs when the economy's growth loses momentum due to monetary policy changes, foreign competition or other external factors and employers begin to reduce their work force.

Question 40

If total legal reserves are $200 billion and nonborrowed reserves are $150 billion, borrowed reserves must equal $350 billion.

Question 41

A sale of securities by the Fed will increase total legal reserves.

Question 42

The purchase of securities by the Fed will decrease total legal reserves.

Question 43

A decline in nonborrowed reserves should cause an increase in interest rates.

Question 44

If more depository institutions are in debt to the Federal Reserve in greater amounts these institutions will tend to expand the supply of credit and make more loans to offset higher borrowing costs.

Question 45

If less monetary restraint is needed, the Fed's Trading Desk will sell securities until nonborrowed reserves decline by an amount the Federal Reserve has targeted.

Question 46

With fewer depository institutions in debt to the Federal Reserve banks, there will be a tendency for depository institutions to decrease their lending activities.

Question 47

Recently the Federal Reserve has been announcing its target for the Federal funds rate when that target is set rather than let the marketplace guess what that target is.

Question 48

The Federal Reserve can maintain the Federal funds rate exactly at its target level every hour of every day.

Question 49

The Federal Reserve can keep the Federal funds interest rate at or near its desired level so long as the central bank is willing to offset changes in the demand for reserves by adjustments in the supply of nonborrowed reserves through open market operations.

Question 50

Nearly all central banks appear to work through changes in the total reserves available to the banking system.

Question 51

Most major central banks have shifted their focus from money and reserve targeting to interest-rate targeting.

Question 52

Ideally, today's central bank monetary policy should be targeted at next year's anticipated economic problems (especially inflation).

Question 53

In the U.S., the Fed seems very hesitant about suddenly changing the direction of interest rates, even when it would be beneficial.

Question 54

Frequently, central banks will intervene in the money markets of other countries.

Question 55

Most central banks, including the Fed, have specific inflation-level and employment-level targets they strive to meet.

Question 56

No loan from the Fed's discount window may exceed 15 days under any circumstances.

Question 57

Borrowing from the Fed's discount window reduces total reserves available to the banking system until the loan is repaid.

Question 58

There are no options available to banks who want to borrow from the Fed, but do not want to do so through the discount window.

Question 59

According to your text, borrowing from the Fed's discount window is a privilege, not a right, of depository institutions.

Question 60

Regardless of the nature of the loan there is only one discount rate that the Federal Reserve quotes on all loans from its discount window.

Question 61

The discount rate is usually above the federal funds rate because the Fed wants to discourage discount window borrowing.

Question 62

The Fed exerts some control over the spread between the discount rate and the federal funds rate through the supply of reserves.

Question 63

If the federal funds rate drops below the discount rate, banks will stop borrowing from the Fed.

Question 64

When a bank repays a loan obtained from the discount window of the Federal Reserve bank in its district, total legal reserves of the banking system decline, other factors held equal.

Question 65

Most discount window loans require the bank that is borrowing to present collateral.

Question 66

Banks borrow at the discount window only to meet short-term liquidity needs.

Question 67

Because of the possibility of negative psychological effects, the discount rate is changed infrequently and often lags behind interest rates in the open market.

Question 68

Since the middle of 1999, the Fed's discount rate has followed the federal funds interest rate, such that the discount rate is now a passive tool in the conduct of U.S. monetary policy.

Question 69

Recently, the Federal Reserve adopted a new policy of "openness" when it comes to announcing its target for the Federal funds interest rate, letting the public know right away when it is moving the funds-rate target level.

Question 70

Recently, the discount rate has reached what is known as the zero lower bound.

Question 71

The discount rates charged by the Federal Reserve banks on loans to depository institutions is lowest for seasonal credit.

Question 72

Farm banks experience in their greatest need for liquidity around planting and harvesting times.

Question 73

Federal Reserve is authorized to adjust reserve requirements downward, even going to zero reserves required.

Question 74

Many countries have taken actions that allow the elimination of any reserve requirements.

Question 75

In 1940 the United States Congress started to undo many of the Depression-era regulations of the banking system, which were imposed because many blamed the banks for the Depression.

Question 76

The gradual process used by the Federal Reserve in adjusting the funds rate in 25 and 50 basis point increments has become known as policy inertia.

Question 77

The GDP gap represents an important measure of economic performance.

Question 78

In the 1990s and early 21st century Japan was struggling with deflation and used a policy known as quantitative easing, which is establishing a zero interest rate and also injecting reserves into the banking system and a rapid pace.

Question 79

Hyperinflation is when the annual inflation rate exceeds 200%.

Question 80

The natural rate of unemployment arises from the temporary unemployment jobseekers, who are either new to the workforce or who are in transition from one job to another.