Deck 18: Monetary Policy: Stabilizing the Domestic Economy

Question 1

The tool the Fed uses to keep the federal funds rate close to the target is:

A)The required reserve rate
B)Discount lending
C)Open market operations
D)They can set the rate by law

Answer 1

C

Question 2

The market for reserves derives from the fact that:

A)Reserves pay a relatively high return
B)Desired reserves don't always equal actual reserves
C)The Fed refuses to lend to banks
D)Banks do not want excess reserves

Answer 2

B

Question 3

During the financial crisis of 2007 - 2009 it became difficult for the Fed to hit their target federal funds rate because:

A)of the number of bank failures
B)of the Federal government stimulus package
C)of the loss of liquidity in the interbank lending market
D)of the instability in the stock market

Answer 3

C

Question 4

Most central banks, including the Fed and the ECB, provide discount loans at a rate:

A)Equal to the target interest rate
B)Below the target interest rate
C)Above the target interest rate
D)That is equal to the overnight interbank lending rate

Question 5

The focus for most central banks today is:

A)The quantity of M1
B)Interest rates
C)The quantity of M2
D)Controlling the size of the money multiplier

Question 6

The Fed could make the market federal funds rate equal the target rate by:

A)Mandating that all loans be transacted at the target rate
B)Setting the discount rate below the federal funds rate
C)Entering the federal funds market as a borrower or a lender
D)Paying higher interest on reserves

Question 7

If the market federal funds rate were above the target rate, the response from the Fed would likely be to:

A)Purchase U.S.Treasury securities
B)Sell U.S.Treasury securities
C)Lower the required reserve rate
D)Lower the discount rate

Question 8

If the market federal funds rate were below the target rate, the response from the Fed would likely be to:

A)Raise the required reserve rate
B)Purchase U.S.Treasury securities
C)Sell U.S.Treasury securities
D)Raise the discount rate

Question 9

Which of the following statements is most correct?

A)The FOMC sets the federal funds rate
B)The discount rate is the primary policy tool of the FOMC
C)The FOMC sets the target federal funds rate
D)The difference between the target and actual federal funds rate is the dealer's spread

Question 10

Which of the following would be categorized as an unconventional monetary policy tool?

A)Discount window lending
B)Lending to nonbanks
C)Federal funds rate target
D)Deposit rate

Question 11

If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except:

A)Making unsecured loans
B)In essence paying interest on excess reserves
C)Eliminating a lot of valuable information coming from the market
D)Following the directives issued by Congress

Question 12

The ways the Fed can inject reserves into the banking system include:

A)An increase in the size of the Fed's balance sheet through purchasing securities
B)Increasing the discount rate
C)Making loans to non-bank corporations
D)An increase in the size of the Fed's balance sheet through selling securities

Question 13

The tools of monetary policy include:

A)The target federal funds rate
B)The excess reserve rate
C)The currency-to-deposit ratio
D)Both the excess reserve rate and the target federal funds rate

Question 14

Federal funds loans are:

A)Secured loans between banks and the Fed
B)Unsecured loans
C)Collateralized loans between banks
D)Guaranteed by the FDIC

Question 15

Which of the following statements is most correct?

A)The Fed can control the amount of reserves, but cannot control the monetary base
B)The Fed can control the make up of the monetary base, but cannot affect the market interest rate
C)The Fed can control the size of the monetary base but not the price of its components
D)The Fed can control either the size of the monetary base or the price of its components

Question 16

The fact that there is a market for federal funds enables banks to:

A)Make fewer loans than they would otherwise
B)Borrow more from the Fed
C)Hold a lower level of excess reserves than they would otherwise hold
D)Hold less in required reserves

Question 17

The tools of monetary policy available to the Fed include each of the following, except the:

A)Currency-to-deposit ratio
B)Discount rate
C)Target federal funds rate
D)Reserve requirement

Question 18

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would:

A)Increase the supply of reserves
B)Decrease the supply of reserves
C)Do nothing; the Fed will let the market work
D)Alter the demand for reserves

Question 19

The primary policy instrument of the Federal Open Market Committee (FOMC) is:

A)The required reserve rate
B)The discount rate
C)The target federal funds rate
D)The exchange rate

Question 20

One outcome that would result if the Fed paid interest on reserves would be:

A)Banks would hold less excess reserves
B)The federal government's deficit would be larger (or surplus smaller)
C)Banks would no longer hold excess reserves
D)The target federal funds rate would have to be fixed at a constant rate

Question 21

In 2002, the Federal Reserve changed its discount lending procedures.Which of the following statements is correct?

A)For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate
B)The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective
C)Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves
D)The Fed now controls the quantity of credit extended as well as its price

Question 22

When the Fed forecasts a sustained increase in the demand for the monetary base, the staff of the Fed is likely to meet this demand through:

A)Discount loans
B)Repurchase agreements
C)An outright purchase of U.S.Treasury Securities
D)An outright sale of U.S.Treasury Securities

Question 23

Which of the following statements is most correct?

A)The market federal funds rate equals the target federal funds rate
B)Over the last 10 years the deviations between the target and market federal funds rate have decreased
C)Over the last 10 years the deviations between the target and market federal funds rate have increased
D)There doesn't appear to be any relationship at all between the target and market federal fund rates

Question 24

The fact that, for most of its history, the Fed was reluctant to make discount loans actually:

A)At times was a destabilizing force for financial markets
B)Proved to be a very stabilizing force for financial markets
C)Pushed the discount rate above the target federal funds rate
D)Resulted in banks in very strong financial shape as being the only ones borrowing from the Fed

Question 25

Variables that can influence the Fed's forecast for reserves each day include forecasting the:

A)Day's demand for mortgage loans
B)Level of float in the banking system, but not the balance in the U.S.Treasury's account
C)Balance of the U.S.Treasury's account, but not the float
D)Level of float in the banking system and the balance of the U.S.Treasury's account

Question 26

Discount lending by the Fed:

A)Is the key component of monetary policy
B)Is more important today than in years past
C)Is not as important today as it was in the past
D)Amounts to five billion dollars in volume during an average week

Question 27

The Fed's temporary operations involve the use of:

A)Discount loans
B)Repurchase agreements
C)An outright purchase of U.S.Treasury Securities
D)An outright sale of U.S.Treasury Securities

Question 28

For most of the Fed's history, the Fed:

A)Lent reserves at an interest rate below the target federal funds rate
B)Found banks would borrow from the Fed far more often than they would borrow in the federal funds market
C)Was very lenient in making discount loans
D)Tied the discount rate to the rate on Treasury securities

Question 29

The Fed would use a reverse repo when they:

A)Want to temporarily increase the monetary base
B)Forecast a permanent decrease in the demand for monetary base
C)Forecast a permanent increase in the demand for monetary base
D)Want to temporarily decrease the monetary base

Question 30

One reason the target federal funds rate may not equal the actual federal funds rate is because:

A)There is no way that the Fed could keep the actual rate at the target rate
B)The target rate changes with the demand for reserves
C)Attaining the target rate involves forecasting reserve demand and forecasts are subject to error
D)None of the answers is correct; the target and the actual federal funds rates are always equal

Question 31

An increase in the federal funds rate should:

A)Cause mortgage rates to increase by less than the increase in the federal funds rate
B)Have an inverse impact on mortgage rates
C)Not impact mortgage rates since the federal funds rate is a very short-term rate
D)Cause the mortgage rates to increase by more than the increase in the federal funds rate

Question 32

The Fed will make a discount loan to a bank during a crisis:

A)No matter what condition the bank is in
B)Only if the bank is sound financially and can provide collateral for the loan
C)But if the bank doesn't have collateral the interest rate is higher
D)Only if the bank would fail without the loan

Question 33

On a particular day, the actual federal funds rate can deviate from the target federal funds rate.This might be due to all of the following except:

A)Unexpected changes in the demand for reserves
B)The forecasts of the Fed's staff were in error
C)There may have been more float in the banking system than anticipated
D)Daily changes in the target rate

Question 34

Primary credit extended by the Fed is:

A)For banks needing long-term loans to work out financial problems
B)The highest interest rate loans offered by the Fed
C)Short-term, usually overnight loans
D)Loans offered at the prime interest rate for periods exceeding thirty days but less than one year

Question 35

If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be:

A)A decrease in the market federal funds rate
B)A market federal funds rate that will equal the target rate
C)An increase in the market federal funds rate
D)Nothing; the Fed would act immediately and the market would not be affected

Question 36

Discount lending today is primarily used for:

A)Controlling reserves
B)Providing short-term financial stability
C)Preventing bank panics
D)Providing short-term financial stability and preventing bank panics

Question 37

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

A)The market federal funds rate will decrease
B)The market federal funds rate will equal the target rate
C)The market federal funds rate will increase
D)Nothing; the Fed would act immediately and the market would not be affected

Question 38

The types of loans the Fed makes consist of each of the following, except:

A)Primary credit
B)Conditional credit
C)Seasonal credit
D)Secondary credit

Question 39

Discount lending ties into the Fed's function of:

A)Lender of last resort
B)Open market operations
C)The government's bank
D)Regulation of banking

Question 40

The daily reserve supply curve is:

A)Upward sloping
B)Downward sloping
C)Vertical until the federal funds rate equals the discount rate; at that point it becomes horizontal
D)Horizontal until the federal funds rate equals the discount rate; at that point it becomes vertical

Question 41

The European Central Bank's Marginal Lending Facility is used to provide:

A)Short-term loans to banks at rates below the target refinancing rate
B)Long-term loans to banks at rates above the target refinancing rate
C)Short-term loans at rates above the target refinancing rate
D)Long-term loans to banks at rates below the target refinancing rate

Question 42

To minimize the cost of holding reserves for small banks, the:

A)Required reserve rate decreases as the amount of deposits increases
B)Required reserve rate is constant
C)Required reserve rate is not applied for transaction deposits less than $100 million
D)First few million of transactions deposits are exempt from reserve requirements

Question 43

Today, reserve requirements are:

A)Set in a way that makes reserve demand highly unpredictable
B)Changed whenever the target federal funds rate is changed
C)Changed instead of making changes in the discount rate
D)Really not a direct tool of monetary policy

Question 44

Seasonal credit provided by the Fed is not as common as it used to be because:

A)There are fewer banks in seasonal areas
B)Other sources for long-term loans have developed for banks in seasonal areas
C)Seasonal credit has been replaced by secondary credit
D)Seasonal credit is being replaced by primary credit

Question 45

The Fed is reluctant to change the required reserve rate because:

A)Changes in the rate have a small impact on the actual quantity of money
B)The money multiplier is not impacted by the required reserve rate
C)The time lag between changing the required reserve rate and changes in the money supply can be too long
D)Small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits

Question 46

The interest rate on primary credit extended by the Fed is:

A)The average of the prime interest rate charged by the ten largest banks in the nation
B)50 basis points below the target federal funds rate
C)200 basis points above the target federal funds rate
D)100 basis points above the target federal funds rate

Question 47

The reserve requirement is applied to two-week balances on:

A)Transactions deposits
B)Savings deposits
C)Both transactions deposits and savings deposits
D)Savings deposits and one-week balances on transactions deposits

Question 48

The weekly refinancing by the European Central Bank (ECB) is most similar to the Fed's use of:

A)The primary credit facility
B)The secondary credit facility
C)Repos
D)The target federal funds rate

Question 49

The interest rate on primary credit extended by the Fed is:

A)The average of the prime interest rate charged by the ten largest banks in the nation
B)100 basis points below the target federal funds rate
C)100 basis points above the target federal funds rate
D)Equal to the target federal funds rate

Question 50

One of the reasons primary credit exists is to:

A)Bail out banks which are in financial trouble
B)Provide additional reserves when the open market staff's forecasts are off
C)Provide banks with an available source for unsecured lending
D)Provide banks with a low interest source for long-term capital

Question 51

Secondary credit provided by the Fed is designed for:

A)Banks who qualify for a lower interest than what is available under primary credit
B)Banks that are in trouble and cannot obtain a loan from anyone else
C)Banks that want to borrow without putting up collateral
D)Foreign banks

Question 52

Within the ECB, there is a minimum interest rate that can be charged on reserves; this is determined by:

A)Law; it's a fixed rate
B)The rate paid on excess reserves by the deposit facility
C)The directors of the National Central Banks
D)The executive committee of the ECB

Question 53

The interest rate the Fed charges for secondary credit is:

A)50 basis points above the primary discount rate
B)Below the market federal funds rate
C)100 basis points above the primary discount rate
D)50 basis points below the primary discount rate

Question 54

For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the:

A)European target discount rate
B)European target federal funds rate
C)Target refinancing rate
D)London Inter-Bank Offer Rate

Question 55

Suppose a European bank has excess reserves.It can either lend them or deposit them overnight in the ECB's Deposit Facility.Ignoring any question of risk, if the bank deposits the funds instead of lending them it must be true that the rate on the loan was less than the:

A)ECB target refinancing rate less 100 basis points
B)ECB target refinancing rate
C)Minimum bid rate
D)Minimum bid rate less 50 basis points

Question 56

Within the European Central Bank, banks with excess reserves:

A)Can deposit them with the ECB and earn an interest rate 100 basis points below the target refinancing rate
B)Earn no interest on excess reserves, similar to the system in the U.S.
C)Must deposit the excess with the ECB's Deposit Facility
D)None of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves

Question 57

The European equivalent of the Fed's open market operations (OMO) is:

A)Very similar to the Fed's OMO in that they are highly centralized
B)Dissimilar to the Fed's OMO in that the operations are conducted at all 13 of the National Central Banks simultaneously
C)Similar to the Fed's OMO in that they accept only U.S.Treasury securities in their refinancing operations
D)Dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities

Question 58

Which of the following statements is true?

A)The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks
B)The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same
C)The ECB's weekly auctions include only a few of the largest banks in Europe
D)The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility

Question 59

The main purpose of reserve requirements today is to:

A)Decrease the demand for reserves
B)Make sure depositors can withdraw currency on demand
C)Enable the FOMC to keep the market federal funds rate closer to the target reserve rate
D)Keep banks sound

Question 60

The use of lagged reserve accounting makes the demand for reserves:

A)Highly unpredictable
B)Constant
C)More predictable
D)Subject to daily changes by the Fed

Question 61

Which of the following statement is most true regarding monetary policy tools?

A)The required reserve rate is the most easily observable tool
B)The central banks cannot set a quantity and a price tool simultaneously
C)The federal funds rate is not the best tool because it fails the controllable test of a good monetary policy tool
D)The Fed currently uses a quantity tool for monetary policy

Question 62

Central banks that have a hierarchical mandate with inflation targeting basically are saying:

A)Hitting the inflation target is the first priority after all other stated objectives are reached
B)Hitting the inflation target is the only objective
C)The inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers
D)Hitting the inflation target comes first, everything else comes second

Question 63

If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must:

A)Target the quantity of reserves
B)Set targets for both interest rates and the quantity of reserves
C)Not target the interest rates
D)Let the quantity of reserves fluctuate

Question 64

Which of the following statements is not correct?

A)The current target of the FOMC is the federal funds rate
B)If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate
C)If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate
D)The Fed can target both the quantity of reserves and the federal funds rate simultaneously

Question 65

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

Question 66

Which of the following would be classified as intermediate targets for U.S.monetary policy?

A)M2 but not M1
B)The federal funds rate
C)M1 and M2
D)M1 but not M2

Question 67

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool.One side effect of this strategy was:

A)The inflation rate increased to over 18 percent in 1983
B)Many banks failed that otherwise may not have
C)Interest rates rose very high
D)Inflation remained high for most of the 1980's

Question 68

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting.This is an example of policymakers:

A)Focusing exclusively on an intermediate target
B)Bypassing intermediate targets and focusing directly on an objective
C)Focusing on multiple numerical targets
D)Developing a new intermediate target

Question 69

Inflation targeting does all of the following except:

A)Increase policymakers' credibility
B)Increase policymakers' accountability
C)Communicate policymakers' objectives clearly and openly
D)Hinder economic growth

Question 70

Which of the following statements is most correct?

A)The FOMC is more successful at keeping the market rate closer to the target rate than the ECB
B)The FOMC is more successful than the ECB at keeping the market rate within a 100 basis point band of the target rate
C)The ECB has kept the market rate within a 100 basis point band of the target rate; the FOMC cannot make this claim
D)The ECB seldom has the market rate within 100 basis points of the target rate

Question 71

The European equivalent of the U.S.'s market federal funds rate is called the:

A)Overnight cash rate
B)Target refinancing rate
C)European discount rate
D)Overnight repurchase rate

Question 72

A good definition for intermediate targets of monetary policy would be:

A)Instruments under the direct control of central bankers but one step removed from operational targets
B)Instruments that are not under the direct control of the central banks but lie between operational instruments and objectives
C)The quantity or non-price targets of monetary policy
D)The real goals of monetary policy

Question 73

Over the last few decades, central bankers have:

A)Mostly abandoned intermediate targets
B)Greatly increased their focus on intermediate targets
C)Found that the links between the operating instruments and intermediate targets have become more stable
D)Developed more intermediate targets

Question 74

The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it:

A)Is not controllable
B)Is not observable
C)Cannot be quickly changed
D)The impact of changing it is unpredictable

Question 75

Which of the following features would characterize a good monetary policy instrument?

A)Observable only to monetary policy officials
B)Tightly linked to monetary policy objectives
C)Controllable and rigid
D)Difficult to change

Question 76

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system.The "channel" or "corridor" refers to the spread between the central bank's:

A)Target interest rate and its deposit rate
B)Target interest rate and its lending rate
C)Lending rate and its deposit rate
D)Target interest rate and the current interest rate

Question 77

Which of the following statements is not correct?

A)The current target of the FOMC is the federal funds rate
B)If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate
C)The Fed currently sets both an interest rate and a quantity target for monetary policy
D)If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate

Question 78

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system that involves setting a:

A)Target interest rate only
B)Target interest rate and a lending rate only
C)Target interest rate and a deposit rate only
D)Target interest rate, a lending rate, and a deposit rate

Question 79

In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the:

A)Economy would have been better off
B)Target would not have been politically acceptable
C)Target would have been a federal funds rate of zero percent
D)Inflation rate would have risen further

Question 80

One key difference between the Fed and the European Central Bank (ECB) in their reserve requirements is that the:

A)Reserve requirements of the ECB are at a much higher rate than the Fed's
B)ECB's reserve requirements are more difficult for banks to predict
C)Reserve requirement of the ECB are determined annually
D)ECB reserve requirement is based on all of a bank's liabilities