Deck 15: Monetary Policy

Question 1

Which of the following is NOT considered to be a goal of monetary policy?

A) fair wages
B) high employment
C) economic growth
D) price stability

Answer 1

A

Question 2

High employment spurs economic growth because high employment

A) usually reduces inflation.
B) discourages foreign imports.
C) often leads to a high birth rate.
D) often leads to high rates of investment.

Answer 2

D

Question 3

The Employment Act of 1946 codified the federal government's commitment to

A) promote high employment consistent with price stability.
B) promote high employment irrespective of the effects on price stability.
C) guarantee a job to every unemployed person.
D) fine companies that engage in excessive layoffs during recessions.

Answer 3

A

Question 4

Interest rate fluctuations

A) are usually not considered to be of much importance and are largely ignored by the Fed.
B) have the paradoxical effect of increasing the rate of economic growth.
C) make it difficult for households and firms to plan for the future.
D) have largely been eliminated by the Fed during the past two decades.

Question 5

Inflation is an economic problem because it

A) leads inevitably to unemployment.
B) makes prices less useful as signals for resource allocation.
C) leads to recession.
D) results in rapid increases in the money supply.

Question 6

Most economists believe that a zero rate of unemployment

A) is obtainable with the correct monetary policy.
B) would result in a better functioning economy.
C) is inconsistent with a well-functioning economy.
D) is obtainable only if the inflation rate is also zero.

Question 7

Rates of inflation in the hundreds or thousands of percent per year are known as

A) super inflation.
B) megainflation.
C) hyperinflation.
D) overinflation.

Question 8

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium,

A) the unemployment rate will be zero.
B) unemployment is at its natural rate.
C) the economy will be experiencing high rates of inflation.
D) frictional unemployment will be zero.

Question 9

The unemployment that is caused by changes in the economy,such as shifts in manufacturing techniques,increased use of computers and electronic machines,and increases in the production of services instead of goods,is called

A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) natural unemployment.

Question 10

John Smith leaves his job in New York to go to California in hopes of finding a better one.If John Smith is unemployed while searching for a job in California,economists would consider him to be

A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) naturally unemployed.

Question 11

The Fed's goal of interest rate stability

A) was formally abandoned in 1998.
B) is motivated by political pressure as well as by a desire for a stable saving and investment environment.
C) is undermined by actions the Fed takes to further its goal of stability in financial markets and institutions.
D) is undermined by actions the Fed takes to further its goal of price stability.

Question 12

Increases in interest rates are often blamed on

A) Congress.
B) the President.
C) the Fed.
D) the U.S. Treasury.

Question 13

When financial markets and institutions are not efficient in matching savers and borrowers,

A) interest rates fall, which discourages saving even further.
B) interest rates fall, which discourages investment even further.
C) resources are lost.
D) investment rises.

Question 14

Which of the following countries experienced hyperinflation during the 1920s?

A) The United States
B) Canada
C) Germany
D) England

Question 15

A rising dollar makes U.S.goods

A) more expensive abroad and increases the volume of U.S. exports.
B) less expensive abroad and increases the volume of U.S. exports.
C) less expensive abroad and decreases the volume of U.S. exports.
D) more expensive abroad and decreases the volume of U.S. exports.

Question 16

Which of the following is considered to be a goal of monetary policy?

A) a low federal budget deficit
B) fair wages
C) price stability
D) an end to poverty

Question 17

Why did the Fed expand discount lending in the aftermath of the terrorist attacks in the fall of 2001?

A) It feared that inflation was going to increase.
B) To ensure the smooth operation of banks in the affected areas.
C) It feared the effects on the U.S. economy of rising oil prices.
D) It was attempting to increase the chances that President Bush would be reelected.

Question 18

Which of the following statements about the natural rate of unemployment is correct?

A) Currently, most economists think that the natural rate is between 5% and 6%.
B) Currently, most economists believe the natural rate is zero.
C) When unemployment is at its natural rate, then only frictional unemployment remains.
D) When unemployment is at its natural rate, then only structural unemployment remains.

Question 19

The Fed was created

A) after financial panics in the late 1800s and early 1900s.
B) after the stock market crash of 1929.
C) to help finance government expenditures during World War II.
D) to help channel funds to the residential mortgage market.

Question 20

Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel.Sally Jones is considered by economists to be

A) naturally unemployed.
B) cyclically unemployed.
C) structurally unemployed.
D) frictionally unemployed.

Question 21

The Fed monitors reserve requirements

A) daily.
B) during two-week maintenance periods.
C) monthly.
D) annually.

Question 22

Suppose the current federal funds rate is 0.25% and the Fed chooses to raise its target to 0.5%.Make use of a graph of the federal funds market to show how it will use open market operations to accomplish this.

Question 23

How does the interest paid on reserves set a floor for the federal funds rate?

Question 24

Which types of unemployment still occur even when the economy is considered to be operating at full employment?

Question 25

Suppose banks incur heavy losses and become more cautious,increasing their demand for reserve.Make use of a graph of the loanable funds market to show how the Fed can use open market operations to maintain the same federal funds rate.

Question 26

Describe the three types of unemployment?

Question 27

In order to increase its target for the federal funds rate,the Fed would normally

A) conduct open market sales.
B) conduct open market purchases.
C) increase the discount rate.
D) increase reserve requirements.

Question 28

Expansionary monetary policy consists of all of the following EXCEPT

A) open market sales.
B) lower interest rates.
C) increased monetary base.
D) increased money supply.

Question 29

Reserve requirements are set by

A) the Secretary of Treasury.
B) the President.
C) Congress.
D) the Fed.

Question 30

The original Federal Reserve Act

A) specified open market operations as the Fed's main policy tool.
B) specified open market operations as one of several Fed policy tools.
C) specified that open market operations be employed by the Fed only in circumstances where discount loans were ineffective.
D) did not specifically mention open market operations.

Question 31

As a result of an open market purchase,bank reserves

A) rise and interest rates fall.
B) fall and interest rates rise.
C) and interest rates both rise.
D) and interest rates both fall.

Question 32

In the federal funds market diagram,a decrease in the required reserve ratio

A) shifts the demand curve for reserves to the left.
B) increases the federal funds rate.
C) results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks.
D) shifts the supply curve for reserves to the right.

Question 33

If the Fed desired to reduce the federal funds rate,

A) it would conduct an open market sale, reducing reserve supply.
B) it would conduct an open market purchase, increasing reserve supply.
C) it would conduct an open market sale, increasing reserve demand.
D) it would conduct an open market purchase, reducing reserve demand.

Question 34

On which type of unemployment can monetary policy have the most effect? Why?

Question 35

Reserve requirements are changed

A) more frequently than the discount rate is changed, but less frequently than open market operations are conducted.
B) more frequently than the discount rate is changed and more frequently than open market operations are conducted.
C) more frequently than open market operations are conducted, but less frequently than the discount rate is changed.
D) less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Question 36

In the federal funds market diagram,an open market sale by the Fed

A) shifts the reserve supply curve to the right.
B) shifts the reserve supply curve to the left.
C) decreases the federal funds rate.
D) increases the volume of federal funds traded.

Question 37

What new policy tools for controlling reserve balances did the Fed introduce during the Financial Crisis of 2007-2009?

Question 38

An open market purchase

A) increases the monetary base.
B) decreases the monetary base.
C) increases the federal funds rate.
D) is another name for a discount loan.

Question 39

A falling dollar makes U.S.goods

A) more expensive abroad and increases the volume of U.S. exports.
B) less expensive abroad and increases the volume of U.S. exports.
C) less expensive abroad and decreases the volume of U.S. exports.
D) more expensive abroad and decreases the volume of U.S. exports.

Question 40

How many times has the Fed has changed reserve requirements since 1995?

A) never.
B) about once a year.
C) only once.
D) only twice.

Question 41

Which of the following statements is correct?

A) Dynamic open market operations are carried out to offset fluctuations in the monetary base.
B) Defensive open market operations are carried out to change monetary policy.
C) The volume of defensive open market operations is much greater than the volume of dynamic open market operations.
D) Defensive open market operations are usually carried out through outright purchases or sales.

Question 42

Which of the following statements is correct?

A) Open market purchases are expansionary and open market sales are contractionary.
B) Open market purchases are contractionary and open market sales are expansionary.
C) Both open market purchases and open market sales are expansionary.
D) Both open market purchases and open market sales are contractionary.

Question 43

Congress established the FOMC because

A) a group was needed to set reserve requirements for member banks.
B) of a lack of coordination among district banks in carrying out open market operations.
C) Congress was attempting to expand its influence within the Federal Reserve System.
D) a group was needed to coordinate the setting of discount rates by the district banks.

Question 44

A matched sale-purchase transaction is also known as a

A) reverse repo.
B) discount loan.
C) put option.
D) federal funds loan.

Question 45

The policy directive from the FOMC is carried out by

A) the presidents of the district banks.
B) the presidents of commercial banks that are members of the Federal Reserve System.
C) the account manager at the Federal Reserve Bank of New York.
D) private dealers in the bond market.

Question 46

How does the Open Market Trading Desk conduct its operations?

A) directly with private securities dealers on the floor of the New York Stock Exchange
B) directly with private securities dealers on the floor of the Federal Reserve Bank of New York
C) over-the-counter electronically with private securities dealers
D) by sending its buy and sell orders to the U.S. Treasury for execution

Question 47

The Open Market Trading Desk is

A) another name for the Federal Open Market Committee.
B) an organization of private traders in government securities.
C) the area on the floor of the New York Stock Exchange set aside for bond trading.
D) a group of private securities traders that the Fed has selected to participate in open market operations.

Question 48

An open market sale

A) decreases the price of Treasury securities and also decreases their yield.
B) increases the price of Treasury securities and decreases their yield.
C) increases the price of Treasury securities and also increases their yield.
D) decreases the price of Treasury securities and increases their yield.

Question 49

Dynamic open market operations

A) are aimed at achieving changes in monetary policy.
B) are used much more frequently than defensive open market transactions.
C) are used to offset disturbances to the monetary base.
D) make it easy to deduce the Fed's intentions for monetary policy.

Question 50

If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC,he will

A) order banks to reduce their reserves.
B) order banks to raise their interest rates in an attempt to get them to loan out more of their reserves.
C) conduct an open market purchase.
D) conduct an open market sale.

Question 51

If the account manager does not use a Federal Reserve repurchase agreement or a matched sale-purchase transaction in carrying out open market operations,he will use

A) an outright purchase or sale.
B) a limited-duration purchase or sale.
C) an indirect purchase or sale.
D) a reverse duration purchase or sale.

Question 52

When did the Fed first begin to use open market operations as a policy tool?

A) The 1920s
B) The 1930s
C) The 1960s
D) The 1980s

Question 53

The FOMC states its overall objectives for interest rates in

A) the Governors' Order.
B) the Policy Directive.
C) the Federal Reserve Bulletin.
D) the Chairman's Order.

Question 54

How were open market operations conducted prior to 1935?

A) They were carried out by the Federal Open Market Committee.
B) They were carried out under the direction of the Secretary of the Treasury.
C) They were carried out by the district Federal Reserve banks.
D) They were carried out by the Banking Committee of the House of Representatives.

Question 55

In a matched sale-purchase transaction,the Fed

A) buys securities from a dealer and the dealer agrees to buy them back.
B) sells securities to a dealer and the dealer agrees to sell them back.
C) buys securities from one dealer and sells the same dollar amount of securities to another dealer.
D) sells securities to one dealer and buys the same dollar amount of securities from another dealer.

Question 56

Primary dealers are those

A) permitted to trade directly with the Fed.
B) who work under the account manager at the Federal Reserve Bank of New York.
C) who specialize in selling bonds to small private investors.
D) responsible for assuring that interest rates do not decline unless the FOMC has given specific instructions that they decline.

Question 57

A Federal Reserve repurchase agreement involves

A) an agreement by a bank to repay a discount loan on a specific day.
B) an agreement by a dealer to buy back securities she has sold to the Fed.
C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount of Treasury securities.
D) an agreement by a commercial bank to make a loan to another bank in the federal funds market.

Question 58

An open market purchase

A) decreases the price of Treasury securities and also decreases their yield.
B) increases the price of Treasury securities and decreases their yield.
C) increases the price of Treasury securities and also increases their yield.
D) decreases the price of Treasury securities and increases their yield.

Question 59

Defensive open market transactions

A) are aimed at achieving changes in monetary policy.
B) are used much less frequently than dynamic open market transactions.
C) are used to offset disturbances to the supply or demand for reserves.
D) make it easy to deduce the Fed's intentions for monetary policy.

Question 60

The Fed generally conducts open market operations in

A) long-term corporate bond markets.
B) the federal funds market.
C) the Treasury securities market.
D) the commercial paper market.

Question 61

The Fed

A) controls discount policy more completely than it controls open market operations.
B) must abide by discount rates set by Congress.
C) controls discount policy less completely than it controls open market operations.
D) controls discount policy completely, just as it controls open market operations.

Question 62

Open market operations

A) lack flexibility because only very small purchases or sales may be carried out in any given month.
B) lack flexibility because open market purchases cannot easily be offset by subsequent open market sales.
C) are more flexible than other policy tools.
D) may be carried out only on the third Friday of each month.

Question 63

What is a matched sale-purchase transaction (also known as a reverse repo)?

Question 64

Which of the following statements is correct?

A) The discount rate is generally above the federal funds rate.
B) The discount rate is generally below the federal funds rate.
C) The discount rate is generally equal to the federal funds rate.
D) There is no general pattern to the relation between the discount rate and the federal funds rate.

Question 65

The Fed tends not to use discount policy as its principal tool in influencing the money supply since

A) discount loans do not affect the money supply.
B) it does not have as much control over discount loans as it has on open market operations.
C) it is prohibited from doing so by an act of Congress.
D) it prefers to use reserve requirements.

Question 66

The Fed can implement open market operations

A) more rapidly than changes in reserve requirements, but less rapidly than changes in the discount rate.
B) more rapidly than changes in the discount rate, but less rapidly than changes in reserve requirements.
C) less rapidly than either changes in the discount rate or changes in reserve requirements.
D) more rapidly than either changes in the discount rate or changes in reserve requirements.

Question 67

If the FOMC's directive indicates a change in monetary policy,the account manager at the Fed's Open Market Trading Desk must

A) design dynamic open market operations.
B) design defensive open market operations.
C) seek approval of the change from the Secretary of the Treasury.
D) seek approval of the change from a majority of the presidents of the Federal Reserve district banks.

Question 68

Which of the following statements concerning seasonal credit is true?

A) It tends to have a lower interest rate than federal funds.
B) It has become increasingly more important in recent years.
C) Only firms receiving secondary credit are eligible to receive seasonal credit.
D) Improvements in credit markets have reduced the need for a seasonal credit facility.

Question 69

Discount loans intended for banks that are not financially healthy are called

A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.

Question 70

What is quantitative easing? What was the Fed's objective in implementing quantitative easing?

Question 71

When the staff of the account manager at the Fed's Open Market Trading Desk analyzes forecasts on Treasury deposits and information on the timing of future Treasury sales of securities,what agency does it interact with?

A) The Securities and Exchange Commission
B) The Treasury's Office of Government Finance
C) The Treasury's Office of Federal Reserve Relations
D) The Federal Deposit Insurance Corporation

Question 72

Primary credit is only a backup source of funds for health banks since

A) the primary credit rate is set above the federal funds rate.
B) restrictions as to its use limit its benefits.
C) the secondary credit rate pays 0.5% more.
D) banks must seek funds from other sources prior to requesting a discount loan.

Question 73

Since 1980,discount loans have been available

A) only to member banks of the Federal Reserve System.
B) only to national banks.
C) only to state banks.
D) to all depository institutions.

Question 74

What is the difference between defensive and dynamic open market operations?

Question 75

Which of the following statements is NOT true?

A) Each Federal Reserve bank maintains its own discount window.
B) Before 1980, the Fed rarely made loans to banks which were not members of the Federal Reserve System.
C) Since 1980, all depository institutions have had access to the discount window.
D) Each Federal District Bank can charge a different discount rate.

Question 76

Which of the following statements is correct?

A) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed.
B) The volume of open market operations is determined jointly by the actions of banks and the Fed.
C) The volume of open market operations is determined jointly by the actions of the public and the Fed.
D) The volume of open market operations is determined solely by the Fed.

Question 77

All of the following statements about secondary credit are true EXCEPT

A) they are temporary, short-term loans to satisfy seasonal requirements.
B) the secondary credit interest rate is set above the primary credit rate.
C) it is intended for banks not eligible for primary credit.
D) borrowers of secondary credit are less financially healthy.

Question 78

The discount window is

A) another name for the discount rate.
B) the means by which the Fed makes discount loans to banks.
C) the spread between the discount rate and the T-bill rate.
D) the period each month during which banks are allowed to apply for discount loans.

Question 79

Temporary,short-term discount loans to banks in areas in which agriculture and tourism are important are known as

A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.

Question 80

Discount loans available to health banks which can be used for any purpose are called

A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.