Question 1

Disadvantages of using reserve requirements to control the money supply include

Accepted Answer

The answer of Disadvantages of using reserve requirements to control...

Question 2

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

Accepted Answer

The Federal Reserve Bank of New York is responsible for executing the FOMC's decisions on the purchase or sale of government securities, as it is located in the financial district of New York City, where many of these transactions occur.

Question 3

If the Federal Reserve wants to drain reserves from the banking system, it will

Accepted Answer

When the Federal Reserve wants to drain reserves from the banking system, it can sell government securities. This way, banks and other financial institutions will have less money in their reserves, leading to a decrease in the amount of money circulating in the economy. Lower reserves also affect lending activities, as banks might choose to increase their lending rates due to fewer reserves.

Question 4

At its inception, the Federal Reserve was intended to be

Accepted Answer

The Federal Reserve was originally created in 1913 to act as a lender of last resort during periods of financial panic and provide a more stable banking system. While the Fed does have other responsibilities such as regulating banks and setting monetary policy, its primary purpose is to serve as a lender of last resort in times of crisis. Therefore, the best choice is C.

Question 5

The Federal Reserve desires interest rate stability because

Accepted Answer

The Federal Reserve desires interest rate stability because it allows for less uncertainty about future planning and interest rate volatility often leads to demands to curtail the Fed's power. It does not guarantee full employment.

Question 6

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by

Accepted Answer

Encouraging firms to invest and people to save directly supports economic growth by increasing capital available for business expansion and innovation, which are key drivers of economic growth.

Question 7

An open market transaction intended to change the level of bank reserves is a

Accepted Answer

A dynamic operation, which is also known as an open market operation, involves the purchase or sale of securities by the central bank to change the level of bank reserves in the financial system. This can help to influence the money supply and interest rates. Repurchase agreements and reverse repos are specific types of open market transactions, but they are not the only types and do not necessarily involve changing bank reserves. Defensive operations, on the other hand, refer to actions taken by the central bank to defend the exchange rate or maintain financial stability, and may not involve open market transactions at all.

Question 8

Discount loans to banks experiencing severe liquidity problems are called

Accepted Answer

Secondary credit is offered to banks that are experiencing severe liquidity problems and do not qualify for primary credit. This type of credit is provided at a higher interest rate than primary credit and is intended to be a backup source of funding for banks in distress.

Question 9

When the Federal Reserve was created, its most important role was intended to be

Accepted Answer

The most important role of the Federal Reserve when it was created in 1913 was to act as a lender of last resort, providing banks with a source of funds in times of financial crisis to prevent bank runs and systemic failures. While the Fed does regulate bank holding companies today, this was not its primary function upon establishment. The Fed also initially played a role in storing the nation's gold, but this was not its primary purpose.

Question 10

If the Fed wants to temporarily drain reserves from the banking system, it will engage in

Accepted Answer

A matched sale-purchase transaction involves the Fed selling securities to banks with an agreement to buy them back at a later date. This temporarily drains reserves from the banking system, as the banks use their reserves to purchase the securities.

Question 11

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

Accepted Answer

The natural rate of unemployment is the point at which the economy is at full employment, meaning there are enough job openings to match all of the individuals who are looking for work. It represents the level of unemployment that exists when the labor market is in equilibrium, and is a combination of frictional and structural unemployment. Therefore, the goal for high employment should be to achieve the natural rate of unemployment.

Question 12

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by

Accepted Answer

Encouraging firms to invest can lead to expansion and innovation, directly contributing to economic growth. Similarly, encouraging people to save increases the availability of capital for investment, also promoting growth. Both strategies are aimed at fostering economic growth.

Question 13

Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called

Accepted Answer

Primary credit refers to the discount loans offered by the Federal Reserve to healthy banks at its discount window. These loans are available on a short-term basis and are intended to provide banks with access to liquidity when they need it. The banks can borrow as much as they wish from the Fed, subject to certain conditions. Therefore, option A is the correct answer. Secondary credit is also a type of discount loan offered by the Fed but is available to banks that do not meet the requirements for primary credit. Seasonal credit is another type of discount loan offered by the Fed to smaller banks that experience seasonal fluctuations in demand for credit. Lender-of-last-resort credit is another term used for discount lending programs provided by central banks during times of financial stress.

Question 14

The Fed is reluctant to use reserve requirements to control the money supply because

Accepted Answer

Reserve requirements have a powerful impact on the money supply, can create liquidity problems for banks, especially those with low excess reserves, and frequent changes complicate liquidity management for banks.

Question 15

The Fed's monetary policy strategy can be described as follows:

Accepted Answer

The Fed uses its policy tools (such as open market operations, discount rate, and reserve requirements) to adjust intermediate targets (such as the federal funds rate and inflation) in a way that directly impacts its operating targets (such as bank reserves and the monetary base), ultimately allowing the Fed to achieve its goals (such as price stability and maximum employment). So, option B correctly represents the Fed's monetary policy strategy.

Question 16

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

Accepted Answer

A matched sale-purchase transaction by the Federal Reserve is used to temporarily decrease reserves in the banking system. This involves selling securities with the agreement to buy them back later.

Question 17

When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called

Accepted Answer

Structural unemployment occurs when there is a mismatch between the skills of available workers and the job requirements. This is a long-term phenomenon resulting from changes in technology, labor mobility, and other macroeconomic factors.

Question 18

The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system.

Accepted Answer

An outright purchase involves the Fed buying securities from banks, resulting in an increase in reserves permanently. Therefore, the answer is choice letter A.

Question 19

Price stability is desirable because

Accepted Answer

Inflation creates uncertainty as it makes it difficult for individuals and businesses to plan for the future. It can lead to fluctuations in the economy and negatively impact purchasing power. Therefore, price stability is desirable.

Question 20

When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called

Accepted Answer

This is because frictional unemployment refers to the temporary unemployment experienced by people who are between jobs or searching for new ones. It is seen as a normal part of the functioning of the labor market and can be caused by factors such as geographic mobility, job search intensity, and differences in skills and qualifications. The other options, structural unemployment, cyclical unemployment, and underemployment, do not accurately describe this type of unemployment.

Quiz 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

Disadvantages of using reserve requirements to control the money supply include

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

If the Federal Reserve wants to drain reserves from the banking system, it will

At its inception, the Federal Reserve was intended to be

The Federal Reserve desires interest rate stability because

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by

An open market transaction intended to change the level of bank reserves is a

Discount loans to banks experiencing severe liquidity problems are called

When the Federal Reserve was created, its most important role was intended to be

If the Fed wants to temporarily drain reserves from the banking system, it will engage in

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by

Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called

The Fed is reluctant to use reserve requirements to control the money supply because

The Fed's monetary policy strategy can be described as follows:

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

When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called

The Federal Reserve will engage in an outright purchase if it wants to reserves in the banking system.

Price stability is desirable because

When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called