Deck 16: Monetary Policy Tools

Question 1

The supply of reserves is horizontal at the equilibrium federal funds rate.

Answer 1

False

Question 2

If the equilibrium federal funds rate equals the discount rate, the supply of reserves intersects the horizontal portion of the demand for reserves.

Answer 2

False

Question 3

On the graph of supply and demand for bonds, if there is a positive quantity of discount lending, open market operations cannot raise the equilibrium federal funds rate.

Answer 3

True

Question 4

An open market sale of bonds shifts the demand for reserves to the left.

Question 5

Lowering the discount rate always lowers the federal funds rate.

Question 6

If the demand for reserves intersects the vertical portion of the supply for reserves, the equilibrium federal funds rate is less than or equal to the discount rate.

Question 7

Paying interest on reserves sets a maximum on the required reserve ratio.

Question 8

The Federal Reserve cannot consistently keep the federal funds rate below discount rate.

Question 9

An open market purchase of bonds shifts the supply of reserves to the right.

Question 10

A change in the discount rate shifts the supply of reserves.

Question 11

The discount rate is the opportunity cost of holding reserves for a bank.

Question 12

On the graph of supply and demand for reserves, if there is positive discount lending, the equilibrium federal funds rate equals the discount rate.

Question 13

On the graph of supply and demand for reserves, if the equilibrium federal funds rate is below the discount rate, there is no discount lending.

Question 14

An increase in the reserve requirement shifts the demand for reserves to the right.

Question 15

If there is a positive quantity of discount lending, the demand for reserves intersects the horizontal portion of the supply for reserves.

Question 16

To lower the equilibrium federal funds rate using open market operations, the Federal Reserve acts to shift the supply of reserve to the right.

Question 17

Only depository institutions can borrow from the Fed's discount window.

Question 18

An increase in the reserve requirement could decrease the equilibrium federal funds rate.

Question 19

National banks must take overnight loans from the Federal Reserve.

Question 20

Raising the discount rate raises the equilibrium federal funds rate if the demand for reserves intersects the vertical portion of the supply for reserves.

Question 21

There is a portion of the supply curve for reserves that is vertical, since the Fed controls the supply of reserves when the equilibrium Federal funds rate is sufficiently low.

Question 22

In the corridor system, the interest rate paid on reserves is the minimum rate on overnight loans.

Question 23

Typically, the Fed sets the discount rate above the equilibrium federal funds rate.

Question 24

Regulators may pay extra attention to a bank that borrows too much from the Fed.

Question 25

A change in which of the following shifts the vertical portion of the supply of reserves?

A) discount lending
B) the reserve requirement
C) open market operations
D) all of the above

Question 26

If banks fear a run, the demand for reserves shifts to the left.

Question 27

The demand for reserves slopes down with respect to the federal funds rate, since the Fed tends to make more loans when the federal funds rate is low.

Question 28

Under the channel system, open market operations are not necessary to keep the overnight rate in the channel.

Question 29

A change in which of the following tools shifts the demand for reserves?

A) discount lending
B) the reserve requirement
C) open market operations
D) all of the above

Question 30

When a central bank sets a maximum and minimum for its target short term interest rate, it is using the channel system.

Question 31

When the Fed raises the reserve requirement, the _____ of reserves shifts to the

A) demand, right.
B) demand, left.
C) supply, right.
D) supply, left.

Question 32

For most central banks, the most commonly used tool to implement monetary policy is open market operations.

Question 33

An increase in which of the following would shift the supply of reserves up?

A) discount lending
B) the reserve requirement
C) open market operations
D) none of the above

Question 34

Forward guidance and TAP led to inflation in 2008.

Question 35

When the Fed makes an open market sale of bonds the _____ of reserves shifts to the

A) demand, left.
B) demand, right.
C) supply, left.
D) supply, right.

Question 36

In practice, the primary tool used by the Federal Reserve to control the money supply is

A) discount lending.
B) the reserve requirement.
C) open market operations.
D) buying commercial paper.

Question 37

When the Fed raises the discount rate, the _____ of reserves shifts to the

A) demand, up.
B) demand, down.
C) supply, up.
D) supply, down.

Question 38

The ECB conducts open market operations by buying and selling bonds, just as the Fed does.

Question 39

Quantitative easing occurs when the central bank reveals its future plans to market participants.

Question 40

To effectively implement the channel system, a central bank must pay interest on reserves.

Question 41

Which of these policy tools can a central bank use?

A) QE
B) SPV
C) TSLF
D) FFR

Question 42

The interest rate used by the ECB that is analogous to the discount rate for the Federal Reserve is the

A) repo rate.
B) marginal lending rate.
C) federal funds rate.
D) none of the above.

Question 43

If there is no discount lending, the Fed must change the _____ to change the equilibrium federal funds rate.

A) discount rate
B) reserve requirement
C) both of the above
D) neither of the above

Question 44

Which of the following central banks pays interest on reserves?

A) Bank of Canada
B) Bank of England
C) ECB
D) all of the above

Question 45

On a graph of the supply and demand for reserves representing a central bank using the channel system, there is/are ____ vertical portions of the supply curve.

A) 0
B) 1
C) 2
D) 3

Question 46

In practice, discount lending is used

A) to ease a financial panic.
B) to control the money supply.
C) to set a minimum for the federal funds rate.
D) all of the above.

Question 47

Which of the following central banks use the channel system for targeting interest rates?

A) ECB
B) Bank of Canada
C) Federal Reserve
D) all of the above

Question 48

On a graph of the supply and demand for reserves, if there is discount lending, what would the Fed have to do to lower the equilibrium federal funds rate?

A) buy bonds
B) sell bonds
C) lower the discount rate
D) none of the above

Question 49

When the Fed uses OMO to offset changes in the MB due to outside factors, its action is said to be

A) compensating.
B) demand driven.
C) dynamic.
D) none of the above.

Question 50

The ECB conducts open market operations through purchases and sales of

A) repos.
B) commercial paper.
C) bonds.
D) all of the above.

Question 51

Under the channel system, a shift in the demand for reserves can change the equilibrium overnight rate if that rate is

A) equal to the discount rate.
B) equal to the interest rate on reserves.
C) between the discount rate and the interest rate on reserves.
D) all of the above.

Question 52

Corridor systems cap the

A) market rate on the upper end.
B) rate on the lower end.
C) rate at both ends.
D) none of the above

Question 53

On a graph of the supply and demand for reserves, if there is discount lending, what would the Fed have to do to raise the equilibrium federal funds rate?

A) buy bonds
B) sell bonds
C) raise the reserve requirement
D) none of the above

Question 54

On a graph of the supply and demand for reserves representing a central bank using the channel system, if the demand curve intersects the leftmost horizontal portion of the supply curve, the equilibrium overnight rate equals

A) the interest rate on reserves.
B) the discount rate.
C) the repo rate.
D) none of the above.

Question 55

During a financial crisis, the demand for reserves shifts to the _____, and the supply for reserves shifts to the

A) left, left.
B) left, right.
C) right, left.
D) right, right.

Question 56

If there is no discount lending and the Fed uses open market operations to lower the equilibrium federal funds rate, the _____ of reserves shifts to the

A) demand, right.
B) demand, left.
C) supply, right.
D) supply, left.

Question 57

The Federal Reserve began paying interest on reserves in what year?

A) 1791
B) 1907
C) 1945
D) 2008

Question 58

In the channel system, to keep the overnight rate above the desired minimum, the central bank must sometimes

A) buy securities.
B) sell securities.
C) both of the above.
D) neither of the above.

Question 59

Which of the following could shift the supply of reserves?

A) an open market purchase of bonds
B) a change in the reserve requirement
C) a fall in the equilibrium federal funds rate
D) all of the above

Question 60

The TSLF is an example of

A) discount lending.
B) open market operations.
C) both of the above.
D) neither of the above.

Question 61

On a graph of the supply and demand for reserves, what would shift the supply curve down?

Question 62

If a central bank sets its discount rate (or rate it lends to banks) below the rate it pays on reserves, what would happen?

Question 63

The goal of quantitative easing is to _____.

A) increase the prices of (increase the yields of) Treasury bonds in order to control inflation
B) decrease the prices of (increase the yields of) Treasury bonds in order to control inflation
C) increase the prices of (decrease the yields of) Treasury bonds and influence the money supply directly
D) decrease the prices of (increase the yields of) Treasury bonds and influence the money supply directly

Question 64

The part of the Federal Reserve that implements open market operations is

A) the FRBNY.
B) the Board of Governors.
C) the FRBSF.
D) Congress.

Question 65

On the graph of the supply and demand for reserves, why is there a portion that is horizontal?

Question 66

Under the channel system, when would a change in the interest rate paid on reserves affect the equilibrium overnight rate?

Question 67

The discount window caps

A) ff*.
B) TAF.
C) reserve requirements.
D) none of the above.

Question 68

A financial panic causes a shift in demand from a situation where there was no discount lending to a situation where there is. Show this on a graph of the supply and demand for reserves.

Question 69

Show a graph for supply and demand for reserves where there is discount lending. Show and explain the effect on equilibrium of raising the discount rate.

Question 70

After the FOMC announces a change in the target fed funds rate, the Fed's trading desk in New York engages in a(n) _____ open market operation.

A) offensive
B) dynamic
C) aggressive
D) none of the above

Question 71

Why does the demand for reserves slope down with respect to the federal funds rate?

Question 72

What does TAF stand for?

Question 73

Draw a graph of the supply and demand for reserves under the channel system where the equilibrium overnight rate strictly inside the channel (not at the max or min).

Question 74

Under the channel system, what are the maximum and minimum values for the equilibrium overnight rate?

Question 75

What is the goal of the policy called quantitative easing?

Question 76

List the unconventional tools a central bank might employ, and tell when they would use them.

Question 77

Show a graph for the supply and demand for reserves where the Fed increases the equilibrium federal funds rate by changing the rate of interest it pays on reserves.

Question 78

Which of the following is not a program developed by the Fed during the 2008 financial crisis?

A) TAF
B) PDCF
C) CPFF
D) TRAPS