Question 1

Which of these policy tools can a central bank use?
A) QE
B) SPV
C) TSLF
D) FFR

Accepted Answer

The answer of Which of these policy tools can a...

Question 2

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.

Accepted Answer

The marginal lending rate is the interest rate at which Eurozone banks lend overnight funds to other banks that have a shortfall in their reserve requirements. It is similar to the discount rate used by the Federal Reserve. The repo rate (A) refers to the interest rate charged when banks borrow money from the ECB by using government securities as collateral, while the federal funds rate (C) is the interest rate at which banks lend and borrow reserves from each other overnight in the United States. Therefore, (B) is the best choice.

Question 3

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

Accepted Answer

The answer of If there is no discount lending, the...

Question 4

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

Accepted Answer

All three of the central banks listed (Bank of Canada, Bank of England, and ECB) pay interest on reserves.

Question 5

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

Accepted Answer

The answer of On a graph of the supply and...

Question 6

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.

Accepted Answer

The answer of In practice, discount lending is used
A) to...

Question 7

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

Accepted Answer

The answer of Which of the following central banks use...

Question 8

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

Accepted Answer

Discount lending refers to the loans made by the Federal Reserve to commercial banks. By lowering the discount rate, the Fed is encouraging commercial banks to borrow more reserves from it, which increases the supply of reserves in the market. This increase in reserves leads to a decrease in the federal funds rate, which is the rate at which banks lend to each other overnight. Therefore, if the Fed wants to lower the equilibrium federal funds rate, it should lower the discount rate. Buying or selling bonds would only affect the supply or demand for reserves, but not directly impact the discount rate or federal funds rate.

Question 9

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.

Accepted Answer

The answer of When the Fed uses OMO to offset...

Question 10

The ECB conducts open market operations through purchases and sales of
A) repos.
B) commercial paper.
C) bonds.
D) all of the above.

Accepted Answer

The answer of The ECB conducts open market operations through...

Question 11

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.

Accepted Answer

If the equilibrium overnight rate is below the interest rate on reserves, banks will prefer to hold reserves rather than lend them out, leading to an increase in the demand for reserves and a corresponding increase in the overnight rate. On the other hand, if the equilibrium overnight rate is above the discount rate, banks will prefer to borrow from the central bank rather than from other banks, leading to an increase in the supply of reserves and a corresponding decrease in the overnight rate. Therefore, a shift in the demand for reserves can only change the equilibrium overnight rate if that rate is between the discount rate and the interest rate on reserves.

Question 12

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

Accepted Answer

Corridor systems are designed to cap the rate at both ends, ensuring that the rate does not go below a certain minimum or above a certain maximum. This helps in maintaining stability within the specified range.

Question 13

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

Accepted Answer

The answer of On a graph of the supply and...

Question 14

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.

Accepted Answer

When the demand curve intersects the leftmost horizontal portion of the supply curve, it means that there is excess supply of reserves in the market, with banks having more reserves than they need to meet their regulatory requirements. In this situation, the central bank can use its policy rate (i.e. interest rate on reserves) to influence the overnight rate. By setting the interest rate on reserves at the equilibrium rate, the central bank can ensure that the overnight rate remains stable and close to its target. Therefore, the equilibrium overnight rate equals the interest rate on reserves.

Question 15

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.

Accepted Answer

During a financial crisis, banks and financial institutions often seek to hold more reserves due to increased uncertainty and risk, shifting the demand for reserves to the right. However, the supply for reserves may not necessarily increase to match this demand, and can even decrease if central banks do not intervene, thus shifting to the left.

Question 16

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.

Accepted Answer

When the Fed uses open market operations to lower the equilibrium federal funds rate, it buys securities, which increases the reserves in the banking system. This action shifts the supply of reserves to the right.

Question 17

The Federal Reserve began paying interest on reserves in what year?
A) 1791
B) 1907
C) 1945
D) 2008

Accepted Answer

The Federal Reserve began paying interest on reserves in 2008. This was implemented as a way to increase control over the federal funds rate and to provide banks with an alternative source of income instead of lending excess reserves to other banks at a lower rate.

Question 18

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.

Accepted Answer

The answer of In the channel system, to keep the...

Question 19

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

Accepted Answer

The answer of Which of the following could shift the...

Question 20

The TSLF is an example of
A) discount lending.
B) open market operations.
C) both of the above.
D) neither of the above.

Accepted Answer

The answer of The TSLF is an example of
A) discount...

Quiz 16: Monetary Policy Tools

Which of these policy tools can a central bank use?

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

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

Which of the following central banks pays interest on reserves?

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.

In practice, discount lending is used

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

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?

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

The ECB conducts open market operations through purchases and sales of

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

Corridor systems cap the

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?

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

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

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

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

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

Which of the following could shift the supply of reserves?

The TSLF is an example of