Question 1

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 supply curve is vertical at the discount rate because the central bank will supply unlimited reserves at that rate.

Question 2

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 Bank of Canada uses the channel system to target interest rates, setting a target overnight rate with a corridor or channel around it.

Question 3

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 4

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

In a channel system used by a central bank, the supply of reserves is represented by a horizontal line at the level of the interest rate on reserves for the portion where reserves are abundant. When the demand for reserves intersects this leftmost horizontal portion, it indicates that reserves are in ample supply, and the equilibrium overnight rate will equal the interest rate on reserves, as banks have no incentive to lend or borrow at rates higher or lower than what they can earn directly from the central bank for holding reserves.

Question 5

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 of the listed central banks (Bank of Canada, Bank of England, and the European Central Bank) pay interest on reserves held by commercial banks. This is a common monetary policy tool used to help manage the money supply and influence interest rates.

Question 6

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

Accepted Answer

The Federal Reserve started paying interest on reserves in 2008 as part of its response to the financial crisis. This policy was aimed at helping to manage the supply of credit and stabilize the economy.

Question 7

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

Under the channel system, the equilibrium overnight rate is influenced by a shift in the demand for reserves if it falls between the discount rate and the interest rate on reserves. This is because the discount rate sets an upper limit and the interest rate on reserves sets a lower limit on the overnight rate.

Question 8

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

Discount lending is primarily used to provide liquidity to banks during times of financial distress or panic, helping to stabilize the financial system.

Question 9

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...

Question 10

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 11

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

The discount rate is the interest rate charged to banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility. By lowering the discount rate, the Fed makes it cheaper for banks to borrow money, which increases the supply of reserves in the banking system. This, in turn, lowers the equilibrium federal funds rate.

Question 12

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 13

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 14

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 15

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 16

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 banks are charged for borrowing money from the European Central Bank overnight. It is analogous to the discount rate in the Federal Reserve system, which is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

Question 17

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 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

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 20

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.

Quiz 16: Monetary Policy Tools

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.

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

The ECB conducts open market operations through purchases and sales of

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

Which of the following central banks pays interest on reserves?

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

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

In practice, discount lending is used

The TSLF is an example of

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, if there is discount lending, what would the Fed have to do to lower the equilibrium federal funds rate?

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

Which of these policy tools can a central bank use?

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

Which of the following could shift the supply of reserves?

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

Corridor systems cap the

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

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

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