Question 1

An increase in ________ reduces the money supply since it causes the ________ to fall.

Accepted Answer

An increase in reserve requirements reduces the money supply by causing the money multiplier to fall. This is because banks are required to hold a larger fraction of deposits as reserves, leaving less available to lend out, which decreases the overall ability of the banking system to create money through lending.

Question 2

A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that

Accepted Answer

The Fed's announcement that it would provide discount loans to any bank that would make loans to the security industry was crucial in averting a financial panic following "Black Monday" in October 1987. This action helped to stabilize the financial system by ensuring liquidity and encouraging banks to support the securities industry during a critical time.

Question 3

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

Accepted Answer

The discount rate is typically kept above the federal funds rate to encourage banks to borrow from each other rather than from the Federal Reserve, allowing them to monitor each other for credit risk.

Question 4

The interest rate on seasonal credit equals

Accepted Answer

The interest rate on seasonal credit is calculated as an average of the federal funds rate and rates on certificates of deposits, reflecting a blend of market rates to support institutions with seasonal patterns of liquidity.

Question 5

At its inception,the Federal Reserve was intended to be

Accepted Answer

The Federal Reserve was initially created as a lender-of-last-resort, with the main goal of stabilizing the financial system during periods of economic turbulence. Its primary function was to lend money to banks that were struggling to meet their obligations and prevent banking panics. While the Federal Reserve does perform other functions, such as regulating bank holding companies and overseeing monetary policy, its original purpose was to serve as a lender-of-last-resort.

Question 6

The Fed's lender-of-last-resort function

Accepted Answer

The Fed's lender-of-last-resort function creates a moral hazard problem because it incentivizes banks to take on riskier investments knowing that they have a safety net in case of failure. This can lead to excessive risk taking and ultimately, financial instability.

Question 7

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

Accepted Answer

The discount rate is kept above the federal funds rate because the Federal Reserve prefers that banks borrow reserves from each other rather than relying on the central bank as a primary source of funding. This encourages a more active interbank lending market and reduces the dependency on the Federal Reserve for liquidity.

Question 8

The discount rate is

Accepted Answer

The discount rate is the interest rate charged by the Federal Reserve on loans made to banks.

Question 9

Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19,1987)must be given to the Federal Reserve System and then-chairman

Accepted Answer

Alan Greenspan was the chairman of the Federal Reserve System in 1987 when "Black Monday" occurred. He is credited with implementing measures to prevent a financial market meltdown, including injecting liquidity into the markets and reassuring investors.

Question 10

The most important advantage of discount policy is that the Fed can use it to

Accepted Answer

The most important advantage of a discount policy is that it allows the Federal Reserve (Fed) to perform its role as a lender of last resort. This means the Fed can provide liquidity to banks in times of financial distress, ensuring the stability of the financial system.

Question 11

The discount rate refers to the interest rate on

Accepted Answer

The discount rate refers to the interest rate charged by the Federal Reserve Banks on loans extended to eligible financial institutions, known as primary credit.

Question 12

The Fed's discount lending is of three types: ________ is the most common category;________ is given to a limited number of banks in vacation and agricultural areas;________ is given to banks that have experienced severe liquidity problems.

Accepted Answer

Primary credit is the most common category of the Fed's discount lending, seasonal credit is given to a limited number of banks in vacation and agricultural areas, and secondary credit is given to banks that have experienced severe liquidity problems.

Question 13

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level,then the appropriate action for the Federal Reserve to take is a ________ open market ________,everything else held constant.

Accepted Answer

To maintain the federal funds rate, the Fed would conduct a defensive sale of securities to absorb the excess reserves and prevent the rate from falling.

Question 14

The Fed prefers that ________ so that ________.

Accepted Answer

The Federal Reserve prefers banks to borrow reserves from each other because this allows banks to monitor each other's credit risk, fostering a self-regulating mechanism within the banking system.

Question 15

The most common type of discount lending,________ credit loans,are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

Accepted Answer

Primary credit loans are the most common type of discount lending offered by central banks to help healthy banks with short-term liquidity problems, often due to temporary deposit outflows.

Question 16

The Fed is considering eliminating

Accepted Answer

The question mentions "eliminating" and the options provide different types of lending functions carried out by the Fed. Among these, seasonal credit lending is the only one that is under consideration for elimination, as mentioned in recent news articles about the Fed's policy review. Therefore, the best choice is C.

Question 17

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level,then the appropriate action for the Federal Reserve to take is a ________ open market ________,everything else held constant.

Accepted Answer

A dynamic open market sale would decrease the supply of reserves in the banking system, thereby increasing the federal funds rate towards the target level.

Question 18

The interest rate on secondary credit is set ________ basis points ________ the primary credit rate.

Accepted Answer

The answer of The interest rate on secondary credit is...

Question 19

Discount policy affects the money supply by affecting the volume of ________ and the ________.

Accepted Answer

Discount policy influences the money supply by impacting the amount of borrowed reserves from the central bank and the overall monetary base.

Question 20

The most common type of discount lending that the Fed extends to banks is called

Accepted Answer

The most common type of discount lending that the Fed extends to banks is called primary credit. Seasonal credit is a type of discount lending offered to smaller banks in areas that experience seasonal fluctuations in their economy, while secondary credit is a higher rate of interest offered to banks that do not qualify for primary credit. Installment credit typically refers to loans provided to individuals or businesses for purchasing goods or services.

Quiz 15: Tools of Monetary Policy

An increase in reduces the money supply since it causes the to fall.

A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that

The discount rate is kept the federal funds rate because the Fed prefers that .

The interest rate on seasonal credit equals

At its inception,the Federal Reserve was intended to be

The Fed's lender-of-last-resort function

The discount rate is kept the federal funds rate because the Fed prefers that .

The discount rate is

Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19,1987) must be given to the Federal Reserve System and then-chairman

The most important advantage of discount policy is that the Fed can use it to

The discount rate refers to the interest rate on

The Fed's discount lending is of three types: is the most common category; is given to a limited number of banks in vacation and agricultural areas; is given to banks that have experienced severe liquidity problems.

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level,then the appropriate action for the Federal Reserve to take is a open market ,everything else held constant.

The Fed prefers that so that .

The most common type of discount lending,________ credit loans,are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

The Fed is considering eliminating

The interest rate on secondary credit is set basis points the primary credit rate.

Discount policy affects the money supply by affecting the volume of and the .

The most common type of discount lending that the Fed extends to banks is called