Question 1

The federal funds rate is

Accepted Answer

The federal funds rate is the interest rate that banks charge each other for overnight loans to maintain reserve requirements. The Federal Reserve sets a target range for the federal funds rate, and open market operations are used to adjust the supply of money to keep the rate within that range. This rate has a significant impact on the broader economy, as it influences borrowing costs for businesses and consumers. The interest rate the Fed charges commercial banks is known as the discount rate and is not the same as the federal funds rate. The interest rate a bank charges its best customers or the interest rate on a Treasury Bill are also not the same as the federal funds rate.

Question 2

The money market model is concerned with ________ and the loanable funds market model is concerned with ________.

Accepted Answer

The answer of The money market model is concerned with...

Question 3

Which of the following correctly describes what the Fed used as monetary targets in the past?

Accepted Answer

The Fed increased its reliance on interest rate targets since the mid-1990s, moving away from monetary aggregates like M1 and M2.

Question 4

When the Fed sells a security to a financial firm and the Fed agrees to buy back the security the next day,the transaction is known as

Accepted Answer

The answer of When the Fed sells a security to...

Question 5

The federal funds rate

Accepted Answer

The federal funds rate is determined by the supply of and demand for bank reserves in the federal funds market. Banks with excess reserves can lend to banks with deficient reserves, and the interest rate on these loans is known as the federal funds rate. The Fed can influence this rate by adjusting the monetary policy tools at its disposal, but ultimately it is determined by market forces. Household and firm demand for funds can indirectly affect the federal funds rate by affecting overall economic conditions and the supply and demand for bank reserves.

Question 6

A decrease in real GDP can

Accepted Answer

A decrease in real GDP will lead to a decrease in the demand for money, as people and businesses will be spending less. This will shift the money demand curve to the left, leading to a decrease in the equilibrium interest rate. Therefore, the correct answer is C: shift money demand to the left and decrease the interest rate.

Question 7

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

Accepted Answer

During a recession, the Federal Reserve typically lowers interest rates in an effort to stimulate the economy. This often results in lower mortgage rates for homebuyers, which can make buying a house during a recession a good idea. However, it is important to note that job security is also a crucial factor to consider when making a big purchase like a house during an economic downturn.

Question 8

In June 2017,the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent.To keep the federal funds rate in this target band,the Fed set the interest rate it pays on reverse repurchase agreements to

Accepted Answer

CThe Federal Reserve uses the interest rate on reverse repurchase agreements as a tool to help control the federal funds rate. By setting this rate at the lower end of the target range (1.00 percent) and the interest rate it pays on reserves at the higher end (1.25 percent), the Fed encourages banks to lend at rates within the target range, effectively helping to keep the federal funds rate within the desired band.

Question 9

If the Fed buys Treasury bills,this will shift the

Accepted Answer

When the Fed buys Treasury bills, it increases the money supply in the economy, which will shift the money supply curve to the right. This is because the Fed is injecting more money into the economy, which will enable banks to lend more and people to spend more. As a result, the supply of money will increase, leading to a shift to the right in the money supply curve.

Question 10

In June 2017,the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent.To keep the federal funds rate in this target band,the Fed set the interest rate it pays on bank reserves to

Accepted Answer

The Fed sets the interest rate it pays on bank reserves to the upper end of the target range for the federal funds rate. Therefore, since the target range for the federal funds rate was raised to 1.00 to 1.25 percent in June 2017, the Fed set the interest rate it pays on bank reserves to 1.25 percent to keep the federal funds rate in this target band.

Question 11

The interest rate the Fed pays banks on their reserve holdings

Accepted Answer

The interest rate the Fed pays banks on their reserve holdings sets a floor for the federal funds rate because banks are unlikely to lend to other banks for a rate lower than what they're earning in interest from the Fed. Therefore, the federal funds rate tends to stay at or above the rate paid on reserves.

Question 12

Following the financial crisis of 2007-2009,banks had a glut of excess reserves.Because of this extraordinary amount of excess reserves being held by banks,the Fed's draining some of them through open market sales of Treasury securities would

Accepted Answer

During the financial crisis of 2007-2009, banks accumulated a significant amount of excess reserves. When the Federal Reserve sells Treasury securities in open market operations, it typically aims to reduce these reserves, which can influence interest rates. However, because banks already had a glut of excess reserves, the marginal effect of the Fed draining some of them would be minimal. The banks' demand for additional reserves was already satisfied, so the reduction in reserves would not significantly change their lending behavior or the overall supply and demand for money. Therefore, the interest rates would likely remain unaffected by this specific action under those circumstances.

Question 13

A monetary policy target is a variable that the Fed can affect directly,which then affects one or more of the Fed's policy goals.

Accepted Answer

A monetary policy target is a specific variable, such as the federal funds rate or money supply, that the Federal Reserve can adjust in order to achieve its policy goals, such as promoting full employment, stabilizing prices, and maintaining financial stability. By controlling the monetary policy target, the Fed can influence economic conditions and achieve its policy objectives.

Question 14

Figure 15-5 
-Refer to Figure 15-5.In the figure above,the movement from point A to point B in the money market would be caused by

Accepted Answer

The answer of Figure 15-5 
-Refer to Figure 15-5.In the...

Question 15

The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.

Accepted Answer

Lowering interest rates can stimulate economic growth by making borrowing cheaper, but it can also increase inflation by increasing the money supply and demand for goods and services. Reducing inflation typically requires raising interest rates to cool off economic activity.

Question 16

Suppose the Fed decreases the money supply.In response households and firms will ________ short term assets and this will drive ________ interest rates.

Accepted Answer

If the Fed decreases the money supply, households and firms will sell their short-term assets such as Treasury bills, certificates of deposits, and commercial papers. This will increase the demand for money and decrease the supply of money in the market, which will drive up interest rates. Thus, Option C is the correct answer. Options A and B are incorrect because buying short-term assets will increase their price and decrease their yield, which is opposite to what happens when the money supply decreases. Option D is also incorrect because selling short-term assets will increase their yield and decrease their price, which is not consistent with a decrease in the money supply.

Question 17

The rate of interest banks charge other banks for overnight loans of reserves is the

Accepted Answer

The federal funds rate is the rate of interest that banks charge each other for overnight loans of reserves. The discount rate is the rate at which banks can borrow directly from the Federal Reserve. The prime rate is the interest rate commercial banks charge their most creditworthy customers. The real rate is the nominal interest rate minus the inflation rate.

Question 18

When the Fed buys a security from a financial firm and the financial firm agrees to buy back the security the next day,the transaction is known as

Accepted Answer

This type of transaction, where the Fed buys a security from a financial firm and agrees to sell it back the next day, is known as a repurchase agreement, or repo for short. This allows the financial firm to obtain short-term funding from the Fed, using the security as collateral. As such, it can be seen as a type of short-term loan. The opposite type of transaction, where the financial firm buys a security from the Fed with an agreement to sell it back the next day, is known as a reverse repurchase agreement, or reverse repo.

Question 19

The Fed can directly lower the inflation rate.

Accepted Answer

The Federal Reserve influences inflation indirectly by adjusting interest rates and controlling the money supply, which in turn affects economic activity and inflation pressures, but it cannot directly set the inflation rate.

Question 20

An increase in the money supply will

Accepted Answer

According to the quantity theory of money, an increase in the money supply leads to an increase in the demand for goods and services, which in turn leads to an increase in spending and economic activity. This increase in economic activity creates a higher demand for loans, which causes interest rates to decrease in order to stimulate borrowing and investment. Therefore, an increase in the money supply will decrease the interest rate.

Quiz 15: Monetary Policy