Deck 15: Tools of Monetary Policy

Question 1

The quantity of reserves supplied equals

A)nonborrowed reserves minus borrowed reserves.
B)nonborrowed reserves plus borrowed reserves.
C)required reserves plus borrowed reserves.
D)total reserves minus required reserves.

Answer 1

nonborrowed reserves plus borrowed reserves.

Question 2

The quantity of reserves demanded equals

A)required reserves plus borrowed reserves.
B)excess reserves plus borrowed reserves.
C)required reserves plus excess reserves.
D)total reserves minus excess reserves.

Answer 2

required reserves plus excess reserves.

Question 3

Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings?

A)Paying interest reduces the effective tax on deposits.
B)Paying interest will help in the implementation of monetary policy.
C)Paying interest will help the Federal Reserve have more control of the amount of discount loans.
D)Paying interest increases the capacity of the Fed's balance sheet which will make it easier to address financial crises.

Answer 3

Paying interest will help the Federal Reserve have more control of the amount of discount loans.

Question 4

In the market for reserves,a lower interest rate paid on excess reserves

A)decreases the supply of reserves.
B)increases the supply of reserves.
C)decreases the effective floor for the federal funds rate.
D)increases the effective floor for the federal funds rate.

Question 5

When the federal funds rate equals the interest rate paid on excess reserves

A)the supply curve of reserves is vertical.
B)the supply curve of reserves is horizontal.
C)the demand curve for reserves is vertical.
D)the demand curve for reserves is horizontal.

Question 6

In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall,everything else held constant.

A)increases; supply
B)increases; demand
C)decreases; supply
D)decreases; demand

Question 7

In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,then an open market ________ the supply of reserves,raising the federal funds interest rate,everything else held constant.

A)sale decreases
B)sale increases
C)purchase increases
D)purchase decreases

Question 8

In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,an open market sale ________ the supply of reserves causing the federal funds rate to ________,everything else held constant.

A)decreases; decrease
B)increases; decrease
C)increases; increase
D)decreases; increase

Question 9

In the market for reserves,when the federal funds interest rate is below the discount rate,the supply curve of reserves is

A)vertical.
B)horizontal.
C)positively sloped.
D)negatively sloped.

Question 10

When the federal funds rate equals the discount rate

A)the supply curve of reserves is vertical.
B)the supply curve of reserves is horizontal.
C)the demand curve for reserves is vertical.
D)the demand curve for reserves is horizontal.

Question 11

In the market for reserves,a lower discount rate

A)decreases the supply of reserves.
B)increases the supply of reserves.
C)lengthens the vertical section of the supply curve of reserves.
D)shortens the vertical section of the supply curve of reserves.

Question 12

In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,an open market sale ________ the ________ of reserves,causing the federal funds rate to increase,everything else held constant.

A)increases; supply
B)increases; demand
C)decreases; supply
D)decreases; demand

Question 13

The primary indicator of the Fed's stance on monetary policy is

A)the discount rate.
B)the federal funds rate.
C)the growth rate of the monetary base.
D)the growth rate of M2.

Question 14

Everything else held constant,when the federal funds rate is ________ the interest rate paid on reserves,the quantity of reserves demanded rises when the federal funds rate ________.

A)above,rises
B)above,falls
C)below,rises
D)below,falls

Question 15

The interest rate charged on overnight loans of reserves between banks is the

A)prime rate.
B)discount rate.
C)federal funds rate.
D)Treasury bill rate.

Question 16

In the market for reserves,when the federal funds rate is above the interest rate paid on excess reserves,the demand curve for reserves is

A)vertical.
B)horizontal.
C)positively sloped.
D)negatively sloped.

Question 17

The opportunity cost of holding excess reserves is the federal funds rate

A)minus the discount rate.
B)plus the discount rate.
C)plus the interest rate paid on excess reserves.
D)minus the interest rate paid on excess reserves.

Question 18

In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________,everything else held constant.

A)decreases; fall
B)increases; fall
C)increases; rise
D)decreases; rise

Question 19

Everything else held constant,in the market for reserves,when the federal funds rate is 3%,lowering the discount rate from 5% to 4%

A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 20

Everything else held constant,in the market for reserves,when the federal funds rate is 3%,increasing the interest rate paid on excess reserves from 1% to 2%

A)lowers the federal funds rate.
B)raises the federal funds rate
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 21

Everything else held constant,in the market for reserves,when the federal funds rate is 3%,raising the discount rate from 5% to 6%

A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 22

Everything else held constant,in the market for reserves,when the federal funds rate is 3%,lowering the interest rate paid on excess reserves rate from 2% to 1%

A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 23

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise,everything else held constant.

A)decreases; demand
B)increases; demand
C)increases; supply
D)decreases; supply

Question 24

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement ________ the demand for reserves,raising the federal funds interest rate,everything else held constant.

A)rise; decreases
B)rise; increases
C)decline; increases
D)decline; decreases

Question 25

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,an increase in the reserve requirement ________ the demand for reserves,________ the federal funds rate,everything else held constant.

A)decreases; lowering
B)increases; lowering
C)increases; raising
D)decreases; raising

Question 26

After 2003,The Federal Reserve usually keeps the discount rate

A)above the target federal funds rate.
B)equal to the target federal funds rate.
C)below the target federal funds rate.
D)equal to zero.

Question 27

Everything else held constant,in the market for reserves,when the federal funds rate is 5%,lowering the discount rate from 5% to 4%

A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 28

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement increases the demand for reserves,________ the federal funds interest rate,everything else held constant.

A)rise; lowering
B)decline; raising
C)decline; lowering
D)rise; raising

Question 29

Everything else held constant,in the market for reserves,when the demand for federal funds intersects the reserve supply curve on the vertical section,increasing the discount rate

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 30

Everything else held constant,the vertical section of the supply curve of reserves is lengthened when the

A)discount rate increases.
B)discount rate decreases.
C)federal funds rate rises.
D)federal funds rate falls.

Question 31

Everything else held constant,in the market for reserves,when the federal funds rate is 1%,increasing the interest rate paid on excess reserves from 1% to 2%

A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 32

Everything else held constant,in the market for reserves,when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve,lowering the interest rate paid on excess reserves

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect of the federal funds rate.

Question 33

Everything else held constant,in the market for reserves,when the supply for federal funds intersects the reserve demand curve on the downward sloping section,decreasing the interest rate paid on excess reserves

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 34

Everything else held constant,in the market for reserves,when the demand for federal funds intersects the reserve supply curve along the horizontal section,increasing the discount rate

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question 35

Everything else held constant,in the market for reserves,when the federal funds rate equals the interest rate paid on excess reserves,raising the interest rate paid on excess reserves

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect of the federal funds rate.

Question 36

Everything else held constant,the vertical section of the supply curve of reserves is shortened when the

A)discount rate increases.
B)discount rate decreases.
C)federal funds rate rises.
D)federal funds rate falls.

Question 37

Everything else held constant,in the market for reserves,decreases in the interest rate paid on excess reserves affect the federal funds rate

A)when the funds rate is below the interest rate paid on excess reserves.
B)when the funds rate equals the interest rate paid on excess reserves.
C)when the funds rate is below the discount rate.
D)when the funds rate equals the discount rate.

Question 38

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________,everything else held constant.

A)decreases; fall
B)increases; fall
C)increases; rise
D)decreases; rise

Question 39

Everything else held constant,in the market for reserves,when the federal funds rate equals the discount rate,lowering the discount rate

A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect of the federal funds rate.

Question 40

Everything else held constant,in the market for reserves,increases in the discount rate affect the federal funds rate

A)when the funds rate is below the discount rate.
B)when the funds rate equals the discount rate.
C)when the demand for federal funds intersects the vertical section of the reserve supply curve.
D)when the demand for federal funds equals zero.

Question 41

There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base,and ________ open market operations are intended to offset movements in other factors that affect the monetary base.

A)defensive; dynamic
B)defensive; static
C)dynamic; defensive
D)dynamic; static

Question 42

The actual execution of open market operations is done at

A)the Board of Governors in Washington,D.C.
B)the Federal Reserve Bank of New York.
C)the Federal Reserve Bank of Philadelphia.
D)the Federal Reserve Bank of Boston.

Question 43

Open market sales shrink ________ thereby lowering ________.

A)the money multiplier; the money supply
B)the money multiplier; reserves and the monetary base
C)reserves and the monetary base; the money supply
D)the money base; the money multiplier

Question 44

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

A)raise; lowering
B)raise; raising
C)lower; lowering
D)lower; raising

Question 45

State whether the following statement is true or false AND explain why: "A decrease in the discount rate will always cause a decrease in the federal reserve funds rate."

Question 46

When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve,the open market operation is said to be

A)defensive.
B)offensive.
C)dynamic.
D)reactionary.

Question 47

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall,everything else held constant.

A)decreases; demand
B)increases; demand
C)increases; supply
D)decreases; supply

Question 48

Open market purchases raise the ________ thereby raising the ________.

A)money multiplier; money supply
B)money multiplier; monetary base
C)monetary base; money supply
D)monetary base; money multiplier

Question 49

The two types of open market operations are

A)offensive and defensive.
B)dynamic and reactionary.
C)active and passive.
D)dynamic and defensive.

Question 50

State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."

Question 51

Open market operations intended to offset movements in noncontrollable factors (such as float)that affect reserves and the monetary base are called

A)defensive open market operations.
B)dynamic open market operations.
C)offensive open market operations.
D)reactionary open market operations.

Question 52

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a decline in the reserve requirement ________ the demand of reserves,________ the federal funds rate,everything else held constant.

A)decreases; lowering
B)increases; lowering
C)increases; raising
D)decreases; raising

Question 53

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________,the main source of fluctuations in the money supply.

A)Open market operations; monetary base
B)Open market operations; money multiplier
C)Changes in reserve requirements; monetary base
D)Changes in reserve requirements; money multiplier

Question 54

Suppose,at a given federal funds rate,there is an excess supply of reserves in the federal funds market.If the Fed wants the federal funds rate to stay at that level,then it should undertake an open market ________ of bonds,everything else held constant.If the Fed does nothing,however,the federal funds rate will ________.

A)sale; increase
B)purchase; increase
C)sale; decrease
D)purchase; decrease

Question 55

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement ________ the demand for reserves,lowering the federal funds interest rate,everything else held constant.

A)rise; decreases
B)rise; increases
C)decline; increases
D)decline; decreases

Question 56

Suppose,at a given federal funds rate,there is an excess demand for reserves in the federal funds market.If the Fed wants the federal funds rate to stay at that level,then it should undertake an open market ________ of bonds,everything else held constant.If the Fed does nothing,however,the federal funds rate will ________.

A)sale; increase
B)purchase; increase
C)sale; decrease
D)purchase; decrease

Question 57

Open market sales ________ reserves and the monetary base thereby ________ the money supply.

A)raise; lowering
B)raise; raising
C)lower; lowering
D)lower; raising

Question 58

Explain the Fed's three tools of monetary policy and how each is used to change the money supply.Does each tool affect the monetary base or the money multiplier?

Question 59

In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,a ________ in the reserve requirement decreases the demand for reserves,________ the federal funds interest rate,everything else held constant.

A)rise; lowering
B)decline; raising
C)decline; lowering
D)rise; raising

Question 60

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities,but these purchases or sales are executed by the Federal Reserve Bank of

A)Chicago.
B)Boston.
C)New York.
D)San Francisco.

Question 61

If the Fed expects currency holdings to fall,it conducts open market ________ to offset the expected ________ in reserves.

A)purchases; increase
B)purchases; decrease
C)sales; increase
D)sales; decrease

Question 62

If Treasury deposits at the Fed are predicted to increase,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)defensive; inject
B)defensive; drain
C)dynamic; inject
D)dynamic; drain

Question 63

If the banking system has a large amount of reserves,many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low,few banks will have excess reserves to lend and the federal funds rate will probably ________.

A)fall; fall
B)fall; rise
C)rise; fall
D)rise; rise

Question 64

If Treasury deposits at the Fed are predicted to ________,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)rise; defensive; drain
B)fall; defensive; drain
C)rise; dynamic; inject
D)fall; dynamic; drain

Question 65

Suppose on any given day the prevailing equilibrium federal funds rate is above 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.

A)defensive; sale
B)defensive; purchase
C)dynamic; sale
D)dynamic; purchase

Question 66

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.

A)increase; permanently
B)increase; temporarily
C)decrease; temporarily
D)decrease; permanently

Question 67

If Treasury deposits at the Fed are predicted to fall,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)defensive; inject
B)defensive; drain
C)dynamic; inject
D)dynamic; drain

Question 68

Suppose on any given day there is an excess demand 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.

A)defensive; sale
B)defensive; purchase
C)dynamic; sale
D)dynamic; purchase

Question 69

When good weather speeds the check-clearing process,float tends to ________ causing the Fed to initiate defensive open market ________.

A)decrease; sales
B)decrease; purchases
C)increase; sales
D)increase; purchases

Question 70

The Fed can offset the effects of an increase in float by engaging in

A)a repurchase agreement.
B)a matched sale-purchase transaction.
C)an interest rate swap.
D)an open market purchase.

Question 71

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

A)increase; permanently
B)increase; temporarily
C)decrease; temporarily
D)decrease; permanently

Question 72

If float is predicted to decrease because of good weather,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)defensive; inject
B)defensive; drain
C)dynamic; inject
D)dynamic; drain

Question 73

When bad storms slow the check-clearing process,float tends to ________ causing the Fed to initiate ________ open market ________.

A)decrease; defensive; sales
B)decrease; dynamic; purchases
C)increase; defensive; sales
D)increase; dynamic; purchases

Question 74

When bad storms slow the check-clearing process,float tends to ________ causing the Fed to initiate defensive open market ________.

A)decrease; sales
B)decrease; purchases
C)increase; sales
D)increase; purchases

Question 75

If Treasury deposits at the Fed are predicted to ________,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)increase; defensive; inject
B)decrease; defensive; inject
C)increase; dynamic; inject
D)decrease; dynamic; drain

Question 76

If float is predicted to increase because of bad weather,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A)defensive; inject
B)defensive; drain
C)dynamic; inject
D)dynamic; drain

Question 77

When good weather speeds the check-clearing process,float tends to ________ causing the Fed to initiate ________ open market ________.

A)decrease; defensive; sales
B)decrease; dynamic; sales
C)decrease; defensive; purchases
D)increase; dynamic; purchases

Question 78

If the Fed wants to temporarily inject reserves into the banking system,it will engage in

A)a repurchase agreement.
B)a matched sale-purchase transaction.
C)a reverse repurchase agreement.
D)an open market sale.

Question 79

If float is predicted to decrease because of unseasonably good weather,the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.

A)defensive; sale
B)defensive; purchase
C)dynamic; sale
D)dynamic; purchase

Question 80

If the Fed expects currency holdings to rise,it conducts open market ________ to offset the expected ________ in reserves.

A)purchases; increase
B)purchases; decrease
C)sales; increase
D)sales; decrease