Question 1

Reserves of the banking system are an important target of central bank policy because, left alone, bankers could increase the quantity of reserves available to them virtually without limit.

Accepted Answer

Bankers cannot increase reserves without limit as reserves are controlled by the central bank, which manages the supply through monetary policy tools like open market operations.

Question 2

The total quantity of reserves available to the banking system can be changed directly by central bank open-market operations.

Accepted Answer

Central bank open-market operations involve buying or selling government securities in the open market to either increase or decrease the total amount of reserves available to the banking system, thereby directly affecting the quantity of reserves.

Question 3

Discount window loans to depository institutions are neutral in their effects on the quantity of reserves available to the banking system; these loans neither increase nor decrease the total supply of reserves.

Accepted Answer

Discount window loans from the Federal Reserve to depository institutions increase the total supply of reserves in the banking system because they directly add to the borrowing institution's reserves.

Question 4

Some of the Federal Reserve's policy tools have an impact on interest rates - for example, open market operations and loans from the discount window; however, some Fed policy tools do not affect interest rates - for example, reserve and margin requirements.

Accepted Answer

All of the Federal Reserve's policy tools, including open market operations, discount window lending, and reserve and margin requirements, can influence interest rates. Open market operations directly affect the federal funds rate, discount window lending influences the discount rate, and reserve requirements can alter the amount of funds banks have available to lend, indirectly impacting interest rates. Margin requirements, while primarily aimed at controlling borrowing for stock purchases, can also influence broader financial conditions and indirectly affect interest rates.

Question 5

A policy directive is issued to the press at the conclusion of each FOMC meeting for the purpose of keeping the public informed about Federal Reserve policy decisions.

Accepted Answer

The answer of A policy directive is issued to the...

Question 6

A straight or outright open-market transaction by the Fed produces a permanent change in the level of reserves held by depository institutions.

Accepted Answer

A straight or outright open-market transaction involves the Fed buying or selling securities, which permanently alters the reserves in the banking system.

Question 7

A Federal Reserve reverse REPO temporarily increases the volume of funds available to a government securities dealer.

Accepted Answer

A Federal Reserve reverse repo temporarily removes reserves from the banking system, thereby decreasing the volume of funds available to government securities dealers and other market participants.

Question 8

The Federal Reserve refuses to pay interest on monies held on reserve.

Accepted Answer

The Federal Reserve does pay interest on reserves held by banks at the Fed. This includes both required reserves and excess reserves.

Question 9

Defensive open-market operations, according to your text, generally result in rising interest rates and reduced availability of credit.

Accepted Answer

Defensive open-market operations are typically aimed at maintaining the current state of liquidity in the banking system, not at altering interest rates or the availability of credit significantly. They are used to offset temporary fluctuations in the bank reserves, keeping the federal funds rate close to the target set by the Federal Reserve, rather than deliberately tightening or loosening credit conditions.

Question 10

The principal purpose of reserve requirements is to safeguard the public's deposits.

Accepted Answer

Reserve requirements are primarily aimed at controlling the money supply and managing banking liquidity, rather than directly safeguarding public deposits.

Question 11

Increased required reserves mandated by the Federal Reserve will tend to increase interest rates in the money market.

Accepted Answer

When the Federal Reserve increases required reserves, banks have less money available to lend, which reduces the supply of loanable funds. This decrease in supply, all else being equal, leads to higher interest rates in the money market.

Question 12

If the Federal Reserve Board elects to lower reserve requirements depository institutions will be willing to make more loans at lower interest rates.

Accepted Answer

Lowering reserve requirements frees up more funds for depository institutions to lend, increasing the supply of money. This typically leads to lower interest rates and an increased willingness to make loans.

Question 13

A change in reserve requirements affects the total legal reserves available to the banking system.

Accepted Answer

A change in reserve requirements affects the amount of reserves banks must hold, not the total legal reserves available to the banking system.

Question 14

The so-called substitution effect argues that the Federal Reserve's discount rate causes money market rates to move in the opposite direction from the discount rate change.

Accepted Answer

The substitution effect actually refers to the idea that when the price of a good or service rises, consumers will replace it with cheaper alternatives, not directly related to the Federal Reserve's discount rate or money market rates.

Question 15

If the Federal Reserve receives and acts on a request from a foreign central bank to acquire securities from private dealers, this will result in a rise in total reserves of the U.S. banking system.

Accepted Answer

When the Federal Reserve acts on behalf of a foreign central bank to acquire securities, it does so using the foreign central bank's funds, not by altering U.S. bank reserves. This transaction does not directly affect the total reserves of the U.S. banking system.

Question 16

When the Fed replaces maturing Treasury securities with new issues, security prices will tend to rise and interest rates will tend to fall.

Accepted Answer

When the Fed replaces maturing Treasury securities with new issues, it is essentially maintaining its level of demand for these securities. This action supports the prices of Treasury securities, as it prevents a decrease in demand that could occur if the securities were allowed to mature without replacement. Higher demand for securities leads to higher prices. Since bond prices and interest rates move inversely to each other, as prices rise, interest rates fall. This is because the fixed interest payments become more attractive relative to the higher price paid for the bond, effectively lowering the yield (interest rate) for new buyers.

Question 17

The U.S. Treasury buys and sells U.S. Treasury securities for foreign central banks.

Accepted Answer

The U.S. Treasury, through its Federal Reserve Bank of New York, conducts transactions in U.S. Treasury securities for foreign central banks as part of its role in managing the country's monetary policy and stabilizing the financial system.

Question 18

If bad weather slows the clearing of checks, there will be an increase in excess reserves.

Accepted Answer

When bad weather slows the clearing of checks, banks that have deposited checks drawn on other banks will not have those checks debited from their reserve accounts as quickly. This delay in the clearing process means that the banks will temporarily have higher balances in their reserve accounts, leading to an increase in excess reserves.

Question 19

If the Fed increases the margin requirement, investors can borrow a larger percentage of the cost of a stock purchase.

Accepted Answer

When the Fed increases the margin requirement, it means investors must put up a larger portion of the purchase price themselves, thus reducing the percentage of the cost they can borrow.

Question 20

If the Fed sells securities to a nonbank dealer, interest rates will fall.

Accepted Answer

When the Fed sells securities to a nonbank dealer, it effectively reduces the amount of reserves in the banking system, leading to higher interest rates, not lower.

Quiz 13: Central Banking and Monetary Policy: Exploring Tools and Strategies