Ch.15

Question 1

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

A. federal funds rate falls.

B. discount rate decreases.

C. federal funds rate rises.

D. discount rate increases.

Answer 1

B

Question 2

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. decreases; supply

C. increases; demand

D. decreases; demand

Answer 2

A

Question 3

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

A. lower the short term interest rates.

B. lower the long term interest rates.

C. increase the short term interest rates.

D. increase the long term interest rates.

Answer 3

B

Question 4

The purpose for a central bank to set negative interest rates on bank’s deposit is to

A. stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank.

B. increase bank’s cost to holding cash.

C. make banks less likely to lend.

D. prevent banks from paying positive interest rates to their depositors.

Answer 4

A

Question 5

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 discount rate.

B. when the funds rate equals the interest rate paid on excess reserves.

C. when the funds rate equals the discount rate.

D. when the funds rate is below the interest rate paid on excess reserves.

Answer 5

B

Question 6

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

A. the growth rate of M2.

B. the federal funds rate.

C. the growth rate of the monetary base.

D. the discount rate.

Answer 6

B

Question 7

A decrease in ________ increases the money supply since it causes the ________ to rise.

A. margin requirements; monetary base

B. reserve requirements; monetary base

C. reserve requirements; money multiplier

D. margin requirements; money multiplier

Answer 7

C

Question 8

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. increases; lowering

B. decreases; raising

C. increases; raising

D. decreases; lowering

Answer 8

D

Question 9

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

Answer 9

B

Question 10

Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?

A. discount policy

B. the Fed’s liquidity provision

C. open market operation

D. required reserve ratio

Answer 10

B

Question 10

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.

Answer 10

C

Question 11

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; dynamic; inject

B. fall; defensive; drain

C. fall; dynamic; drain

D. rise; defensive; drain

Answer 11

B

Question 12

Open market sales shrink ________ thereby lowering ________.

A. the money multiplier; the money supply

B. the money base; the money multiplier

C. the money multiplier; reserves and the monetary base

D. reserves and the monetary base; the money supply

Answer 12

D

Question 13

The equivalent to the Federal Reserve’s discount rate in the European System of Central Banks is the

A. deposit facility rate.

B. federal funds rate.

C. lombard rate.

D. marginal lending rate.

Answer 13

D

Question 14

To make sure that the federal funds rate does not fall much below the floor set by the interest rate on excess reserves, the Federal Reserve has set up the ________ facility in which these nonbank lenders can lend to the Fed and earn an interest rate that is close to the interest rate the Fed pays on excess reserves.

A. Primary Dealer Credit

B. Term Securities Lending

C. reverse repo

D. Term Auction

Answer 14

C

Question 15

Which of the following statements about the deposit facility in the Eurosystem are correct?

A. Banks are paid an interest rate that is typically 100 basis points below the target financing rate.

B. The prespecified interest rate on the deposit facility provides a floor for the overnight market interest rate.

C. The interest rate on reserves set by the ECB is not always positive.

D. All of these.

E. Only Banks are paid an interest rate that is typically 100 basis points below the target financing rate and The prespecified interest rate on the deposit facility provides a floor for the overnight market interest rate.

Answer 15

D

Question 16

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.

Answer 16

B

Question 17

When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using

A. discount policy.

B. dynamic open market operations.

C. reserve requirements.

D. defensive open market operations.

Answer 17

D

Question 18

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.

Answer 18

C

Question 19

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. purchase; increase

B. sale; decrease

C. sale; increase

D. purchase; decrease

Answer 19

A