Chapter 10

Question 1

balance sheet

Answer 1

: A list of the assets and liabilities of a
bank (or firm) that balances: Total assets equal
total liabilities plus capital.

Question 2

bubbles

Answer 2

A situation in which the price of an asset differs from its fundamental market value.

Question 3

deposit facility

Answer 3

The European Central Bank’s standing facility in which banks are paid a fixed
interest rate 100 basis points below the target
financing rate.

Question 4

discount loans

Answer 4

A bank’s borrowings from the Federal
Reserve System.

Question 5

discount rate

Answer 5

The interest rate that the Federal
Reserve charges banks on discount loans.

Question 6

discount window

Answer 6

The Federal Reserve facility at
which discount loans are made to banks.

Question 7

dual mandate

Answer 7

: A central bank mandate in which
there are two equal objectives, price stability and
maximum employment.

Question 8

dynamic open market operations

Answer 8

Open market operations intended to change the level of reserves
and the monetary base.

Question 9

excess reserves

Answer 9

Reserves in excess of required
reserves.

Question 10

federal funds rate

Answer 10

The interest rate on overnight
loans of deposits at the Federal Reserve.

Question 11

forward guidance

Answer 11

A strategy in which the Fed
committed to keep the federal funds rate at zero

Question 12

hierarchical mandate

Answer 12

A mandate for the central
bank that puts the goal of price stability first,
but as long as it is achieved other goals can be
pursued.

Question 13

inflation targeting

Answer 13

A monetary policy strategy that
involves public announcement of a medium-term
numerical target for inflation

Question 14

lender of last resort

Answer 14

Provider of reserves to financial
institutions when no one else would provide
them to prevent a financial crisis.

Question 15

longer term refinancing operations

Answer 15

A second category
of open market operations by the European
Central Bank that are similar to the Fed’s
outright purchase of securities.

Question 16

macroprudential regulation

Answer 16

: Regulatory policy to
affect what is happening in credit markets in
the aggregate.

Question 17

conventional monetary policy tools

Answer 17

Three tools of
monetary policy—open market operations,
discount lending, and reserve requirements—
the Federal Reserve uses to control the money
supply and interest rates.

Question 18

main refifancing operations

Answer 18

Operations that involve
weekly reverse transactions (purchase or sale
of eligible assets under repurchase agreements
or credit operations against eligible assets as
collateral) that are reversed within two weeks
and are the primary monetary policy tool of the
European Central Bank.

Question 19

marginal lending facility

Answer 19

The European Central
Bank’s standing lending facility in which banks
can borrow (against eligible collateral) overnight loans from the national central bank at a
rate 100 basis points above the target financing
rate.

Question 20

marginal lending rate

Answer 20

The interest rate charged by
the European Central Bank for borrowing at its
marginal lending facility

Question 21

matched sale purchase

Answer 21

An arrangement
whereby the Fed sells securities and the
buyer agrees to sell them back to the Fed in
the near future; sometimes called a reverse
repo. 2

Question 22

transaction costs

Answer 22

The time and money spent
trying to exchange financial assets, goods, or
services.

Question 23

natural rate of output

Question 24

natural rate of unemployment

Answer 24

The rate of unemployment consistent with full employment at which the
demand for labor equals the supply of labor.

Question 25

nominal anchor

Answer 25

A nominal variable such as the inflation rate, an exchange rate, or the money supply
that monetary policy makers use to tie down the
price level.

Question 26

nonconventional monetary policy tools. 3 TOOLS!!

Answer 26

Three noninterest-rate tools used to stimulate the
economy: (1) liquidity provision, (2) asset
purchases, and (3) commitment to future
monetary policy actions.

Question 27

open market operations

Answer 27

The buying and selling of
government securities in the open market that
affect both interest rates and the amount of
reserves in the banking system.

Question 28

overnight cash rate

Answer 28

The interest rate for very-shortterm interbank loans in the euro area

Question 29

potential output

Answer 29

The level of output that is produced
at the natural rate of unemployment. (Also called
natural rate of output.)

Question 30

price stability

Answer 30

: Low and stable inflation.

Question 31

primary dealers

Answer 31

Government securities dealers,
operating out of private firms or commercial banks,
with whom the Fed’s open market desk trades

Question 32

credit easing

Answer 32

The altering of the composition of
the Fed’s balance sheet in order to improve the
functioning of particular segments of the credit
markets.

Question 33

defensive open market operations

Answer 33

Open market
operation intended to offset movements in other
factors that affect reserves and the monetary
base.

Question 34

quantitative easing

Question 35

repurchase agreement

Answer 35

A form of loan in which the
borrower simultaneously contracts to sell securities and contracts to repurchase them, either on
demand or on a specified date

Question 36

required reserve ratio

Answer 36

The fraction of deposits that the
Fed requires to be kept as reserves.

Question 37

required reserves

Answer 37

Reserves that are held to meet
Fed requirements that a certain fraction of bank
deposits be kept as reserves.

Question 38

reserve requirements

Answer 38

Regulations making it obligatory for depository institutions to keep a certain
fraction of their deposits in accounts with the
Fed.

Question 39

reserves

Answer 39

Banks’ holding of deposits in accounts with
the Fed, plus currency that is physically held by
banks (vault cash).

Question 40

reverse repo

Question 41

reverse transactions

Answer 41

Purchase or sale of eligible
assets by the European Central Bank under
repurchase agreements or credit operations
against eligible assets as collateral that are
reversed within two weeks.

Question 42

standing lending facility

Answer 42

A lending facility in which
healthy banks are allowed to borrow all they
want from a central bank.

Question 43

t account

Question 44

target financing rate

Answer 44

The European Central Bank’s
target for the overnight cash rate, the interest
rate for very-short-term interbank loans in the
euro area.

Question 45

time inconsistency problem