Econ Test 3 - Tools of Monetary Policy Flashcards
Affects the quantity of reserves and the monetary base
Open market operations
The primary tool of monetary policy?
Open market operations
The federal funds rate is determined in the market for ____?
reserves
The federal funds rate is strongly influenced by what?
the fed’s open market operations
What is the primary target of monetary policy in contemporary periods?
the federal funds rate
What is the primary credit tool of the monetary policy?
Discount Loans
What does discount loans change?
borrowed reserves BR
What kind of borrowing occurs in Discount Loans?
banks borrowing directly from the Fed
What primarily reflects the Fed’s role as the lender of last resort to the banking system?
Discount Loans
Who is the lender of last resort to the banking system?
The Fed’s
Does discount loans affect monetary base?
Yes
The reserve requirement is changed at whose discretion?
The Fed’s with statutory limits
What isn’t really used as a monetary policy tool since the early years, but still affects the money multiplier?
Reserve Requirement
The fourth tool that was recently added to the Monetary Tools
Interest paid on RR and ER balances
Quantity of reserves demanded =
Required reserves + quantity of excess reserves demanded
RR + ER
What are insurance against deposit outflows?
Excess reserves
What is the cost of holding excess reserves?
The interest rate that could have been earned by ledning them out minus the interest rate that is paid on these reserves by the Fed
The higher the federal funds rate is above the rate paid on excess reserves the higher/lower the opportunity cost of holding excess reserves
higher
The lower the federal funds rate is above the rate paid on excess reserves, the higher/lower the opportunity cost of holding excess reservers
lower
The quantity of reserves demanded is neg/pos related ot the federal funds interest rate
negatively
When is there no opportunity cost to holding excess reserves?
If the federal funds rate tries to fall below the excess reserves rate
If the federal funds rate equals the excess reserves rate, what happens to reserves demanded (R^d)
becomes infinitely elastic (flat)
When did the Fed start paying interest on reserves, both required and excess?
October 2008
What is the targe range for effective federal funds rate?
0 to 1/4 percent
The federal reserve board established the interest rates on reserve balances and excess balances at what percent?
1/4
What was the original interest rate based on for required and excessive reserves?
a formula
What are the two components of supply of reserves?
non-borrowed reserves
borrowed reserves
Who supplies the non-borrowed reserves?
The fed’s out of market operations
Where do borrowed reserves come from?
the Fed by banks wanting/needing reserves
Borrowed reserves come via?
discount loans
The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility
discount rate
What is the discount window?
the Federal Reserve Bank’s lending facility
How many discount window programs are offered?
3
What are the three discount window programs offered?
Primary credit
Secondary credit
seasonal credit
Are discount window loanns fully secured?
yes
Under this program, loans are extended for a very short term (usually overnight) to depository institutions in good financial conditions.
primary credit program
What do depository institutions that are not eligible for primary credit apply for?
secondary credit
When will depository institutions apply for secondary credit?
meet short-term liquidity needs or to resolve severe financial difficulties
This is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs?
Seasonal credit
Where is the discount rate charged for primary credit set?
Above the usual level of short-term market interest rates
What is the Federal Reserve’s main discount window program?
Primary credit
What is the term used at times to mean the primary credit rate?
discount rate
Is the discount rate on secondary credit above or below the rate on primary credit?
above
How is the discount rate for seasonal credit found?
average of selected market rates
Who establishes discount rates?
each Reserve Bank’s board of directors
Who are the discount rates subject to review of?
The board of governors of the federal reserve system
What is a substitute for borrowing from other banks?
borrowing from the Fed
What is the discount rate set by the Fed at a fixed amount above the target federal funds rate?
the cost of borrowing from the Fed
If federal funds rate < Interest d what happens to borrowed reserves and banks borrowing?
banks won’t borrow from the feds and borrowed reserves = 0
When is the supply curve of reserves vertical at the amount supplied?
When borrowed reserves = 0 because federal funds rate < interest d
As federal funds rate (iff) rises above id banks will borrow more at ___ and re-lend at ____?
borrower more at id
re-lend at federal funds rate
When is the supply curve infinitely elastic?
When it is horizontal
When does the supply curve become horizontal at id?
as discount borrowing puts more and more reserves into the market
Pressure from where can raise federal funds rate above id?
reserve market pressure
Rate on what sets a ceiling on the federal funds rate?
discount loans
Rate on what sets a floor on the federal funds rate?
excess reserves
NBR means?
nonborowed reserves supplied at fed’s discretion
How is the targeted federal funds rate set?
The fed estimates reserves demanded and sets the nonborrowed reserves to establish the target
id =
discount loan rate
When is there no disincentive to borrowing from the fed?
when federal funds rate rises to greater than or equal to the discount loan rate
When does opportunity cost of excess reserves result in downward sloped demand for reserves?
When federal funds rate > excess reserve rate
Open market purchases increase what?
nonborrowed reserves
Open market purchases shift the vertical section of the supply curve right/left?
right
An increase in nonborrowed reserves shifts the vertical section of the supply curve right/left?
right
Open market sale inc/dec nonborrowed reserves?
decreases
Open market sales shifts vertical section of the supply curve right/left?
left
A shift left in the vertical section of the supply curve results from?
an open market sale and a decrease in nonborrowed reserves
What does the effects of an open market operation on the federal funds rate depend on?
Whether the supply curve intersects the demand curve in its downward sloped section versus its flat section
If intersection stays on downward sloped section of a demand curve than an OMO purchase creates an excess/deficit supply of reserves
excess
What happens to the equilibrium when there is a greater quantity of reserves demanded as opportunity cost of holding excess reserves falls?
new lower equilibrium
An open market operation creates an _____ demand for reserves at the initial federal funds rate?
excess
Less/more quantity of reserves demanded as opportunity cost of holding excess reserves rises?
lesser
If the intersection is on the horizontal section of a demand curve, then an open market operation purchase results in the new reserves _______?
being absorbed as excess reserve earnings
If the intersection stays on the downward sloped section of the demand curve, what happens to the federal funds rate?
new lower equilibirum
If the intersection stays on the horizontal section of the demand curve, what happens to the federal funds rate?
nothing
What action does the Fed take in response to the zero lower bound (ZLB) problem that it faces today?
large scale, unconventional policy of asset purchasing (long-term bond buying)
The interest rate the Fed pays on reserves should set what?
a lower bound for the federal funds rate
What is the rate banks charge each other for reserves?
Federal funds rate
Open market operation purchase shifts reserves supply right/left?
right
When supply > demand for reserves, bidding increases/decreases?
decreases
As opportunity cost falls, quantity of reserves held inc/dec along reserves demanded?
increases
This is reflected as a shift down of the horizontal section of the supply curve
discount rate decrease
A discount rate decrease results in a shift up/down of the horizontal section of the supply curve?
down
A discount rate increase results in a shift of the horizontal supply curve up/down?
up
A shift in the horizontal section of the supply curve up is a result of?
discount rate increase
What do the effects of a change in the discount rate depend on?
Whether the horizontal section of the supply curve intersects the demand curve in its downward sloped section
Is it normal to have a discount rate set above the target federal funds rate?
yes
In a normal situation, will increases and decreases in the discount rate affect the federal funds rate?
no
When is the discount rate situation considered normal?
When the discount rate is set above the target federal funds rate
The intersection of supply and demand on the horizontal section of the supply curve implies what?
some discount borrowing is occuring
When the federal funds rate = the discount rate, the intersection of the supply and demand curve is occuring where?
on the horizontal section of the supply curve
As more reserves become available to the banking system, what happens to the federal funds rate?
gets pushed down to the lower discount rate
As less reserves are available to the banking system, what happens to the federal funds rate?
its pushed up
An increase in the discount rate encourages/discourages discount borrowing?
discourages
The fed sets the discount rate above the federal funds rate as a matter of what?
policy
What is the fed’s policy upper limit called?
federal funds rate
The discount rate is not allowed to do what?
permanently affect the federal funds rate
The discount rate serves as what to the federal funds rate?
an upper bound on the federal funds rate
What would happen if the federal funds rate rose to a point where it might exceed the discount rate?
banks would obtain all their desired reserves by borrowing from the fed rather than other banks
Why does the Fed require the bank to maintain a certain percentage of deposits as reserves?
in case depositors want to draw money out
When a bank has excess reserves they are known as what?
federal funds
Why are excess reserves known as federal funds?
they are held on deposit in regional federal reserve banks
When one bank borrows money from another bank, the rate that is charged is called?
the federal funds rate
When a bank wants to lend more money than it has, it borrows from where?
A bank with excess reserves
When will the required reserve fall below the required percentage?
high demand for loans
sudden demand for withdrawals
The rate the Feds charge banks to borrow?
discount rate
When does the quantity of reserves demanded increase for any and all federal funds rate?
when the feds raise reserve requirements
When the feds raise the reserve requirements the demand curve shifts left/right?
right
When the fed reduces reserve requirements, what happens to the federal funds rate?
falls
When the fed increase reserve requirements what happens to the federal funds rate?
increases
When required reserves are raised, the demand curve shifts left/right?
right
If fed increases required reserves, the federal funds rate rises/falls?
rises
It has been suggested that the Feds do what to encourage bank lending?
pay negative interest
The federal reserve’s operating procedures are designed to limit fluctuations in the federal funds rate between?
the discount rate and the excess reserve rate
The interest rate the Fed pays on reserves should set a lower/higher bound for the federal funds rate
lower
The interest rate the Fed pays on reserves should set a lower bound for?
the federal funds rate
The interest rate the Fed charges on discount loans to banks should set a lower/upper bound for the federal funds rate?
upper
The interest rate the Fed charges on discount loans to banks should set an upper bound for?
the federal funds rate
The interest rate the Fed pays should limit fluctuations in its?
policy rate
These open market operations are intended to change the monetary base and level of reserves
dynamic
Monetary policy is reflected in what operations?
dynamic
These open market operations are intended to offset the various factors that affect reserves and the monetary base that are outside the Fed’s direct control
defensive
Defensive OMO defend against factors that would do what with policy objectives?
they would interfere with policy objectives
Varying float, currency holdings, treasury deposits, etc.. are examples of what OMO?
defensive
The federal funds rate aims to stay between?
0%-25%
Where do OMO get carried out at the New York Fed bank?
trading desk
OMO are carried out based on what?
the policy it has received from the last FOMC meeting
Most transactions are designed to be?
self-reversing
Fed purchases that are repurchased by the seller within 1-15 days
repurchase agreements
Fed sales that are essentially reverse repos
Matched sale-purchase agreements
Are outright transactions reversable?
no
Permanent changes or implementations to reserves or policies are carried out via?
outright transactions
These occur at the initiative of the Fed at any time
open market operations
Adv of OMO?
occur at the initiative of the fed at any time
flexible and precise
easily reversed
quick
Does the Fed have complete control over the specific amount of reserves that will be added or removed from the banking system?
yes
What have been essentially THE monetary policy tool of the FED for many years?
OMOs
Virtually all traditional monetary policy is carried out via?
OMOs
How can the feds encourage or discourage bank borrowing at the discount window?
by altering the discount rate
How much is a bank allowed to borrow at any time?
any amount they want
Why are discount rates set higher than federal funds rate?
to encourage banks to borrow from other banks
Secondary credit is granted to banks with?
severe liquidity problems
Banks only are granted secondary credit when?
they are in trouble
What prevents the federal funds rate from rising too far above its target level?
the window and the discount rate
Is the secondary credit rate higher or lower than the primary credit rate?
higher
If a borrower had arbitrage opportunities, they would likely use primary or secondary credit?
primary
If a borrower had a liquidity demand or was addressing an overnight overdraft would they use primary or secondary credit?
secondary
If the borrower was in a tight money market or meeting a need for backup funding would they use primary or secondary credit?
secondary
When is it inappropriate to borrow secondary credit?
arbitrage opp
facilitate balance sheet expansion
Primary credit is available in terms from?
overnight to 90 days
Secondary credit is generally extended on?
a very short-term basis, usually overnight
What is not used to fund an expansion of the borrower’s assets?
secondary credit
The main monetary policy tool of the European Central Bank?
Open Market Operations
Reserve requirements of the European Central Bank?
2% of the total amount of checking deposits and other short-term deposits
What is it called when the federal reserve implements unprecedented increases in its lending facilities to provide liquidity to the financial markets?
liquidity provisions
