FC CH 5

Question 1

Changing the ______ requirement would have the least impact on money supply

Answer 1

Changing the margin requirement (Regulation T) would have the least impact on money supply.

Question 2

True or False: The FRB only sets short-term rates (discount rate) and has no direct control over long-term yields.

Answer 2

True

Question 3

Changing the _______ requirement would have the most immediate impact on money supply.

Answer 3

Changing reserve requirements would have the most immediate impact on money supply.

Question 4

What indicator measures all of the goods and services that are produced with the United States?

Answer 4

Gross Domestic Product (GDP)

Question 5

The difference between the yields for high rated corporates and Treasuries is referred to as the ______ over Treasuries.

Answer 5

The difference between the yields for high rated corporates and Treasuries is referred to as the spread over Treasuries.

Question 6

To slow inflation, the FRB may _______ the money supply and ____ Treasuries to banks.

Answer 6

To slow inflation, the FRB may tighten the money supply and sell Treasuries to banks.

Question 7

If interest rates trend upward as the term of the debt lengthens, this is referred to as a _______________ yield curve.

Answer 7

If interest rates trend upward as the term of the debt lengthens, this is referred to as a positive/normal yield curve.

Question 8

On what two items does monetary policy focus?

Answer 8

Money supply and the extension of credit (interest rates)

Question 9

Using government spending and taxation to influence the economy is considered ______ policy.

Answer 9

Using government spending and taxation to influence the economy is considered fiscal policy.

Question 10

What role does the Federal Open Market Committee play in the economy?

Answer 10

The FOMC oversees the trading of government securities in the secondary market.

Question 11

What index is designed to mirror the cost of a basket of goods purchased by a typical individual?

Answer 11

The Consumer Price Index (CPI)

Question 12

True or False: Long-term debt is considered more liquid than short-term debt.

Answer 12

False

Question 13

Define the monetary base.

Answer 13

The sum of currency in circulation as well as deposits held by banks and other depositories in their accounts at the FRB

Question 14

High demand for short-term debt would lead to an ________ yield curve.

Answer 14

High demand for short-term debt would lead to an inverted yield curve.

Question 15

True or False: Investments in money market mutual funds are typically included in M1.

Answer 15

False. Money market fund deposits are included in M2, not M1.

Question 16

What is included in M2?

Answer 16

All items included in M1 as well as savings deposits, small denomination time deposits, and money market mutual funds

Question 17

What is the Producer Price Index (PPI) an indicator for?

Answer 17

The first indicator of the level of inflation each month

Question 18

What is included in M1?

Answer 18

Currency that is held by the public, demand deposits, and checkable deposits

Question 19

What yield curve has short-term rates that are higher than long-term rates?

Answer 19

An inverted, abnormal, or negative yield curve

Question 20

What is the only interest rate that is directly controlled by the FRB?

Answer 20

The discount rate

Question 21

List the three business cycle indicators.

Answer 21

Leading, coincident and lagging

Question 22

__________ deficit occurs when the economy is operating at full employment.

Answer 22

Structural deficit occurs when the economy is operating at full employment.

Question 23

List the three main objectives of monetary policy.

Answer 23

Stable prices, long-term economic growth, and maximum employment

Question 24

As it relates to bonds, explain compression.

Answer 24

The fact that prices on certain debt will not rise as much as other debt when interest rates fall

Question 25

Prices on bonds of equal rating, but with different coupons, would likely be influenced by ___________.

Answer 25

Prices on bonds of equal rating, but with different coupons, would likely be influenced by compression.

Question 26

List four items that influence a bond’s liquidity.

Answer 26

Its coupon, quality, maturity, and callability

Question 27

Define flight to quality.

Answer 27

Investors choosing high quality debt over low quality debt

Question 28

True or False: Fiscal policy is implemented by the Federal Reserve Board.

Answer 28

False. Fiscal policy is implemented by Congress.

Question 29

Define liquidity.

Answer 29

The ability to readily convert a security into cash

Question 30

If the government enters into repurchase agreements, what is the effect on money supply?

Answer 30

A short-term increase