Homework 6

Question 1

The discount window is:
A) another name for the discount rate
B) the means by which the Fed makes discount loans to banks
C) the spread between the discount rate and the T-bill rate
D) the period each mont during which the banks are allowed to apply for discount loans

Answer 1

B) the means by which the Fed makes discount loans to banks

Question 2

Discount loans available to healthy banks which can be used for any purpose are called:
A) primary credit
B) secondary credit
C) seasonal credit
D) repo loans

Answer 2

A) primary credit

Question 3

Which of the following statements is correct?
A) the discount rate is generally above the federal funds rate
B) the discount rate is generally below the federal funds rate
C) the discount rate is generally equal to the federal funds rate
D) there is no general pattern

Answer 3

A) the discount rate is generally above the federal funds rate

Question 4

Which of the following statements accurately describes the Fed’s control of discount policy?
A) it controls discount policy more completely than it controls open market operations
B) it must abide by discount rates set by Congress
C) it controls discount policy less completely than it controls open market operations
D) it controls discount policy completely, just as it controls open market operations

Answer 4

C) it controls discount policy less completely than it controls open market operations

Question 5

The Fed's inability to instantaneously observe changes in inflation and economic growth result in:
A) information lag
B) impact lag
C) policy lag
D) jet lag

Answer 5

A) information lag

Question 6

Which of the following is an operating target?
A) M1
B) M2
C) non borrowed reserves
D) the inflation rate

Answer 6

C) non borrowed reserves

Question 7

According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT:
A) output gap
B) current inflation
C) inflation gap
D) yield curve

Answer 7

D) yield curve

Question 8

The inflation gap can best be described as:
A) the percentage difference between GDP and its potential
B) the difference between inflation and its target
C) the change in the inflation rate from one year to the next
D) the difference between the inflation rate and the average inflation rate

Answer 8

B) the difference between inflation and its target

Question 9

An open market purchase:
A) increases the monetary base
B) decreases the monetary base
C) increases the federal funds rate
D) is another name for a discount loan

Answer 9

A) increases the monetary base

Question 10

How were open market operations conducted prior to 1935?
A) Federal Open Market Committee
B) Secretary of the Treasury
C) district Federal Reserve banks
D) Banking committee of the House

Answer 10

C) district Federal Reserve banks

Question 11

Under which circumstance is the Fed most likely to carry out a defensive open market operation?
A) to prevent an increase in inflation
B) if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float
C) to defend the value of the US dollar on the foreign exchange market
D) to prevent the negative impact of a demand shock

Answer 11

B) if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float

Question 12

An open market sale:
A) decreases the price of Treasury securities and also decreases their yield
B) increases the price of Treasury securities and decreases their yield
C) increases the price of Treasury securities and also increases their yield
D) decreases the price of Treasury securities and increases their yield

Answer 12

D) decreases the price of Treasury securities and increases their yield

Question 13

The FOMC states its overall objectives for interest rates in:
A) the Governor's Order
B) the Policy Directive
C) the Federal Reserve bulletin
D) the Chairman's Order

Answer 13

B) the Policy Directive

Question 14

If the accounting manager find the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will:
A) order banks to reduce their reserves
B) order banks to raise their interest rates in an attempt to get them to loan out more of their reserves
C) conduct an open market purchase
D) conduct an open market sale

Answer 14

D) conduct an open market sale

Question 15

Open market operations:
A) lack flexibility because only very small purchases or sales may be carried out in any given month
B) lack flexibility because open market purchases cannon easily be offset by subsequent open market sales
C) are more flexible than other policy tools
D) may be carried out only on Friday

Answer 15

C) are more flexible than other policy tools

Question 16

Which of the following is NOT an accurate description of open market operations prior to 2008?
A) it was used to affect the market for bank reserves
B) it was used to control the federal funds rate
C) it involved buying and selling short-term Treasury securities
D) it involved buying and selling long-term securities

Answer 16

D) it involved buying and selling long-term securities

Question 17

What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities?
A) Operation Go Long
B) Operation Twist
C) QE2
D) QE3

Answer 17

B) Operation Twist

Question 18

Which of the following best describes a policy of inflation targeting?
A) it’s an inflexible rule that requires the central bank to always achieve a specified inflation rate
B) it allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession
C) it allows the central bank the flexibility of setting different inflation targets each year
D) it requires central banks to target current inflation rather than inflation forecasts

Answer 18

B) it allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession

Question 19

Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor’s rule following the recovery from the 2001 recession?
A) the federal funds rate was above that suggested by Taylor’s rule
B) the federal funds rate was below that suggested by Taylor’s rule
C) the federal funds rate was about equal to that suggested by Taylor’s rule
D) there was not a clear relationship

Answer 19

B) the federal funds rate was below that suggested by Taylor’s rule

Question 20

The output gap can best be described as:
A) the percentage difference between GDP and its potential
B) the difference between GDP in the current year compared to the previous year
C) the difference between a nation’s GDP and that of the nation with the highest GDP
D) the difference between the GDP and it’s forecasted level

Answer 20

A) the percentage difference between GDP and it’s potential