Slides 15-17

Question 1

Low mortgage rates, and particularly adjustable rates, provided a boost to ___.

Answer 1

Home sales

Question 2

In early August 2007, Structured Investment Vehicles were unable to roll over ___.

Answer 2

Commercial paper

Question 3

To blame for the 2008 crisis is the fed for keeping rates ___, securitization of ___, ___ agencies, risky mortgage instruments and a naive public.

Answer 3

Keeping rates too low for too long, securitization of mortgages, rating agencies

Question 4

What forced borrowers to show up at the doorsteps of banks was the inability of issuers to roll-over ___.

Answer 4

Commercial paper

Question 5

Banks faced with increased ___ requirements, aggressively attempted to increase so-called “___-Liabilities”

Answer 5

Funding, managed

Question 6

The Eurodollar was born out of an incentive for US banks to circumvent reserve requirements and regulation ___.

Answer 6

Q

Question 7

LIBOR is the ___ rate for a subset of London banks.

Answer 7

Eurodollar rate

Question 8

LIBOR setting are based on a survey of ___ London banks; the BBA averages the middle ___ responses.

Answer 8

16, 8

Question 9

Bidding for ___ caused a rise in term interbank funding rates, such as Eurodollars or LIBOR.

Answer 9

Managed Liabilities

Question 10

LIBOR rates are analogous to ___ rates.

Answer 10

Eurodollar

Question 11

LIBOR represents the ___ funds to banks (similar to ___).

Answer 11

Marginal cost of term funds, similar to Fed Funds

Question 12

Many business loans and adjustable rate sub-prime mortgages are priced at a spread over ___.

Answer 12

The LIBOR rate

Question 13

Banks’ sudden surge in assets triggered ___ requirements rendering strains in the ___ funding market.

Answer 13

Funding/liquidity, inter-banks

Question 14

In response to funding strains and stress on bank capital positions, banks did what?

Answer 14

Tightened lending standards

Question 15

In addition to credit becoming less available, it become more ___.

Answer 15

Costly

Question 16

When banks borrow from the discount window, bank reserves (increase/decrease).

Answer 16

Increase

Question 17

Prior to 2003, the discount rate was set (above/below) the Fed Funds rate.

Answer 17

Below

Question 18

Prior to 2003, the discount rate served as an ___ on the Fed funds rate.

Answer 18

Anchor

Question 19

Banks were forced to borrow from the discount window because the provision of non-borrowed reserves was ___ the demand for combined demand for required and excess reserves.

Answer 19

Was below

Question 20

The larger the volume of forced discount window borrowing, the ___ the spread between the discount rate and the Funds rate.

Answer 20

Greater

Question 21

The higher the implicit costs of borrowing from the fed, the ___ the spread between the Funds rate and the discount rate for a given level of borrowing.

Answer 21

The Larger

Question 22

The FOMC would establish “___,” instructing the Open Market Desk to provide nonborrowed reserves in such volumes as to force a particular volume of discount window borrowings.

Answer 22

Borrowing Objectives

Question 23

By establishing Borrowing Objectives, the FOMC was attempting to foster a particular ___ between the funds rate and the discount rate.

Answer 23

Spread

Question 24

Beginning January 2003, the discount rate became a ___ rate, being set ___ percent (above/below) the prevailing Fed funds target.

Answer 24

Penalty; 1%, Above

Question 25

The penalty rate was an attempt to remove any ___ costs of borrowing, and banks were no longer ___ from borrowing at the discount window.

Answer 25

Implicit, discouraged

Question 26

The penalty rate approach was thought of as putting a ___ on the Fed funds rate.

Answer 26

Putting a ceiling

Question 27

Cutting the discount rate only impacts the funds rate only if banks are ___.

Answer 27

Are already borrowing heavily from the window

Question 28

As a crisis-related countermeasure, the fed reduced the spread between the funds rate target and the discount rate from 1% to 0.50%, and the intent was to encourage ___, so that stress in the ___ markets would ease.

Answer 28

Borrowings, inter-bank funding markets

Question 29

Banks were concerned that if it became known that they were accessing the discount window, they would be perceived as suffering ___ problems.

Answer 29

Liquidity

Question 30

To ease terms at discount window, the Fed instituted the ___ ___ Facility, and the PDCF which stands for ___.

Answer 30

Term Auction Facility, Primary Dealer Credit Facility

Question 31

The PDCF ensured ___ to dealers with appropriate collateral.

Answer 31

Liquidity

Question 32

As a crisis-response, the Fed activated currency Swap Lines, providing dollar related credit to foreign central banks to enable a ___ of these dollars to banks outside the US.

Answer 32

Re-lending

Question 33

The rise in bank reserves associated with liquidity provisions would have resulted in a fed funds rate plunge to zero, if not for ___.

Answer 33

Payment of interest on reserves

Question 34

By paying interest on reserves IOR, the fed could expand its ___ ___ without having the funds rate fall to zero. The thinking was that IOR would put a ___ on the funds rate, even when there was an abundance of excess reserves in the banking system.

Answer 34

Balance Sheet, Floor

Question 35

If the fed pays 0.25% interest on reserve balances, this lifts the floor on funds from zero to ___.

Answer 35

0.25%

Question 36

The Fed will move towards managing the Fed funds rate within a "___" sometime in the years ahead,

Answer 36

Corridor

Question 37

The discount rate serves as the theoretical ___ on the funds rate.

Answer 37

Ceiling

Question 38

The IOER serves as a theoretical ___ on the funds rate.

Answer 38

Floor

Question 39

Together the IOER and the Discount Rate define a "___" for the fed funds rate.

Answer 39

Corridor

Question 40

A shift in the demand for reserves (causes/does not cause) the funds rate to shift to trade above ceiling.

Answer 40

Does not

Question 41

As a rebuttal to the term quantitative easing, Bernake deemed that securities purchases work by affecting the ___ on the acquired securities, via ___ effects on investors portfolios, on a wider range of assets.

Answer 41

Yields, substitution

Question 42

Quantitative easing is the targeted expansion of ___, which are the same as ___, with the intention of influencing money and ___ growth.

Answer 42

Fed liabilities, same as bank reserves/monetary base, credit

Question 43

In contrast to QE, LSAP (Large Scale Asset Purchases) was aimed at the ___ side of the Fed's balance sheet with the intention of lowering ___ and private sector borrowing costs.

Answer 43

Asset-side, longer term interest rates

Question 44

The QE expression is used to mean an expansion of the Fed's ___.

Answer 44

Security holdings

Question 45

When the Fed buys securities, bank reserves increase. But the Fed's main goal was rather to influence longer-term ___ and ___ costs.

Answer 45

Interest rates, private borrowing costs

Question 46

LSAP1 or QE1 was initiated to reduce the cost and increase the availability of credit for the purchase of ___.

Answer 46

Houses

Question 47

LSADP2 or QE2 was a plan to buy an additional $600b in Treasury securities, aimed to promote a stronger pace of economic recovery and ensure that inflation was at levels consistent with its ___ (e.g. diminishing ___ risk).

Answer 47

Mandate, deflationary risk

Question 48

Under the maturity extension program, the Fed would sell $400b of ___-term securities by the end of Jun 2012, and use the proceeds to buy $400b of ___-term securities.

Answer 48

Shorter-term, longer-term

Question 49

The intent of the maturity extension program was to extend the ___ of the securities in the Fed's portfolio from about 5 years to 100 months.

Answer 49

Average maturity

Question 50

LSAP3 or QE3 was a plan to buy $40b of Agency MBS per month. The purchases would continue until there was evidence of ___ in labor market conditions.

Answer 50

Sustained improvement

Question 51

Additions to SOMA have recently been ___-term securities.

Answer 51

Longer

Question 52

The average maturity of the Fed's holdings have recently exceeded ___-years compared to only about 3.5 years prior to the onset of the crisis.

Answer 52

10

Question 53

Prior to Lehman failure, reserve balances were effectively unchanged, but after Lehman, reserve balances ___.

Answer 53

Surged

Question 54

Monetarists believe the Fed influences the economy through the ___ side of its balance sheet (which are bank reserves and the ___). These types refer to recent policy as (QE/LSAP).

Answer 54

Liability, monetary base, QE

Question 55

Keynesians view policy as working more through ___ channels, and are likely to refer to recent policy as (QE/LSAP).

Answer 55

Interest rate, LSAP

Question 56

In Operation Twist of 1961, the Fed used its ___ ___ to influence longer term rates.

Answer 56

Balance sheet

Question 57

Operation twist was an attempt to promote higher ___-term rates for ___ reasons, while pushing ___-term rates lower to promote economic activity.

Answer 57

Short-term, international, long-term

Question 58

The fed promoted higher short-term rates while pushing longer-term rates down by selling ___ and buying ___ & ___.

Answer 58

Selling Bills, Buying Notes & Bonds

Question 59

Monetary policy affects spending and inflation with a ___, and thus policy decisions must be based on an assessment of medium-term economic prospects.

Answer 59

Lag