Financial Markets and Institutions, 8e (Mishkin)
1) Assets on the Fed’s balance sheet include
A) government securities and currency in circulation.
B) discount loans and reserves.
C) government securities and discount loans.
D) currency in circulation and reserves.
2) The monetary base consists of
A) currency in circulation and reserves.
B) government securities held by the Fed and discount loans.
C) government securities held by the Fed and currency in circulation.
D) discount loans and reserves.
3) An open market purchase of securities by the Fed will
A) increase assets of the nonbank public and increase assets of the banking system.
B) decrease assets of the nonbank public and increase assets of the Fed.
C) decrease assets of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase assets of the Fed.
E) increase assets of the banking system and decrease assets of the Fed.
4) An open market sale of securities by the Fed will
A) decrease liabilities of the Fed and not affect assets of the banking system.
B) decrease assets of the nonbank public and decrease assets of the Fed.
C) increase liabilities of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase liabilities of the Fed.
E) decrease assets of the banking system and increase assets of the Fed.
5) If the Federal Reserve wants to expand reserves in the banking system, it will
A) purchase government securities.
B) raise the discount rate.
C) sell government securities.
D) raise reserve requirements.
6) If the Federal Reserve wants to lower the monetary base and the money supply, it will
A) increase bank reserves.
B) lower the discount rate.
C) sell government securities.
D) lower reserve requirements.
7) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system
and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
8) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the
banking system and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
9) The federal funds rate is
A) the interest rate on loans from the Fed to a bank.
B) the price the Fed pays for government securities.
C) the interest rate on loans of reserves from one bank to another.
D) the price banks pay the Fed for government securities.
E) the interest rate on loans from a bank to the federal government.
10) The discount rate is
A) the interest rate on loans from the Fed to a bank.
B) the price the Fed pays for government securities.
C) the interest rate on loans of reserves from one bank to another.
D) the price banks pay the Fed for government securities.
E) the interest rate on loans from a bank to the federal government.
11) Holding everything else constant, if the federal funds rate rises, then the demand for
A) excess reserves rises because they have a higher return.
B) excess reserves falls because they have a higher cost.
C) required reserves falls because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.
12) Holding everything else constant, if the federal funds rate falls, then the demand for
A) excess reserves falls because they have a lower return.
B) excess reserves rises because they have a lower cost.
C) required reserves rises because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.
13) Bank reserves can be categorized as
A) vault cash and deposits at the Fed.
B) required reserves and excess reserves.
C) borrowed reserves and nonborrowed reserves.
D) all of the above.
14) An open market purchase
A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall.
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise.
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise.
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.
15) The supply curve for reserves is ________ when the federal funds rate is below the discount
rate and ________ when the federal funds rate is above the discount rate.
A) upward sloping; horizontal
B) upward sloping; vertical
C) vertical; horizontal
D) vertical; downward sloping
16) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed
A) raises reserves requirements.
B) does an open market purchase.
C) does an open market sale.
D) raises the discount rate.
17) The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed
A) decreases reserve requirements or does an open market purchase.
B) lowers the discount rate.
C) lowers the discount rate or does an open market purchase.
D) decreases reserves requirements.
E) does an open market sale.
18) Under usual circumstances, an increase in the discount rate causes
A) the federal funds rate to fall.
B) the federal funds rate to rise.
C) no change in the federal funds rate.
D) the supply of reserves to increase.
E) the supply of reserves to decrease.
19) If the Fed increases reserve requirements, the demand for reserves ________ and the
equilibrium federal funds rate ________.
A) increases; drops
B) decreases; rises
C) decreases; drops
D) increases; rises
20) The actual execution of open market operations is done at
A) the Board of Governors in Washington, D.C.
B) the Federal Reserve Bank of New York.
C) the Federal Reserve Bank of Philadelphia.
D) the Federal Reserve Bank of Boston.
21) During 2007 as the global financial crisis started, the Fed implemented several new lending
programs to increase liquidity, including ________.
A) expansion of the discount window
B) setting up the Term Auction Facility, making loans through competitive auctions
C) lending to investment banks
D) only A and B above.
E) A, B, and C, are all correct.
22) During QE1, the Fed purchased ________.
A) $1.25 trillion in mortgage-backed securities
B) $600 billion in long-term Treasury securities
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start)
D) $500 billion in U.S. corporate debt
23) During QE2, the Fed purchased ________.
A) $1.25 trillion in mortgage-backed securities
B) $600 billion in long-term Treasury securities
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start)
D) $500 billion in U.S. corporate debt
24) During QE3, the Fed purchased ________.
A) $1.25 trillion in mortgage-backed securities
B) $600 billion in long-term Treasury securities
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start)
D) $500 billion in U.S. corporate debt
25) The Federal Open Market Committee makes the Fed’s decisions on the purchase or sale of
government securities, but these purchases or sales are executed by the Federal Reserve Bank of
A) Chicago.
B) Boston.
C) New York.
D) San Francisco.
26) An open market transaction intended to change the level of bank reserves is a
A) repurchase agreement.
B) reverse repo.
C) dynamic operation.
D) defensive operation.
27) If the Federal Reserve wants to drain reserves from the banking system, it will
A) purchase government securities.
B) lower the discount rate.
C) sell government securities.
D) raise reserve requirements.
28) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves
________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
29) If the Fed wants to temporarily drain reserves from the banking system, it will engage in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) a “pump” agreement.
D) none of the above.
30) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to
________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
31) Discount loans to banks experiencing severe liquidity problems are called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) lender-of-last-resort credit.
32) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are
called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) lender-of-last-resort credit.
33) Disadvantages of using reserve requirements to control the money supply include
A) their overly-powerful impact on the money supply.
B) creating potential liquidity problems for banks with high levels of excess reserves.
C) their overly-powerful impact on the monetary base.
D) all of the above.
34) The Fed is reluctant to use reserve requirements to control the money supply because
A) of their overly-powerful impact on the money supply.
B) they have the potential to create liquidity problems for banks with low excess reserves.
C) frequent changes in reserve requirements complicate liquidity management for banks.
D) of all of the above.
E) of only A and B of the above.
35) When the Federal Reserve was created, its most important role was intended to be
A) a storage facility for the nation’s gold.
B) a lender of last resort.
C) a regulator of bank holding companies.
D) none of the above.
36) At its inception, the Federal Reserve was intended to be
A) the Treasury’s banker.
B) the issuer of government debt.
C) a lender of last resort.
D) a regulator of bank holding companies.
37) Price stability is desirable because
A) inflation creates uncertainty, making it difficult to plan for the future.
B) everyone is better off when prices are stable.
C) price stability increases the profitability of the Fed.
D) it guarantees full employment.
38) The Federal Reserve desires interest rate stability because
A) it allows for less uncertainty about future planning.
B) interest rate volatility often leads to demands to curtail the Fed’s power.
C) it guarantees full employment.
D) both A and B of the above.
39) When workers voluntarily quit a job or decline a job offer so they can search for a better one,
the resulting unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
40) When there is a mismatch between job requirements and the skills of available workers, the
resulting unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
41) The goal for high employment should be a level of unemployment at which the demand for
labor equals the supply of labor. Economists call this level of unemployment the
A) frictional rate of unemployment.
B) structural rate of unemployment.
C) natural rate of unemployment.
D) ideal rate of unemployment.
42) Although the goals of high employment and economic growth are closely related, policies
can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest.
B) encouraging people to save.
C) both A and B of the above.
D) neither A nor B of the above.
43) Although the goals of high employment and economic growth are closely related, policies
can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest and people to save.
B) encouraging firms to limit their price increases.
C) encouraging people to consume.
D) all of the above.
E) only A and C of the above.
44) The Fed’s monetary policy strategy can be described as follows:
A) The Fed uses its policy tools to adjust intermediate targets that directly impact its operating
targets in a way that allows the Fed to achieve its goals.
B) The Fed uses its policy tools to adjust operating targets that directly impact its intermediate
targets in a way that allows the Fed to achieve its goals.
C) The Fed uses its operating targets to adjust its intermediate targets that directly impact its
policy tools in a way that allows the Fed to achieve its goals.
D) None of the above.