978-0133427073 Test Bank Chapter 10 Part 3

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73) Which of the following statements is true regarding the Fed’s procedures for operating the

discount window?

A) The Fed’s operating procedures and paying interest on reserves contains the federal funds rate

between the interest rate paid on reserves and the discount rate.

B) The Fed’s operating procedures and paying interest on reserves creates more fluctuation in the

federal funds rate than if they simply didn’t pay interest on reserves.

C) The Fed’s operating procedures and paying interest on reserves has no impact on the

fluctuation of the federal funds rate.

D) None of the above is correct.

74) Which of the following statements is true?

A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the

deleveraging of credit markets reduces economic activity.

B) Bubbles driven soley by irrational exuberance lead to a failure of financial institutions.

C) Both A and B are correct.

D) Neither A nor B is correct.

75) If the Fed wants to “prick” an asset-pricing bubble driven by a credit boom, what is the

primary tool for accomplishing this?

A) Raising interest rates

B) Lowering interest rates

C) Increasing reserve requirements

D) Taking a short position in the overpriced asset

76) In response to an asset-price bubble, macroprudential regulation appears to be the right tool.

What is macroprudential regulation?

A) Increasing the federal funds rate across the macroeconomy

B) The use of tax incentives to capture some of the gains from bubbles

C) Regulatory policy to affect what is happening in credit markets in the aggregate

D) None of the above is correct.

77) As of June 2013, the consolidated balance sheet of the Federal Reserve System included

about ________ in assets.

A) $3.5 trillion

B) $2.0 trillion

C) $1.5 trillion

D) $500 billion

1) An objective of the Federal Reserve in its conduct of monetary policy is high employment.

2) When workers voluntarily leave work while they look for better jobs, the resulting

unemployment is called frictional unemployment.

3) The discount rate is an operating target.

4) The federal funds rate is an operating target.

5) Open market purchases by the Fed increase the supply of nonborrowed reserves.

6) Open market purchases by the Fed cause the federal funds rate to rise.

7) Flexibility is a requirement in selecting an intermediate target.

8) Inflation targeting makes the central bank less accountable.

9) An open market sale leads to an expansion of reserves and deposits in the banking system and

hence to a decline in the monetary base and the money supply.

10) Decreased transparency of the monetary policy strategy through communication with the

public and the markets about the plans and objectives of monetary policymakers is an element of

inflation targeting.

11) The Fed’s operating procedures and paying interest on reserves contains the federal funds

rate between the interest rate paid on reserves and the discount rate.

12) An important lesson from the global financial crisis is that central banks and other regulators

should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction.

Intervention is always a mistake.

13) Quantitative easing and credit easing are essentially the same thing.

14) In the long run, the price stability goal is inconsistent with other goals, such as economics

growth, stability of financial markets, etc.

15) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot

produce lower unemployment or more employment in the long run.

16) In the short run, price stability often conflicts with the goals of high employment and

interest-rate stability.

1) Explain how the Fed’s use of its three tools of monetary policy affect supply and demand in

the market for reserves and the equilibrium federal funds interest rate.

Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate