17) If float is predicted to increase because of bad weather, the manager of the trading desk at the
New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
18) If float is predicted to decrease because of good weather, the manager of the trading desk at
the New York Fed bank will likely conduct ________ open market operations to ________
reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
19) If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at
the New York Fed bank will likely conduct ________ open market operations to ________
reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
20) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at
the New York Fed bank will likely conduct ________ open market operations to ________
reserves.
A) increase; defensive; inject
B) decrease; defensive; inject
C) increase; dynamic; inject
D) decrease; dynamic; drain
21) If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the
New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
22) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at
the New York Fed bank will likely conduct ________ open market operations to ________
reserves.
A) rise; defensive; drain
B) fall; defensive; drain
C) rise; dynamic; inject
D) fall; dynamic; drain
23) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the
expected ________ in reserves.
A) purchases; increase
B) purchases; decrease
C) sales; increase
D) sales; decrease
24) If the Fed expects currency holdings to fall, it conducts open market ________ to offset the
expected ________ in reserves.
A) purchases; increase
B) purchases; decrease
C) sales; increase
D) sales; decrease
25) If the banking system has a large amount of reserves, many banks will have excess reserves
to lend and the federal funds rate will probably ________; if the level of reserves is low, few
banks will have excess reserves to lend and the federal funds rate will probably ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
26) The Federal Reserve will engage in a repurchase agreement when it wants to ________
reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
27) If the Fed wants to temporarily inject reserves into the banking system, it will engage in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) a reverse repurchase agreement.
D) an open market sale.
28) The Fed can offset the effects of an increase in float by engaging in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) an interest rate swap.
D) an open market purchase.
29) 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
30) Suppose on any given day there is an excess demand of reserves in the federal funds market.
If the Federal Reserve wishes to keep the federal funds rate at its current level, then the
appropriate action for the Federal Reserve to take is a ________ open market ________,
everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
31) Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal
Reserve’s federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be
at their target level, then the appropriate action for the Federal Reserve to take is a ________
open market ________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
32) Suppose on any given day there is an excess supply of reserves in the federal funds market.
If the Federal Reserve wishes to keep the federal funds rate at its current level, then the
appropriate action for the Federal Reserve to take is a ________ open market ________,
everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
33) Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal
Reserve’s federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be
at their target level, then the appropriate action for the Federal Reserve to take is a ________
open market ________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
34) Discount policy affects the money supply by affecting the volume of ________ and the
________.
A) excess reserves; monetary base
B) borrowed reserves; monetary base
C) excess reserves; money multiplier
D) borrowed reserves; money multiplier
35) The discount rate is
A) the interest rate the Fed charges on loans to banks.
B) the price the Fed pays for government securities.
C) the interest rate that banks charge their most preferred customers.
D) the price banks pay the Fed for government securities.
36) The most common type of discount lending that the Fed extends to banks is called
A) seasonal credit.
B) secondary credit.
C) primary credit.
D) installment credit.
37) The most common type of discount lending, ________ credit loans, are intended to help
healthy banks with short-term liquidity problems that often result from temporary deposit
outflows.
A) secondary
B) primary
C) temporary
D) seasonal
38) The Fed’s discount lending is of three types: ________ is the most common category;
________ is given to a limited number of banks in vacation and agricultural areas; ________ is
given to banks that have experienced severe liquidity problems.
A) seasonal credit; secondary credit; primary credit
B) secondary credit; seasonal credit; primary credit
C) primary credit; seasonal credit; secondary credit
D) seasonal credit; primary credit; secondary credit
39) The discount rate is kept ________ the federal funds rate because the Fed prefers that
________.
A) below; banks borrow reserves from each other
B) below; banks borrow reserves from the Fed
C) above; banks borrow reserves from each other
D) above; banks borrow reserves from the Fed
40) The discount rate is kept ________ the federal funds rate because the Fed prefers that
________.
A) below; banks can monitor each other for credit risk
B) below; the Fed can monitor banks for credit risk
C) above; banks can monitor each other for credit risk
D) above; the Fed can monitor banks for credit risk
41) The Fed prefers that ________ so that ________.
A) banks borrow reserves from each other; banks can monitor each other for credit risk
B) banks borrow reserves from each other; the Fed can monitor banks for credit risk
C) banks borrow reserves from the Fed; banks can monitor each other for credit risk
D) banks borrow reserves from the Fed; the Fed can monitor banks for credit risk
42) The discount rate refers to the interest rate on
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) federal funds.
43) The interest rate on secondary credit is set ________ basis points ________ the primary
credit rate.
A) 100; above
B) 100; below
C) 50; above
D) 50; below
44) The interest rate on seasonal credit equals
A) the federal funds rate.
B) the primary credit rate.
C) the secondary credit rate.
D) an average of the federal funds rate and rates on certificates of deposits.
45) The Fed is considering eliminating
A) primary credit lending.
B) secondary credit lending.
C) seasonal credit lending.
D) its lender of last resort function.
46) 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.
47) Much of the credit for prevention of a financial market meltdown after “Black Monday”
(October 19, 1987) must be given to the Federal Reserve System and then-chairman
A) Paul Volcker.
B) Alan Blinder.
C) Arthur Burns.
D) Alan Greenspan.
48) A financial panic was averted in October 1987 following “Black Monday” when the Fed
announced that
A) it was lowering the discount rate.
B) it would provide discount loans to any bank that would make loans to the security industry.
C) it stood ready to purchase common stocks to prevent a further slide in stock prices.
D) it was raising the discount rate.
49) The Fed’s lender-of-last-resort function
A) has proven to be ineffective.
B) cannot prevent runs by large depositors.
C) is no longer necessary due to FDIC insurance.
D) creates a moral hazard problem.
50) The most important advantage of discount policy is that the Fed can use it to
A) precisely control the monetary base.
B) perform its role as lender of last resort.
C) control the money supply.
D) punish banks that have deficient reserves.
51) An increase in ________ reduces the money supply since it causes the ________ to fall.
A) reserve requirements; monetary base
B) reserve requirements; money multiplier
C) margin requirements; monetary base
D) margin requirements; money multiplier
52) A decrease in ________ increases the money supply since it causes the ________ to rise.
A) reserve requirements; monetary base
B) reserve requirements; money multiplier
C) margin requirements; monetary base
D) margin requirements; money multiplier
53) The Federal Reserve has had the authority to vary reserve requirements since the
A) 1920s.
B) 1930s.
C) 1940s.
D) 1950s.
54) Since 1980, ________ are subject to reserve requirements.
A) only commercial banks
B) only the member institutions of the Federal Reserve
C) only nationally chartered depository institutions
D) all depository institutions
55) Funds held in ________ are subject to reserve requirements.
A) all checkable deposits
B) all checkable and time deposits
C) all checkable, time, and money market fund deposits
D) all time deposits
56) The policy tool of changing reserve requirements is
A) the most widely used.
B) the preferred tool from the bank’s perspective.
C) no longer used.
D) still used, even with its disadvantages.
57) When the Fed wants to raise interest rates after banks have accumulated large amounts of
excess reserves, it would
A) increase the interest rate paid on excess reserves.
B) increase discount rate.
C) increase the required reserve ratio.
D) conduct massive open market purchase.
58) Explain dynamic and defensive open market operations. What is the purpose of each type?
Describe two situations when defensive open market operations are used. How are defensive
open market operations typically conducted?
16.3 Nonconventional Monetary Policy Tools and Quantitative Easing
1) From before the financial crisis began in September of 2007 to when the crisis was over at the
end of 2009, amount of Federal Reserve assets rose, leading to
A) a huge increase in the monetary base.
B) a huge expansion of the money supply.
C) an economic expansion.
D) a high inflation.
2) From before the financial crisis began in September of 2007 to when the crisis was over at the
end of 2009, the huge expansion in the Fed’s balance sheet and the monetary base did not result
in a large increase in monetary supply because
A) most of it just flowed into holdings of excess reserve.
B) the Fed also increased the required reserve ratio.
C) the Fed also conducted open market sales.
D) the discount loan decreased.
3) Which of the following monetary policy tools is more effective when the economy faces the
interest rate zero-lower-bound problem?
A) open market operation
B) discount policy
C) required reserve ratio
D) the Fed’s liquidity provision
4) The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long
period of time is to
A) lower the long term interest rates.
B) lower the short term interest rates.
C) increase the long term interest rates.
D) increase the short term interest rates.
5) The interest rate for primary credit is USUALLY set ________ basis points ________ the
federal funds rate. In March 2008, this gap was changed to ________ basis points.
A) 50; below; 100
B) 100; above; 25
C) 100; below; 50
D) 50; above; 25
6) The facility that was created in December of 2007 that banks can use to borrow from the Fed
that has less of a stigma for banks compared to borrowing from the discount window is the
A) Term Securities Lending Facility.
B) Term Auction Facility.
C) Primary Dealer Credit Facility.
D) Commercial Paper Funding Facility.
7) The Fed’s open market operations normally involve only the purchase of government
securities, particularly those that are short-term. However, during the crisis, the Fed started new
programs to purchase
A) mortgage-backed securities and long-term Treasuries.
B) mortgage-backed securities and Treasury bills.
C) commercial papers and short-term Treasuries.
D) Treasury bills and Treasury notes.
8) To lower interest rates on residential mortgages to stimulate the housing market, the Fed
extended its open market operations to purchase
A) mortgage-backed securities.
B) commercial papers.
C) long-term Treasuries.
D) Treasury bills and Treasury notes.
9) To lower long-term interest rates, in 2010 the Fed started its new open market operation
program to purchase
A) mortgage-backed securities.
B) commercial papers.
C) long-term Treasuries.
D) Treasury bills and Treasury notes.
10) Which of the following statements is an example of the Fed’s conditional commitment
policy?
A) “In these circumstances, the Committee believes that policy accommodation can be
maintained for a considerable period.”
B) “The Committee anticipates that weak economic conditions are likely to warrant
exceptionally low levels of the federal funds rate for some time.”
C) “Policy accommodation can be removed at a pace that is likely to be measured.”
D) “The exceptionally low range for the federal funds rate will be appropriate at least as long as
the unemployment rate remains above 6-1/2 percent, and inflation between one and two years
ahead is projected to be no more than a half percentage point above the Committee’s 2 percent
longer-run goal.”
11) The purpose for a central bank to set negative interest rates on bank’s deposit is to
A) stimulate the economy by encouraging banks to lend out the deposits they were keeping at the
central bank.
B) increase bank’s cost to holding cash.
C) prevent banks from paying positive interest rates to their depositors.
D) make banks less likely to lend.
16.4 Monetary Policy Tools of the European Central Bank
1) The European System of Central Banks signals the stance of its monetary policy by setting a
target for the
A) federal funds rate.
B) overnight cash rate.
C) lombard rate.
D) reserve rate.
2) When the European System of Central Banks uses main refinancing operations, it is similar to
the Federal Reserve using
A) dynamic open market operations.
B) defensive open market operations.
C) discount policy.
D) reserve requirements.
3) When the European System of Central Banks uses long-term refinancing operations, it is
similar to the Federal Reserve using
A) dynamic open market operations.
B) defensive open market operations.
C) discount policy.
D) reserve requirements.
4) The equivalent to the Federal Reserve’s discount rate in the European System of Central
Banks is the
A) federal funds rate.
B) marginal lending rate.
C) deposit facility rate.
D) lombard rate.
5) Which of the following statements about the deposit facility in the Eurosystem are correct?
A) Banks are paid an interest rate that is typically 100 basis points below the target financing
rate.
B) The prespecified interest rate on the deposit facility provides a floor for the overnight market
interest rate.
C) The interest rate on reserves set by the ECB is not always positive.
D) All of the above.
E) Only A and B.