Banking Chapter 18 1 If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

1. The focus for most central banks today is:

D. Controlling the size of the money multiplier

2. Most central banks, including the Fed and the ECB, provide discount loans at a rate:

A. Equal to the target interest rate

3. The ways the Fed can inject reserves into the banking system include:

D. An increase in the size of the Fed’s balance sheet through selling securities

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

18-2

4. Which of the following statements is most correct?

A. The Fed can control the amount of reserves, but cannot control the monetary base

5. The tools of monetary policy available to the Fed include each of the following, except the:

D. Reserve requirement

6. The tools of monetary policy include:

D. Both the excess reserve rate and the target federal funds rate

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

7. The primary policy instrument of the Federal Open Market Committee (FOMC) is:

A. The required reserve rate

8. Which of the following statements is most correct?

A. The FOMC sets the federal funds rate

9. The market for reserves derives from the fact that:

D. Banks do not want excess reserves

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

10. The fact that there is a market for federal funds enables banks to:

A. Make fewer loans than they would otherwise

11. Which of the following would be categorized as an unconventional monetary policy tool?

D. Deposit rate

12. During the financial crisis of 2007 – 2009 it became difficult for the Fed to hit their target

federal funds rate because:

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

13. Federal funds loans are:

D. Guaranteed by the FDIC

14. The Fed could make the market federal funds rate equal the target rate by:

A. Mandating that all loans be transacted at the target rate

15. If the Fed entered the federal funds market as a borrower or a lender to make sure the

market rate always equals the target rate, they would be doing all of the following except:

A. Making unsecured loans

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

D. The target federal funds rate would have to be fixed at a constant rate

17. The tool the Fed uses to keep the federal funds rate close to the target is:

A. The required reserve rate

18. If the market federal funds rate were below the target rate, the response from the Fed

would likely be to:

A. Raise the required reserve rate

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

19. If the market federal funds rate were above the target rate, the response from the Fed

D. Lower the discount rate

20. If the demand for reserves remains constant and the market federal funds rate is below the

target rate, the Fed would:

D. Alter the demand for reserves

21. If the current market federal funds rate equals the target rate and the demand for reserves

decreases, the likely response in the federal funds market will be:

D. Nothing; the Fed would act immediately and the market would not be affected

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

22. If the current market federal funds rate equals the target rate and the demand for reserves

increases, the likely response in the federal funds market will be:

A. A decrease in the market federal funds rate

23. One reason the target federal funds rate may not equal the actual federal funds rate is

because:

A. There is no way that the Fed could keep the actual rate at the target rate

24. The daily reserve supply curve is:

A. Upward sloping

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

25. Which of the following statements is most correct?

D. There doesn’t appear to be any relationship at all between the target and market federal

fund rates

26. Discount lending by the Fed:

A. Is the key component of monetary policy

27. Discount lending today is primarily used for:

A. Controlling reserves

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

28. Discount lending ties into the Fed’s function of:

D. Regulation of banking

29. An increase in the federal funds rate should:

D. Cause the mortgage rates to increase by more than the increase in the federal funds rate

30. When the Fed forecasts a sustained increase in the demand for the monetary base, the staff

of the Fed is likely to meet this demand through:

A. Discount loans

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

31. The Fed’s temporary operations involve the use of:

D. An outright sale of U.S. Treasury Securities

32. The Fed would use a reverse repo when they:

A. Want to temporarily increase the monetary base

33. Variables that can influence the Fed’s forecast for reserves each day include forecasting

the:

A. Day’s demand for mortgage loans

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

34. On a particular day, the actual federal funds rate can deviate from the target federal funds

rate. This might be due to all of the following except:

A. Unexpected changes in the demand for reserves

35. In 2002, the Federal Reserve changed its discount lending procedures. Which of the

following statements is correct?

A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the

target federal funds rate; after 2002 the rate would be below the target federal funds rate

36. The Fed will make a discount loan to a bank during a crisis:

D. Only if the bank would fail without the loan

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

37. For most of the Fed’s history, the Fed:

D. Tied the discount rate to the rate on Treasury securities

38. The fact that, for most of its history, the Fed was reluctant to make discount loans

actually:

D. Resulted in banks in very strong financial shape as being the only ones borrowing from the

Fed

39. The types of loans the Fed makes consist of each of the following, except:

D. Secondary credit

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

40. Primary credit extended by the Fed is:

A. For banks needing long-term loans to work out financial problems

41. The interest rate on primary credit extended by the Fed is:

A. The average of the prime interest rate charged by the ten largest banks in the nation

42. The interest rate on primary credit extended by the Fed is:

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

43. One of the reasons primary credit exists is to:

D. Provide banks with a low interest source for long-term capital

44. Secondary credit provided by the Fed is designed for:

D. Foreign banks

D. 50 basis points below the primary discount rate

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

46. Seasonal credit provided by the Fed is not as common as it used to be because:

D. Seasonal credit is being replaced by primary credit

47. The Fed is reluctant to change the required reserve rate because:

A. Changes in the rate have a small impact on the actual quantity of money

48. The reserve requirement is applied to two-week balances on:

D. Savings deposits and one-week balances on transactions deposits

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

49. The use of lagged reserve accounting makes the demand for reserves:

A. Highly unpredictable

50. To minimize the cost of holding reserves for small banks, the:

A. Required reserve rate decreases as the amount of deposits increases

51. The main purpose of reserve requirements today is to:

A. Decrease the demand for reserves

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

52. Today, reserve requirements are:

A. Set in a way that makes reserve demand highly unpredictable

53. For the European Central Bank (ECB), the equivalent of the FOMC’s target federal funds

rate is the:

A. European target discount rate

54. The European equivalent of the Fed’s open market operations (OMO) is:

D. Dissimilar to the Fed’s OMO because fewer banks participate in the auctions of the

securities

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

55. The weekly refinancing by the European Central Bank (ECB) is most similar to the Fed’s

use of:

A. The primary credit facility

56. The European Central Bank’s Marginal Lending Facility is used to provide:

A. Short-term loans to banks at rates below the target refinancing rate

57. Which of the following statements is true?

D. The Fed’s redesign of its procedures for lending to banks was the model for the ECB’s

marginal lending facility

Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy

58. Within the European Central Bank, banks with excess reserves:

D. None of the above answers is correct; there are no required reserves for the ECB and so

therefore no excess reserves

59. Within the ECB, there is a minimum interest rate that can be charged on reserves; this is

determined by:

D. The executive committee of the ECB

60. Suppose a European bank has excess reserves. It can either lend them or deposit them

overnight in the ECB’s Deposit Facility. Ignoring any question of risk, if the bank deposits the

funds instead of lending them it must be true that the rate on the loan was less than the:

D. Minimum bid rate less 50 basis points