Financial Markets and Institutions, 6e (Mishkin/Eakins)
Chapter 8 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
8.1 Multiple Choice
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) 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.
22) 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.
23) 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.
24) 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
25) 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.
26) 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
27) 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.
28) 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.
29) Financial panic was averted in October 1987 following “Black Monday” when the Fed
announced that
A) it was lowering the discount rate on extended credit.
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) all of the above.
30) Following the terrorist destruction of the World Trade Center on September 11, 2001, the Fed
A) closed for a week to allow time for panic in financial markets to lessen.
B) increased its discount lending and open market purchases by unusually large amounts
to provide liquidity to the financial system.
C) reduced its discount lending and open market purchases to reduce fears that an
inflationary spiral might begin.
D) borrowed money from other central banks to provide liquidity to the financial system.
31) 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.
32) 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.
33) 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.
34) 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.
35) Changes in the reserve requirement are an infrequently used monetary policy tool since
A) this tool is too blunt.
B) this tool is too weak.
C) banks find it costly to adjust to such changes.
D) both A and C of the above are true.
36) Open market operations as a monetary policy tool have the advantage that
A) they are flexible and precise.
B) they are easily reversed if mistakes are made.
C) they can be implemented quickly without administrative delays.
D) all of the above.
E) only A and B of the above.
37) What actions did the Fed take following the terrorist attacks of September 11, 2001?
A) It increased discount lending and conducted open market purchases to meet the
liquidity needs of the financial system.
B) It decreased discount lending and conducted open market sales to meet the liquidity
needs of the financial system.
C) It suspended monetary policy actions so as to avoid taking hasty actions which might
ultimately prove to be unwise.
D) It reduced its monetary liabilities in order to stabilize the financial system.
38) 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.
39) 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) of both A and B of the above.
40) 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.
41) 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.
42) 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 level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) ideal level of unemployment.
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.
B) encouraging people to save.
C) doing both A and B of the above.
D) doing neither (a) nor (b) of the above.
44) 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) doing all of the above.
E) doing A and C only.
45) 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.
46) If the Fed’s strategy for conducting monetary policy is thought of as a game plan that
proceeds in stages, then the game plan can be summarized as follows:
A) The Fed selects its policy goals, then the intermediate targets consistent with achieving
its policy goals, then the operating targets consistent with its intermediate targets.
Finally, it adjusts its policy tools to effect the desired targets and goals.
B) The Fed selects its policy goals, then the operating targets consistent with achieving its
policy goals, then the intermediate targets consistent with its operating targets. Finally,
it adjusts its policy tools to effect the desired targets and goals.
C) The Fed selects its policy goals, then the intermediate targets consistent with achieving
its policy goals, then the policy tools consistent with its intermediate targets. Finally, it
adjusts its operating targets to effect the desired targets and tools.
D) The Fed selects its policy tools, then the operating targets consistent with achieving its
policy tools, then the intermediate targets consistent with its operating targets. Finally,
it adjusts its policy goals to effect the desired targets and tools.
E) None of the above.
47) An advantage of an intermediate targeting strategy is that it provides the Fed with
A) more timely information regarding the effect of monetary policy.
B) a slow adjustment process.
C) a target that is precisely correlated with economic activity.
D) all of the above.
E) only A and B of the above.
48) Which of the following is not a requirement in selecting an intermediate target?
A) measurability
B) controllability
C) flexibility
D) predictability
49) Which of the following is a potential operating target for the Fed?
A) The monetary base
B) The M1 money supply
C) Nominal GDP
D) The discount rate
50) Which of the following is a potential operating target for the Fed?
A) Nonborrowed reserves
B) The federal funds rate
C) The monetary base
D) All of the above
51) Which of the following is not an operating target?
A) Nonborrowed reserves
B) Monetary base
C) Federal funds interest rate
D) Discount rate
E) All are operating targets.
52) When it comes to choosing an operating target, both the _________ rate and _________
aggregates are easily controllable using the Fed’s policy tools.
A) federal funds; monetary
B) federal funds; reserve
C) three–month Treasury–bill; monetary
D) ten–year Treasury–bond; reserve
53) If the desired intermediate target is an interest rate, then the preferred operating target will
be a(n) _________ variable like the _________.
A) interest rate; three–month Treasury–bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
54) If the desired intermediate target is a monetary aggregate, then the preferred operating
target will be a(n) _________ variable like the _________.
A) interest rate; three–month Treasury–bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed reserves
55) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in the
reserves demand curve will cause _________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) monetary aggregates
D) the inflation rate
56) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, an increase in the
demand for reserves will result in a(n) _________ in _________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
57) If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves
demand curve will cause _________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) Treasury bill interest rates
D) the inflation rate
58) If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for
reserves will result in a(n) _________ in _________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate