Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 15 Tools of Monetary Policy
15.1 The Market for Reserves and the Federal Funds Rate
1) The interest rate charged on overnight loans of reserves between banks is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
2) The primary indicator of the Fed’s stance on monetary policy is
A) the discount rate.
B) the federal funds rate.
C) the growth rate of the monetary base.
D) the growth rate of M2.
3) The quantity of reserves demanded equals
A) required reserves plus borrowed reserves.
B) excess reserves plus borrowed reserves.
C) required reserves plus excess reserves.
D) total reserves minus excess reserves.
4) Everything else held constant, when the federal funds rate is ________ the interest rate paid
on reserves, the quantity of reserves demanded rises when the federal funds rate ________.
A) above, rises
B) above, falls
C) below, rises
D) below, falls
5) The opportunity cost of holding excess reserves is the federal funds rate
A) minus the discount rate.
B) plus the discount rate.
C) plus the interest rate paid on excess reserves.
D) minus the interest rate paid on excess reserves.
6) In the market for reserves, when the federal funds rate is above the interest rate paid on excess
reserves, the demand curve for reserves is
A) vertical.
B) horizontal.
C) positively sloped.
D) negatively sloped.
7) When the federal funds rate equals the interest rate paid on excess reserves
A) the supply curve of reserves is vertical.
B) the supply curve of reserves is horizontal.
C) the demand curve for reserves is vertical.
D) the demand curve for reserves is horizontal.
8) The quantity of reserves supplied equals
A) nonborrowed reserves minus borrowed reserves.
B) nonborrowed reserves plus borrowed reserves.
C) required reserves plus borrowed reserves.
D) total reserves minus required reserves.
9) In the market for reserves, when the federal funds interest rate is below the discount rate, the
supply curve of reserves is
A) vertical.
B) horizontal.
C) positively sloped.
D) negatively sloped.
10) When the federal funds rate equals the discount rate
A) the supply curve of reserves is vertical.
B) the supply curve of reserves is horizontal.
C) the demand curve for reserves is vertical.
D) the demand curve for reserves is horizontal.
11) In the market for reserves, if the federal funds rate is above the interest rate paid on excess
reserves, then an open market ________ the supply of reserves, raising the federal funds interest
rate, everything else held constant.
A) sale decreases
B) sale increases
C) purchase increases
D) purchase decreases
12) In the market for reserves, if the federal funds rate is above the interest rate paid on excess
reserves, an open market purchase ________ the ________ of reserves which causes the federal
funds rate to fall, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
13) In the market for reserves, if the federal funds rate is above the interest rate paid on excess
reserves, an open market purchase ________ the supply of reserves and causes the federal funds
interest rate to ________, everything else held constant.
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
14) In the market for reserves, if the federal funds rate is above the interest rate paid on excess
reserves, an open market sale ________ the supply of reserves causing the federal funds rate to
________, everything else held constant.
A) decreases; decrease
B) increases; decrease
C) increases; increase
D) decreases; increase
15) In the market for reserves, if the federal funds rate is above the interest rate paid on excess
reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate
to increase, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
16) In the market for reserves, a lower discount rate
A) decreases the supply of reserves.
B) increases the supply of reserves.
C) lengthens the vertical section of the supply curve of reserves.
D) shortens the vertical section of the supply curve of reserves.
17) In the market for reserves, a lower interest rate paid on excess reserves
A) decreases the supply of reserves.
B) increases the supply of reserves.
C) decreases the effective floor for the federal funds rate.
D) increases the effective floor for the federal funds rate.
18) Everything else held constant, in the market for reserves, when the federal funds rate is 3%,
lowering the discount rate from 5% to 4%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
19) Everything else held constant, in the market for reserves, when the federal funds rate is 3%,
increasing the interest rate paid on excess reserves from 1% to 2%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
20) Everything else held constant, in the market for reserves, when the federal funds rate is 5%,
lowering the discount rate from 5% to 4%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
21) Everything else held constant, in the market for reserves, when the federal funds rate is 1%,
increasing the interest rate paid on excess reserves from 1% to 2%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
22) Everything else held constant, in the market for reserves, when the federal funds rate is 3%,
raising the discount rate from 5% to 6%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
23) Everything else held constant, in the market for reserves, when the federal funds rate is 3%,
lowering the interest rate paid on excess reserves rate from 2% to 1%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
24) Everything else held constant, in the market for reserves, when the federal funds rate equals
the discount rate, lowering the discount rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.
25) Everything else held constant, in the market for reserves, when the federal funds rate equals
the interest rate paid on excess reserves, raising the interest rate paid on excess reserves
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.
26) Everything else held constant, in the market for reserves, when the demand for federal funds
intersects the reserve supply curve along the horizontal section, increasing the discount rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
27) Everything else held constant, in the market for reserves, when the supply for federal funds
intersects the reserve demand curve along the horizontal section of the demand curve, lowering
the interest rate paid on excess reserves
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.
28) Everything else held constant, in the market for reserves, when the demand for federal funds
intersects the reserve supply curve on the vertical section, increasing the discount rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
29) Everything else held constant, in the market for reserves, when the supply for federal funds
intersects the reserve demand curve on the downward sloping section, decreasing the interest rate
paid on excess reserves
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
30) Everything else held constant, in the market for reserves, increases in the discount rate affect
the federal funds rate
A) when the funds rate is below the discount rate.
B) when the funds rate equals the discount rate.
C) when the demand for federal funds intersects the vertical section of the reserve supply curve.
D) when the demand for federal funds equals zero.
31) Everything else held constant, in the market for reserves, decreases in the interest rate paid
on excess reserves affect the federal funds rate
A) when the funds rate is below the interest rate paid on excess reserves.
B) when the funds rate equals the interest rate paid on excess reserves.
C) when the funds rate is below the discount rate.
D) when the funds rate equals the discount rate.
32) After 2003, The Federal Reserve usually keeps the discount rate
A) above the target federal funds rate.
B) equal to the target federal funds rate.
C) below the target federal funds rate.
D) equal to zero.
33) Everything else held constant, the vertical section of the supply curve of reserves is
shortened when the
A) discount rate increases.
B) discount rate decreases.
C) federal funds rate rises.
D) federal funds rate falls.
34) Everything else held constant, the vertical section of the supply curve of reserves is
lengthened when the
A) discount rate increases.
B) discount rate decreases.
C) federal funds rate rises.
D) federal funds rate falls.
35) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, an increase in the reserve requirement ________ the
demand for reserves, ________ the federal funds rate, everything else held constant.
A) decreases; lowering
B) increases; lowering
C) increases; raising
D) decreases; raising
36) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement ________ the
demand for reserves, raising the federal funds interest rate, everything else held constant.
A) rise; decreases
B) rise; increases
C) decline; increases
D) decline; decreases
37) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement increases the
demand for reserves, ________ the federal funds interest rate, everything else held constant.
A) rise; lowering
B) decline; raising
C) decline; lowering
D) rise; raising
38) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, an increase in the reserve requirement ________ the
demand of reserves and causes the federal funds interest rate to ________, everything else held
constant.
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
39) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, an increase in the reserve requirement ________ the
________ for reserves and causes the federal funds interest rate to rise, everything else held
constant.
A) decreases; demand
B) increases; demand
C) increases; supply
D) decreases; supply
40) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement ________ the
demand for reserves, lowering the federal funds interest rate, everything else held constant.
A) rise; decreases
B) rise; increases
C) decline; increases
D) decline; decreases
41) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement decreases the
demand for reserves, ________ the federal funds interest rate, everything else held constant.
A) rise; lowering
B) decline; raising
C) decline; lowering
D) rise; raising
42) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a decline in the reserve requirement ________ the
________ curve of reserves and causes the federal funds interest rate to fall, everything else held
constant.
A) decreases; demand
B) increases; demand
C) increases; supply
D) decreases; supply
43) In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand
of reserves, ________ the federal funds rate, everything else held constant.
A) decreases; lowering
B) increases; lowering
C) increases; raising
D) decreases; raising
44) Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal
funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake
an open market ________ of bonds, everything else held constant. If the Fed does nothing,
however, the federal funds rate will ________.
A) sale; increase
B) purchase; increase
C) sale; decrease
D) purchase; decrease
45) Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal
funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake
an open market ________ of bonds, everything else held constant. If the Fed does nothing,
however, the federal funds rate will ________.
A) sale; increase
B) purchase; increase
C) sale; decrease
D) purchase; decrease
46) Explain the Fed’s three tools of monetary policy and how each is used to change the money
supply. Does each tool affect the monetary base or the money multiplier?
47) State whether the following statement is true or false AND explain why: “A decrease in the
discount rate will always cause a decrease in the federal reserve funds rate.”
48) State whether the following statement is true or false AND explain why: “An increase in the
interest rate paid on excess reserves will always cause an increase in the federal reserve funds
rate.”
15.2 Conventional Monetary Policy Tools
1) ________ are the most important monetary policy tool because they are the primary
determinant of changes in the ________, the main source of fluctuations in the money supply.
A) Open market operations; monetary base
B) Open market operations; money multiplier
C) Changes in reserve requirements; monetary base
D) Changes in reserve requirements; money multiplier
2) Open market purchases raise the ________ thereby raising the ________.
A) money multiplier; money supply
B) money multiplier; monetary base
C) monetary base; money supply
D) monetary base; money multiplier
3) Open market purchases ________ reserves and the monetary base thereby ________ the
money supply.
A) raise; lowering
B) raise; raising
C) lower; lowering
D) lower; raising
4) Open market sales shrink ________ thereby lowering ________.
A) the money multiplier; the money supply
B) the money multiplier; reserves and the monetary base
C) reserves and the monetary base; the money supply
D) the money base; the money multiplier
5) Open market sales ________ reserves and the monetary base thereby ________ the money
supply.
A) raise; lowering
B) raise; raising
C) lower; lowering
D) lower; raising
6) The two types of open market operations are
A) offensive and defensive.
B) dynamic and reactionary.
C) active and passive.
D) dynamic and defensive.
7) There are two types of open market operations: ________ open market operations are
intended to change the level of reserves and the monetary base, and ________ open market
operations are intended to offset movements in other factors that affect the monetary base.
A) defensive; dynamic
B) defensive; static
C) dynamic; defensive
D) dynamic; static
8) Open market operations intended to offset movements in noncontrollable factors (such as
float) that affect reserves and the monetary base are called
A) defensive open market operations.
B) dynamic open market operations.
C) offensive open market operations.
D) reactionary open market operations.
9) When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of
Treasury funds from the Federal Reserve, the open market operation is said to be
A) defensive.
B) offensive.
C) dynamic.
D) reactionary.
10) 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.
11) 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.
12) If float is predicted to decrease because of unseasonably good weather, the manager of the
trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open
market ________ of securities.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
13) When bad storms slow the check-clearing process, float tends to ________ causing the Fed
to initiate defensive open market ________.
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases