18) A Federal Reserve repurchase agreement involves
A) an agreement by a bank to repay a discount loan on a specific day.
B) an agreement by a dealer to buy back securities she has sold to the Fed.
C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount of
Treasury securities.
D) an agreement by a commercial bank to make a loan to another bank in the federal funds
market.
19) A matched sale-purchase transaction is also known as a
A) reverse repo.
B) discount loan.
C) put option.
D) federal funds loan.
20) In a matched sale-purchase transaction, the Fed
A) buys securities from a dealer and the dealer agrees to buy them back.
B) sells securities to a dealer and the dealer agrees to sell them back.
C) buys securities from one dealer and sells the same dollar amount of securities to another
dealer.
D) sells securities to one dealer and buys the same dollar amount of securities from another
dealer.
21) Dynamic open market operations
A) are aimed at achieving changes in monetary policy.
B) are used much more frequently than defensive open market transactions.
C) are used to offset disturbances to the monetary base.
D) make it easy to deduce the Fed’s intentions for monetary policy.
22) Defensive open market transactions
A) are aimed at achieving changes in monetary policy.
B) are used much less frequently than dynamic open market transactions.
C) are used to offset disturbances to the supply or demand for reserves.
D) make it easy to deduce the Fed’s intentions for monetary policy.
23) Which of the following statements is correct?
A) Dynamic open market operations are carried out to offset fluctuations in the monetary base.
B) Defensive open market operations are carried out to change monetary policy.
C) The volume of defensive open market operations is much greater than the volume of dynamic
open market operations.
D) Defensive open market operations are usually carried out through outright purchases or sales.
24) When the staff of the account manager at the Fed’s Open Market Trading Desk analyzes
forecasts on Treasury deposits and information on the timing of future Treasury sales of
securities, what agency does it interact with?
A) The Securities and Exchange Commission
B) The Treasury’s Office of Government Finance
C) The Treasury’s Office of Federal Reserve Relations
D) The Federal Deposit Insurance Corporation
25) If the FOMC’s directive indicates a change in monetary policy, the account manager at the
Fed’s Open Market Trading Desk must
A) design dynamic open market operations.
B) design defensive open market operations.
C) seek approval of the change from the Secretary of the Treasury.
D) seek approval of the change from a majority of the presidents of the Federal Reserve district
banks.
26) Which of the following statements is correct?
A) The volume of open market operations is determined jointly by the actions of the public,
banks, and the Fed.
B) The volume of open market operations is determined jointly by the actions of banks and the
Fed.
C) The volume of open market operations is determined jointly by the actions of the public and
the Fed.
D) The volume of open market operations is determined solely by the Fed.
27) Open market operations
A) lack flexibility because only very small purchases or sales may be carried out in any given
month.
B) lack flexibility because open market purchases cannot easily be offset by subsequent open
market sales.
C) are more flexible than other policy tools.
D) may be carried out only on the third Friday of each month.
28) The Fed can implement open market operations
A) more rapidly than changes in reserve requirements, but less rapidly than changes in the
discount rate.
B) more rapidly than changes in the discount rate, but less rapidly than changes in reserve
requirements.
C) less rapidly than either changes in the discount rate or changes in reserve requirements.
D) more rapidly than either changes in the discount rate or changes in reserve requirements.
29) The discount window is
A) another name for the discount rate.
B) the means by which the Fed makes discount loans to banks.
C) the spread between the discount rate and the T-bill rate.
D) the period each month during which banks are allowed to apply for discount loans.
30) Which of the following statements is NOT true?
A) Each Federal Reserve bank maintains its own discount window.
B) Before 1980, the Fed rarely made loans to banks which were not members of the Federal
Reserve System.
C) Since 1980, all depository institutions have had access to the discount window.
D) Each Federal District Bank can charge a different discount rate.
31) Since 1980, discount loans have been available
A) only to member banks of the Federal Reserve System.
B) only to national banks.
C) only to state banks.
D) to all depository institutions.
32) All of the following statements about secondary credit are true EXCEPT
A) they are temporary, short-term loans to satisfy seasonal requirements.
B) the secondary credit interest rate is set above the primary credit rate.
C) it is intended for banks not eligible for primary credit.
D) borrowers of secondary credit are less financially healthy.
33) Discount loans available to health banks which can be used for any purpose are called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.
34) Discount loans intended for banks that are not financially healthy are called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.
35) Temporary, short-term discount loans to banks in areas in which agriculture and tourism are
important are known as
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) repo loans.
36) Which of the following statements is correct?
A) The discount rate is generally above the federal funds rate.
B) The discount rate is generally below the federal funds rate.
C) The discount rate is generally equal to the federal funds rate.
D) There is no general pattern to the relation between the discount rate and the federal funds rate.
37) Primary credit is only a backup source of funds for health banks since
A) the primary credit rate is set above the federal funds rate.
B) restrictions as to its use limit its benefits.
C) the secondary credit rate pays 0.5% more.
D) banks must seek funds from other sources prior to requesting a discount loan.
38) Which of the following statements concerning seasonal credit is true?
A) It tends to have a lower interest rate than federal funds.
B) It has become increasingly more important in recent years.
C) Only firms receiving secondary credit are eligible to receive seasonal credit.
D) Improvements in credit markets have reduced the need for a seasonal credit facility.
39) The Fed tends not to use discount policy as its principal tool in influencing the money supply
since
A) discount loans do not affect the money supply.
B) it does not have as much control over discount loans as it has on open market operations.
C) it is prohibited from doing so by an act of Congress.
D) it prefers to use reserve requirements.
40) The Fed
A) controls discount policy more completely than it controls open market operations.
B) must abide by discount rates set by Congress.
C) controls discount policy less completely than it controls open market operations.
D) controls discount policy completely, just as it controls open market operations.
41) What is the difference between defensive and dynamic open market operations?
42) What is a matched sale-purchase transaction (also known as a reverse repo)?
43) What is quantitative easing? What was the Fed’s objective in implementing quantitative
easing?
44) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of
2007-2009.
15.4 Monetary Targeting and Monetary Policy
1) An important problem facing the Fed is that
A) the goals for economic growth and price stability may conflict in the short run.
B) it lost effective control over the monetary base.
C) it has been given responsibility for meeting policy goals, but true control over monetary
policy remains with Congress.
D) it has been given responsibility for meeting policy goals, but true control over monetary
policy remains with the President.
2) The Fed’s monetary policy tools
A) have proven to be of little value in helping the Fed to achieve its monetary policy goals.
B) have allowed the Fed to achieve its monetary policy goals directly.
C) have allowed the Fed to achieve its monetary policy goals indirectly.
D) are no longer as effective in achieving its monetary policy goals, due to restrictive legislation
passed by Congress in the 1990s.
3) The information lag facing the Fed is
A) the difficulty of becoming informed quickly of changes in public opinion about which policy
goal is most important.
B) the delay in receiving accurate information about the state of the economy.
C) the delay in Congress and the President communicating their policy goals for the Fed to act
on.
D) the time required for monetary policy changes to affect output, employment, and prices.
4) The Fed’s inability to instantaneously observe changes in inflation and economic growth result
in
A) information lag.
B) impact lag.
C) policy lag.
D) jet lag.
5) The impact lag facing the Fed is
A) the delay before open market operations are able to affect the monetary base.
B) the delay before the Fed’s announcement of a new policy has an impact on the decisions of
the public.
C) the time required for monetary policy changes to affect output, employment, and prices.
D) the delay before the impact of a recession on output and prices becomes clear to the Fed.
6) A consequence of the impact lag is that the Fed
A) may not know the impact of a change in policy.
B) might not be able to correct a mistaken policy soon enough.
C) may not have current information about the state of the economy.
D) may see the impact of a change in policy on inflation, but not economic growth.
7) The Fed has attempted to solve the problems of being unable to directly control the variables
that determine economic performance and the timing lags in observing and reacting to economic
fluctuations by
A) pressing Congress for legislation which would expand its powers.
B) using targets to meet its goals.
C) abandoning some goals in order to achieve others.
D) devising new monetary policy tools.
8) Intermediate targets are
A) interim goals set on the way to fully achieving policy goals.
B) targets for policy goals that are of secondary importance.
C) targets the Fed hopes to achieve by June of each year.
D) financial variables, such as interest rates or monetary aggregates, the Fed believes will help it
to achieve policy goals.
9) Which of the following is an intermediate target?
A) M2
B) reserves
C) unemployment rate
D) inflation rate
10) Which of the following is an operating target?
A) M1
B) M2
C) nonborrowed reserves
D) the inflation rate
11) The Fed uses operating targets as well as intermediate targets because
A) the Federal Reserve Act of 1913 requires it to do so.
B) the Fed controls intermediate targets only indirectly.
C) the public is much more unfamiliar with the variables used as operating targets, so for policy
to be effective intermediate targets must also be announced.
D) if one set of targets proves ineffective in attaining policy goals, the other set is available.
12) Using a monetary aggregate for an intermediate target
A) will cause the inflation rate to accelerate.
B) will cause interest rates to fluctuate.
C) requires the use of an interest rate as an operating target.
D) is required by the Federal Reserve Act.
13) Using an interest rate for an intermediate target
A) will cause the quantity of money to fluctuate.
B) will often lead to a recession.
C) requires the use of a monetary aggregate as an operating target.
D) is required by the Federal Reserve Act.
14) According to Taylor’s rule, all of the following variables help explain the behavior of the
federal funds rate EXCEPT
A) output gap.
B) current inflation.
C) inflation gap.
D) yield curve.
15) Which of the following describes the relationship between the actual federal funds rate and
that suggested by Taylor’s rule following the recovery from the 2001 recession?
A) The federal funds rate was above that suggested by Taylor’s rule.
B) The federal funds rate was below that suggested by Taylor’s rule.
C) The federal funds rate was about equal to that suggested by Taylor’s rule.
D) There was not a clear relationship between the federal funds rate and that suggested by
Taylor’s rule.
16) Which chair of the Fed advocated that the Fed engage in inflation targeting?
A) Greenspan
B) Bernanke
C) Volcker
D) Martin
17) All of the following arguments are presented in favor of inflation targeting EXCEPT
A) it would draw attention to what the central bank can achieve in practice.
B) it would provide an anchor for inflationary expectations.
C) it would promote accountability by providing a yardstick by which policy can be measured.
D) it would reduce the lags inherent in monetary policy.
18) All of the following arguments are made against inflation targeting EXCEPT
A) rigid numerical targets would diminish the flexibility of monetary policy.
B) the Fed would need to depend on future forecasts of inflation since monetary policy acts with
a lag.
C) the Fed has little influence on inflation.
D) Holding the Fed accountable for low inflation may make it difficult for elected officials to
monitor whether the Fed is supporting good overall economic policy.
19) In 2006, the Bank of Japan adopted a policy framework focusing on
A) expected inflation one to two years in the future.
B) current inflation.
C) maintaining a fixed exchange rate.
D) the growth in the money supply.
20) Which central bank has its exchange rate as a focus of its monetary policy?
A) Bank of Canada
B) Bank of England
C) European Central Bank
D) Federal Reserve
21) In practice, the ECB has committed to what type of strategy for monetary policy?
A) inflation targeting
B) monetary targeting
C) unclear as to inflation or monetary targeting
D) exchange rate targeting
22) According to the Taylor rule, what should the federal funds rate target be if inflation is 5%,
the target rate of inflation is 2%, the equilibrium real federal funds rate is 2%, full-employment
real GDP is $9 trillion, and current real GDP is $8.55 trillion?
23) What is meant by inflation targeting? Does the Fed engage in inflation targeting?
24) What has been the approach of the European Central Bank to monetary targeting?
25) How did the federal funds rate compare to that suggested by Taylor’s rule following the 2001
recession and during the Financial Crisis of 2007-2009? How would proponents of Taylor’s rule
evaluate monetary policy in each period.