Question 1

Assume that the M1 multiplier is 3 and the Federal Reserve sells $100 million worth of government securities. Bank reserves will

Accepted Answer

A)  rise by $100 million. 
B)  fall by $100 million. 
C)  fall by $300 million. 
D)  fall by $33.33 million. 
A)  rise by $100 million. 
B)  fall by $100 million. 
C)  fall by $300 million. 
D)  fall by $33.33 million.

Question 2

As a tool of monetary policy the effectiveness of the discount rate is __________ because __________.

Accepted Answer

A)  Limited; banks will not borrow reserves from the Fed as long as they have ample excess reserves no matter how low the discount rate goes 
B)  Limited; banks will borrow reserves from the Fed whenever they need them as long as they have a reserve deficiency no matter how high the discount rate goes 
C)  very effective; changes in the discount rate leads changes in money market rates and thus assures that the injections and withdrawals of reserves from the banking system desired by the Fed will occur 
D)  very effective; banks will predictably increase borrowings from the Federal Reserve when the discount rate decreases and decrease borrowings when the discount rate increases 
A)  Limited; banks will not borrow reserves from the Fed as long as they have ample excess reserves no matter how low the discount rate goes 
B)  Limited; banks will borrow reserves from the Fed whenever they need them as long as they have a reserve deficiency no matter how high the discount rate goes 
C)  very effective; changes in the discount rate leads changes in money market rates and thus assures that the injections and withdrawals of reserves from the banking system desired by the Fed will occur 
D)  very effective; banks will predictably increase borrowings from the Federal Reserve when the discount rate decreases and decrease borrowings when the discount rate increases

Question 3

The deposit expansion multiplier is decreased if the Federal Reserve

Accepted Answer

A)  buys government securities. 
B)  sells government securities. 
C)  lowers reserve requirements. 
D)  raises reserve requirements. 
A)  buys government securities. 
B)  sells government securities. 
C)  lowers reserve requirements. 
D)  raises reserve requirements.

Question 4

Which of the following statements is incorrect?

Accepted Answer

A)  When market rates are changing, the discount rate adjusts immediately. 
B)  Money market interest rates tend to respond quickly to Federal Reserve open market operations. 
C)  The discount rate may be above or below other money market interest rates at a given point in time. 
D)  All of the above are true. 
A)  When market rates are changing, the discount rate adjusts immediately. 
B)  Money market interest rates tend to respond quickly to Federal Reserve open market operations. 
C)  The discount rate may be above or below other money market interest rates at a given point in time. 
D)  All of the above are true.

Question 5

A reverse repurchase agreement of government securities by the Fed

Accepted Answer

A)  permanently increases bank reserves. 
B)  temporarily increases bank reserves. 
C)  permanently reduces bank reserves. 
D)  temporarily reduces bank reserves. 
A)  permanently increases bank reserves. 
B)  temporarily increases bank reserves. 
C)  permanently reduces bank reserves. 
D)  temporarily reduces bank reserves.

Question 6

Which of the following is a primary policy tool of the Federal Reserve?

Accepted Answer

A)  The federal funds rate 
B)  Open market operations 
C)  The prime rate 
D)  The money supply 
A)  The federal funds rate 
B)  Open market operations 
C)  The prime rate 
D)  The money supply

Question 7

A change in the discount rate is likely to occur

Accepted Answer

A)  after a change in the Treasury bill rate. 
B)  after a change in the Treasury bond rate. 
C)  before a change in the federal funds rate. 
D)  before a change in the inflation rate. 
A)  after a change in the Treasury bill rate. 
B)  after a change in the Treasury bond rate. 
C)  before a change in the federal funds rate. 
D)  before a change in the inflation rate.

Question 8

If the Federal Reserve sells $20 million worth of government securities and the M1 multiplier is 2.5. Bank reserves will

Accepted Answer

A)  fall by $20 million. 
B)  fall by $50 million. 
C)  fall by $16 million. 
D)  fall by $8 million. 
A)  fall by $20 million. 
B)  fall by $50 million. 
C)  fall by $16 million. 
D)  fall by $8 million.

Question 9

Which of the following institutions is not subject to Federal Reserve's reserve requirements?

Accepted Answer

A)  A state-chartered commercial bank 
B)  A savings and loan association 
C)  A money market mutual fund 
D)  A credit union 
A)  A state-chartered commercial bank 
B)  A savings and loan association 
C)  A money market mutual fund 
D)  A credit union

Question 10

A sound policy to combat a temporary liquidity surplus in the banking system would be

Accepted Answer

A)  a reduction in the discount rate. 
B)  a decrease in the discount rate. 
C)  the purchase of government securities by the Fed under a repurchase agreement. 
D)  the sale of government securities by the Fed under a repurchase agreement. 
A)  a reduction in the discount rate. 
B)  a decrease in the discount rate. 
C)  the purchase of government securities by the Fed under a repurchase agreement. 
D)  the sale of government securities by the Fed under a repurchase agreement.

Question 11

Open market operations are

Accepted Answer

A)  seldom used by the Federal Reserve because they have such a large impact on bank Reserves. 
B)  seldom used by the Federal Reserve because they have little impact on bank reserves. 
C)  used frequently by the Federal Reserve but not as often as changes in the discount rate. 
D)  the primary method used by the Federal Reserve to alter bank reserves. 
A)  seldom used by the Federal Reserve because they have such a large impact on bank Reserves. 
B)  seldom used by the Federal Reserve because they have little impact on bank reserves. 
C)  used frequently by the Federal Reserve but not as often as changes in the discount rate. 
D)  the primary method used by the Federal Reserve to alter bank reserves.

Question 12

A limitation of the discount rate as a policy tool is that the initiative for its use rests with

Accepted Answer

A)  commercial banks. 
B)  consumers. 
C)  the U.S. Treasury. 
D)  state governments. 
A)  commercial banks. 
B)  consumers. 
C)  the U.S. Treasury. 
D)  state governments.

Question 13

Immediately after the Federal Reserve buys government securities,

Accepted Answer

A)  bank excess reserves rise. 
B)  bank excess reserves fall. 
C)  bank capital rises. 
D)  bank capital falls. 
A)  bank excess reserves rise. 
B)  bank excess reserves fall. 
C)  bank capital rises. 
D)  bank capital falls.

Question 14

One method used by the Federal Reserve to prevent abuse of the discount facility is

Accepted Answer

A)  higher bank taxes. 
B)  higher reserve requirements. 
C)  tighter bank surveillance. 
D)  selling fewer government securities to the banks involved. 
A)  higher bank taxes. 
B)  higher reserve requirements. 
C)  tighter bank surveillance. 
D)  selling fewer government securities to the banks involved.

Question 15

Which of the following is an administered interest rate set by commercial banks?

Accepted Answer

A)  The discount rate 
B)  The federal funds rate 
C)  The prime rate 
D)  The commercial paper rate 
A)  The discount rate 
B)  The federal funds rate 
C)  The prime rate 
D)  The commercial paper rate

Question 16

An indication to the Open Market Account Manager that commercial banks are experiencing a liquidity shortage would be a

Accepted Answer

A)  falling federal funds rate. 
B)  rising federal funds rate. 
C)  falling discount rate. 
D)  rising discount rate. 
A)  falling federal funds rate. 
B)  rising federal funds rate. 
C)  falling discount rate. 
D)  rising discount rate.

Question 17

When a bank borrows from the Federal Reserve the bank

Accepted Answer

A)  receives a new deposit of legal reserves at the Federal Reserve. 
B)  creates a new checkable deposit payable to the Federal Reserve. 
C)  normally will do so because it has excess reserves. 
D)  loses reserves equal to the amount of the loan. 
A)  receives a new deposit of legal reserves at the Federal Reserve. 
B)  creates a new checkable deposit payable to the Federal Reserve. 
C)  normally will do so because it has excess reserves. 
D)  loses reserves equal to the amount of the loan.

Question 18

Excess reserves immediately increase if

Accepted Answer

A)  reserve requirements increase. 
B)  reserve requirements decrease. 
C)  the discount rate increases. 
D)  the discount rate decreases. 
A)  reserve requirements increase. 
B)  reserve requirements decrease. 
C)  the discount rate increases. 
D)  the discount rate decreases.

Question 19

If a commercial bank borrows from the Federal Reserve, the price it pays is

Accepted Answer

A)  zero, there is no payment. 
B)  the prime rate. 
C)  the federal funds rate. 
D)  the discount rate. 
A)  zero, there is no payment. 
B)  the prime rate. 
C)  the federal funds rate. 
D)  the discount rate.

Question 20

Which of the following is an administered interest rate set by the Federal Reserve?

Accepted Answer

A)  The discount rate 
B)  The federal funds rate 
C)  The prime rate 
D)  The commercial paper rate 
A)  The discount rate 
B)  The federal funds rate 
C)  The prime rate 
D)  The commercial paper rate

Exam 19: The Instruments of Central Bankin

Assume that the M1 multiplier is 3 and the Federal Reserve sells $100 million worth of government securities. Bank reserves will

As a tool of monetary policy the effectiveness of the discount rate is __________ because __________.

The deposit expansion multiplier is decreased if the Federal Reserve

Which of the following statements is incorrect?

A reverse repurchase agreement of government securities by the Fed

Which of the following is a primary policy tool of the Federal Reserve?

A change in the discount rate is likely to occur

If the Federal Reserve sells $20 million worth of government securities and the M1 multiplier is 2.5. Bank reserves will

Which of the following institutions is not subject to Federal Reserve's reserve requirements?

A sound policy to combat a temporary liquidity surplus in the banking system would be

Open market operations are

A limitation of the discount rate as a policy tool is that the initiative for its use rests with

Immediately after the Federal Reserve buys government securities,

One method used by the Federal Reserve to prevent abuse of the discount facility is

Which of the following is an administered interest rate set by commercial banks?

An indication to the Open Market Account Manager that commercial banks are experiencing a liquidity shortage would be a

When a bank borrows from the Federal Reserve the bank

Excess reserves immediately increase if

If a commercial bank borrows from the Federal Reserve, the price it pays is

Which of the following is an administered interest rate set by the Federal Reserve?

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

As a tool of monetary policy the effectiveness of the discount rate is because .