Deck 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

Question 1

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.

Answer 1

shifts the supply curve for reserves to the right and causes the federal funds rate to fall.

Question 2

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

Answer 2

increases; rises

Question 3

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.

Answer 3

excess reserves falls because they have a higher cost.

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

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

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

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.

Question 19

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

Question 20

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

Question 21

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)all of the above.
E)only A and C of the above.

Question 22

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.

Question 23

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)both A and B of the above.
D)neither A nor B of the above.

Question 24

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

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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

Question 30

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.

Question 31

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 rate of unemployment.
B)structural rate of unemployment.
C)natural rate of unemployment.
D)ideal rate of unemployment.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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)both A and B of the above.

Question 41

The first country to mandate that its central bank adopt inflation targeting was

A)the United States.
B)the United Kingdom.
C)Canada.
D)New Zealand.

Question 42

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

Question 43

An open market ________ leads to a(n)________ of reserves and deposits in the banking system and hence to a(n)________ of the monetary base and the money supply.

A)sale; expansion; contraction
B)purchase; expansion; contraction
C)sale; expansion; expansion
D)purchase; expansion; expansion

Question 44

Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks are called

A)the monetary base.
B)government securities.
C)open market operations.
D)reserves.

Question 45

Under inflation targeting, a central bank must pursue policies that

A)keep the inflation rate at a target value of zero.
B)keep the inflation rate at some specific target value.
C)keep the inflation rate within a specific target range.
D)lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value.

Question 46

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.

Question 47

The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is

A)the dynamic open market operations.
B)the defensive open market operations.
C)the reserve requirements.
D)market equilibrium.

Question 48

Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are

A)open market operations.
B)federal funds rate.
C)required reserve ratio.
D)reserve requirements.

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

Which type of open market operation is intended to change the level of reserves?

A)Defensive open market operations
B)Reserve requirements
C)Dynamic open market operations
D)Market equilibrium

Question 54

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.

Question 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

Question 56

Which of the following is not a requirement in selecting an intermediate target?

A)measurability
B)controllability
C)flexibility
D)predictability

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Inflation targeting involves

A)a public announcement of medium-term numerical targets for inflation.
B)increased accountability of the central bank for attaining its inflation objectives.
C)an information-inclusive approach in which many variables are used in making decisions about monetary policy.
D)all of the above.

Question 62

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

Question 63

Which of the following statements is true?

A)Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity.
B)Bubbles driven solely by irrational exuberance lead to a failure of financial institutions.
C)Both A and B are correct.
D)Neither A nor B is correct.

Question 64

If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this?

A)Raising interest rates.
B)Lowering interest rates.
C)Increasing reserve requirements.
D)Taking a short position in the overpriced asset.

Question 65

Flexibility is a requirement in selecting an intermediate target.

Question 66

An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply.

Question 67

The federal funds rate is an operating target.

Question 68

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.

Question 69

During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis?

A)The Fed lowered the spread on the discount rate to 50 basis points, and then to 25.
B)The Fed set up the Term Auction Facility to provide further liquidity to banks.
C)The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan.
D)all of the above.

Question 70

In response to an asset-price bubble, macroprudential regulation appears to be the right tool. What is macroprudential regulation?

A)Increasing the federal funds rate across the macroeconomy.
B)The use of tax incentives to capture some of the gains from bubbles.
C)Regulatory policy to affect what is happening in credit markets in the aggregate.
D)None of the above is correct.

Question 71

Open market purchases by the Fed cause the federal funds rate to rise.

Question 72

The discount rate is an operating target.

Question 73

The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.

Question 74

Inflation targeting makes the central bank less accountable.

Question 75

What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?

A)High unemployment
B)Instability in foreign exchange markets
C)Interest-rate stability
D)All of the above

Question 76

An important lesson from the 2007-2009 financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.

Question 77

Explain how the Fed's use of its three tools of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate.

Question 78

Open market purchases by the Fed increase the supply of nonborrowed reserves.

Question 79

Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting.

Question 80

Which of the following statements is true regarding the Fed's procedures for operating the discount window?

A)The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
B)The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves.
C)The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate.
D)None of the above is correct.