Deck 13: The Tools and Goals of Central Bank Monetary Policy

Question 1

In the open-market operation known as a runoff, if the Federal Reserve decides not to acquire new securities from the U.S. Treasury, security prices should rise and money market interest rates should fall.

Answer 1

False

Question 2

According to your text, the Federal Reserve has de-emphasized the use of moral suasion in recent years in favor of heavier use of open-market operations.

Answer 2

False

Question 3

Increases in public holdings of "pocket money"
would result in a drawing down of legal reserves in the banking system unless the Federal Reserve offsets the additional public demand with open-market sales of securities.

Answer 3

False

Question 4

The maximum loan value for marginable stocks, convertible bonds and short sales are specified under rules set out in the Federal Reserve Regulations G, T and U.

Question 5

The manager of the Trading Desk that carries out open market operations on behalf of the Federal Reserve System is a vice president at the Federal Reserve Bank of New York.

Question 6

A Federal Reserve purchase or sale of securities in answer to a request from a foreign institution is referred to as a foreign portfolio switch at the Federal Reserve.

Question 7

If the Federal Reserve purchases securities on behalf of a foreign central bank and adds them to its own portfolio U.S. bank reserves will fall.

Question 8

The Swiss National Bank uses currency swaps with foreign central banks to carry out its monetary policy goals.

Question 9

Today in the U.S. legal reserves apply only to checkable-type deposits and are gradually being reduced.

Question 10

The federal funds rate reflects the "price"
of reserves in the banking system.

Question 11

One positive aspect of inflation is its impact on the allocation of resources.

Question 12

Changes in the rate of money supply growth appear to precede changes in economic activity.

Question 13

One of the limitations of monetary policy is continuing changes in the structure of the economy itself which disturb the linkages between monetary variables and economic conditions.

Question 14

Frequently the Federal Reserve System has been forced to carry the burden of economic policy almost totally alone.

Question 15

The term "fiscal policy"
refers to the impact of Federal Reserve open market operations upon the size of the government's debt.

Question 16

A period of falling interest rates usually results in a rise in bank borrowings at the discount window.

Question 17

Recent research suggests the CBOT's futures contract for Federal funds is a reliable and generally accurate (unbiased) forecaster of what the actual funds rate is likely to be.

Question 18

Between July 1, 2004 in July 1, 2006 the Federal Reserve raised the federal funds interest rate from 1% to 5 1/4 percent in 17 incremental steps.

Question 19

The Federal Reserve's power to limit the amount of credit that may be used to purchase stocks and bonds is referred to as:

A) Regulation Q
B) Moral suasion
C) Open-market requirements
D) Announcement effect
E) None of the above

Question 20

Regulations G, T and U contain the rules for the conduct of:

A) Open market operations
B) Reserve requirements
C) Margin requirements
D) Moral suasion
E) None of the above

Question 21

The type of open-market operation that results in the U.S. Treasury redeeming securities for cash with the
Federal Reserve System is known as a(n):

A) Outright or straight transaction
B) RP or Reverse RP transaction
C) Bills only transaction
D) Agency
E) None of the above

Question 22

The central bank that uses U.S. dollar-euro currency swaps to influence economic conditions in its home country is the:

A) Bank of Japan
B) Bank of France
C) Bank of Mexico
D) Bank of Canada
E) None of the above

Question 23

The central bank that affects reserves available in the financial system by moving government deposits between the central bank and private banks is the:

A) Bank of Mexico
B) Bank of Japan
C) Bank of Canada
D) Bank of Italy
E) None of the above

Question 24

The principal immediate target of policy for most central banks consists of:

A) The volume of reserves available to the banking system
B) Influencing interest rates via open-market operations
C) Fighting inflation and unemployment
D) All of the above
E) None of the above

Question 25

The principal immediate target of policy for most central banks consists of the volume of reserves available to the banking system. The total supply of reserves can be changed by:

A) Conducting open-market operations
B) Making loans to depository institutions through a credit or discount window
C) Changing the legal reserve requirements applicable to deposit
D) All of the above
E) Choices A and B only

Question 26

The Employment Act of 1946 committed the federal government to:

A) Minimizing unemployment
B) Reducing inflation
C) Reducing balance of payments deficits
D) Defending the dollar
E) None of the above

Question 27

An increase in goods purchased from foreign countries causes:

A) The value of the dollar to fall
B) The value of the dollar to rise
C) An equilibrium balance of payments position
D) All of the above
E) None of the above

Question 28

The Federal Reserve influences the Federal Funds interest rate by:

A) Changing the demand for reserves
B) Making changes in reserve requirements on a monthly basis
C) Changing the stock of nonborrowed reserves through open market operations
D) Selling discount window loans and advances
E) None of the above

Question 29

Nearly all central banks appear to work through:

A) Changes in the total reserves available to the banking system
B) Changes in the Federal funds rate
C) Changes in prime bank loan rates
D) Changes in borrowed reserves
E) None of the above

Question 30

The majority of loans granted through the Fed's discount window are secured by:

A) Signature loans
B) Commercial paper
C) Municipal bonds
D) Federal fund loans
E) Repurchase agreements
F) U.S. Government securities
G) None of the above

Question 31

Rather than seeking loans from the Federal Reserve's discount window, financial institutions involved in mortgage lending can borrow on a longer-term basis from:

A) Fannie Mae
B) The Office of Management and Budget
C) A Federal Home Loan Bank
D) The Money Store
E) None of the above

Question 32

Today many economists believe that the natural rate of unemployment is back down to its historic pattern of

A) 3%
B) 5%
C) 7%
D) 9%
E) None of the above

Question 33

In the 1970s and in the 1980s the natural rate of unemployment increased to 6 1/4 percent because of the

A) Baby boomers
B) The recession
C) Women entering the workforce
D) A and C above
E) None of the above

Question 34

The difference between where the nation's GDP is and the potential GDP is referred to as the

A) GDP gap
B) GDP potential
C) Natural GDP
D) All of the above
E) None of the above

Question 35

The Federal Reserve will be able to commence adjusting reserve requirements downward even going to zero reserve is required in the year

A) 2009
B) 2010
C) 2011
D) 2012
E) 2015

Question 36

Between July 1, 2004 and July 1, 2006 the Federal Reserve raised the federal funds interest rate by

A) 3¼%
B) 1¼%
C) 4¼%
D) 5¼%
E) None of the above

Question 37

In the 1990s and early 21st century Japan was struggling with deflation and used a policy establishing a zero interest rate and injecting reserves into the banking system at a rapid pace, which is referred to as

A) Free money
B) Free interest
C) Quantitative easing
D) A common contemporary practice
E) None of the above

Question 38

It is considered hyperinflation when the annual inflation rate exceeds

A) 50%
B) 100%
C) 200%
D) 1000%
E) None of the above

Question 39

How does the reserve requirement tool affect the ability of deposit-type financial institutions to create money? What are the principal advantages and disadvantages of the reserve requirement tool?

Question 40

How and why does a depository institution borrow from the central bank? Explain what happens when a central bank changes its discount or lending rate. What are the principal advantages and disadvantages of the discount policy tool?

Question 41

Why do you think reserve requirements and discount rates are being phased out as policy tools by many central banks around the world? Are reserve requirements and the discount rate a general credit control or a selective credit control? Why?

Question 42

Why are open market operations increasingly the most popular and frequently used monetary policy tool?
What are the principal effects of open market operations on the financial system?

Question 43

Describe the relationship between the SOMA manager and the FOMC. What is a policy directive? What types of policy targets does the Federal Reserve use?

Question 44

Explain the difference between an RP and a straight (or outright) open market transaction. Why is each used? What is a runoff? An agency operation?

Question 45

What is moral suasion? Do you believe this tool can be effective?

Question 46

Explain how margin requirements affect the financial system. Why were these requirements instituted by the U.S. Congress during the 1930s?

Question 47

What is interest-rate targeting? Which interest rate does the Federal Reserve focus upon in its conduct of monetary policy?

Question 48

If the Federal Reserve wishes to put upward pressure on market interest rates, what would it be most likely to do? How would it proceed to push the Federal funds rate in an upward direction? How would it lower the funds rate?

Question 49

Suppose the banking system's nonborrowed reserves total $48.3 billion with total legal reserves standing at $51.2 billion. What must borrowed reserves be? This morning the Federal Reserve decided to undertake the sale of $500 million in government securities through open market operations. What will be the new level of nonborrowed reserves? If interest rates don't change, what will be the new level of total reserves? What must you assume to make this calculation? If interest rates do change, which way are they likely to move?

Question 50

If the total supply of nonborrowed reserves equals $500 million and borrowed reserves are $50 million at the current equilibrium federal funds rate (FFR) and if the supply of total reserves is described by the following equation: S=$530 million + 4 FFR, what is the equilibrium federal funds rate (FFR)? What could the central bank do to increase the federal funds rate above its current equilibrium level? How could it reduce the funds rate below its current equilibrium level?

Question 51

In problem 3 above suppose the supply of nonborrowed reserves falls to $490 million due to open-market sales by the central bank. Holding all other factors constant what happens to the equilibrium Federal funds interest rate? If nonborrowed reserves drop to $490 million while borrowed reserves increase to $56 million, all else held equal, what happens to the equilibrium funds rate?

Question 52

First National Bank of Elderidge borrowed $550,000 from the Federal Reserve Bank of St. Louis last Friday. The bank received short-term adjustment credit for 3 days and plans to repay its loan at the close of business Monday. Show the proper accounting (T-account) entries for this transaction when the loan was taken out on Friday and when it is repaid Monday afternoon. How much did total bank reserves rise when this loan was made? Are reserve requirements a factor here?