Deck 20: Monetary Policy Tools

Question 1

An open market purchase

A)decreases the price of Treasury securities and also decreases their yield.
B)increases the price of Treasury securities and decreases their yield.
C)increases the price of Treasury securities and also increases their yield.
D)decreases the price of Treasury securities and increases their yield.

Answer 1

increases the price of Treasury securities and decreases their yield.

Question 2

How were open market operations conducted prior to 1935?

A)They were carried out by the Federal Open Market Committee.
B)They were carried out under the direction of the Secretary of the Treasury.
C)They were carried out by the district Federal Reserve banks.
D)They were carried out by the Banking Committee of the House of Representatives.

Answer 2

They were carried out by the district Federal Reserve banks.

Question 3

As a result of an open market purchase, bank reserves

A)rise and interest rates fall.
B)fall and interest rates rise.
C)and interest rates both rise.
D)and interest rates both fall.

Answer 3

rise and interest rates fall.

Question 4

Banks and Wall Street firms engage in Fed watching in order to

A)guide lending and investment decisions.
B)assess the riskiness of borrowers.
C)evaluate the potential for changes in tax policy.
D)better gauge movements in exchange rates.

Question 5

An open market sale

A)decreases the price of Treasury securities and also decreases their yield.
B)increases the price of Treasury securities and decreases their yield.
C)increases the price of Treasury securities and also increases their yield.
D)decreases the price of Treasury securities and increases their yield.

Question 6

The Open Market Trading Desk is

A)another name for the Federal Open Market Committee.
B)an organization of private traders in government securities.
C)the area on the floor of the New York Stock Exchange set aside for bond trading.
D)a group of bond traders at the Federal Reserve Bank of New York.

Question 7

Expansionary monetary policy consists of all of the following EXCEPT

A)open market sales.
B)lower interest rates.
C)increased monetary base.
D)increased money supply.

Question 8

The Fed can use open market operations to regulate the money supply provided that

A)interest rates are low enough.
B)the inflation rate is low enough.
C)the money multiplier is stable.
D)the President or Congress does not object.

Question 9

Why did the Fed expand discount lending in the aftermath of the terrorist attacks in the fall of 2001?

A)It feared that inflation was going to increase.
B)To ensure the smooth operation of banks in the affected areas.
C)It feared the effects on the U.S. economy of rising oil prices.
D)It was attempting to increase the chances that President Bush would be reelected.

Question 10

Which of the following statements is correct?

A)Open market purchases are expansionary and open market sales are contractionary.
B)Open market purchases are contractionary and open market sales are expansionary.
C)Both open market purchases and open market sales are expansionary.
D)Both open market purchases and open market sales are contractionary.

Question 11

Which of the following is the dominant means by which the Fed attempts to change the monetary base?

A)Discount loans
B)Open market operations
C)Changes in the required reserve ratio
D)Moral suasion

Question 12

The original Federal Reserve Act

A)specified open market operations as the Fed's main policy tool.
B)specified open market operations as one of several Fed policy tools.
C)specified that open market operations be employed by the Fed only in circumstances where discount loans were ineffective.
D)did not specifically mention open market operations.

Question 13

The Fed generally conducts open market operations in

A)long-term corporate bond markets.
B)the federal funds market.
C)the Treasury securities market.
D)the commercial paper market.

Question 14

Congress established the FOMC because

A)a group was needed to set reserve requirements for member banks.
B)of a lack of coordination among district banks in carrying out open market operations.
C)Congress was attempting to expand its influence within the Federal Reserve System.
D)a group was needed to coordinate the setting of discount rates by the district banks.

Question 15

How does the Open Market Trading Desk conduct its operations?

A)Directly with government securities dealers on the floor of the New York Stock Exchange
B)Directly with government securities dealers on the floor of the Federal Reserve Bank of New York
C)Over-the-counter electronically with government securities dealers
D)By sending its buy and sell orders to the U.S. Treasury for execution

Question 16

An open market purchase

A)increases the monetary base.
B)decreases the monetary base.
C)increases the federal funds rate.
D)is another name for a discount loan.

Question 17

The general directive from the FOMC is carried out by

A)the presidents of the district banks.
B)the presidents of commercial banks that are members of the Federal Reserve System.
C)the account manager at the Federal Reserve Bank of New York.
D)private dealers in the bond market.

Question 18

The FOMC states its overall objectives for interest rates in

A)the Governors' Order.
B)the General Directive.
C)the Federal Reserve Bulletin.
D)the Chairman's Order.

Question 19

When did the Fed first begin to use open market operations as a policy tool?

A)The 1920s
B)The 1930s
C)The 1960s
D)The 1980s

Question 20

Primary bond dealers are those

A)permitted to trade directly with the Fed.
B)who work under the account manager at the Federal Reserve Bank of New York.
C)who specialize in selling bonds to small private investors.
D)responsible for assuring that interest rates do not decline unless the FOMC has given specific instructions that they decline.

Question 21

How often does the FOMC issue its Domestic Policy Directive?

A)Once per year
B)Once per month
C)At the end of every meeting
D)Whenever requested to do so by the House Banking Committee or the Senate Finance Committee

Question 22

If the account manager does not use a Federal Reserve repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use

A)an outright purchase or sale.
B)a limited-duration purchase or sale.
C)an indirect purchase or sale.
D)a reverse duration purchase or sale.

Question 23

FOMC directives to the account manager

A)are usually very detailed, leaving him little room for discretion.
B)are issued very infrequently, leaving the account manager effectively in charge of monetary policy for months at a time.
C)are usually vaguely worded.
D)are usually concerned with technical matters and have little to do with monetary policy.

Question 24

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 monetary base.
D)make it easy to deduce the Fed's intentions for monetary policy.

Question 25

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.

Question 26

If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will

A)order banks to reduce their reserves.
B)order banks to raise their interest rates in an attempt to get them to loan out more of their reserves.
C)conduct an open market purchase.
D)conduct an open market sale.

Question 27

Under current Fed practice, changes in policy made by the FOMC

A)are announced at the time they are made.
B)are announced six weeks after they are made.
C)must be approved by the Secretary of the Treasury.
D)must be approved by a majority of the presidents of the Federal Reserve district banks.

Question 28

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.

Question 29

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.

Question 30

The discussion of the balance of risks in the FOMC statement refers to the relative risk

A)of increasing or decreasing interest rates.
B)toward economic weakness or higher inflation.
C)of changing policy now or waiting for more information.
D)open market sales or purchases.

Question 31

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.

Question 32

In December 2004, what action did the Fed take to make communication with the public more transparent?

A)Holding press conferences
B)Televising meetings
C)Publishing minutes 3 weeks after the meeting
D)Issuing policy statements following each meeting

Question 33

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.

Question 34

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.

Question 35

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

Question 36

The effect of which of the following on the monetary base could be offset with a defensive open market purchase?

A)The Treasury pays for $1 billion in federal government purchases out of its account at the Fed.
B)Federal Reserve float declines.
C)Discount loans increase.
D)The amount of Treasury coins outstanding increases.

Question 37

A matched sale-purchase transaction is also known as a

A)reverse repo.
B)discount loan.
C)put option.
D)federal funds loan.

Question 38

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.

Question 39

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.

Question 40

Why are there periodic increases in borrowing in the banking system?

A)Payments on discount loans are due periodically.
B)Trading volume on the New York Stock Exchange peaks periodically.
C)Banks must satisfy reserve requirements periodically.
D)Banks make their federal tax payments periodically.

Question 41

A decrease in the volume of discount loans

A)increases the monetary base, but decreases the money supply.
B)decreases the monetary base, but increases the money supply.
C)increases both the monetary base and the money supply.
D)decreases both the monetary base and the money supply.

Question 42

Discount loans in the form of primary credit tend

A)to increase the money supply by increasing bank reserves.
B)to decrease the money supply by increasing bank liabilities.
C)to increase the money supply by increasing the money multiplier.
D)not to affect the money supply.

Question 43

An increase in the volume of discount loans

A)increases the monetary base, but decreases the money supply.
B)decreases the monetary base, but increases the money supply.
C)increases both the monetary base and the money supply.
D)decreases both the monetary base and the money supply.

Question 44

A higher discount rate exerts upward pressure on other short-term interest rates because

A)banks try to raise funds from sources other than discount loans.
B)by law, the spread between the discount rate and other interest rates must remain constant.
C)other lenders become aware that the Fed would like them to raise their interest rates as well.
D)banks generally increase their lending following a rise in the discount rate.

Question 45

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.

Question 46

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.

Question 47

The oldest policy tool of the Fed is

A)open market operations.
B)reserve requirements.
C)moral suasion.
D)discount policy.

Question 48

Which type of loan has the highest interest rate?

A)Primary credit
B)Secondary credit
C)Seasonal credit
D)Federal funds

Question 49

If the Fed is generous in its granting of discount loans during a crisis,

A)the result will likely be a contraction of the money supply.
B)risk taking by banks and corporations may be encouraged.
C)the discount rate will be bid up as the demand for loans exceeds the supply.
D)market interest rates will rise sharply.

Question 50

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.

Question 51

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.

Question 52

All of the following statements about secondary credit are true EXCEPT

A)it may be used to expand a bank's assets.
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.

Question 53

Discount policy

A)is the most frequently used of the Fed's monetary policy tools.
B)is the oldest of the Fed's monetary policy tools.
C)may be implemented more rapidly than open market operations.
D)affects the monetary base, but does not affect interest rates.

Question 54

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.

Question 55

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)An increase in the volume of discount loans reduces the monetary base.

Question 56

The Fed

A)is obliged to make whatever discount loans are requested by banks that are members of the Federal Reserve System.
B)has been obliged since 1980 to make whatever discount loans are requested by any depository institution.
C)will make a discount loan only if it appears certain that the institution requesting the loan would fail without it.
D)extends discount loans at its discretion.

Question 57

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.

Question 58

Primary credit is only a backup source of funds for health banks since

A)the primary credit rate is set 1% 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.

Question 59

Discount loans intended for banks that are not financially healthy are called

A)primary credit.
B)secondary credit.
C)seasonal credit.
D)repo loans.

Question 60

Which of the following statements is true?

A)The Fed sets the discount rate, but Congress sets the conditions for the availability of discount loans.
B)The Fed sets the discount rate, but the Secretary of the Treasury sets the conditions for the availability of discount loans.
C)The Secretary of the Treasury sets both the discount rate and the conditions for the availability of discount loans.
D)The Fed sets both the discount rate and the conditions for the availability of discount loans.

Question 61

Between 1950 and 1980, the Fed adjusted required reserve ratios

A)daily.
B)about once a year.
C)only once.
D)only twice.

Question 62

Which of the following statements is true?

A)Only about 10% of reserves are held as deposits with the Fed.
B)About 90% of banks meet their reserve requirements with vault cash.
C)Large banks may not use vault cash to meet their reserve requirements.
D)All banks must keep at least half of their required reserves on deposit at a Federal Reserve bank.

Question 63

Reserve requirements

A)may be set by the FOMC at whatever level they choose.
B)may be set by the Board of Governors at whatever level it chooses.
C)are established annually by Congress.
D)are set by the Board of Governors within limits set by Congress.

Question 64

The Fed monitors reserve requirements

A)daily.
B)during two-week maintenance periods.
C)montly.
D)annually.

Question 65

As of 2006, what was the reserve requirement for checkable deposits?

A)All checkable deposits are subject to a 10% reserve requirement.
B)Checkable deposits at banks are subject to a 10% reserve requirement, while checkable deposits at S&Ls are not subject to a reserve requirement.
C)The first $8.5 million is subject to 0%, then 3% up to $45.8 million in checkable deposits are subject to a 3% reserve requirement and checkable deposits above $45.8 million are subject to a 10% reserve requirement.
D)Reserve requirements on checkable deposits vary according to the location and size of the depository institution.

Question 66

During the mid-to-late 1930s

A)the Fed cut reserve requirements in order to stimulate the economy.
B)banks accumulated substantial excess reserves.
C)the Fed successfully reduced bank holdings of excess reserves by raising required reserve ratios.
D)the economy grew rapidly despite large increases in bank holdings of excess reserves and increases in required reserve ratios.

Question 67

The main way in which the Fed's policy tools affect the monetary base is through

A)changes in the demand for or supply of reserves.
B)changes in interest rates.
C)the announcement effect.
D)their impact on the portfolio decisions of the nonbank public.

Question 68

In 1980, the Depository Institutions Deregulation and Monetary Control Act

A)gave the Board of Governors authority over reserve requirements.
B)established that country banks would have lower reserve requirements than urban banks.
C)established uniform reserve requirements for all depository institutions.
D)eliminated reserve requirements on demand deposits at S&Ls.

Question 69

When did Congress first give the Board of Governors authority over reserve requirements?

A)1913
B)1935
C)1980
D)1998

Question 70

If the federal funds rate was above the discount rate,

A)banks would choose not to borrow from the Fed.
B)banks would want to borrow as much as they could from the Fed.
C)reserves would decline, causing the two to become equal.
D)the reserve supply curve would become vertical.

Question 71

How does the reserve policy of the European Central Bank (ECB) differ from the reserve policy of the Fed?

A)The ECB has a required reserve ratio of 100%.
B)The ECB pays interest on reserve balances.
C)The ECB does not apply reserve requirements to checkable deposits.
D)The ECB applies the same required reserve ratio to all banks and all deposits.

Question 72

All of the following are ways a bank may meet its reserve requirement EXCEPT

A)using treasury securities as required reserves
B)seeking discount loans from the Fed
C)borrowing in the federal funds market
D)carrying up to 4% or $50,000 to the next period

Question 73

Under a 100% reserve system

A)banks could originate loans, but could not hold them.
B)the Fed's control over the money supply would be drastically reduced.
C)the monetary base would equal M1.
D)banks could not originate loans, but could hold them.

Question 74

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.

Question 75

Which of the following is true of current reserve requirements?

A)Time deposits have no reserve requirement.
B)Eurocurrency liabilities have no reserve requirement.
C)All checkable deposits are subject to a 10% reserve requirement.
D)Checkable deposits in rural banks have a lower reserve requirement than checkable deposits in urban banks.

Question 76

Reserve requirements are changed

A)more frequently than the discount rate is changed, but less frequently than open market operations are conducted.
B)more frequently than the discount rate is changed and more frequently than open market operations are conducted.
C)more frequently than open market operations are conducted, but less frequently than the discount rate is changed.
D)less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Question 77

Banks that can't meet their reserve requirements

A)must declare bankruptcy and liquidate their assets within 30 days.
B)lose their privilege of borrowing at the discount window for a period of one year.
C)must pay the Fed interest on the deficit at a rate 2% above the discount rate.
D)are subject to criminal penalties, including possible jail terms for their officers.

Question 78

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.

Question 79

According to the efficient markets hypothesis

A)any change in Fed policy will affect security prices and returns.
B)nothing the Fed does is capable of affecting security prices and returns.
C)the announcement of an unexpected change in Fed policy will affect security prices and returns.
D)securities prices are determined largely by Fed actions.

Question 80

As the federal funds rate rises,

A)the reserve tax increases.
B)banks prefer to hold more reserves.
C)the opportunity cost of holding excess reserves falls.
D)the reserve tax falls.