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Question
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.
Answer
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Related questions
Q:
Money market transactions
A) do not take place in any one particular location or building.
B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically.
C) are both A and B of the above.
D) are none the the above.
Q:
Which of the following statements about money market securities are true?
A) The interest rates on all money market instruments move very closely together over time.
B) The secondary market for Treasury bills is extensive and well developed.
C) There is no well-developed secondary market for commercial paper.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system.
A) sell; add reserves to
B) sell; remove reserves from
C) buy; add reserves to
D) buy; remove reserves from
Q:
Finance companies play a unique role in money markets by
A) giving consumers indirect access to money markets.
B) combining consumers' investments to purchase money market securities on their behalf.
C) borrowing in capital markets to finance purchases of money market securities.
D) assisting the government in its sales of U.S. Treasury securities.
Q:
Finance companies raise funds in the money market by selling
A) commercial paper.
B) federal funds.
C) negotiable certificates of deposit.
D) Eurodollars.
Q:
Commercial banks are large holders of ________ and are the major issuer of ________.
A) negotiable certificates of deposit; U.S. government securities
B) U.S. government securities; negotiable certificates of deposit
C) commercial paper; Eurodollars
D) Eurodollars; commercial paper
Q:
What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?
Q:
Why does the Fed use open market operations to a greater extent than reserve requirements in its conduct of monetary policy?
Q:
Flexibility is a requirement in selecting an intermediate target.
Q:
When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.
Q:
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.
Q:
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.
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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.
Q:
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.
Q:
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
Q:
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
Q:
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.
Q:
The FOMC issues directives to the trading desk at the New York Fed.
Q:
The Board of Governors sets reserve requirements.
Q:
In November 2007, the Fed announced major enhancements to its communication strategy. Which of the following was a part of the changes?
A) The forecast horizon for the FOMC's projections was extended from two calendar years to three.
B) The committee publishes FOMC projections four times a year instead of twice a year.
C) The release would include a narrative of the forces shaping the outlook and risks to that outlook.
D) All of the above were proposed changes.
Q:
The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and
A) Atlanta.
B) Los Angeles.
C) Baltimore.
D) San Francisco.
Q:
Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress. This law restricts the Fed's
A) instrument independence.
B) goal independence.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) resists so vigorously congressional attempts to limit the central bank's autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) all of the above.
E) only A and B of the above.
Q:
Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to
A) withhold appropriations from the Board of Governors.
B) withhold appropriations from the Federal Open Market Committee.
C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.
D) do all of the above.
Q:
Although the Federal Open Market Committee does not have formal authority to set ________ and the ________, it does possess the authority in practice.
A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate