TUTORIAL 10
CENTRAL BANKS AND TOOLS OF MONETARY POLICY
Part 1: Review questions
1. Distinguish the difference between central banks and commercial banks
2. Tools of monetary policy: advantages and disadvantages
Part 2. Multiple-choice questions
1. The federal funds rate
A. Is usually several percentage points above the discount rate.
B. Is set by the Board of Governors.
C. Is the interest rate banks charge each other when making overnight loans of
reserves.
D. Is the interest rate the Fed charges when lending reserves to a bank.
2. An open market purchase of securities by the Federal Reserve system will
A. increase the demand for Federal funds.
B. increase the supply of Federal funds.
C. reduce the demand for Federal funds.
D. reduce the supply of Federal funds.
3. An increase in the discount rate can:
A. reduce the supply of Federal funds and increase the Federal funds rate.
B. reduce the demand for Federal funds and reduce the Federal funds rate.
C. increase the demand for Federal funds and increase the Federal funds rate.
D. increase the supply of Federal funds and reduce the Federal funds rate.
4. An increase in the reserve requirement ratio will:
A. reduce the supply of Federal funds and increase the Federal funds rate.
B. increase the supply of Federal funds and reduce the Federal funds rate.
C. increase the demand for Federal funds and increase the Federal funds rate.
D. reduce the demand for Federal funds and reduce the Federal funds rate.
5. Sometimes the Fed purchases a security and the seller agrees to buy the
security back. This is called a
A. TRAPS
B. Matched sale-purchase transaction
C. Reverse repurchase
D. Repurchase agreement
6. Which of the following is not an advantage of open market operations
compared to other methods of changing the money supply?
A. Open market operations are easily reversible.
B. Open market operations are done at the Fed's initiative.
C. Open market operations do not need the approval of Congress.
D. Open market operations can be implemented quickly.
7. The demand for reserves has a negative slope because
A. A lower Federal Funds rate increases deposits and increases required reserves.
B. A higher Federal Funds rate increases the cost of excess reserves so that banks
wish to hold smaller amounts of reserves.
C. A lower Federal Funds rate induces banks to borrow more from the Federal
Reserve System, decreasing reserves.
D. A higher Federal Funds rate reduces the required reserve ratio and the amount of
required reserves.
8. The shape of the supply curve for reserves
A. Depends on the relationship between the Federal Funds rate and the discount rate.
B. Is vertical at the level of reserves determined by the Fed because banks have no
influence on the supply of reserves.
C. Is upward-sloping because as the Federal Funds rate rises, banks are more willing
to supply reserves for lending.
D. Is horizontal at the Federal Funds rate set by the Fed, because banks can borrow as
much as they want at that rate.
9. When the Fed sells government securities on the open market,
A. The Federal Funds rate rises.
B. The Federal Funds rate falls.
C. The Federal Funds rate remains unchanged.
D. The volume of reserve lending in the Federal Funds market increases.
10. If the Fed eliminated reserve requirements,
A. banks would keep no reserves.
B. banks would still keep reserves because of the need for vault cash.
C. the money supply would grow out of control.
D. the money multiplier would be undefined.
11. The objective of a defensive open market operation is to:
A. change the money supply.
B. prevent a change in the monetary base.
C. increase the monetary base.
D. decrease the monetary base.
12. An advantage of using reserve requirement changes to control the money
supply is:
A. they affect all banks equally.
B. they ease banks' liquidity management concerns.
C. banks' cost of adjusting to them is low.
D. it is easy to achieve small changes in the money supply.
13. The primary role of discount lending is now
A. To allow the Fed to easily control the money supply.
B. To allow the Fed to act as the lender of last resort to troubled banks.
C. To influence the Federal Funds rate.
D. To provide a source of low-cost funds to banks so they can increase their
profitability.
14. In the market for reserves, when the federal funds interest rate is below the
discount rate, the supply curve of reserves is
A.
B.
C.
D.
vertical.
horizontal.
positively sloped.
negatively sloped.
15. When the federal funds rate equals the discount rate
A. the supply curve of reserves is vertical.
B. the supply curve of reserves is horizontal.
C. the demand curve for reserves is vertical.
D. the demand curve for reserves is horizontal.
16. In the market for reserves, an open market ________ the supply of reserves,
raising the federal funds interest rate, everything else held constant.
A. sale decreases
B. sale increases
C. purchase increases
D. purchase decreases
17. Suppose on any given day there is an excess demand of reserves in the
federal funds market. If the Federal Reserve wishes to keep the federal funds
rate at its current level, then the appropriate action for the Federal Reserve
to take is a ________ open market ________, everything else held constant.
A. defensive; sale
B. dynamic; sale
C. dynamic; purchase
D. defensive; purchase
18. In the market for reserves, an open market purchase ________ the supply of
reserves and causes the federal funds interest rate to ________, everything
else held constant.
A. decreases; fall
B. increases; rise
C. increases; fall
D. decreases; rise
Part 3. Problems and applications
Chapter 15, problems 2, 8
Chapter 18, problem 1