Chapter 16: Monetary Policy Tools
True/False
1) The discount rate is the opportunity cost of holding reserves for a bank.
2) A change in the discount rate shifts the supply of reserves.
3) A change in the federal funds rate shifts the demand for reserves.
4) The Federal Reserve cannot consistently keep the federal funds rate below discount
rate.
7) National banks must take overnight loans from the Federal Reserve.
15) An increase in the reserve requirement could decrease the equilibrium federal funds
rate.
22) For most central banks, the most commonly used tool to implement monetary policy
is open market operations.
24) Typically, the Fed sets the discount rate above the equilibrium federal funds rate.
32) The ECB conducts open market operations by buying and selling bonds, just as the
Fed does.
(F)
Multiple Choice
1) In practice, the primary tool used by the Federal Reserve to control the money supply
is
a) discount lending.
b) the reserve requirement.
c) open market operations.
d) buying commercial paper.
10) In practice, discount lending is used
a) to ease a financial panic.
b) to control the money supply.
c) to set a minimum for the federal funds rate.
d) all of the above.
19) The ECB conducts open market operations through purchases and sales of
a) repos.
b) commercial paper.
c) bonds.
d) all of the above.
28) After the FOMC announces a change in the target fed funds rate, the Fed’s trading
desk in New York engages in a(n) _____ open market operation.
a) offensive
b) dynamic
c) aggressive
d) none of the above
29) The part of the Federal Reserve that implements open market operations is the
a) FRBNY.
b) Board of Governors.
c) FRBSF.
d) Congress.
32) The goal of quantitative easing is to _____.
a) increase the prices of (increase the yields of) Treasury bonds in order to control
inflation
b) decrease the prices of (increase the yields of) Treasury bonds in order to control
inflation
c) increase the prices of (decrease the yields of) Treasury bonds and increase the
money supply directly
d) decrease the prices of (increase the yields of) Treasury bonds and decrease the
money supply directly
Short Answer
1) Why does the demand for reserves slope down with respect to the federal funds rate?
If the federal funds rate is high, reserves are costly to acquire, so banks tend to
hold less.
12) If a central bank sets its discount rate (or rate it lends to banks) below the rate it pays
on reserves, what would happen?
Banks would borrow as much as they could from the central bank and keep them
as reserves for a guaranteed profit.
13) What is the goal of the policy called quantitative easing?
The goal of quantitative easing appears to be to increase the prices of (decrease
the yields of) Treasury bonds and the other financial assets purchased and to influence
the money supply directly.