Econ 3229 Ch 18

23 Questions  I  By Stlepin
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Econ 3229 Ch 18

  
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  • 1. 
    1. The focus for most central banks today is: 
    • A. 

      The quantity of M1

    • B. 

      Interest rates

    • C. 

      The quantity of M2

    • D. 

      Controlling the size of the money multiplier


  • 2. 
    2. Most central banks, including the Fed and the ECB, provide discount loans at a rate: 
    • A. 

      Equal to the target interest rate

    • B. 

      Below the target interest rate

    • C. 

      Above the target interest rate

    • D. 

      That is equal to the overnight interbank lending rate


  • 3. 
    3. The ways the Fed can inject reserves into the banking system include: 
    • A. 

      An increase in the size of the Fed's balance sheet through purchasing securities

    • B. 

      Increasing the discount rate

    • C. 

      Making loans to non-bank corporations

    • D. 

      An increase in the size of the Fed's balance sheet through selling securities


  • 4. 
    4. The tools of monetary policy available to the Fed include each of the following, except the: 
    • A. 

      Currency to deposit ration

    • B. 

      Discount rate

    • C. 

      Target federal funds rate

    • D. 

      Reserve requirement


  • 5. 
    5. Which of the following statements is most correct? 
    • A. 

      The FOMC sets the federal funds rate

    • B. 

      The discount rate is the primary policy tool of the FOMC

    • C. 

      The FOMC sets the target federal funds rate

    • D. 

      The difference between the target and actual federal funds rate is the dealer's spread


  • 6. 
    6. Which of the following would be categorized as an unconventional monetary policy tool? 
    • A. 

      Discount window lending

    • B. 

      Lending to nonbanks

    • C. 

      Federal funds rate target

    • D. 

      Deposit rate


  • 7. 
    7. If the market federal funds rate were below the target rate, the response from the Fed would likely be to: 
    • A. 

      Raise the required reserve rate

    • B. 

      Purchase US treasury securities

    • C. 

      Sell US treasury securities

    • D. 

      Raise the discount rate


  • 8. 
    8. If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be: 
    • A. 

      The market federal funds rate will decrease

    • B. 

      The market federal funds rate will equal the target rate

    • C. 

      The market federal funds rate will increase

    • D. 

      Nothing; the Fed would act immediately and the market would not be affected


  • 9. 
    9. One reason the target federal funds rate may not equal the actual federal funds rate is because: 
    • A. 

      There is no way that the Fed could keep the actual rate at the target rate

    • B. 

      The target rate changes with the demand for reserves

    • C. 

      Attaining the target rate involves forecasting reserve demand and forecasts are subject to error

    • D. 

      None of the answers is correct; the target and the actual federal funds rates are always equal


  • 10. 
    10. Discount lending ties into the Fed's function of: 
    • A. 

      Lender of last resort

    • B. 

      Open market operations

    • C. 

      The governments bank

    • D. 

      Regulation of banking


  • 11. 
    11. The Fed will make a discount loan to a bank during a crisis: 
    • A. 

      No matter what condition the bank is in

    • B. 

      Only if the bank is sound financially and can provide collateral for the loan

    • C. 

      But if the bank doesn't have collateral the interest rate is higher

    • D. 

      Only if the bank would fail without the loan


  • 12. 
    12. The types of loans the Fed makes consist of each of the following, except: 
    • A. 

      Primary credit

    • B. 

      Conditional credit

    • C. 

      Seasonal credit

    • D. 

      Secondary credit


  • 13. 
    13. Secondary credit provided by the Fed is designed for: 
    • A. 

      Banks who qualify for a lower interest than what is available under primary credit

    • B. 

      Banks that are in trouble and cannot obtain a loan from anyone else

    • C. 

      Banks that want to borrow without putting up collateral

    • D. 

      Foreign banks


  • 14. 
    14. Seasonal credit provided by the Fed is not as common as it used to be because: 
    • A. 

      There are fewer banks in seasonal areas

    • B. 

      Other sources for long-term loans have developed for banks in seasonal areas

    • C. 

      Seasonal credit has been replaced by secondary credit

    • D. 

      Seasonal credit is being replaced by primary credit


  • 15. 
    15. The Fed is reluctant to change the required reserve rate because: 
    • A. 

      Changes in the rate have a small impact on the actual quantity of money

    • B. 

      The money multiplier is not impacted by the required reserve rate

    • C. 

      The time lag between changing the required reserve rate and changes in the money supply can be too long

    • D. 

      Small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits


  • 16. 
    16. Which of the following features would characterize a good monetary policy instrument? 
    • A. 

      Observable only to monetary policy officials

    • B. 

      Tightly linked to monetary policy objectives

    • C. 

      Controllable and rigid

    • D. 

      Difficult to change


  • 17. 
    17. From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: 
    • A. 

      The inflation rate increased to over 18 percent in 1983

    • B. 

      Many banks failed that otherwise may not have

    • C. 

      Interest rates rose very high

    • D. 

      Inflation remained high for most of the 1980's


  • 18. 
    18. Which of the following statements is not correct? 
    • A. 

      The current target of the FOMC is the federal funds rate

    • B. 

      If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate

    • C. 

      The Fed currently sets both an interest rate and a quantity target for monetary policy

    • D. 

      If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate


  • 19. 
    19. A good definition for intermediate targets of monetary policy would be: 
    • A. 

      Instruments under the direct control of central bankers but one step removed from operational targets

    • B. 

      Instruments that are not under the direct control of the central banks but lie between operational instruments and objectives

    • C. 

      The quantity or non-price targets of monetary policy

    • D. 

      The real goals of monetary policy


  • 20. 
    20. Over the last few decades, central bankers have: 
    • A. 

      Mostly abandoned intermediate targets

    • B. 

      Greatly increased their focus on intermediate targets

    • C. 

      Found that the links between the operating instruments and intermediate targets have become more stable

    • D. 

      Developed more intermediate targets


  • 21. 
    21. The components of the formula for the Taylor rule includes each of the following, except: 
    • A. 

      Target federal funds rate

    • B. 

      Current inflation rate

    • C. 

      30-year US treasury bond rate

    • D. 

      Inflation gap


  • 22. 
    22. If each of the coefficients in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, this implies: 
    • A. 

      That the Fed assumes that inflation and output are right on target

    • B. 

      That inflation and output are one half a percent off of their targets

    • C. 

      The Fed is giving equal weight to objectives of inflation and output

    • D. 

      That the Fed will not accept higher inflation unless unemployment falls by twice the inflation rate


  • 23. 
    23. Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap) If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: 
    • A. 

      6.5%

    • B. 

      2.5%

    • C. 

      3.5%

    • D. 

      10.5%


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