Question 1

According to the efficient markets hypothesis

Accepted Answer

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. 
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 2

Discount policy

Accepted Answer

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. 
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 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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. 
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 5

A decrease in the volume of discount loans

Accepted Answer

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. 
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 6

Banks that can't meet their reserve requirements

Accepted Answer

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. 
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 7

In the federal funds market diagram, a decrease in the required reserve ratio

Accepted Answer

A) shifts the demand curve for reserves to the left. 
B) increases the federal funds rate. 
C) results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks. 
D) shifts the supply curve for reserves to the right. 
A) shifts the demand curve for reserves to the left. 
B) increases the federal funds rate. 
C) results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks. 
D) shifts the supply curve for reserves to the right.

Question 8

The Fed can implement open market operations

Accepted Answer

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. 
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 9

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

Accepted Answer

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. 
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 10

An open market purchase

Accepted Answer

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. 
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 11

Open market operations

Accepted Answer

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. 
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 12

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

Accepted Answer

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

Question 13

If the Fed desired to reduce the federal funds rate,

Accepted Answer

A) it would conduct an open market sale, reducing reserve supply. 
B) it would conduct an open market purchase, increasing reserve supply. 
C) it would conduct an open market sale, increasing reserve demand. 
D) it would conduct an open market purchase, reducing reserve demand. 
A) it would conduct an open market sale, reducing reserve supply. 
B) it would conduct an open market purchase, increasing reserve supply. 
C) it would conduct an open market sale, increasing reserve demand. 
D) it would conduct an open market purchase, reducing reserve demand.

Question 14

The Fed tends not to use discount policy as its principal tool in influencing the money supply since

Accepted Answer

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. 
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 15

Reserve requirements are changed

Accepted Answer

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. 
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 16

A Federal Reserve repurchase agreement involves

Accepted Answer

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. 
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 17

Under a 100% reserve system

Accepted Answer

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. 
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 18

The discount window is

Accepted Answer

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. 
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 19

Defensive open market transactions

Accepted Answer

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. 
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 20

How often does the FOMC issue its Domestic Policy Directive?

Accepted Answer

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 
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

Exam 20: Monetary Policy Tools

According to the efficient markets hypothesis

Discount policy

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

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 decrease in the volume of discount loans

Banks that can't meet their reserve requirements

In the federal funds market diagram, a decrease in the required reserve ratio

The Fed can implement open market operations

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

An open market purchase

Open market operations

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

If the Fed desired to reduce the federal funds rate,

The Fed tends not to use discount policy as its principal tool in influencing the money supply since

Reserve requirements are changed

A Federal Reserve repurchase agreement involves

Under a 100% reserve system

The discount window is

Defensive open market transactions

How often does the FOMC issue its Domestic Policy Directive?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters