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Money, Banking, and Financial Markets Practice Test: Tools for Monetary Policy (U.S.)
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The Federal Reserve (Fed) uses three main tools to implement monetary policy in the US: Open market operations: Buying or selling federal government bonds Discount rate: Changing the discount rate, which affects how much banks loan Reserve requirements: Changing reserve requirements  Other tools the Fed uses include: Term Auction Facility: Provides financial institutions with access to Fed dollars to alleviate short-term cash needs Term Securities Lending Facility: Allows institutions to swap out mortgage-backed CDOs in exchange for U.S. Treasuries  The Fed controls the monetary policy... Show more
Money, Banking, and Financial Markets Practice Test: Tools for Monetary Policy (U.S.)
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25 Questions

1. Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.
2. The actual execution of open market operations is done at
3. ________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.
4. The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves________ in the banking system.
5. The interest rate charged on overnight loans of reserves between banks is the
6. If the Fed wants to temporarily inject reserves into the banking system, it will engage in
7. The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.
8. In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.
9. The opportunity cost of holding excess reserves is the federal funds rate ________.
10. The two types of open market operations are
11. Open market sales ________ reserves and the monetary base thereby ________ the money supply.
12. The primary indicator of the Fedʹs stance on monetary policy is
13. If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at theNew York Fed bank will likely conduct ________ open market operations to ________ reserves.
14. Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate
15. In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.
16. The quantity of reserves demanded equals
17. The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points.
18. Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.
19. Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%
20. The Fedʹs discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.
21. Which of the following special lending facilities set up by the Federal Reserve is reserve neutral?
22. In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
23. In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is ________.
24. If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.
25. In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

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