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Multiple Choice Quiz
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1
The primary policy instrument of the Federal Open Market Committee (FOMC) is:
A)The required reserve rate
B)The discount rate
C)The target federal funds rate
D)The exchange rate
2
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
3
The market for reserves derives from the fact that:
A)Reserves pay a relatively high return
B)Desired reserves don't always equal actual reserves
C)The Fed refuses to lend to banks
D)Banks do not want excess reserves
4
Federal funds loans are:
A)Secured loans between banks and the Fed
B)Unsecured loans
C)Collateralized loans between banks
D)Guaranteed by the FDIC
5
If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except:
A)Making unsecured loans
B)In essence paying interest on excess reserves
C)Eliminating a lot of valuable information coming from the market
D)Following the directives issued by Congress
6
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 U.S. Treasury securities
C)Sell U.S. Treasury securities
D)Raise the discount rate
7
If the market federal funds rate were above the target rate, the response from the Fed would likely be to:
A)Purchase U.S. Treasury securities
B)Sell U.S. Treasury securities
C)Lower the required reserve rate
D)Lower the discount rate
8
Targetted asset purchases:
A)Increases the size of the central bank's balance sheet.
B)Shifts the composition of the central bank's balance sheet away from risk-free assets toward risky assets.
C)Happens when the central banks announces that it will maintain an easy credit policy.
D)Is the most well-known unconventional policy tool.
9
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
10
The unconventional policy approaches available to central banks include:
A)Forward guidance
B)Quantitative easing
C)Targetted asset purchases
D)All of the above
11
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
12
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
13
Which of the following statements is true regarding the European Central Bank's (ECB) and the Federal Reserve's (Fed) open market operations?
A)Hundreds of different banks participate in both the ECB's and Fed's auctions.
B)The auctions are undertaken at the all of the National Central Banks for the ECB and at all the Fed Branch banks.
C)The National Central Banks take a wide variety of collateral while the Fed only accepts U.S. government securities.
D)The ECB targets the supply of money, while the Fed target the Federal Funds rate.
14
Given the following formula for the Taylor rule: Target federal funds rate = 2½ + current inflation + ½(inflation gap) + ½(output gap) if the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:
A)7%
B)9%
C)5%
D)4.5%
15
A practical limitation of using the Taylor rule for setting the target federal funds rate would be that it:
A)Makes monetary policy less transparent
B)Makes monetary policymakers less accountable
C)Requires better real-time data than is available
D)Is difficult to calculate the target from the formula





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