Policy Implementation1
Chapter 27
Policy Implementation
1.______are 25 large banks and securities firms that deal directly with the Fed.
a.Bank holding companies
b.Primary dealers
c.The “big-25”
d.Financial holding companies
ANSWER:b
- The ______is a statement issued by the FOMC to the New York Fed that directs the stance of monetary policy until the next FOMC meeting.
- a. Monetary Policy Report
- b. policy directive
- c. long term policy stance
- d. the short run strategy
ANSWER:b
3.The FOMC issues a Policy Directive that
a.specifies an exact numerical value for the fed funds rate.
- b. communicates whether the rate is likely to go up or down in the future but does not specify a numerical target value
- c. the target growth range for the money supply until the next FOMC meeting.
- d. is kept secret from the public until the minutes have been approved at the next FOMC meeting.
ANSWER:a
4.The FOMC issues a statement that indicates the risks are weighted mainly towards conditions that may generate economic weakness. This means
a.the Fed is more worried about unemployment than inflation in the near future.
b.the Fed is more worried about inflation than unemployment in the near future.
c.the Fed is worried about both unemployment and inflation.
d.the Fed is worried about the potential security of the economy.
ANSWER:a
5.The statement that emerges from the FOMC Meeting and is used by the New York Fed to gauge monetary policy is called the
a.monetary policy report.
b.Fed monetary directive.
c.uniform directive.
d.policy directive.
ANSWER:d
6.The FOMC issues a statement that indicates the risks are weighted mainly towards conditions that may generate heightened inflationary pressures. This means
a.the Fed is more worried about unemployment than inflation in the near future.
b.the Fed is more worried about inflation than unemployment in the near future.
c.the Fed is worried about both unemployment and inflation.
d.the Fed is worried about the potential security of the economy.
ANSWER:b
7.The equation showing the relationship between reserves and other items on the Fed's balance sheet is called the bank reserves equation. Which of the following accurately restates that equation?
a.DF – VC = R = GS + IR + L + F + OA – C – TD – OL
b.DF + VC = R = GS + IR + L + F + OA – C – TD – OL
c.DF + VC = R = GS + IR + L + F – OA – C – TD – OL
d.DF – VC = R = GS + IR + L + F – OA – C – TD – OL
ANSWER:b
8. is a system of reserve accounting in which the maintenance period more or less corresponds to the computation period.
a.Computation period accounting
b.Double-entry accounting
c.Lagged reserve accounting
d.Contemporaneous reserve accounting
ANSWER:d
9. is a system of reserve accounting in which the maintenance period occurs after the computation period is over.
a.Maintenance period accounting
b.Double-entry accounting
c.Lagged reserve accounting
d.Contemporaneous reserve accounting
ANSWER:c
10.Which of the following is another name for a reverse repurchase agreement?
a.Reciprocal resale agreement
b.System repurchase agreement
c.Matched sale-purchase transaction
d.Asymmetrical reserve need transaction
ANSWER:c
11.Which of the following is another name for a matched sale-purchase transaction?
a.Reciprocal resale agreement
b.System repurchase agreement
c.Reverse repurchase agreement
d.Asymmetrical reserve need transaction
ANSWER:c
12.Which of the following is most likely to occur if the quantity demanded of reserves is greater than the quantity supplied of reserves?
a.The fed funds rate will fall.
b.The fed funds rate will rise.
c.Discount borrowing will decrease.
d.Both the fed funds rate will rise and discount borrowing will fall.
ANSWER:b
13.Which of the following is most likely to occur if the quantity demanded of reserves is less than the quantity supplied of reserves?
a.The fed funds rate will fall.
b.The fed funds rate will rise.
c.Discount borrowing will decrease.
d.Both discount borrowing will decrease and the fed funds rate will rise.
ANSWER:a
14.The Trading Desk has determined that a positive reserve need exists but expects the need to be temporary. What can the manager do to temporarily increase the amount of reserves in the system?
a.Engage in open market outright purchases
b.Engage in open market outright sales
c.Engage in a system repurchase agreement
d.Engage in matched sale-purchase transactions
ANSWER:c
15.What kind of Fed activity is likely to be evident in the following scenario? Reserves must be added to the system, but only temporarily.
a.No Fed buying or selling is likely to occur.
b.The Fed is likely to use matched sales.
c.The Fed is likely to engage in system repurchase agreements.
d.The Fed is likely to engage in outright sales.
ANSWER:c
16.What kind of Fed activity is likely to be evident when the Fed desires to drain reserves out of the banking system and underscore a policy move toward restraint?
a.No Fed buying or selling is likely to occur.
b.The Fed is likely to use matched sales.
c.The Fed is likely to engage in system repurchase agreements
d.The Fed is likely to engage in outright sales.
ANSWER:d
17.What kind of Fed activity is likely to be evident when a reserve drain is required, but the Fed does not want to signal a policy move toward restraint?
a.No Fed buying or selling is likely to occur.
b.The Fed is likely to use matched sale-purchase transactions.
c.The Fed is likely to engage in system repurchase agreements.
d.The Fed is likely to engage in outright sales.
ANSWER:b
18.Which of the following can be used to decrease banking system reserves?
a.A system repurchase agreement
b.Open market purchases
c.Decrease reserve requirements
d.Matched sale-purchase transactions
ANSWER:d
19Which of the following is not used to temporarily alter the level of reserves in the system?
a.Open market purchases of securities
b.System repurchase agreements
c.Customer repurchase agreements
d.Matched sale-purchase transactions
ANSWER:a
20.The policy directive is the link between which of the following?
a.The Fed and the President of the United States
b.The Fed and Congress
c.The Fed Open Market Committee and the Trading Desk of the New York Fed
d.The decision makers formulating policy and the President of the United States
ANSWER:c
- 21. A statement that accurately reflects Fed behavior in recent is which of the following?
- a. The Fed has become much more open in recent years.
- b. The Fed prefers to operate in secrecy so that it can execute its policies before they are made public.
- c. The Fed continues it long-term policies of secrecy.
- d. The Fed is much more open with Congress now but not with the public.
ANSWER:a
- 22. Examples of greater Fed openness include all of the following except:
- a. An announcement of Fed policy changes immediately following any FOMC meeting.
- b. Publication of transcripts of FOMC Meetings with a 4 year lag
- c. A release of a statement following FOMC meetings about the FOMC’s view of the risks facing the economy.
- d. Public attendance at FOMC meetings.
ANSWER:d
23.Economic projections and expected performance for the next year are announced in which of these reports?
a.The Monetary Policy Report to the President
b.The Monetary Policy Report to the Congress
c.The Monetary Policy Report to the Senate
d.The Monetary Policy Report to the Fed
ANSWER:b
24.Equilibrium in the market for reserves means which of the following?
a.The quantity demanded exceeds the quantity supplied by a large consistent amount.
b.The quantity supplied exceeds the quantity demanded by only a small consistent amount.
c.The quantity demanded equals the quantity supplied.
d.The fed funds rate equals the fed fund rate target set by the FOMC.
ANSWER:c
25.Ceteris paribus, if the quantity demanded of reserves exceeds the quantity supplied of reserves, the Fed funds rates will
a.decrease.
b.remain the same.
c.increase.
d.decrease significantly.
ANSWER:c
26.Ceteris paribus, if the quantity supplied of reserves exceeds the quantity demanded of reserves, the Fed funds rates will
a.decrease.
b.remain the same.
c.increase.
d.decrease significantly.
ANSWER:a
- 27. Which of the following statements is false?
- a. The demand for reserve balances has decreased significantly in recent years due to the growth of retail sweep accounts.
- b. The FOMC releases a statement following every meeting announcing any shifts in its view of upcoming economic developments.
- c. The Fed can make an intermeeting policy change in the situation warrants it.
- d. Intermeeting changes have been historically very frequent.
ANSWER:d
28.The amount of reserves necessary to maintain the existing level of borrowing and the fed funds rate specified by the policy directive is called which of the following?
a.The reserve need
b.Open market operations
c.The maintenance period reserves
d.The reserve drain
ANSWER:a
29.Outright transactions are used when
a.the manager of the Fed's open market account wants to provide reserves for a relatively short period.
b.the manager of the Fed's open market account wants to absorb reserves for a relatively short period.
c.the manager of the Fed's open market account wants to provide discount loans for a long period.
d.the manager of the Fed's open market account wants to provide or absorb reserves for a relatively long period.
ANSWER:d
30.Outright purchases in the open market typically account for
a.no less than 50 percent of total Fed transactions.
b.no more than 30 percent of total Fed transactions.
c.no less than 20 percent total Fed transactions.
d.no more than 10 percent of total Fed transactions.
ANSWER:d
31.In general, the largest portion of outright purchases in the open market involve which of the following?
a.Treasury bills
b.Common stock
c.Municipal savings bonds
d.Federal agency issues
ANSWER:a
32.When the trading desk buys securities on a self-reversing, temporary basis, this is called which of the following?
a.reverse repurchase agreements
b.repurchase agreements
c.outright transactions
d.temporary buy back
ANSWER:b
33.Repurchase agreements are
a.for long periods of time.
b.often made for overnight or other short periods.
c.extremely complicated.
d.ineffective in providing reserves.
ANSWER:b
34.What is the name of a repurchase agreement used by the Fed for the purpose of supplying reserves on a temporary basis?
a.Temporary repurchase agreement
b.Outright repurchase agreement
c.Fed repurchase agreement
d.System repurchase agreement
ANSWER:d
35.Matched sale-purchase transactions are often referred to in the market as which of the following?
a.System repurchase agreements
b.Temporary repurchase agreements
c.Outright repurchase agreements
d.Reverse repurchase agreements
ANSWER:d
36.When the manager of the Fed's open market account wants to drain reserves temporarily from the banking system, which of the following are used?
a.System repurchase agreements
b.Temporary repurchase agreements
c.Outright repurchase agreements
d.Reverse repurchase agreements
ANSWER:d
- 37. Effects of the Fed’s more openness in recent years are all of the following except:
- a. there is less uncertainty about policy moves
- b. as a result of less uncertainty, there is more control over future expectations and long term interest rates
- c. a smaller volume of open market operations are needed to hit any fed funds targeted rate
- d. the monetary policy lag is longer
ANSWER:d
38.The Fed does not
a.generally react to economic events.
b.give heavy weight to forecasts.
c.closely monitor incoming data to solicit changes in the economy.
d.give heavy weight to incoming data.
ANSWER:b
- 39. Which of the following is true?
- a. The Fed’s new openness has led to more direct control over the fed funds rate and a smaller volume of open market operation necessary to hit the targeted fed funds rate.
- b. Expectations of market participants cause the fed funds rate to move in the desired direction before the Fed even intervenes.
- c. With the new Fed openness, time lags in the monetary policy process have been reduced.
- d. All of the above.
ANSWER:d
40.In 1994, the Fed began to announce the decisions made at the FOMC meetings______. This policy was formally adopted in 1995.
a.a week after the meetings.
b.in the published minutes.
c.immediately following the meetings.
d.10 days after the meetings.
ANSWER:c
41.The period in which banks are required to hold an amount of reserve assets that was determined in the computation period is called which of the following?
a.the fiscal period
b.the cyclical period
c.the maintenance period
d.the band period
ANSWER:c
42.The period during which the actual amount of required reserve assets to be held during the maintenance period is determined is called the
a.maintenance period.
b.cyclical period.
c.required reserve period.
d.computation period.
ANSWER:d
43.Which of the following is a system of reserve accounting in which the maintenance period more or less corresponds to the computation period?
a.Required reserve period
b.Fiscal period
c.Computation period
d.Contemporaneous reserve accounting
ANSWER:d
- 44. Total reserves are
- a. required reserves plus excess reserves.
- b. borrowed reserves plus nonborrowed reserves.
- c. vault cash plus deposits at the Fed.
- d. All of the above
ANSWER:a
45.During the maintenance period, the actual average amount of reserves held must be
a.more than the average required reserves determined in the computation period.
b.equal to the average required reserves determined in the computation period.
c.less than the average required reserves determined in the computation period.
d.substantially less than the average required reserves determined in the computation period.
ANSWER:b
46.Currently, which of the following are subject to reserve requirements?
a.Mortgage loans
b.All small business transactions
c.Checkable deposits
d.Large business loans
ANSWER:c
47.If checkable deposits average $700 billion per day during the computation period and there is a 5 percent reserve requirement, required reserve assets during the maintenance period must equal
a.$350 billion
b.$665 billion
c.$35 billion
d.$3.5 billion
ANSWER:c
48.Assume a 10 percent reserve requirement and an average excess reserve of 1 percent. If checkable deposits average $600 billion per day during a bank's computation period, then
a.required reserve assets must average $60 billion per day during the maintenance period.
b.excess reserve assets must average $60 billion per day during the maintenance period.
c.required reserve assets must average $60 billion per day during the computation period.
d.total reserve assets must average $60 billion per day during the maintenance period.
ANSWER:a
49.Which of the following would not be considered an asset of the Fed?
a.Float
b.Government securities held
c.Discount loans
d.Treasury deposits
ANSWER:d
50.Which of the following would not be considered an asset of the Fed?
a.Float
b.Currency outside the Fed
c.Discount loans
d.The gold and special drawing rights reflecting international reserve holdings
ANSWER:b
51.Which of the following would be considered a liability of the Fed?
a.Government securities
b.Discount loans
c.Treasury deposits
d.Float
ANSWER:c
52.Which of the following would be considered an asset of the Fed?
a.Treasury deposits
b.Currency outside the Fed
c.Reserve balances of depository institutions
d.Government securities held
ANSWER:d
53.The demand for reserves is
a.less than required plus desired excess reserves.
b.more than required plus desired excess reserves.
c.equal to the demand for required plus desired excess reserves.
d.equal to required minus desired excess reserves.
ANSWER:c
54.The supply of reserves is which of the following?
a.Less than borrowed plus nonborrowed reserves
b.More than borrowed plus nonborrowed reserves
c.Equal to borrowed plus nonborrowed reserves
d.Equal to borrowed minus nonborrowed reserves
ANSWER:c
55.Reserves are
a.more than the Fed's portfolio of securities plus the net amount of other factors affecting reserves.
b.less than the Fed's portfolio of securities plus the net amount of other factors affecting reserves.
c.equal to the Fed's portfolio of securities minus the net amount of other factors affecting reserves.
d.equal to the Fed's portfolio of securities plus the net amount of other factors affecting reserves.
ANSWER:d
- 56. The ______is the difference between actual reserves and those projected to be needed to keep the fed funds rate at the targeted level.
- a. contemporaneous amount of reserves
- b. reserve need
- c. required reserves
- d. lagged amount of reserves
ANSWER:b
57.A system of lagged reserve accounting has been used since which of the following?
a.July, 1978
b.July, 1988
c.July, 1998
d.none of the above; a system of contemporaneous reserve accounting is currently used.
ANSWER:c
- 58.Which of the following is false?
- a. Retail sweep accounts “sweep” balances out of transactions accounts that are subject to reserve requirements and into other accounts that are not.
- b. Retail sweep accounts have experienced enormous growth since they were introduced in 1994.
- c. Because of retail sweep accounts, required reserves have fallen significantly.
- d. The decline in required reserves due to retail sweep accounts gives the Fed more precise control over the fed funds rate and the implementation of monetary policy.
ANSWER:d
- 59.Which of the following true?
- a. If the fed funds rate rises above the targeted rate, the Trading Des should increase the amount of reserves available to depository institutions to bring the rate back to the targeted level.
- b. Retail sweep accounts have jeopardized the implementation of monetary policy because required reserves have fallen to very low levels.
- c. The funds available for required reserves have increased significantly in recent years due to the growth of retail sweep accounts.
- d. All of the above
ANSWER:a
- 60.Under the current lagged reserve accounting system, the maintenance period begins how many days after the computation period?
- a. 2 days
- b. 30 days
- c. 14 days
- d. 40 days
ANSWER:b
- 61.Which of the following is false?
- a. the bank reserves equation is derived from the Fed’s balance sheet.
- b. The bulk of open market operations involve temporary transactions as opposed to outright purchases or sales.
- c. Banks reserves are equal to borrowed plus nonborrowed reserves or to required plus excess reserves.
- d. The Fed directly controls long-term interest rates and it is long-term rates that have the greatest effect on the economy.
ANSWER:d
62.Nonborrowed reserves are which of the following?
a.Total reserves plus those borrowed from the Fed at the discount window
b.Total reserves minus those borrowed from the Fed at the discount window
c.Total reserves divided by total Fed funds
d.Total reserves plus total Fed funds
ANSWER:b