ECON 2035 Lecture : LectureNotes 11.5

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15 Mar 2019

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The cost of holding these is the interest rate that could have been earned minus the interest rate that is paid on these reserves, ior. Two components of reserves: two components: non-borrowed and borrowed reserves, cost of borrowing from the fed is the discount rate, borrowing from the fed is a substitute for borrowing from other banks. Fed response to change in the discount rate: depends on whether demand intersects supply curve at vertical or horizontal portion. Increasing the reserve requirement causes the demand curve to shift to the right: and the federal funds rate rises. Figure 6 how the federal reserve"s operating procedures limit fluctuations in the federal funds rate. Open market operations: dynamic open market operations, defensive open market operations, primary dealers, traps (trading room automated processing system, repurchase agreements, matched sale-purchase agreements. Advantages of open market operations: the fed has complete control over the volume, flexible and precise, easily reversed, quickly implemented.

Related Questions

Q30. The higher the reserve requirement,
a. the more the money supply can expand
b. the more interest the bank will earn on its reserve account
c. the less the money supply can expand
d. both the more the money supply can expand and the more interest the bank will earn on its reserve account

Q31. If depositors withdraw their funds and create a shortage of reserves, bankers
a. have no alternative but to call in outstanding loans
b. can borrow reserves from the Fed
c. must close their operations until their reserves increase
d. must sell bank stock to replenish reserves

Q32. If a bank has excess reserves,
a. its reserves are greater than its liabilities
b. it can make a loan if it wishes
c. it cannot make a loan if it wishes
d. it must borrow from the Fed

Q33. Which of the following is most influenced by changes in the discount rate?
a. the interest rate paid on savings
b. the commercial loan rate
c. the installment loan rate
d. the mortgage loan rate

Q34. The Federal Reserve System is built around
a. four regional banks
b. six regional banks
c. twelve district banks
d. one bank with several branches

Q35. The interest rate at which banks borrow excess reserves from each other is known as the
a. prime rate
b. federal funds rate
c. discount rate
d. T-bill rate

Q36. If the U. S. government increases spending, the U. S. Treasury
a. has the legal right to issue currency to pay for the spending
b. does not have the legal right to issue currency to pay for the spending
c. usually pays for the spending by selling bonds directly to the Fed
d. seldom pays for the spending by selling bonds to the public

Q37. Forces within the economy that naturally tend to counteract recessions and inflation are known as
a. discretionary stabilizers
b. automatic stabilizers
c. demand-management policies
d. fiscal dividends

orchidraven755

6. Other things beingâ equal, the M1 money supply varies in the same direction as the magnitude of

A.âk, theâ currency/DDO ratio

B.rrâ , the average required reserve ratio

C.âre, theâ banksâ desired excess reserves ratio

D.none of the above

7. Suppose that discounts and advancesâ (Fed loans of reserves toâ banks) increaseâ $200 million, Treasury deposits at the Fed increaseâ $500 million, and the Fed buysâ $700 million of Treasury bills from dealers. The net effect of these 3 transactions is to

A.increase bank reserves byâ $1,000 million

B.increase bank reserves byâ $1,400 million

C.increase bank reserves byâ $400 billion

D.leave bank reserves unchanged

8. Other things being equalâ (assuming the Fed takes noâ action), a sharp increase in interest rates caused by market forces in a strong economic recovery is likely to

A.increaseâ k, the currencyâ ratio, thus reducing the money supply

B.reduce the monetaryâ base, thus increasing the money supply

C.reduce reâ , the desired excess reserveâ ratio, thus increasing the money supply

D.do none of the above

9. The Federal Reserve is able to control most accurately in the short run

A.âB, the monetary base

B.âk, the currency ratio

C.reâ , theâ bankâs desired excess reserve ratio

D.M1, the U.S. money supply

10. The Federal Reserve implementedâ âoperation twistâ inâ 2011-2012 by

A.simultaneously buyingâ long-term and sellingâ short-term Treasury securities

B.heavy purchases of bothâ long-term andâ short-term Treasury securities

C.lowering the federal funds rate target and buyingâ long-term bonds

D.purchasingâ short-term securities and buyingâ mortgage-backed bonds

11. Duringâ 2008-2014, Fed Chairman Ben Bernanke drew a lot of criticism for

A.maintainingâ short-term interest rates at extremely low levels for an extended period

B.bailing out large banks that would otherwise have failed

C.conducting the quantitative easing policy for about six years

D.all of the above

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

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ECON 2035 Lecture : LectureNotes 11.5

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