Tools of Monetary Policy

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

• above; rises

• above; falls

• below; rises

• below; falls

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

• vertical.

• horizontal.

• positively sloped.

• negatively sloped.

The quantity of reserves supplied equals

• nonborrowed reserves minus borrowed reserves.

• nonborrowed reserves plus borrowed reserves.

• required reserves plus borrowed reserves.

• total reserves minus required reserves.

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.

• sale decreases

• sale increases

• purchase increases

• purchase decreases

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.

• increases; supply

• increases; demand

• decreases; supply

• decreases; demand

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

• has an indeterminate effect on the federal funds rate.

• lowers the federal funds rate.

• has no effect on the federal funds rate.

• raises the federal funds rate.

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.

• decreases; lowering

• increases; lowering

• increases; raising

• decreases; raising

To make sure that the federal funds rate does not fall much below the floor set by the interest rate on excess reserves, the Federal Reserve has set up the ________ facility in which these nonbank lenders can lend to the Fed and earn an interest rate that is close to the interest rate the Fed pays on excess reserves.

• Term Securities Lending

• Primary Dealer Credit

• Reverse repo

• Term Auction

________ 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.

• Open market operations; money multiplier

• Open market operations; monetary base

• Changes in reserve requirements; money multiplier

• Changes in reserve requirements; monetary base

Open market sales shrink ________ thereby lowering ________.

• the money multiplier; the money supply

• the money multiplier; reserves and the monetary base

• reserves and the monetary base; the money supply

• the money base; the money multiplier