Chapter 15: Tools of Monetary Policy

Question 1

Tools of monetary policy

Answer 1

• open market operations
• changes in borrowed reserves
• changes in reserve requirements
• federal funds rate

Question 2

arbitrage

Answer 2

buy low, sell high

Question 3

shifts in reserves demand curve

Answer 3

• change in deposits changes R
• change in r
• change in expected deposit flows
• interest on reserves

Question 4

Supply of Reserves

Answer 4

R_N + DL

Question 5

Open market operation effects on fed funds rate when supply intersects demand in its downward sloping sections

Answer 5

• open market purchases cause fed fund rate to call
• open market sales cause fed funds rate to rise

Question 6

Open market operation effects on fed funds rate when supply intersects demand in its flat section

Answer 6

no effect on fed funds rate

Question 7

Discount rate change when demand intersects supply in vertical section

Answer 7

no effect on fed funds rate

Question 8

Discount rate change when demand intersects supply in flat section

Answer 8

Reserves increases as discount rate decreases

Question 9

Relationship between RR and Fed Funds rate

Answer 9

when the Fed raises reserve requirements, the fed funds rate rises

Question 10

Relationship between interest on reserves and the Fed funds rate

Answer 10

when the fed funds rate is at the interest rate paid on reserves, an increase in the interest rate on reserves increases the fed funds rate

Question 11

conventional monetary policy tools

Answer 11

open market operations, discount lending, and reserve requirements

Question 12

dynamic open market operations

Answer 12

intended to change the level of reserves and the monetary base

Question 13

defensive open market operations

Answer 13

offset movements in floats and Treasury Deposits which affect reserves and the monetary base

Question 14

discount window

Answer 14

where banks can borrow reserves from the Fed

Question 15

Types of discount loans

Answer 15

primary credit, secondary credit, and seasonal credit

Question 16

primary credit

Answer 16

discount rate overnight loans

Question 17

secondary credit

Answer 17

given to banks in financial trouble
- higher than discount rate

Question 18

seasonal credit

Answer 18

given to meet the needs of a limited number of small banks in vacation and agricultural areas
- interest rate is an average of fed funds rate and CD rates

Question 19

advantages of OMO

Answer 19

1. initiative of the Fed
2. flexible and precise
3. easily reversed
4. implemented quickly

Question 20

zero lower bound problem

Answer 20

the central bank is unable to lower its policy interest rate

Question 21

nonconventional monetary policy tools

Answer 21

liquidity provision, asset purchases, forward guidance, negative interest rates

Question 22

liquidity provision

Answer 22

increases in lending to provide liquidity to financial markets

Question 23

Asset purchase

Answer 23

buying large scale asset purchases to lower interest rates for particular types of credit

Question 24

Forward guidance

Answer 24

attempts to influence the financial decisions by changing expectations of the future interest rate

Question 25

negative interest rates

Answer 25

banks pay the Fed to keep their deposits

Question 26

shifts in the reserves supply curve

Answer 26

• OMO
• discount rate

Question 27

What does the Fed mainly use to conduct conventional open market operations?

Answer 27

US Treasury securities and US government securities

Question 28

Two types of defensive OMO

Answer 28

repurchase agreements and reverse repos

Question 29

standing lending facility

Answer 29

primary credit facility

Question 30

advantages monetary policy tools outside of OMO

Answer 30

• interest on ER can change when banks have a lot in ER
• discount rate can be used as a lender of last resort

Question 31

when is conventional monetary policy ineffective?

Answer 31

• financial system seized up
• zero lower bound problem

Question 32

quantitative easing vs credit easing

Answer 32

• quantitative easing doesn’t always lead to increase in MS
• instead, credit easing can be used to alter the composition of the Fed’s balance sheet to improve credit markets

Question 33

two types of commitments to future policy actions

Answer 33

conditional and unconditional

Question 34

conditional commitments

Answer 34

if economic circumstances change, the Fed will abandon their commitment

Question 35

unconditional commitment

Answer 35

if economic circumstances change, the Fed will not abandon their commitment

Question 36

what is the disadvantage of unconditional commitments?

Answer 36

In cases when it is better to get rid of the commitment, the Fed might not go back on their word

Question 37

what is a disadvantage of negative interest rates?

Answer 37

instead of using reserves for lending, the banks might change reserves into vault cash