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Economics > Econ Test 3 - Tools of Monetary Policy > Flashcards

Econ Test 3 - Tools of Monetary Policy Flashcards

0
Q

Affects the quantity of reserves and the monetary base

A

Open market operations

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1
Q

The primary tool of monetary policy?

A

Open market operations

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2
Q

The federal funds rate is determined in the market for ____?

A

reserves

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3
Q

The federal funds rate is strongly influenced by what?

A

the fed’s open market operations

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4
Q

What is the primary target of monetary policy in contemporary periods?

A

the federal funds rate

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5
Q

What is the primary credit tool of the monetary policy?

A

Discount Loans

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6
Q

What does discount loans change?

A

borrowed reserves BR

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7
Q

What kind of borrowing occurs in Discount Loans?

A

banks borrowing directly from the Fed

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8
Q

What primarily reflects the Fed’s role as the lender of last resort to the banking system?

A

Discount Loans

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9
Q

Who is the lender of last resort to the banking system?

A

The Fed’s

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10
Q

Does discount loans affect monetary base?

A

Yes

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11
Q

The reserve requirement is changed at whose discretion?

A

The Fed’s with statutory limits

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12
Q

What isn’t really used as a monetary policy tool since the early years, but still affects the money multiplier?

A

Reserve Requirement

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13
Q

The fourth tool that was recently added to the Monetary Tools

A

Interest paid on RR and ER balances

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14
Q

Quantity of reserves demanded =

A

Required reserves + quantity of excess reserves demanded

RR + ER

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15
Q

What are insurance against deposit outflows?

A

Excess reserves

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16
Q

What is the cost of holding excess reserves?

A

The interest rate that could have been earned by ledning them out minus the interest rate that is paid on these reserves by the Fed

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17
Q

The higher the federal funds rate is above the rate paid on excess reserves the higher/lower the opportunity cost of holding excess reserves

A

higher

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18
Q

The lower the federal funds rate is above the rate paid on excess reserves, the higher/lower the opportunity cost of holding excess reservers

A

lower

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19
Q

The quantity of reserves demanded is neg/pos related ot the federal funds interest rate

A

negatively

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20
Q

When is there no opportunity cost to holding excess reserves?

A

If the federal funds rate tries to fall below the excess reserves rate

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21
Q

If the federal funds rate equals the excess reserves rate, what happens to reserves demanded (R^d)

A

becomes infinitely elastic (flat)

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22
Q

When did the Fed start paying interest on reserves, both required and excess?

A

October 2008

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23
Q

What is the targe range for effective federal funds rate?

A

0 to 1/4 percent

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24
Q

The federal reserve board established the interest rates on reserve balances and excess balances at what percent?

A

1/4

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25
Q

What was the original interest rate based on for required and excessive reserves?

A

a formula

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26
Q

What are the two components of supply of reserves?

A

non-borrowed reserves

borrowed reserves

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27
Q

Who supplies the non-borrowed reserves?

A

The fed’s out of market operations

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28
Q

Where do borrowed reserves come from?

A

the Fed by banks wanting/needing reserves

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29
Q

Borrowed reserves come via?

A

discount loans

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30
Q

The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility

A

discount rate

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31
Q

What is the discount window?

A

the Federal Reserve Bank’s lending facility

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32
Q

How many discount window programs are offered?

A

3

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33
Q

What are the three discount window programs offered?

A

Primary credit
Secondary credit
seasonal credit

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34
Q

Are discount window loanns fully secured?

A

yes

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35
Q

Under this program, loans are extended for a very short term (usually overnight) to depository institutions in good financial conditions.

A

primary credit program

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36
Q

What do depository institutions that are not eligible for primary credit apply for?

A

secondary credit

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37
Q

When will depository institutions apply for secondary credit?

A

meet short-term liquidity needs or to resolve severe financial difficulties

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38
Q

This is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs?

A

Seasonal credit

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39
Q

Where is the discount rate charged for primary credit set?

A

Above the usual level of short-term market interest rates

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40
Q

What is the Federal Reserve’s main discount window program?

A

Primary credit

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41
Q

What is the term used at times to mean the primary credit rate?

A

discount rate

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42
Q

Is the discount rate on secondary credit above or below the rate on primary credit?

A

above

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43
Q

How is the discount rate for seasonal credit found?

A

average of selected market rates

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44
Q

Who establishes discount rates?

A

each Reserve Bank’s board of directors

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45
Q

Who are the discount rates subject to review of?

A

The board of governors of the federal reserve system

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46
Q

What is a substitute for borrowing from other banks?

A

borrowing from the Fed

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47
Q

What is the discount rate set by the Fed at a fixed amount above the target federal funds rate?

A

the cost of borrowing from the Fed

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48
Q

If federal funds rate < Interest d what happens to borrowed reserves and banks borrowing?

A

banks won’t borrow from the feds and borrowed reserves = 0

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49
Q

When is the supply curve of reserves vertical at the amount supplied?

A

When borrowed reserves = 0 because federal funds rate < interest d

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50
Q

As federal funds rate (iff) rises above id banks will borrow more at ___ and re-lend at ____?

A

borrower more at id

re-lend at federal funds rate

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51
Q

When is the supply curve infinitely elastic?

A

When it is horizontal

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52
Q

When does the supply curve become horizontal at id?

A

as discount borrowing puts more and more reserves into the market

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53
Q

Pressure from where can raise federal funds rate above id?

A

reserve market pressure

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54
Q

Rate on what sets a ceiling on the federal funds rate?

A

discount loans

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55
Q

Rate on what sets a floor on the federal funds rate?

A

excess reserves

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56
Q

NBR means?

A

nonborowed reserves supplied at fed’s discretion

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57
Q

How is the targeted federal funds rate set?

A

The fed estimates reserves demanded and sets the nonborrowed reserves to establish the target

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58
Q

id =

A

discount loan rate

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59
Q

When is there no disincentive to borrowing from the fed?

A

when federal funds rate rises to greater than or equal to the discount loan rate

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60
Q

When does opportunity cost of excess reserves result in downward sloped demand for reserves?

A

When federal funds rate > excess reserve rate

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61
Q

Open market purchases increase what?

A

nonborrowed reserves

62
Q

Open market purchases shift the vertical section of the supply curve right/left?

A

right

63
Q

An increase in nonborrowed reserves shifts the vertical section of the supply curve right/left?

A

right

64
Q

Open market sale inc/dec nonborrowed reserves?

A

decreases

65
Q

Open market sales shifts vertical section of the supply curve right/left?

A

left

66
Q

A shift left in the vertical section of the supply curve results from?

A

an open market sale and a decrease in nonborrowed reserves

67
Q

What does the effects of an open market operation on the federal funds rate depend on?

A

Whether the supply curve intersects the demand curve in its downward sloped section versus its flat section

68
Q

If intersection stays on downward sloped section of a demand curve than an OMO purchase creates an excess/deficit supply of reserves

A

excess

69
Q

What happens to the equilibrium when there is a greater quantity of reserves demanded as opportunity cost of holding excess reserves falls?

A

new lower equilibrium

70
Q

An open market operation creates an _____ demand for reserves at the initial federal funds rate?

A

excess

71
Q

Less/more quantity of reserves demanded as opportunity cost of holding excess reserves rises?

A

lesser

72
Q

If the intersection is on the horizontal section of a demand curve, then an open market operation purchase results in the new reserves _______?

A

being absorbed as excess reserve earnings

73
Q

If the intersection stays on the downward sloped section of the demand curve, what happens to the federal funds rate?

A

new lower equilibirum

74
Q

If the intersection stays on the horizontal section of the demand curve, what happens to the federal funds rate?

A

nothing

75
Q

What action does the Fed take in response to the zero lower bound (ZLB) problem that it faces today?

A

large scale, unconventional policy of asset purchasing (long-term bond buying)

76
Q

The interest rate the Fed pays on reserves should set what?

A

a lower bound for the federal funds rate

77
Q

What is the rate banks charge each other for reserves?

A

Federal funds rate

78
Q

Open market operation purchase shifts reserves supply right/left?

A

right

79
Q

When supply > demand for reserves, bidding increases/decreases?

A

decreases

80
Q

As opportunity cost falls, quantity of reserves held inc/dec along reserves demanded?

A

increases

81
Q

This is reflected as a shift down of the horizontal section of the supply curve

A

discount rate decrease

82
Q

A discount rate decrease results in a shift up/down of the horizontal section of the supply curve?

A

down

83
Q

A discount rate increase results in a shift of the horizontal supply curve up/down?

A

up

84
Q

A shift in the horizontal section of the supply curve up is a result of?

A

discount rate increase

85
Q

What do the effects of a change in the discount rate depend on?

A

Whether the horizontal section of the supply curve intersects the demand curve in its downward sloped section

86
Q

Is it normal to have a discount rate set above the target federal funds rate?

A

yes

87
Q

In a normal situation, will increases and decreases in the discount rate affect the federal funds rate?

A

no

88
Q

When is the discount rate situation considered normal?

A

When the discount rate is set above the target federal funds rate

89
Q

The intersection of supply and demand on the horizontal section of the supply curve implies what?

A

some discount borrowing is occuring

90
Q

When the federal funds rate = the discount rate, the intersection of the supply and demand curve is occuring where?

A

on the horizontal section of the supply curve

91
Q

As more reserves become available to the banking system, what happens to the federal funds rate?

A

gets pushed down to the lower discount rate

92
Q

As less reserves are available to the banking system, what happens to the federal funds rate?

A

its pushed up

93
Q

An increase in the discount rate encourages/discourages discount borrowing?

A

discourages

94
Q

The fed sets the discount rate above the federal funds rate as a matter of what?

A

policy

95
Q

What is the fed’s policy upper limit called?

A

federal funds rate

96
Q

The discount rate is not allowed to do what?

A

permanently affect the federal funds rate

97
Q

The discount rate serves as what to the federal funds rate?

A

an upper bound on the federal funds rate

98
Q

What would happen if the federal funds rate rose to a point where it might exceed the discount rate?

A

banks would obtain all their desired reserves by borrowing from the fed rather than other banks

99
Q

Why does the Fed require the bank to maintain a certain percentage of deposits as reserves?

A

in case depositors want to draw money out

100
Q

When a bank has excess reserves they are known as what?

A

federal funds

101
Q

Why are excess reserves known as federal funds?

A

they are held on deposit in regional federal reserve banks

102
Q

When one bank borrows money from another bank, the rate that is charged is called?

A

the federal funds rate

103
Q

When a bank wants to lend more money than it has, it borrows from where?

A

A bank with excess reserves

104
Q

When will the required reserve fall below the required percentage?

A

high demand for loans

sudden demand for withdrawals

105
Q

The rate the Feds charge banks to borrow?

A

discount rate

106
Q

When does the quantity of reserves demanded increase for any and all federal funds rate?

A

when the feds raise reserve requirements

107
Q

When the feds raise the reserve requirements the demand curve shifts left/right?

A

right

108
Q

When the fed reduces reserve requirements, what happens to the federal funds rate?

A

falls

109
Q

When the fed increase reserve requirements what happens to the federal funds rate?

A

increases

110
Q

When required reserves are raised, the demand curve shifts left/right?

A

right

111
Q

If fed increases required reserves, the federal funds rate rises/falls?

A

rises

112
Q

It has been suggested that the Feds do what to encourage bank lending?

A

pay negative interest

113
Q

The federal reserve’s operating procedures are designed to limit fluctuations in the federal funds rate between?

A

the discount rate and the excess reserve rate

114
Q

The interest rate the Fed pays on reserves should set a lower/higher bound for the federal funds rate

A

lower

115
Q

The interest rate the Fed pays on reserves should set a lower bound for?

A

the federal funds rate

116
Q

The interest rate the Fed charges on discount loans to banks should set a lower/upper bound for the federal funds rate?

A

upper

117
Q

The interest rate the Fed charges on discount loans to banks should set an upper bound for?

A

the federal funds rate

118
Q

The interest rate the Fed pays should limit fluctuations in its?

A

policy rate

119
Q

These open market operations are intended to change the monetary base and level of reserves

A

dynamic

120
Q

Monetary policy is reflected in what operations?

A

dynamic

121
Q

These open market operations are intended to offset the various factors that affect reserves and the monetary base that are outside the Fed’s direct control

A

defensive

122
Q

Defensive OMO defend against factors that would do what with policy objectives?

A

they would interfere with policy objectives

123
Q

Varying float, currency holdings, treasury deposits, etc.. are examples of what OMO?

A

defensive

124
Q

The federal funds rate aims to stay between?

A

0%-25%

125
Q

Where do OMO get carried out at the New York Fed bank?

A

trading desk

126
Q

OMO are carried out based on what?

A

the policy it has received from the last FOMC meeting

127
Q

Most transactions are designed to be?

A

self-reversing

128
Q

Fed purchases that are repurchased by the seller within 1-15 days

A

repurchase agreements

129
Q

Fed sales that are essentially reverse repos

A

Matched sale-purchase agreements

130
Q

Are outright transactions reversable?

A

no

131
Q

Permanent changes or implementations to reserves or policies are carried out via?

A

outright transactions

132
Q

These occur at the initiative of the Fed at any time

A

open market operations

133
Q

Adv of OMO?

A

occur at the initiative of the fed at any time
flexible and precise
easily reversed
quick

134
Q

Does the Fed have complete control over the specific amount of reserves that will be added or removed from the banking system?

A

yes

135
Q

What have been essentially THE monetary policy tool of the FED for many years?

A

OMOs

136
Q

Virtually all traditional monetary policy is carried out via?

A

OMOs

137
Q

How can the feds encourage or discourage bank borrowing at the discount window?

A

by altering the discount rate

138
Q

How much is a bank allowed to borrow at any time?

A

any amount they want

139
Q

Why are discount rates set higher than federal funds rate?

A

to encourage banks to borrow from other banks

140
Q

Secondary credit is granted to banks with?

A

severe liquidity problems

141
Q

Banks only are granted secondary credit when?

A

they are in trouble

142
Q

What prevents the federal funds rate from rising too far above its target level?

A

the window and the discount rate

143
Q

Is the secondary credit rate higher or lower than the primary credit rate?

A

higher

144
Q

If a borrower had arbitrage opportunities, they would likely use primary or secondary credit?

A

primary

145
Q

If a borrower had a liquidity demand or was addressing an overnight overdraft would they use primary or secondary credit?

A

secondary

146
Q

If the borrower was in a tight money market or meeting a need for backup funding would they use primary or secondary credit?

A

secondary

147
Q

When is it inappropriate to borrow secondary credit?

A

arbitrage opp

facilitate balance sheet expansion

148
Q

Primary credit is available in terms from?

A

overnight to 90 days

149
Q

Secondary credit is generally extended on?

A

a very short-term basis, usually overnight

150
Q

What is not used to fund an expansion of the borrower’s assets?

A

secondary credit

151
Q

The main monetary policy tool of the European Central Bank?

A

Open Market Operations

152
Q

Reserve requirements of the European Central Bank?

A

2% of the total amount of checking deposits and other short-term deposits

153
Q

What is it called when the federal reserve implements unprecedented increases in its lending facilities to provide liquidity to the financial markets?

A

liquidity provisions

Economics (5 decks)

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