quiz 15 Flashcards
(27 cards)
What is the interest rate charged on overnight loans of reserves between banks?
The federal funds rate.
What is the primary indicator of the Fed’s stance on monetary policy
The federal funds rate.
What equals required reserves plus excess reserves
The quantity of reserves demanded.
What happens to reserve demand when the federal funds rate is above the interest rate on reserves and the federal funds rate falls?
The quantity of reserves demanded rises.
What is the opportunity cost of holding excess reserves?
The federal funds rate minus the interest rate paid on excess reserves.
What is the shape of the demand curve for reserves when the fed funds rate is above the interest rate on excess reserves?
Negatively sloped.
When the federal funds rate equals the interest rate paid on excess reserves, what is the shape of the demand curve for reserves?
Horizontal.
What equals nonborrowed reserves plus borrowed reserves?
The quantity of reserves supplied.
When the fed funds rate is below the discount rate, what is the shape of the supply curve of reserves?
Vertical.
When the fed funds rate equals the discount rate, what is the shape of the supply curve of reserves?
Horizontal.
What effect does an open market sale have when the fed funds rate is above the interest rate on excess reserves?
It decreases the supply of reserves, raising the federal funds rate.
What effect does an open market purchase have when the fed funds rate is above the interest rate on excess reserves?
It increases the supply of reserves, causing the federal funds rate to fall.
What happens to the fed funds rate when an open market purchase increases the supply of reserves?
The fed funds rate falls.
What happens when an open market sale decreases the supply of reserves?
The federal funds rate increases.
What does an open market sale do to the supply of reserves, and what is the effect?
It decreases the supply, causing the fed funds rate to increase.
When the fed funds rate is 3%, what is the effect of lowering the discount rate from 5% to 4%?
It has no effect on the federal funds rate.
When the fed funds rate is 3%, what is the effect of increasing the interest rate paid on excess reserves from 1% to 2%?
It has no effect on the federal funds rate.
When the fed funds rate is 5%, what is the effect of lowering the discount rate from 5% to 4%?
It lowers the federal funds rate.
What is the most important monetary policy tool, and why?
Open market operations, because they determine changes in the monetary base, the main source of money supply fluctuations.
How does a decline in reserve requirements affect the market for reserves?
It decreases the demand curve of reserves, causing the fed funds rate to fall.
What do open market purchases raise, and what is the result?
They raise the monetary base, which raises the money supply
How do open market purchases affect reserves and the money supply?
They raise reserves and the monetary base, increasing the money supply.
What are the two types of open market operations?
Dynamic and defensive.
What is the difference between dynamic and defensive open market operations?
Dynamic operations change reserves and the monetary base; defensive operations offset other movements in the monetary base.
