Financial Markets and Institutions, 9e (Mishkin)

Chapter 10 Conduct of Monetary Policy

10.1 Multiple Choice

1) Assets on the Fed's balance sheet include

A) government securities and currency in circulation.
B) discount loans and reserves.
C) government securities and discount loans.
D) currency in circulation and reserves.
Answer: C
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

2) An open market purchase of securities by the Fed will

A) increase assets of the nonbank public and increase assets of the banking system.
B) decrease assets of the nonbank public and increase assets of the Fed.
C) decrease assets of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase assets of the Fed.
E) increase assets of the banking system and decrease assets of the Fed.
Answer: D
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

3) An open market sale of securities by the Fed will

A) decrease liabilities of the Fed and not affect assets of the banking system.
B) decrease assets of the nonbank public and decrease assets of the Fed.
C) increase liabilities of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase liabilities of the Fed.
E) decrease assets of the banking system and increase assets of the Fed.
Answer: A
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

4) If the Federal Reserve wants to expand reserves in the banking system, it will
A) purchase government securities.
B) raise the discount rate.
C) sell government securities.
D) raise reserve requirements.
Answer: A
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

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5) If the Federal Reserve wants to lower the monetary base and the money supply, it will
A) increase bank reserves.
B) lower the discount rate.
C) sell government securities.
D) lower reserve requirements.
Answer: C
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

6) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system
and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
Answer: D
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

7) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the
banking system and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
Answer: B
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

8) The federal funds rate is

A) the interest rate on loans from the Fed to a bank.
B) the price the Fed pays for government securities.
C) the interest rate on loans of reserves from one bank to another.
D) the price banks pay the Fed for government securities.
E) the interest rate on loans from a bank to the federal government.
Answer: C
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

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9) The discount rate is
A) the interest rate on loans from the Fed to a bank.
B) the price the Fed pays for government securities.
C) the interest rate on loans of reserves from one bank to another.
D) the price banks pay the Fed for government securities.
E) the interest rate on loans from a bank to the federal government.
Answer: A
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

10) Holding everything else constant, if the federal funds rate rises, then the demand for
A) excess reserves rises because they have a higher return.
B) excess reserves falls because they have a higher cost.
C) required reserves falls because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.
Answer: B
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

11) Holding everything else constant, if the federal funds rate falls, then the demand for
A) excess reserves falls because they have a lower return.
B) excess reserves rises because they have a lower cost.
C) required reserves rises because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.
Answer: B
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

12) Bank reserves can be categorized as

A) vault cash and deposits at the Fed.
B) required reserves and excess reserves.
C) borrowed reserves and nonborrowed reserves.
D) all of the above.
Answer: D
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

13) An open market purchase

A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall.
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise.
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise.
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.
Answer: A
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition
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14) The supply curve for reserves is ________ when the federal funds rate is below the discount
rate and ________ when the federal funds rate is above the discount rate.
A) upward sloping; horizontal
B) upward sloping; vertical
C) vertical; horizontal
D) vertical; downward sloping
Answer: C
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

15) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed
A) raises reserves requirements.
B) does an open market purchase.
C) does an open market sale.
D) raises the discount rate.
Answer: C
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

16) The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed
A) decreases reserve requirements or does an open market purchase.
B) lowers the discount rate.
C) lowers the discount rate or does an open market purchase.
D) decreases reserves requirements.
E) does an open market sale.
Answer: D
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

17) Under usual circumstances, an increase in the discount rate causes

A) the federal funds rate to fall.
B) the federal funds rate to rise.
C) no change in the federal funds rate.
D) the supply of reserves to increase.
E) the supply of reserves to decrease.
Answer: C
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

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18) If the Fed increases reserve requirements, the demand for reserves ________ and the
equilibrium federal funds rate ________.
A) increases; drops
B) decreases; rises
C) decreases; drops
D) increases; rises
Answer: D
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

19) An open market ________ leads to a(n) ________ of reserves and deposits in the banking
system and hence to a(n) ________ of the monetary base and the money supply.
A) sale; expansion; contraction
B) purchase; expansion; contraction
C) sale; expansion; expansion
D) purchase; expansion; expansion
Answer: D
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

20) The actual execution of open market operations is done at

A) the Board of Governors in Washington, D.C.
B) the Federal Reserve Bank of New York.
C) the Federal Reserve Bank of Philadelphia.
D) the Federal Reserve Bank of Boston.
Answer: B
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

21) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of
government securities, but these purchases or sales are executed by the Federal Reserve Bank of
A) Chicago.
B) Boston.
C) New York.
D) San Francisco.
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

22) An open market transaction intended to change the level of bank reserves is a
A) repurchase agreement.
B) reverse repo.
C) dynamic operation.
D) defensive operation.
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition
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23) If the Federal Reserve wants to drain reserves from the banking system, it will
A) purchase government securities.
B) lower the discount rate.
C) sell government securities.
D) raise reserve requirements.
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

24) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves
________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer: A
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

25) If the Fed wants to temporarily drain reserves from the banking system, it will engage in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) a "pump" agreement.
D) none of the above.
Answer: B
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

26) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to
________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

27) Discount loans to banks experiencing severe liquidity problems are called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) lender-of-last-resort credit.
Answer: B
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition
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28) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are
called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) lender-of-last-resort credit.
Answer: A
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

29) When the Federal Reserve was created, its most important role was intended to be
A) a storage facility for the nation's gold.
B) a lender of last resort.
C) a regulator of bank holding companies.
D) none of the above.
Answer: B
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

30) At its inception, the Federal Reserve was intended to be

A) the Treasury's banker.
B) the issuer of government debt.
C) a lender of last resort.
D) a regulator of bank holding companies.
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

31) Which type of open market operation is intended to change the level of reserves?
A) Defensive open market operations
B) Reserve requirements
C) Dynamic open market operations
D) Market equilibrium
Answer: C
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

32) The type of open market operation intended to offset movements in other factors that affect
reserves and the monetary base is
A) the dynamic open market operations.
B) the defensive open market operations.
C) the reserve requirements.
D) market equilibrium.
Answer: B
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition
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33) Disadvantages of using reserve requirements to control the money supply include
A) their overly-powerful impact on the money supply.
B) creating potential liquidity problems for banks with high levels of excess reserves.
C) their overly-powerful impact on the monetary base.
D) all of the above.
Answer: A
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

34) The Fed is reluctant to use reserve requirements to control the money supply because
A) of their overly-powerful impact on the money supply.
B) they have the potential to create liquidity problems for banks with low excess reserves.
C) frequent changes in reserve requirements complicate liquidity management for banks.
D) of all of the above.
E) of only A and B of the above.
Answer: D
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

35) Which of the following statements is true regarding the Fed's procedures for operating the
discount window?
A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate
between the interest rate paid on reserves and the discount rate.
B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the
federal funds rate than if they simply didn't pay interest on reserves.
C) The Fed's operating procedures and paying interest on reserves has no impact on the
fluctuation of the federal funds rate.
D) None of the above is correct.
Answer: A
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

36) Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in
banks are called
A) the monetary base.
B) government securities.
C) open market operations.
D) reserves.
Answer: D
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

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37) Regulations making it obligatory for depository institutions to keep a certain fraction of their
deposits in accounts with the Fed are
A) open market operations.
B) federal funds rate.
C) required reserve ratio.
D) reserve requirements.
Answer: D
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

38) During 2007 as the global financial crisis started, the Fed implemented several new lending
programs to increase liquidity, including
A) expansion of the discount window.
B) setting up the Term Auction Facility, making loans through competitive auctions.
C) lending to investment banks.
D) only A and B above.
E) A, B, and C, are all correct.
Answer: E
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

39) During QE1, the Fed purchased

A) $1.25 trillion in mortgage-backed securities.
B) $600 billion in long-term Treasury securities.
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start).
D) $500 billion in U.S. corporate debt.
Answer: A
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

40) During QE2, the Fed purchased

A) $1.25 trillion in mortgage-backed securities.
B) $600 billion in long-term Treasury securities.
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start).
D) $500 billion in U.S. corporate debt.
Answer: B
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

41) During QE3, the Fed purchased

A) $1.25 trillion in mortgage-backed securities.
B) $600 billion in long-term Treasury securities.
C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start).
D) $500 billion in U.S. corporate debt.
Answer: C
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition
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42) During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the
crisis?
A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25.
B) The Fed set up the Term Auction Facility to provide further liquidity to banks.
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P.
Morgan.
D) all of the above.
Answer: D
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

43) The European Central Bank uses open market operations as its primary tool for conducting
monetary policy. ________ are the predominant form of open market operations.
A) Main refinancing operations
B) Direct bank loans
C) Longer-term refinancing operations
D) Dynamic reserve requirements
Answer: A
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question

44) The European Central Bank uses all of the following tools to implement its monetary policy,
expect
A) open market operations.
B) lending to banks.
C) reserve requirements.
D) None of the above.
Answer: D
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question

45) Price stability is desirable because

A) inflation creates uncertainty, making it difficult to plan for the future.
B) everyone is better off when prices are stable.
C) price stability increases the profitability of the Fed.
D) it guarantees full employment.
Answer: A
Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor
Question Status: Previous Edition

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46) The Federal Reserve desires interest rate stability because
A) it allows for less uncertainty about future planning.
B) interest rate volatility often leads to demands to curtail the Fed's power.
C) it guarantees full employment.
D) both A and B of the above.
Answer: D
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

47) When workers voluntarily quit a job or decline a job offer so they can search for a better one,
the resulting unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
Answer: B
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

48) When there is a mismatch between job requirements and the skills of available workers, the
resulting unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
Answer: A
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

49) The goal for high employment should be a level of unemployment at which the demand for
labor equals the supply of labor. Economists call this level of unemployment the
A) frictional rate of unemployment.
B) structural rate of unemployment.
C) natural rate of unemployment.
D) ideal rate of unemployment.
Answer: C
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

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50) Although the goals of high employment and economic growth are closely related, policies
can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest.
B) encouraging people to save.
C) both A and B of the above.
D) neither A nor B of the above.
Answer: C
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

51) Although the goals of high employment and economic growth are closely related, policies
can be specifically aimed at encouraging economic growth by
A) encouraging firms to invest and people to save.
B) encouraging firms to limit their price increases.
C) encouraging people to consume.
D) all of the above.
E) only A and C of the above.
Answer: A
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

52) What goals are continually mentioned by central bank officials when discussing the
objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
Answer: C
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

53) Which of the following statements is correct, concerning price stability as a monetary goal?
A) In the long run, no inconsistency exists between the price stability goal and the
other goals, such as high unemployment.
B) In the short run price stability often conflicts with the goals of high employment and interest-
rate stability.
C) Neither A nor B is true.
D) Both A and B are correct.
Answer: D
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

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54) Which of the following statements is correct, concerning price stability as a monetary goal?
A) In the long run, inconsistencies exists between the price stability goal and the
other goals, such as high unemployment.
B) In the short run price stability does not conflict with the goals of high employment and
interest-rate stability.
C) Neither A nor B is true.
D) Both A and B are correct.
Answer: C
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

55) The Bank of England, as well as the ECB, put price stability first among all goals. This is
known as a
A) hierarchical mandate.
B) dual mandate.
C) singular mandate.
D) ubiquitous mandate.
Answer: A
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

56) The Fed puts price stability along with maximum employment as its primary goals. This is
known as a
A) hierarchical mandate.
B) dual mandate.
C) singular mandate.
D) ubiquitous mandate.
Answer: B
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

57) Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of
England, refers to as an "inflation nutter," that can lead to large
A) inflation spikes.
B) output fluctuations.
C) unemployment rates.
D) economic growth.
Answer: B
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

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58) The first country to mandate that its central bank adopt inflation targeting was
A) the United States.
B) the United Kingdom.
C) Canada.
D) New Zealand.
Answer: D
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

59) Inflation targeting involves

A) a public announcement of medium-term numerical targets for inflation.
B) increased accountability of the central bank for attaining its inflation objectives.
C) an information-inclusive approach in which many variables are used in making decisions
about monetary policy.
D) all of the above.
Answer: A
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

60) Which of the following statements is true?

A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the
deleveraging of credit markets reduces economic activity.
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions.
C) Both A and B are correct.
D) Neither A nor B is correct.
Answer: A
Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

61) If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the
primary tool for accomplishing this?
A) Raising interest rates
B) Lowering interest rates
C) Increasing reserve requirements
D) Taking a short position in the overpriced asset
Answer: A
Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

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62) In response to an asset-price bubble, macroprudential regulation appears to be the right tool.
What is macroprudential regulation?
A) Increasing the federal funds rate across the macroeconomy
B) The use of tax incentives to capture some of the gains from bubbles
C) Regulatory policy to affect what is happening in credit markets in the aggregate
D) None of the above is correct.
Answer: C
Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

63) As of June 2013, the consolidated balance sheet of the Federal Reserve System included
about ________ in assets.
A) $3.5 trillion
B) $2.0 trillion
C) $1.5 trillion
D) $500 billion
Answer: A
Topic: Chapter 10.A1 The Fed's Balance Sheet and the Monetary Base
Question Status: Previous Edition

10.2 True/False

1) Open market purchases by the Fed increase the supply of nonborrowed reserves.
Answer: TRUE
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: Previous Edition

2) A discount loan by the Fed leads to an expansion of reserves, which can be lent out, thereby
leading to an expansion of liquidity in the banking system.
Answer: TRUE
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: New Question

3) Open market purchases by the Fed cause the federal funds rate to rise.
Answer: FALSE
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

4) The Fed's operating procedures and paying interest on reserves contains the federal funds rate
between the interest rate paid on reserves and the discount rate.
Answer: TRUE
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

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5) An open market sale leads to an expansion of reserves and deposits in the banking system and
hence to a decline in the monetary base and the money supply.
Answer: FALSE
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

6) Dynamic open market operations are intended to change the level of reserves and the
monetary base, and defensive open market operations are intended to offset movements in other
factors that affect reserves and the monetary base.
Answer: TRUE
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: New Question

7) Open market operations were the primary monetary policy tool used by the Fed to set interest
rates during the Global Financial Crisis of 2007-2009.
Answer: FALSE
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: New Question

8) Quantitative easing and credit easing are essentially the same thing.
Answer: FALSE
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

9) During the Global Financial Crisis of 2007-2009, conventional monetary policy actions
proved sufficient to heal the U.S. financial markets and contain the financial crisis.
Answer: FALSE
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: New Question

10) The European Central Bank uses main refinancing operations as the predominant form of
open market operations, which are similar to the Fed's repo transactions.
Answer: TRUE
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question

11) The European Central Bank uses the marginal lending facility where banks can borrow
overnight loans from the national central banks at the marginal lending rate.
Answer: TRUE
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question

12) Unlike the United States, Canada, and Australia, the European Central Bank does not have a
facility where banks are paid interest on reserves.
Answer: FALSE
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question
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13) The European Central Bank does imposes reserve requirement on its member banks.
Answer: TRUE
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: New Question

14) Price stability is defined by central bankers as low and stable inflation.
Answer: TRUE
Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor
Question Status: New Question

15) In addressing the goal of price stability, central bankers must deal with the time-
inconsistency problem, in which monetary policy conducted on a discretionary, day-by-day basis
leads to poor long-run outcomes.
Answer: TRUE
Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor
Question Status: New Question

16) An objective of the Federal Reserve in its conduct of monetary policy is high employment.
Answer: TRUE
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

17) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called frictional unemployment.
Answer: TRUE
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

18) In the long run, the price stability goal is inconsistent with other goals, such as economics
growth, stability of financial markets, etc.
Answer: FALSE
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

19) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot
produce lower unemployment or more employment in the long run.
Answer: TRUE
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

20) In the short run, price stability often conflicts with the goals of high employment and
interest-rate stability.
Answer: TRUE
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

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21) Inflation targeting makes the central bank less accountable.
Answer: FALSE
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

22) Decreased transparency of the monetary policy strategy through communication with the
public and the markets about the plans and objectives of monetary policymakers is an element of
inflation targeting.
Answer: FALSE
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

23) An important lesson from the global financial crisis is that central banks and other regulators
should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction.
Intervention is always a mistake.
Answer: FALSE
Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

10.3 Essay

1) Explain how the Fed's uses open market operations and discount lending to affect reserves in
the banking system.
Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System
Question Status: New Question

2) Explain how the Fed's use of its three tools of monetary policy affect supply and demand in
the market for reserves and the equilibrium federal funds interest rate.
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: Previous Edition

3) Explain how the Fed's current procedures for operating the discount window and paying
interest on reserves limit fluctuations in the federal funds rate.
Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate
Question Status: New Question

4) Distinguish between the three types of Fed discount loans: primary credit, secondary credit,
and seasonal credit.
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

5) Can the Fed control the money supply? Has it done so? What evidence can you provide to
support your answer to each question?
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

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6) Discuss how altering the composition of the Fed's balance sheet can stimulate the economy.
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

7) Why does the Fed use open market operations to a greater extent than reserve requirements in
its conduct of monetary policy?
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

8) What is the argument for the Fed paying interest to banks on required reserves? Are there
good arguments for not doing this?
Topic: Chapter 10. 3 Conventional Monetary Policy Tools
Question Status: Previous Edition

9) Discuss the role of the Fed as a lender of last resort during the 2007-2009 financial crisis.
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

10) Discuss the differences between quantitative easing and credit easing.
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

11) Discuss the unconventional liquidity provisions implemented by the Fed in 2007.
Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing
Question Status: Previous Edition

12) Discuss how the monetary policy of the European Central Bank is similar to the U.S. How
are they different?
Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank
Question Status: Previous Edition

13) Discuss why policy makers have become more concerned with maintaining a stable price
level as a goal of economic policy.
Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor
Question Status: New Question

14) Describe the goals of the Federal Reserve. What happens when these goals come into
conflict? How would one decide if lower inflation is more important than lower unemployment?
Explain.
Topic: Chapter 10. 7 Other Goals of Monetary Policy
Question Status: Previous Edition

15) Distinguish between a hierarchical mandate and a dual mandate, with regard to central bank
goals.
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

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16) Discuss some of the issues central banks will face maintaining price stability as a short-run
goal?
Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy?
Question Status: Previous Edition

17) Explain why the use of an interest rate targeting strategy may result in procyclical monetary
growth.
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

18) "The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to
procyclical money growth." True, false, or uncertain? Why?
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

19) If inflation and unemployment are of direct concern to Fed officials, why do they make such
a big issue about money growth and interest rates? Why don't they just target the unemployment
rate and the inflation rate directly? Explain.
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

20) Describe and discuss Chairman Bernanke's views on inflation targeting and transparency in
central banking.
Topic: Chapter 10. 9 Inflation Targeting
Question Status: Previous Edition

21) Describe an asset-price bubble.

Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

22) What are the arguments for and against central bank intervention during asset-price bubbles?
Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the
Global Financial Crisis
Question Status: Previous Edition

23) List and describe the various assets and liabilities making up the consolidated balance sheet
of the Federal Reserve System.
Topic: Chapter 10.A1 The Fed's Balance Sheet and the Monetary Base
Question Status: Previous Edition

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