econ423hw4

econ423hw4 - Econ 423, Summer 2009 Lauren Heller Homework...

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Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework #4, Due 7—8—09 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The federal funds rate is A) the interest rate on loans of reserves from one bank to another. B) the interest rate on loans from a bank to the federal government. C) the price the Fed pays for government securities. D) the interest rate on loans from the Fed to a bank. E) the price banks pay the Fed for government securities. 2) The discount rate is A) the price banks pay the Fed for government securities. B) the interest rate on loans from a bank to the federal government. C) the interest rate on loans from the Fed to a bank. D) the price the Fed pays for government securities. E) the interest rate on loans of reserves from one bank to another. 3) 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) required reserves rises because the cost of borrowing from the Fed is relatively lower. C) required reserves falls because the cost of borrowing from the Fed is relatively higher. D) reserves will not change because the Fed sets the level of required reserves. E) excess reserves falls because they have a higher cost. 4) An open market purchase A) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. B) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. C) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. D) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. 5) 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) vertical; horizontal B) vertical; downward sloping C) upward sloping; vertical D) upward sloping; horizontal E) horizontal; vertical 6) 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) does an open market sale. C) lowers the discount rate. D) lowers the discount rate or does an open market purchase. E) decreases reserves requirements. 1) 2) 3) 4) 5) 6) Remember: All work on this problem set is to be your own, without any assistance from others. 7) If the Fed increases reserve requirements, the demand for reserves and the equilibrium 7) federal funds rate A) decreases; rises B) increases; drops C) increases; rises D) decreases; drops 8) An open market transaction intended to change the level of bank reserves is a 8) A) defensive operation. B) reverse repo. C) repurchase agreement. D) dynamic operation. 9) If the Federal Reserve wants to drain reserves from the banking system, it will 9) A) sell government securities. B) lower the discount rate. C) purchase government securities. D) raise reserve requirements. 10) Discount loans to banks experiencing severe liquidity problems are called 10) A) secondary credit. B) lender—of-last—resort credit. C) seasonal credit. D) primary credit. 11) The Fed is reluctant to use reserve requirements to control the money supply because 11) A) of their overly—powerful impact on the money supply. B) frequent changes in reserve requirements complicate liquidity management for banks. C) they have the potential to create liquidity problems for banks with low excess reserves. D) of all of the above. E) of only A and B of the above. 12) Price stability is desirable because 12) A) everyone is better off when prices are stable. B) inflation creates uncertainty, making it difficult to plan for the future. C) it guarantees full employment. D) price stability increases the profitability of the Fed. 13) When there is a mismatch between job requirements and the skills of available workers, the 13) resulting unemployment is called A) structural unemployment. B) underemployment. C) frictional unemployment. D) cyclical unemployment. 14) The Fed's monetary policy strategy can be described as follows: 14) A) The Fed uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the Fed to achieve its goals. B) The Fed uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the Fed to achieve its goals. C) The Fed uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the Fed to achieve its goals. D) None of the above. 15) The goal for high employment should be a level of unemployment at which the demand for labor 15) equals the supply of labor. Economists call this level of unemployment the A) frictional level of unemployment. B) ideal level of unemployment. C) structural level of unemployment. D) natural rate level of unemployment. Page 2 of 4 Remember: All work on this problem set is to be your own, without any assistance from others. 16) Which of the following is not an operating target? 16) A) Discount rate B) Federal funds interest rate C) Monetary base D) Nonborrowed reserves E) All are operating targets. 17) If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) 17} variable like the A) resewe aggregate; nonborrowed base B) interest rate; three-month Treasury-bill rate C) interest rate; federal funds rate D) reserve aggregate; monetary base 18) if the Fed uses the federal funds rate as an interest rate target, an increase in the demand for 18) reserves will result in a(n) in A) increase; nonborrowed reserves B) decrease; the federal funds interest rate C) increase; the federal funds interest rate D) decrease; nonborrowed reserves 19) Under inflation targeting, a central bank must pursue policies that 19) A) keep the inflation rate within a specific target range. B) keep the inflation rate at a target value of zero. C) keep the inflation rate at some specific target value. D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value. 20) The first country to mandate that its central bank adopt inflation targeting was 20) A) the United Kingdom. B) Canada. C) the United States. D) New Zealand. 21) Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks 21) are called A) open market operations. B) the monetary base. C) reserves. D) government securities. 22) An open market leads to afan of reserves and deposits in the banking system 22) and hence to afan of the monetary base and the money supply. A) purchase; expansion; contraction B) sale; expansion; expansion C) sale; expansion; contraction D) purchase; expansion; expansion 23) inflation targeting involves 23) A) an information-inclusive approach in which many variables are used in making decisions about monetary policy. B) increased accountability of the central bank for attaining its inflation objectives. C) public announcement of medium—term numerical targets for inflation. D) all of the above. Page 3 of 4 Remember: All work on this problem set is to be your own, without any assistance from others. 24) What goals are continually mentioned by central bank officials 1when discussing the objectives of 24) monetary policy? A) Interest-rate stability B) High unemployment C) Instability in foreign exchange markets D) All of the above 25) The type of open market operation intended to offset movements in other factors that affect 25) reserves and the monetary base is A) the defensive open market operations. 13) the reserve requirements. C) market equilibrium. D) the dynamic open market operations. Essays and Textbook Problems. Write your answer in the space provided or on a separate sheet of paper. Be sure to show all work and provide full explanations when needed. 26) Explain how the Fed's use of its three tool of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate. 2'7) Distinguish between the three types of Fed discount loans: primary credit, secondary credit, and seasonal credit. 28) Compare the advantages and disadvantages of monetary targeting and inflation targeting. 29) Mishkin and Eakins, p. 205, Question #3 30) Mishkin and Eakins, p. 205, Question #5 31) Mishkin and Eakins, p. 205, Question #10 32) Mishkin and Eakins, p. 206, Quantitative Problem #1 33) Mishkin and Eakins, p. 206, Quantitative Problem #3 34) Mishkin and Eakins, p. 206, Quantitative Problem #5 35) Nfishkin and Eakins, p. 206, Quantitative Problem #8 Page 4 of 4 ...
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423hw4 - Econ 423, Summer 2009 Lauren Heller Homework...

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