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# econ423hw4answer - Econ 423 Summer 2009 Lauren Heller...

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Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework Quiz #4 Name By signing my name and PID above, I ree to abide by the honor code during this quiz. I will only use the homework thatl have completed on my own, and will not use any other notes or materials. 1) federal funds rate is 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. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A 2) Holding everything else constant, if the federal funds rate rises, then the demand for 2) e 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 fails because the cost of borrowing from the Fed is relatively higher. reserves will not change because the Fed sets the level of required reserves. xcess reserves fails because they have a higher cost. 3) An open market purchase 3) 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. shifts the demand curve for reserves to the left and causes the federal funds rate to fall. 6 shifts the supply curve for reserves to the right and causes the federal funds rate to fall. . - when the federal funds rate is above the discount rate. 6 vertical; horizontal 5 vertical; downward sloping C) upward sloping; vertical D) upward sloping; horizontal E) horizontal; vertical 5) The demand curve for reserves shifts to the left and the federal funds rate fails when the Fed 5) A) decreases reserve requirements or does an open market purchase. B) does an open market sale. C) lowers the discount rate. lowers the discount rate or does an open market purchase. ecreases reserves requirements. 4) The supply curve for reserves is when the federal funds rate is below the discount rate 4) I 5 6) The Fed is reluctant to use reserve requirements to control the money supply because 6) A) of their overly—powerful impact on the money supply. B) frequent changes in reserve requirements complicate liquidity management for banks. they have the potential to create liquidity problems for banks with low excess reserves. of all of the above. ) of only A and B of the above. 7) Price stability is desirable because A everyone is better off when prices are stable. B nflation creates uncertainty, making it difficult to plan for the future. it guarantees full employment. D) price stability increases the profitability of the Fed. 8) When there is a mismatch between job requirements and the skills of available workers, the re ting unemployment is called tructural unemployment. B) underemployment. frictional unemployment. D) cyclical unemployment. 9) If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for re ves will result in a(n) in increase; nonborrowed reserves B) decrease; the federal funds interest rate C) increase; the federal funds interest rate D) decrease; nonborrowed reserves 10) U - er inﬂation targeting, a central bank must pursue policies that a keep the inﬂation rate within a specific target range. 3 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. 1 1) An open market leads to afan of reserves and deposits in the banking system and hence to afan of the monetary base and the money supply. A) purchase; expansion; contraction sale; expansion; expansion C) sale; expansion; contraction épurchase; expansion; expansion 12) What goals are continually mentioned by central bank officials when discussing the objectives of m v .- -tary policy? glitterest—rate stability B) High unemployment ) Instability in foreign exchange markets D) All of the above 13) The type of open market operation intended to offset movements in other factors that affect re. es and the monetary base is the defensive open market operations. B) the reserve requirements. C) market equilibrium. D) the dynamic open market operations. 14) The short—term nominal interest rate is 5% with an expected inflation of 2%. Economists forecast that next year’s nominal rate will increase by 100 basis points, but inflation will fall to 1.5%. What is the expected change in real interest rates? A) Real rates will fall by 1.5% B) Rea] rates will fall by 0.5% Real rates will not change. Q Real rates will rise by 1.5% ) Real rates will rise by 4.5% Page 2 of 3 15) The trading desk at the Federal Reserve sold \$100,000,000 in T—bills to the public. If the current 15) z i re - e requirement is 8.0%, how much could the money supply change? We money supply could decrease by as much as \$1,250,000,000 i The money supply could decrease by as much as \$8,000,000,000 C) The money supply could decrease by as mu ch as \$8,000,000 D) The money supply could increase by as much as \$8,000,000 E) The money supply could increase by as much as \$1,250,000,000 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. 16) (3 points) Distinguish between the three types of Fed discount loans: primary credit, secondary credit, and seasonal credit. 17) (2 points) The benefits of using Fed discount operations to prevent bank panics are straightforward. What are the costs? Explain. Page 3 of 3 ...
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