Chapter 13 The Federal Reserve System

Interest rates that the Fed sets are the _______________________ rate and an interest rate that the Fed influences (but does not set) is the _____________________

interest on reserves (IOR) rate and the overnight reverse repurchase (ON-RRP), federal funds rate

The ON-RRP rate is the interest rate

a nonbank financial institution earns on an overnight reverse repurchase.

Suppose that it is before October 2008 and the current federal funds rate is below the federal funds target rate. To try to hit the federal funds target rate, the Fed would have ________________ securities on the open market which would have ________________ the supply of reserves in the market for reserves, pushing the federal funds rate closer to the target rate

sold, decreased

Why is October 2008 such an important date when it comes to monetary policy?

That is the date on which the Fed first began paying interest on reserves

When the Fed conducts an overnight reverse repurchase agreement, it

sells a security to a nonbank financial institution while agreeing to buy back the security the next day at a higher price

The ___________________rate is the primary tool the Fed uses to conduct monetary policy today, and the __________________ rate is a supplementary tool

IOR, ON-RRP

Suppose it is some time after October 2008 and the federal funds rate is 5 percent, the interest rate on a loan a bank makes to its customers is 9 percent, the interest on reserves (IOR) rate is 4.5 percent and the overnight reverse repurchase (ON-RRP) rate is 4 percent. The Fed wants banks to create more loans. Which of the following will bring will help the Fed to achieve its goal

Lower the federal funds rate target range to something such as 3.50 to 3.75 percent

Consider the following scenario: It is sometime in 2021 and the federal funds rate is 2 percent, the interest rate on a loan a bank makes to its customers is 4 percent, the interest on reserves (IOR) rate is 3 percent and the overnight reverse repurchase (ON-RRP) rate is 2.75 percent. The Fed wants banks to create fewer loans. Which of the following will bring this scenario about?

Raise the federal funds rate target range to something such as 4.25 to 4.50 percent

Suppose the federal funds rate target range is set as 2.00 to 2.40 percent. It follows that the 2.00 percent is the ______________ rate and 2.40 is the ____________ rate

overnight reverse repurchase (ON-RRP), interest on reserves (IOR

Prior to October 2008, the Fed used ______________________ to change the federal funds rate. Since October 2008, the Fed uses ______________________ to change the federal funds rate

open market operations, changes in the IOR rate and the ON-RRP rate

If the interest on reserves (IOR) rate is lower than the federal funds rate, banks will hold ______________ reserves with the Fed and lend ____________ reserves in the federal funds market

fewer, more

The discount rate is the interest rate that __________________________ and the federal funds rate is the interest rate that ____________________________.

depository institutions pay to borrow reserves from the Fed, banks charge one another to borrow reserves

If Bank ABC's reserve account at the Fed contains $65 million and its total reserves equal $85 million, how much vault cash does Bank ABC have?

$20 million

Suppose the Fed sells a $10,000 U.S. Treasury security to Bill, who is a member of the public. Bill writes a check to the Fed to buy the security. As a result, the money in Bill's checking account will be transferred to

the Fed, and the $10,000 will no longer exist.

The Fed buys $40 million worth of government securities from Bank A. The required reserve ratio is 10 percent and there are no cash leakages or excess reserves held by the banking system. Checkable deposits will ______________ by ___________________ million

rise, $400 million

The United States is divided into _____________ Federal Reserve Districts

14

The Federal Reserve district bank for the 12th district is in

San Francisco, California

Suppose the interest on reserves (IOR) rate is 2.5 percent and the federal funds rate is 2 percent. This will encourage banks to hold ______________ reserves with the Fed and lend ____________ reserves in the federal funds market

more, fewer

Suppose the interest on reserves (IOR) rate is 2.5 percent and the federal funds rate is 2 percent. This will encourage banks to hold ______________ reserves with the Fed and lend ____________ reserves in the federal funds market

more, fewer

In what year did the Federal Reserve System begin operations

1914

Since October 2008, in conducting monetary policy the Fed tries to target a specific _____________ rather than a specific ________________ target

federal funds rate, money supply

Since October 2008, banks have been able to do which of the following with their reserves?

hold reserves at the Fed and earn the overnight reverse repurchase (ON-RRP) rate

The interest on reserves (IOR) rate is the interest rate

the Fed pays on reserves

If the simple deposit multiplier is 9.09, then the required reserve ratio is

11 percent

Open market operations are the

buying and selling of government securities by the Fed

The Federal Reserve system is

the central bank of the United States

The major policymaking group in the Fed that reviews economic and financial conditions and determines the appropriate stance of monetary policy is the

Federal Open Market Committee

Members of the Fed Board of Governors serve ___________ year terms and are ________________

14, appointed by the president and approved by the U.S. Senate

Suppose the Fed sells a security to a nonbank financial institution on Thursday for $10,000 and buys it back on Friday for $10,390. The ON-RRP rate is therefore ___________ percent

3.9

Which of the following monetary policy tools did the Fed use prior to October 2008

open market operations

A bank is reserve deficient when its

reserves are below the level specified by the required reserve ratio

The Board of Governors of the Federal Reserve has ____________ members, who are appointed to serve a _____________ year term

7, 14

Which one of the following cities is not the location of a Federal Reserve district bank?

Boise, Idaho

A check is written on Bank B and deposited in Bank A. As a result, the reserve account of ____________ will rise and reserves in the entire banking system will __________

Bank A, remain unchanged

Bank B has checkable deposits of $80 million and total reserves of $20 million. If the required reserve ratio is 10 percent, it follows that the bank has excess reserves of ______________.

$12 million

Suppose that it is before October 2008 and the current federal funds rate is above the federal funds target rate. To try to hit the federal funds target rate, the Fed would have ________________ securities on the open market which would have ________________ the supply of reserves in the market for reserves, pushing the federal funds rate closer to the target rate

bought, increased

Since October 2008, the Fed affects interest rates to influence consumption and investment by

changing both the interest on reserves (IOR) rate and the overnight reverse repurchase (ON-RRP) rate to influence changes in the federal funds rate.

Which of the following statements is false

Required reserves = Reserves + Excess Reserves

Suppose the federal funds rate is 2 percent and the Fed wants to lower it to 1.5 percent using the interest on reserves (IOR) rate to do so. What would the Fed do and how would banks respond to what the Fed did

The Fed would lower the IOR rate to 2 percent; then banks would choose to reduce their holdings of reserves with the Fed - which would earn 1.5 percent - and move those reserves into the federal funds market - where reserves earn 3 percent. In the process, the supply of reserves in the federal funds market would increase and the federal funds rate would decrease

Prior to 2008, could the Fed have used the interest on reserves (IOR) rate to increase the money supply?

No; because the Fed did not start paying interest on reserves until October 2008.

If checkable deposits at Bank A total $120 million and the required reserve ratio is 8 percent, then required reserves at Bank A equal

$9.6 million

The Federal Reserve came into existence with the Federal Reserve Act of ___________ which divided the country into ___________ Federal Reserve Districts

1913, 12

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