Chapter 19

The Instruments of Central Banking

D2Interpretive
1. The primary function of reserve requirements is to serve as A) a source of bank liquidity. B) an instrument of monetary control. C) a means of reducing bank profits. D) a means of controlling the amount of currency in the banking system. Ans er! B

D2Factual
". #ince being originally set in 1$1%& bank reserve requirements have A) not been changed. B) been changed only once. C) been changed on numerous occasions. D) been changed on a daily basis. Ans er! C

D2Factual
%. 'hich of the follo ing institutions is not sub(ect to )ederal *eserve+s reserve requirements, A) A state-chartered commercial bank B) A savings and loan association C) A money market mutual fund D) A credit union Ans er! C

D2Factual
.. *eserve requirements apply to A) life insurance companies. B) investment banks. C) credit unions. D) stock brokers. Ans er! C

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D2Factual
2. *eserve requirements are highest for A) transactions deposits. B) bank borro ings from foreign branches. C) federal funds. D) business time deposits. Ans er! A

D2Factual
3. *eserve requirements apply to A) demand deposits. B) business-o ned time deposits. C) business-o ned savings deposits. D) *eserve requirements apply to all of the above. Ans er! A

D2Factual
4. *eserve requirements apply to A) )D5C-insured banks only. B) nationally chartered banks only. C) )ederal *eserve member banks only. D) all commercial banks. Ans er! D

D1Factual
6. 17cess reserves immediately increase if A) reserve requirements increase. B) reserve requirements decrease. C) the discount rate increases. D) the discount rate decreases. Ans er! B

D2Factual
$. 888888888888888888 the required reserve ratio ill 888888888888888888 the potential for multiple e7pansion. A) *aising9 increase B) :o ering9 decrease C) *aising9 decrease D) ;one of the above Ans er! C

D1Factual
1<. 17cess reserves immediately decrease if A) reserve requirements increase. B) reserve requirements decrease. C) the discount rate increases. D) the discount rate decreases. Ans er! A

Chapter 1$The 5nstruments of Central Banking 224

D2Interpretive
11. The deposit e7pansion multiplier is increased if the )ederal *eserve A) buys government securities. B) sells government securities. C) lo ers reserve requirements. D) raises reserve requirements. Ans er! C

D2Interpretive
1". The deposit e7pansion multiplier is decreased if the )ederal *eserve A) buys government securities. B) sells government securities. C) lo ers reserve requirements. D) raises reserve requirements. Ans er! D

D1Factual
1%. 5f a commercial bank borro s from the )ederal *eserve& the price it pays is A) =ero& there is no payment. B) the prime rate. C) the federal funds rate. D) the discount rate. Ans er! D

D2Interpretive
1.. A limitation of the discount rate as a policy tool is that the initiative for its use rests ith A) commercial banks. B) consumers. C) the 0.#. Treasury. D) state governments. Ans er! A

D2Factual
12. 'hich of the follo ing institutions is eligible to borro from the )ederal *eserve at the discount rate, A) >roperty and casualty insurance companies B) ?oney market mutual funds C) Credit unions D) 5nvestment banks Ans er! C

225*itter/#ilber/0dell Money, Banking, and Financial Markets & 1leventh 1dition

D2Factual
13. 'hich of the follo ing institutions is eligible to borro from the )ederal *eserve at the discount rate, A) )ederal government B) #avings and loan institutions C) ?oney market mutual funds D) :ife insurance companies Ans er! C

D1Factual
14. 'hich of the follo ing institutions can not borro from the )ederal *eserve at the discount indo , A) Thrift institutions B) ?ember banks C) ;onmember banks D) :ife insurance companies Ans er! D

D1Factual
16. 'hen a bank borro s from the )ederal *eserve the bank A) receives a ne deposit of legal reserves at the )ederal *eserve. B) creates a ne checkable deposit payable to the )ederal *eserve. C) normally ill do so because it has e7cess reserves. D) loses reserves equal to the amount of the loan. Ans er! A

D2Factual
1$. 'hich of the follo ing institutions is not eligible to borro from the )ederal *eserve at the discount rate, A) )ederal government B) Commercial banks C) Credit unions D) ?utual savings banks Ans er! A

D1Factual
"<. The price of reserves that are borro ed from the )ederal *eserve is called the A) discount rate. B) federal funds rate. C) :5B@*. D) prime rate. Ans er! A

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D3Interpretive
"1. 5f the )ederal *eserve eliminated all reserve requirements the most likely result ould be A) a large number of depository institution failures because they ould not have enough liquidity. B) the )ederal reserve ould be unable to control the money supply. C) banks ould no longer be able to clear checks at the )ederal *eserve because there ould be no required reserves. D) the si=e of the money multiplier might fluctuate considerably making the )ederal *eserve+s (ob of controlling the money supply more difficult. Ans er! D

D2Interpretive
"". The ultimate source of liquidity in a modern industrial economy is the A) government Treasury. B) central bank. C) capital market. D) liquidity market. Ans er! B

D2Interpretive
"%. The )ederal *eserve vie s commercial bank use of the discount indo as A) something to be used only by commercial banks. B) completely up to the borro er. C) a privilege& not a right for eligible borro ers. D) something to be used only in financial panics. Ans er! C

D2Factual
".. @ne method used by the )ederal *eserve to prevent abuse of the discount facility is A) higher bank ta7es. B) higher reserve requirements. C) tighter bank surveillance. D) selling fe er government securities to the banks involved. Ans er! C

D2Factual
"2. The discount rate tends to be (ust belo the A) inflation rate. B) Treasury bill rate. C) Treasury bond rate. D) real interest rate. Ans er! B

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D2Interpretive
"3. As a tool of monetary policy the effectiveness of the discount rate is 888888888888888888 because888888888888888888. A) :imited9 banks ill not borro reserves from the )ed as long as they have ample e7cess reserves no matter ho lo the discount rate goes B) :imited9 banks ill borro reserves from the )ed henever they need them as long as they have a reserve deficiency no matter ho high the discount rate goes C) very effective9 changes in the discount rate leads changes in money market rates and thus assures that the in(ections and ithdra als of reserves from the banking system desired by the )ed ill occur D) very effective9 banks ill predictably increase borro ings from the )ederal *eserve hen the discount rate decreases and decrease borro ings hen the discount rate increases Ans er! A

D2Factual
"4. 'hich of the follo ing interest rates is usually belo other money market rates, A) Discount rate B) >rime rate C) )ederal funds rate D) Treasury note rate Ans er! A

D2Interpretive
"6. A change in the discount rate is likely to occur A) after a change in the Treasury bill rate. B) after a change in the Treasury bond rate. C) before a change in the federal funds rate. D) before a change in the inflation rate. Ans er! A

D2Interpretive
"$. *ecently& ne discount indo lending procedures set a penalty rate that is normally 888888888888888888 short-term market interest rates. A) (ust belo B) above C) appro7imately equal to D) ;one of the above Ans er! B

D2Interpretive
%<. A 888888888888888888 discount rate makes it 888888888888888888 advantageous to sell securities to obtain additional reserves. A) higher9 less B) lo er9 more C) higher9 more D) ;one of the above Ans er! C

Chapter 1$The 5nstruments of Central Banking 228

D2Interpretive
%1. A sign that the )ederal *eserve is moving to lo er interest rates ould be A) a reduction in bank reserves. B) an increase in margin requirements. C) a idening gap bet een the Treasury bill yield and the discount rate. D) a narro ing gap bet een the Treasury bill yield and the discount rate. Ans er! D

D2Interpretive
%". A sign that the )ederal *eserve is moving to raise interest rates ould be A) an increase in bank reserves. B) large purchases of Treasury securities by the )ederal *eserve. C) a idening gap bet een the Treasury bill yield and the discount rate. D) a narro ing gap bet een the Treasury bill yield and the discount rate. Ans er! C

D2Interpretive
%%. A good e7ample of using the discount rate to serve the lender of last resort role for the financial system occurred during the A) savings and loan crisis of the 1$6<s. B) stock market crash of 1$64. C) sharp rise in government deficits during the 1$6<s. D) developing-country debt crisis of the 1$6<s. Ans er! B

D1Factual
%.. 'hich of the follo ing is a primary policy tool of the )ederal *eserve, A) The federal funds rate B) @pen market operations C) The prime rate D) The money supply Ans er! B

D2Interpretive
%2. 'hich of the follo ing statements is incorrect, A) 'hen market rates are changing& the discount rate ad(usts immediately. B) ?oney market interest rates tend to respond quickly to )ederal *eserve open market operations. C) The discount rate may be above or belo other money market interest rates at a given point in time. D) All of the above are true. Ans er! A

229*itter/#ilber/0dell Money, Banking, and Financial Markets & 1leventh 1dition

D1Factual
%3. @pen market operations are A) seldom used by the )ederal *eserve because they have such a large impact on bank *eserves. B) seldom used by the )ederal *eserve because they have little impact on bank reserves. C) used frequently by the )ederal *eserve but not as often as changes in the discount rate. D) the primary method used by the )ederal *eserve to alter bank reserves. Ans er! D

D2Interpretive
%4. 'hen the )ederal *eserve sells A1<< orth of government securities& bank reserves A) rise by A1<<. B) rise by A1<< times the deposit e7pansion multiplier. C) fall by A1<<. D) fall by A1<< times the deposit e7pansion multiplier. Ans er! C

D2Factual
%6. 5mmediately after the )ederal *eserve buys government securities& A) bank e7cess reserves rise. B) bank e7cess reserves fall. C) bank capital rises. D) bank capital falls. Ans er! A

D2Factual
%$. 'hich of the follo ing is an interest rate determined by the supply and demand for loans among commercial banks, A) The discount rate B) The federal funds rate C) The prime rate D) The commercial paper rate Ans er! B

D2Factual
.<. 'hich of the follo ing is an administered interest rate set by commercial banks, A) The discount rate B) The federal funds rate C) The prime rate D) The commercial paper rate Ans er! C

Chapter 1$The 5nstruments of Central Banking 230

D2Factual
.1. 'hich of the follo ing is an administered interest rate set by the )ederal *eserve, A) The discount rate B) The federal funds rate C) The prime rate D) The commercial paper rate Ans er! A

D2Interpretive
.". 'hen the )ederal *eserve buys A"<< orth of government securities& the money supply A) rises by A"<<. B) rises by more than A"<<. C) falls by A"<<. D) falls by more than A"<<. Ans er! D

D2Interpretive
.%. 'hen the )ederal *eserve sells A2<< orth of government securities& the money supply A) rises by A2<<. B) rises by more than A2<<. C) falls by A2<<. D) falls by more than A2<<. Ans er! D

D2Applied
... Assume that the ?1 multiplier is ".2. 5f the )ederal *eserve purchases A"<< orth of government securities& the money supply ill A) rise by A"<<. B) rise by A2<<. C) fall by A"<<. D) fall by A2<<. Ans er! B

D2Applied
.2. Assume that the ?1 multiplier is .. 5f the )ederal *eserve purchases A"<< orth of government securities& the money supply ill A) rise by A"<<. B) rise by A6<<. C) fall by A"<<. D) fall by A6<<. Ans er! B

231*itter/#ilber/0dell Money, Banking, and Financial Markets & 1leventh 1dition

D2Applied
.3. Assume that the ?1 multiplier is % and the )ederal *eserve sells A1<< million orth of government securities. Bank reserves ill A) rise by A1<< million. B) fall by A1<< million. C) fall by A%<< million. D) fall by A%%.%% million. Ans er! B

D2Applied
.4. 5f the )ederal *eserve sells A"< million orth of government securities and the ?1 multiplier is ".2. Bank reserves ill A) fall by A"< million. B) fall by A2< million. C) fall by A13 million. D) fall by A6 million. Ans er! A

D2Interpretive
.6. The money market rate observed most closely by the @pen ?arket Account ?anager is the A) Treasury bill rate. B) commercial paper rate. C) discount rate. D) federal funds rate. Ans er! D

D2Interpretive
.$. An indication to the @pen ?arket Account ?anager that commercial banks are e7periencing a liquidity surplus ould be a A) falling federal funds rate. B) rising federal funds rate. C) falling discount rate. D) rising discount rate. Ans er! A

D2Interpretive
2<. An indication to the @pen ?arket Account ?anager that commercial banks are e7periencing a liquidity shortage ould be a A) falling federal funds rate. B) rising federal funds rate. C) falling discount rate. D) rising discount rate. Ans er! B

Chapter 1$The 5nstruments of Central Banking 232

D2Factual
21. An outright purchase of government securities by the )ed A) permanently increases bank reserves. B) temporarily increase bank reserves. C) permanently reduces bank reserves. D) temporarily reduces bank reserves. Ans er! A

D2Factual
2". An outright sale of government securities by the )ed A) permanently increases bank reserves. B) temporarily increases bank reserves. C) permanently reduces bank reserves. D) temporarily reduces bank reserves. Ans er! D

D2Factual
2%. A repurchase agreement of government securities by the )ed A) permanently increases bank reserves. B) temporarily increases bank reserves. C) permanently reduces bank reserves. D) temporarily reduces bank reserves. Ans er! D

D2Factual
2.. A reverse repurchase agreement of government securities by the )ed A) permanently increases bank reserves. B) temporarily increases bank reserves. C) permanently reduces bank reserves. D) temporarily reduces bank reserves. Ans er! D

D2Factual
22. A matched sale-purchase agreement of government securities by the )ed A) permanently increases bank reserves. B) temporarily increases bank reserves. C) permanently reduces bank reserves. D) temporarily reduces bank reserves. Ans er! D

D3Interpretive
23. A sound policy to combat a temporary liquidity surplus in the banking system ould be A) a reduction in the discount rate. B) a decrease in the discount rate. C) the purchase of government securities by the )ed under a repurchase agreement. D) the sale of government securities by the )ed under a repurchase agreement. Ans er! D

233*itter/#ilber/0dell Money, Banking, and Financial Markets & 1leventh 1dition

D3Interpretive
24. A sound policy to combat a temporary liquidity shortage in the banking system ould be A) a reduction in the discount rate. B) a decrease in the discount rate. C) the purchase of government securities by the )ed under a repurchase agreement. D) the sale of government securities by the )ed under a repurchase agreement. Ans er! D