1. When the Fed sells T-bills,

A: the federal funds rate decreases and the yield on T-bills increases.

B: the federal funds rate and the yield on T-bills both decrease.

C: the federal funds rate and the yield on T-bills both increase.

D: the federal funds rate increases and the yield on T-bills decreases.

2. Which of the following statements relating Fedwire (the Federal Reserve’s payment system) and CHIPS (the modern equivalent of the New York Clearinghouse Association’s system) is false?

A: CHIPS has a very small number of member participants (only about 47), while Fedwire has a much larger network of eligible institutions (approximately 9,000).

B: CHIPS is a private system, while Fedwire is a public system.

C: Fedwire is a real-time gross settlement system (where all payments are made immediately), while CHIPS uses a netting system (only the net “due tos” and “due froms” are transferred).

D: CHIPS allows banks to run negative balances during the day, but payments made through Fedwire can only occur if the paying bank has a positive reserve balance at the Fed.

3. The effective federal funds rate is set by the Federal Reserve and is the rate that banks are required to charge on overnight loans to other banks.

A: TRUE

B: FALSE

4. The “TED spread” and the “LIBOR-OIS spread” are

A: both indicators of perceived interest rate risk.

B: both indicators of perceived credit risk.

C: each used to tell very different stories about the overall condition of the economy.