Handout 7-

[Q1] An assumption in the model of the money supply process is that the desired levels of currency and excess reserves

A) are given as constants.

B) grow proportionally with checkable deposits.

C) grow proportionally with high-powered money.

D) grow proportionally over time.

[Q2] Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

A) sale; increase

B) purchase; increase

C) sale; decrease

D) purchase; decrease

[Q3] The money supply is _____ related to expected deposit outflows, and is _____ related to the market interest rate.

A) negatively; negatively

B) negatively; positively

C) positively; negatively

D) positively; positively

[Q4] The primary indicator of the Fed´s stance on monetary policy is

A) the discount rate.

B) the federal funds rate.

C) the growth rate of the monetary base.

D) the growth rate of M2.

[Q5] In the market for reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

A) increases; supply

B) increases; demand

C) decreases; supply

D) decreases; demand

[Q6] Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%

A) lowers the federal funds rate.

B) raises the federal funds rate.

C) has no effect on the federal funds rate.

D) has an indeterminate effect on the federal funds rate.

[Q7] In the market for reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant.

A) rise; decreases

B) rise; increases

C) decline; increases

D) decline; decreases

[Q8] In the market for reserves, a decline in the reserve requirement______the_____ curve of reserves and causes the federal funds interest rate to fall, everything else held constant.

A) increases; demand

B) increases; supply

C) decreases; supply

D) decreases; demand

[Q9] Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ___________open market __________, everything else held constant.

A) defensive; sale

B) dynamic; purchase

C) dynamic; sale

D) defensive; purchase

[Q10] The Federal Reserve will engage in a repurchase agreement when it wants to___________ reserves__________ in the banking system.

A) decrease; temporarily

B) decrease; permanently

C) increase; permanently

D) increase; temporarily