Level 3, Test 3 Answers United States Money and Monetary System
1. The Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives through its control of what?
1. The economy
2. Taxes
3.The federal funds rate
4. State banks
2. A sizable share of the Federal Reserve’s holdings is held in Treasury securities with remaining maturities of how many years?
1. 5 years
2. 10 years
3. 20 years
4. 1 year or less
3. The Federal Reserve’s conduct of open market operations, its policies related to required reserves and contractual clearing balances, and its lending through the discount window all play important roles in keeping the federal funds rate close to the FOMC’s target rate. If, even after an open market operation is arranged, the supply of balances falls short of demand, then what mechanism is used for expanding the supply of balances to contain pressures on the funds rate?
1. Selling bonds
2. Discount window lending
3. Buying bonds
4. Reserve balance requirements and contractual clearing balances need to be met only on average over a so-called reserve maintenance period, not each day. This structure gives depository institutions considerable flexibility in managing their end-of-day balances at the Federal Reserve from one day to the next. This flexibility helps smooth fluctuations in the federal funds rate. If a depository institution finds that its balance at the Federal Reserve is unexpectedly high on one day (for instance, because a customer made an unexpected deposit or an expected payment was not made), it does not have to offer to lend the extra balance at very low rates; it can absorb the surplus by choosing to hold lower balances in the remaining days of the maintenance period and still meet its balance requirements.
2. Controlling the Federal Funds Rate
3. False
5. The Federal Reserve Bank of New York conducts open market operations for the Federal Reserve, under an authorization from the Federal Open Market Committee. The group that carries out the operations is commonly referred to as “the Open Market Trading Desk” or “the Desk.” The Desk is permitted by the FOMC’s authorization to conduct business with U.S. securities dealers and with foreign official and international institutions that maintain accounts at the Federal Reserve Bank of New York. All of these open market operations transacted are conducted through:
1. A money exchange program.
2. An auction process.
3. A preferred customer program.
6. The demand for Federal Reserve balances has three components: required reserve balances, excess reserve balances, and what other balance?
1. Savings balances
2. Contractual clearing balances
3. Tax balances
7 In theory, the Federal Reserve could conduct open market operations by purchasing or selling any type of asset. In practice, however, most assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the federal funds rate at the target level. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself. The U.S. Treasury securities market is the broadest and most active of U.S. financial markets.
1. The market for U.S. Treasury securities satisfies these conditions.
2. The market for state bonds satisfies these conditions.
3. The market for buying foreign currency satisfies these conditions.
8. The U.S. Treasury securities market is the broadest and most active of U.S. financial markets.
2. True
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