Title: QUIZ: How Does the Fed Use Its Monetary Policy Tools to Influence the Economy? -- Page One Economics®
Course: Kelly's Copy & Export Course > Section: How Does the Fed Use Its Monetary Policy Tools to Influence the Economy? -- Page One Economics®

Q: When the FOMC conducts monetary policy, it sets the target range for
- the federal funds rate.
- interest on reserve balances rate.
- the overnight reverse repurchase agreement rate.
- open market operations.
A: the federal funds rate.

Q: Which monetary policy implementation tool is the primary tool the Fed uses to steer the federal funds rate into the FOMC’s target range?
- Open market operations
- Interest on reserve balances
- Overnight reverse repurchase agreement facility
- Discount rate
A: Interest on reserve balances

Q: How is the interest on reserve balances rate a reservation rate?
- Banks should not demand a higher rate for their funds.
- Banks should not be willing to accept a lower rate for their funds.
- Banks should not supply funds at a higher rate for their funds.
- Banks should demand lower rates for their funds.
A: Banks should not be willing to accept a lower rate for their funds.

Q: When the interest on reserve balances rate is higher than the federal funds rate, how will banks likely respond?
- Banks will withdraw from their account at their Federal Reserve Bank and lend the funds in the federal funds market.
- Banks will borrow in the federal funds market and deposit funds at their Federal Reserve Bank.
- Banks will lend money to their best customers at the interest on reserve balances rate.
- Banks will seek to attract new funds from investors by offering the interest on reserve balances rate.
A: Banks will borrow in the federal funds market and deposit funds at their Federal Reserve Bank.

Q: When the interest on reserve balances rate is higher than the federal funds rate, how will arbitrage pull the two rates together?
- The increase in competition for funds in the federal funds market will pull the federal funds rate higher.
- The increase in competition for funds in the federal funds market will push the federal funds rate lower.
- When banks deposit funds in their reserve accounts at the Fed, it will pull the interest on reserve balances rate higher.
- When banks deposit funds in their reserve accounts at the Fed, it will push the interest on reserve balances rate lower.
A: The increase in competition for funds in the federal funds market will pull the federal funds rate higher.

Q: Which monetary policy tool is a supplementary tool that sets a floor for the federal funds rate?
- Open market operations
- Interest on reserve balances
- Overnight reverse repurchase agreement facility
- Discount rate
A: Overnight reverse repurchase agreement facility

Q: Which monetary policy tool serves as a ceiling for the federal funds rate?
- Open market operations
- Interest on reserve balances
- Overnight reverse repurchase agreement facility
- Discount rate
A: Discount rate

Q: Which best describes how the FOMC conducts monetary policy to increase employment during a recession to achieve its maximum employment objective?
- It increases the target rate range for the federal funds rate.
- It decreases the target rate range for the federal funds rate.
- It sells Treasury securities in the open market to decrease the federal funds rate.
- It buys Treasury securities in the open market to increase the federal funds rate.
A: It decreases the target rate range for the federal funds rate.

Q: Assume economic growth is very strong and the inflation rate has been above the Fed’s price stability goal for some time. Which of the following would best describe an appropriate policy action?
- Raise the target range for the federal funds rate and simultaneously increase the interest on reserve balances rate, overnight reverse repurchase agreement rate, and discount rate.
- Raise the target range for the federal funds rate and use open market operations to decrease the level of reserves in the banking system.
- Lower the target range for the federal funds rate and simultaneously decrease the interest on reserves rate, overnight reverse repurchase agreement rate, and discount rate.
- Lower the target range for the federal funds rate and simultaneously raise the interest on reserve balances rate and discount rate, and lower the overnight reverse repurchase agreement rate.
A: Raise the target range for the federal funds rate and simultaneously increase the interest on reserve balances rate, overnight reverse repurchase agreement rate, and discount rate.

Q: What role do open market operations play in monetary policy?
- The Fed uses open market operations to move the federal funds rate higher or lower.
- The Fed uses open market operations to move the interest on reserve balances rate higher or lower.
- The Fed uses open market operations to move the discount rate higher or lower.
- The Fed uses open market operations to ensure that the level of reserves remains ample.
A: The Fed uses open market operations to ensure that the level of reserves remains ample.