1. Which of the following would most likely result from the Fed imposing negativ
ID: 1106353 • Letter: 1
Question
1. Which of the following would most likely result from the Fed imposing negative nominal interest rates in response to a financial crisis and recession?
Multiple Choice
a.The negative interest rates would stimulate massive borrowing and spending, triggering rapid inflation in the short term.
b.It would signal trouble to financial markets, causing people to deposit more money in banks to enhance feelings of financial security.
c.Banks would freeze customer accounts so that they couldn’t withdraw money, inciting financial panic.
d. Customers would withdraw deposits, banks would have less money to lend, and the money supply and aggregate demand would both fall.
2.If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold
Multiple Choice
a.less required reserves.
b.more required reserves.
c.less excess reserves.
d.more excess reserves.
3. Since the financial crisis of 2007–2009, borrowing at the federal funds rate
Multiple Choice
a.virtually never happens, as most banks have sufficient excess reserves.
b.has increased significantly, as banks struggle to maintain enough reserves.
c.has replaced open-market operations as the most frequently used tool of monetary policy.
d.has dropped significantly because the rate has increased.
4. Consider This) When the Fed engages in a repo transaction,
Multiple Choice
a.the Fed repossesses securities held by a failing bank.
b.it involves a bank repurchasing a collateralized loan it previously sold to the Fed.
c. it is part of a restrictive monetary policy action.
d. the Fed buys real property that a bank owns after repossessing it from a defaulted lender.
Explanation / Answer
1.D) during the period of recession, people hoard money instead of spending and investing, this leads to collapse in aggregate demand which leads to prices falling, a slowdown in real production and output and increases in unemployment.
2.C) If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold less excess reserves.
3.C)Since the financial crisis of 2007–2009, Federal Open Market Committee (FOMC) sets a target for the federal fund's rate.For example, if the Fed wanted to increase the effective rate, they would sell securities to banks in the open market.
4.B) When the Fed engages in a repo transaction, it involves a bank repurchasing a collateralized loan it previously sold to the Fed.
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