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1. Open market operations generally involve (Points : 1) the Fed making discount

ID: 1208213 • Letter: 1

Question

1. Open market operations generally involve (Points : 1)        the Fed making discount loans to depository institutions.
       the Fed buying and selling common stock in order to affect the liquidity of the stock market.
       the Fed buying and selling U.S. government securities.
       private investors buying and selling securities directly on exchanges, rather than through brokers. Question 2.2. Most of the increase in the monetary base between 2007 and 2012 was due to increases in: (Points : 1)        currency
       bank deposits
       excess reserves
       Treasury bills Question 3.3. When banks hold excess reserves, the size of the money multiplier (Points : 1)        is less than the simple deposit multiplier would suggest.
       is greater than the simple deposit multiplier would suggest.
       is equal to the size of the simple deposit multiplier.
       becomes infinite. Question 4.4. The primary assets of the Fed are (Points : 1)        discount loans and reserves.
       discount loans and government securities.
       government securities and reserves.
       discount loans and open market operations. Question 5.5. Reserves equal (Points : 1)        deposits with the Fed plus holdings of U.S. government securities.
       currency in circulation plus vault cash.
       deposits with the Fed plus vault cash.
       currency outstanding plus currency in circulation. Question 6.6. The Fed's portfolio of securities consists principally of (Points : 1)        municipal bonds.
       corporate bonds.
       U.S. Treasury obligations.
       obligations of foreign governments. Question 7.7. The benchmark default-free interest rate of the financial system is generally considered to be: (Points : 1)        the federal funds rate
       the interest rate on the 10-year Treasury note
       the discount rate
       the 30-year fixed rate mortgage Question 8.8. The percentage of deposits that banks must hold as reserves is called the (Points : 1)        percentage rate.
       required reserve ratio.
       Fed rate.
       discount rate. Question 9.9. Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic? (Points : 1)        The Fed sets the required reserve ratio.
       The Fed is able to affect the level of reserves in the banking system.
       Banks loan out all of their excess reserves.
       The simple deposit multiplier is equal to 1 divided by the required reserve ratio. Question 10.10. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)? (Points : 1)        rise by $1 million
       decline by $1 million
       rise by $8 million
       rise by $12.5 million 1. Open market operations generally involve (Points : 1)        the Fed making discount loans to depository institutions.
       the Fed buying and selling common stock in order to affect the liquidity of the stock market.
       the Fed buying and selling U.S. government securities.
       private investors buying and selling securities directly on exchanges, rather than through brokers.

Explanation / Answer

1)   the Fed buying and selling U.S. government securities.

Fed enters the market to buy bonds directly sometimes, This is direct market intervention

2) currency

The fed reserve went ahead and allowed QE 1 which resulted in fed openly buying mortgage based assets in the market by infusing huge amount of cash

3)   is less than the simple deposit multiplier would suggest.

Because when banks hold cash reserves then certainly money will be blocked in the bank creating less multiplier effect

4)   government securities and reserves.

Government securities and reserves are primary assets of federal reserve. Fed is the agency incharge of issuing government debt

5)  deposits with the Fed plus vault cash

6)  U.S. Treasury obligations.

7) the federal funds rate

8) required reserve ratio.