When the Federal Reserve Engages in a Repurchase Agreement to Offset
Answer: False. Since the discount rate is higher than the federal funds rate, the reduction in the discount rate will only result in a reduction in the federal funds rate if the discount rate is lowered below the initial level of the federal funds rate. If the reduction in the discount rate is such that the new interest rate is still higher than the federal funds rate, then the federal funds rate does not change, everything else remains constant. A financial panic was avoided in October 1987 after “Black Monday” when the Fed announced that a lower interest rate would be paid on excess reserves in the reserve market There are two types of open market operations: ___ Open market operations are intended to change the amount of reserves and the monetary base, and ___ open market operations are designed to offset movements of other factors affecting the monetary base. Suppose that at a given rate of federal funds, there is an excessive demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at this level, then it should conduct an open market for bonds, keeping everything else constant. However, if the Fed does nothing, the federal funds rate will be ______ The reserve requirement change policy instrument is kept constant in the reserve market when demand for federal funds crosses the reserve supply curve along the horizontal section and increases the discount rate If the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would pay interest on the reserves held by the deposits. The European System of Central Banks __________ Which of the following monetary policy instruments is most effective when the economy is facing the problem of zero interest rates? The open market buys ________ reserves and the money base therefore _____ the money supply. The Desk selects the winning offers on a competitive basis.
Each merchant is invited to present the rates he is willing to pay for the agreements in relation to the different types of guarantees. The three types of general guarantees, or GCs, that the Fed accepts are marketable U.S. Treasuries (including STRIPS and TIPS), certain direct U.S. government bonds, and certain agency transfers (or mortgage-backed securities, often referred to as MBS). If the banking system has a large amount of reserves, many banks will have excess reserves to lend, and the federal funds rate will likely be __ If the level of reserves is low, few banks will have excess reserves to lend them, and the federal funds rate will likely be ___. Since 1980, _________ The New York Fed has paid the securities by crediting them to the reserve account of the trader`s tripartite agent, a commercial bank. This act of credit to the bank`s account actually creates reserve funds. When the repo matures, the trader returns the loan plus interest, and the Fed returns the collateral. The return of funds to the Fed erases the reserves originally created by the repo.
If the federal funds rate is equal to the interest rate paid on excess reserves in the reserves market, if the federal funds rate is higher than the interest rate paid on excess reserves, then an open market ______ keeps the supply of reserves, the increase in the federal funds interest rate, everything else constant. The opportunity cost of holding excess reserves is the federal funds rate Everything else is kept constant in the reserves market when the federal funds rate is 3%, lowering the discount rate from 5% to 4%. At the end of 2009, the amount of the Federal Reserve`s assets increased, so that when the Federal Reserve enters into a repurchase agreement to offset a withdrawal of funds from the Federal Reserve`s Treasury, the open market operation is kept constant like anything else when the federal funds rate _____ is the interest rate paid on the reserves, the amount of reserve in demand increases, if the federal funds rate is _________. If government bond deposits to the Fed are expected to increase, the manager of the New York Fed`s trading desk will likely perform ____ Everything that is kept constant in the reserve market, discount rate increases affect the Fed`s reverse repo rate DVP are settled, where the securities are moved against simultaneous payment. In this case, the Fed sends guarantees to the traders` clearing bank, which triggers a simultaneous movement of money against the security. At this point, the reserve balances are extinguished. When the trade matures, the trader returns the guarantee to the Fed`s DVP, which triggers the simultaneous return of the trader`s funds. With this law, reserve balances that have been removed on the front part of the transaction are recreated. Before the onset of the financial crisis in September 2007 until the end of the crisis at the end of 2009, the enormous expansion of the Fed`s balance sheet and monetary base did not lead to a sharp increase in the money supply, as the Federal Reserve will enter into a retirement agreement if it wants to have reserves. Repurchase agreements are concluded at the initiative of the Trading Desk of the New York Fed (The Desk). The Desk implements the Federal Reserve`s monetary policy at the request of the Federal Open Market Committee (FOMC). The Fed can offset the impact of an increase in the free float by committing to the primary borrowing rate, which is typically __ In March 2008, this vulnerability was replaced by ___ the three instruments are open market operations, the purchase and sale of government bonds; discount policy, control of the price and quantity of discount loans to banks; and minimum reserves, which set the percentage of deposits that banks must hold in reserve.
Open market operations and the discount rate affect the monetary base, and reserve requirements affect the monetary multiplier. Market participants often use repurchase agreements and RSO transactions to acquire funds or use funds for short periods of time. However, transactions in which the central bank is not involved do not affect the total reserves of the banking system. The interest rate applied on overnight loans of reserves between banks is the assumption that on a given day there is an excessive demand for reserves in the federal funds market. If the Federal Reserve wants to keep the federal funds rate at its current level, then the appropriate measure for the Federal Reserve is an __open market____,everything else kept constant. Answer: Dynamic OMOs are used to permanently change the money base and money supply. Defensive operations are used to compensate for temporary changes in the monetary base and/or money supply. Defensive operations are used to offset floating, changes in Treasury balances inside or outside the Fed, and temporary currency changes. .