8. It is inconceivable and impossible for a central bank to pursue a negative-in
ID: 1105344 • Letter: 8
Question
8. It is inconceivable and impossible for a central bank to pursue a negative-interest rate policy because interest rates simply cannot turn negative.
True or False
15.The Fed's response to the zero lower bound problem was quantitative easing (or "QE"), where the Fed buys large amounts of bonds in order to
Multiple Choice
a.lower the interest rates.
b.increase banks' reserves.
c.reduce money supply.
d. lower bond prices.
16.Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of
Multiple Choice
a."not in my backyard."
b."There ain't no such thing as a free lunch."
c."You can lead a horse to water, but you can't make it drink."
d."putting all your eggs in one basket."
23. In recent years, the Federal Reserve has
Multiple Choice
a.taken an activist, pragmatic approach to monetary policy, paying close attention to interest rates.
b.relied more on changes in the discount rate than open-market operations in establishing monetary policy.
c.increased M2 at a fixed annual rate, regardless of the health of the economy.
d. paid closer attention to M1 than M2 in setting monetary targets.
24.Which of the following statements about quantitative easing (or "QE") and open-market purchase is true?
Multiple Choice
a.QE is similar to open-market purchase in that both are aimed at reducing short-term interest rates in the economy.
b.QE is different from open-market purchase in that QE involves not just T-bonds but also bonds issued by other government agencies and government-backed corporations.
c.QE has to have Congressional approval, whereas open-market purchase does not.
d.QE is done by the U.S. Treasury, whereas open-market purchase is done by the Federal Reserve System.
25.Which of the following statements is most accurate about the Fed’s zero interest rate policy (ZIRP)?
Multiple Choice
a.It ended in late 2015, with the Fed increasing the IOER and engaging in reverse repo transactions.
b.The Fed has abandoned the ZIRP, recognizing the need to reduce nominal interest rates to below zero.
c.As of 2016, the ZIRP is being pursued by the Fed.
d.In an effort to end the ZIRP, the Fed prohibited nonbank lending to banks.
Explanation / Answer
Q8. False, Negative interest rate means people will pay money in order to keep there deposits in banks, this action will lead to disincentivisation of banking policies because of which central banks won't do this, otherwise interest rates can be negative.
Q15. B, increase bank reserves.
Q16. C, Banks cannot loan money if there is no demand, although they have reserves.
Q23. A, General Trend from history.
Q24. B
Q25. A
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