Question

1.) During the financial crisis of 2007-2009,

A. yields on all types of securities fell.

B. yields on all types of securities rose.

C. yields on Treasury securities fell while yields on corporate securities rose.

D. yields on Treasury rose while yields on corporate securities fell.

2.) SELECT ALL the true statements about the Federal Funds rate (FFR).

A. The FFR is a market determined interest rate. B. The FFR is explicitly set be the Federal Reserve.

C. The FFR the interest rates that banks pay/receive when they borrow/lend from/to each other overnight.

D. The FFR cannot be influenced by open market operations. E. The FFR is the interest rate that banks pay for loans from the Federal Reserve.

3.) An open market sale of securities by the Federal Reserve

A. increases the monetary base.

B. decreases the monetary base.

C. increases the money multiplier.

D. decreases the money multiplier.

(BONUS) M2 declined by almost 30% over the period 1929 - 1933 (the first part of the Great Depression). Explain why this happened. What could the Federal Reserve have done, but did not do, to prevent this from occurring.

(BONUS) The U.S. government and Federal Reserve engaged in very unconventional fiscal and monetary policies in response to the financial crisis. With the knowledge you have so far, do you think intervention was a good idea or not? Explain.

Answer 1

1. A. yields on all types of securities fell.. During financial crisis interest rates fell down drastically leading to decrease in yield.

2. B. The FFR is explicitly set be the Federal Reserve. & E. The FFR is the interest rate that banks pay for loans from the Federal Reserve.

FFR is an important monetary policy tool. It affects the lending rate of commercial banks directly.

3. B. decreases the monetary base. Sale leads to transfer of money from public to Fed and hence money supply decreases.

3.