Question

In a speech to the Fed conference in Jackson​ Hole, Wyoming mentioned in the chapter​ opener, Fed Chair Janet Yellen observed that the financial crisis revealed the​ Fed's open double quote“inability to control the federal funds rate once reserves were no longer relatively scarce.close double quote” She went on to state​ that:open double quote“To address the challenges posed by the financial crisis ...the Federal Reserve significantly expanded its monetary policy toolkit.... Our current toolkit proved effective last December. In an environment of superabundant​ reserves, the FOMC raised the effective federal funds rate close double quote”

​Source: Janet L.​ Yellen, open double quote“The Federal​ Reserve's Monetary Policy​ Toolkit: Past,​ Present, and​Future,close double quote”Remarks at open double quote“Designing

Resilient Monetary Policy Frameworks for the Future close double quote” a symposium sponsored by the Federal Reserve Bank of Kansas​ City, Jackson​ Hole, Wyoming, August​ 26, 2016.

What does Yellen mean by saying that open double quote“reserves were no longer relatively scarce close double quote”​?

A.

Reserves are so large that banks can easily increase their lending activities.

B.

Reserves are so large that banks can easily borrow reserves from other banks.

C.

Reserves are so large that banks have little need to increase the level of their depository accounts.

D.

Reserves are so large that banks have little need to borrow reserves from other banks.

​Why, with the monetary policy tools it had used prior to the financial​ crisis, could the Fed not control the federal funds​ rate?

A.

Investor and consumer behavior was not conforming to normal patterns.

B.

Using the tools the Fed had available would have disrupted the financial system.

C.

Reserves would have needed to be increased by too large an amount.

D.

The Fed would have needed to conduct a massive open market purchase of government securities.

How was the Fed able to use its new monetary policy tools to increase the federal funds rate in December​ 2015?

A.

The Fed raised the rate it pays on excess reserves and reverse purchase agreements.

B.

The Fed established a new federal funds rate.

C.

The Fed raised the rate it pays on excess reserves.

D.

The Fed raised the rate it pays on reverse purchase agreements.

Answer 1

A. Reserves are so large that banks can easily increase their lending activities.
(By saying that reserves are no longer relatively scarce, Yellen meant that banks can increase their lending easily because of large reserves.)

B. Using the tools the Fed had available would have disrupted the financial system.
(The Fed couldn't have used those tools because they would have disrupted the financial system.)

A. The Fed raised the rate it pays on excess reserves and reverse purchase agreements.
(Fed was able to use its new monetary policy by raising the rate it paid on reverse purchase agreements and excess reserves.)