Question

126) Which of the following statements is true?

126) A) The discount window in the United States is operated by Citibank. B) The discount window is accessible only to well-performing banks. C) When banks borrow from the discount window, it is an admission of trouble. D) The discount window is operated only in periods of economic expansion.

\127) The ________ is the interest rate that banks charge each other for overnight loans.

127) A) discount window interest rate B) spot interest rate C) federal funds rate D) subsidized banking interest rate

128) The funds being lent in the federal funds market are:

128) A) investments of foreign firms. B) bank deposits of domestic households. C) reserves at the Fed. D) tax revenue earned by the federal government.

129) The demand curve for reserves is:

129) A) vertical. B) downward sloping. C) upward sloping. D) horizontal.

130) If a bank has $6 billion in reserves and loans $2 billion to another bank, then the total quantity of reserves demanded is:

130) A) $4 billion. B) $2 billion. C) $8 billion. D) $6 billion.

Answer 1

126) A) The discount window in the United States is operated by Citibank.: False

The discount window is operated by Federal Reserve in United States. Discount window is a monetary policy tool & is usually controlled by central bank. It allows eligible institutions to borrow money from Federal Reserve on short term basis which helps them in liquidity management.

B) The discount window is accessible only to well-performing banks.: True.

In order to reduce the credit risk of Federal reserve of providing such loans, discount window lending has been collaterilized. Banks & depositories need to be in a sound financial condition in order to access discount window. Earlier it was accessible to illiquid or insolvent banks but now it is accessible only to well-performing banks.

C) When banks borrow from the discount window, it is an admission of trouble.: True

Financial market participants looks for signals about a bank's condition. They view it as a signal of trouble when banks borrow through deposit window rather than borrowing from the market because borrowing from discount window is more expensive & market participants assume that banks access discount window only when they face difficulties in accessing funds from the market. So, it is said that when banks borrow from the discount window, it is an admission of trouble.

D) The discount window is operated only in periods of economic expansion.: False

This is a monetary policy tool & is used by the central bank either to stimulate i.e., expand money supply (expansionary monetary policy) or to rein i.e., to contract money supply (contractionary monetary policy) in the economy. Fed decreases or increases the discount rate to influence the supply of money in the economy.

127) Correct option is C) federal funds rate.

The federal funds rate is the interest rate that banks charge each other for overnight loans. Federal funds rate refers to the interest rate charged by banks over overnight loans borrowed by other banks.

128) Correct option is C) reserves at the Fed.

The funds being lent in the federal funds market are reserves at the Fed. The reserves at the federal reserve bank is the source of the funds that are being lent in the federal funds market.

129) Correct option is B) downward sloping.

The demand curve for reserves is downward sloping. Due to the inverse relationship between the liquidity preference & the interest rate, the demand curve for reserves is downward sloping.