Question 1

What happens after the Fed buys securities on the open market (assume the demand for reserves is downward sloping)?

	A.	Supply of reserves shifts leftward and federal funds rate increases
	B.	Supply of reserves shifts rightward and federal funds rate increases
	C.	Supply of reserves shifts leftward and federal funds rate declines
	D.	Supply of reserves shifts rightward and federal funds rate declines

QUESTION 2

Why does the demand curve for reserves have a flat segment?

	A.	Banks are not willing to lend reserves in the overnight market if the federal funds rate is less than the interest rate paid on reserves on deposit at the Fed
	B.	The kinked demand curve is due to the cartel in reserves operated by the Fed and the ECB
	C.	The flat spot occurs at a federal funds rate equal to zero since interest rates cannot be negative
	D.	Congress has imposed a floor on the federal funds rate

QUESTION 3

What happens if the Fed decreases the reserve requirement?

	A.	Demand curve shifts rightward
	B.	Demand curve shifts leftward
	C.	Supply curve shifts leftward
	D.	Supply curve shifts rightward

QUESTION 4

Can the Fed act as the lender of last resort to non-bank financial institutions?

	A.	Yes
	B.	No

QUESTION 5

What is the key problem associated with the Fed's lender-of-last-resort role?

	A.	May generate free-rider problems
	B.	May generate adverse selection problems
	C.	May generate moral hazard problems if banks believe they will be bailed out
	D.	May generate moral hazard problems if individual firms believe they will be bailed out