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17) If the Federal Reserve wants to lower the federal funds rate, it should A) increase reserve requirements. B) announce a lower rate. C) request a lower rate. D) purchase government securities. 18) Federal funds are A) funds owned by the federal government. B) funds owned by the Federal Reserve. C) bank reserves that are lent overnight between banks. D) bank reserves that are lent overnight by the Federal Reserve to banks. 19) The demand for reserves is __________ related to the federal funds rate because banks __________ their excess reserves as the federal funds rate falls. A) inversely; increase B) inversely; decrease C) positively; increase D) positively; decrease 20) If the federal funds rate is __________ the equilibrium interest rate, banks would try to __________ in the federal funds market. A) above; borrow B) below; lend C) below; borrow D) None of the above. 21) The supply of reserves __________ when the federal funds rate __________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; changes 22) The supply of and demand for bank reserves determines the A) Treasury bill rate. B) prime rate. C) discount rate. D) federal funds rate. 23) One effect of a shrinking economy is A) an increase in the discount rate. B) a decrease in the discount rate. C) an increase in the federal funds rate. D) a decrease in the federal funds rate. 24) If the federal funds rate is above the equilibrium federal funds rate, then the supply of reserves would be __________ than the demand for reserves and the banks would try to __________ reserves causing the federal funds rate to fall. A) greater than; lend B) greater than; borrow C) less than; lend D) less than; borrow 25) If the federal funds rate is below the equilibrium federal funds rate, then the supply of reserves would be __________ than the demand for reserves and the banks would try to __________ reserves causing the federal funds rate to fall. A) greater than; lend B) greater than; borrow C) less than; lend D) less than; borrow 26) The Federal Reserve uses the federal funds rate as an operating target because A) it is an excellent indicator of the economy’s underlying inflation rate. B) it is very sensitive to bank reserve level changes. C) it is determined by the Treasury. D) the Fed sets the rate directly.

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