Federal Reserve Nominee Backs Reduction in Balance Sheet Size

Answer the following questions to check your understanding of the story.

How are Treasury bills, Treasury bonds, and bank reserves classified on the Federal Reserve’s balance sheet?

Treasury bills and Treasury bonds are __________ and bank reserves are __________ on the Federal Reserve’s balance sheet.

a) liabilities; assets

b) assets; liabilities

c) assets; also assets

d) liabilities; also liabilities

What is meant by reducing the size of the Fed’s balance sheet?

Reducing the size of the Fed’s balance sheet means ____________.

a) decreasing the Fed’s assets only, particularly Treasury bills and bonds

b) decreasing the Fed’s liabilities only, particularly bank reserves

c) increasing the Fed’s assets, particularly Treasury bills and bonds, and increasing its liabilities, particularly reserves

d) decreasing the Fed’s assets, particularly Treasury bills and bonds, and decreasing its liabilities, particularly bank reserves

Which of the following monetary policy tools would the Federal Reserve use to reduce the size of its balance sheet?

a) Conduct an open market purchase of government securities

b) Conduct an open market sale of government securities

c) Lower the required reserve ratio

d) Lower the federal funds rate

Would reducing the size of the Federal Reserve’s balance sheet bring the lower interest rates President Trump wants?

a) Yes, because lowering the required reserve ratio decreases bank reserves and lowers the nominal interest rate.

b) No, because an open market purchase decreases the money supply and raises the nominal interest rate.

c) Yes, lowering the federal funds rate increases the money supply and lowers the nominal interest rate.

d) No, because an open market sale decreases the money supply and raises the nominal interest rate.

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