Deck 13: The Federal Reserve System

Question 1

When we speak of the Fed's responsibility to supervise member banks,we are saying that the

A) Fed's advisory board will help member banks manage their assets and liabilities.
B) Fed's Open Market Committee will advise member banks regarding the purchase and sale of government securities.
C) Fed's Board of Governors will advise member banks regarding the appropriate interest rates to be charged on various loans.
D) Fed will advise member banks regarding the nature of loans and compliance with regulations.
E) Fed will advise member banks about the proper control of each individual bank's money supply.

Answer 1

D

Question 2

The Federal Reserve System is the

A) federal government agency that collects taxes and spends these receipts on tanks, bridges, government employees' salaries, etc.
B) company that delivers packages to your front door.
C) central bank of the United States.
D) federal government agency that collects and disseminates all the economic data that economists are interested in.

Answer 2

C

Question 3

The Board of Governors of the Federal Reserve is comprised of

A) seven persons, each appointed to a seven-year term.
B) seven persons, each appointed to a fourteen-year term.
C) fourteen persons, each appointed to a seven-year term.
D) twelve persons, each appointed to a seven-year term.
E) twelve persons, each appointed to a fourteen-year term.

Answer 3

B

Question 4

The Board of Governors of the Federal Reserve is part of a larger policy-making group called the

A) Senate Banking Committee.
B) Federal Deposit Insurance Corporation.
C) American Banking Association.
D) Federal Open Market Committee.

Question 5

When commercial banks need more Federal Reserve Notes,

A) they call the Bureau of Engraving and Printing, which delivers the requested amount.
B) they call the Board of Governors of the Fed, which delivers the requested amount.
C) they ask their customers to exchange their Federal Reserve Notes for U.S. Treasury securities.
D) they call the Treasury, which delivers the requested amount.
E) they call their Federal Reserve District Bank, which delivers the requested amount.

Question 6

The Federal Reserve System began operations in

A) 1834.
B) 1896.
C) 1914.
D) 1935.

Question 7

Open Market Operations are conducted by

A) the main Fed office in Washington, D.C.
B) the U.S. Treasury on behalf of the Fed.
C) the Federal Reserve Bank of New York.
D) a consortium of private banks contracted by the Fed.

Question 8

The Fed

A) can examine the books of a member bank without warning.
B) can examine the books of a member bank after giving advance notice.
C) can examine the books of a member bank with the bank's permission.
D) is never allowed to see the books of a privately owned bank.

Question 9

If the Fed purchases government securities from commercial banks,the reserves of the banking system will immediately

A) increase by the amount of the purchase.
B) increase by more than the amount of the purchase.
C) remain constant.
D) decrease by the amount of the purchase.
E) decrease by more than the amount of the purchase.

Question 10

Open market operations are the

A) buying and selling of Federal Reserve Notes in the open market.
B) means by which the Fed supplies the economy with currency.
C) means by which the Fed acts as the government's banker.
D) buying and selling of government securities by the Fed.
E) buying and selling of government securities by the Treasury.

Question 11

The United States is divided into __________ Federal Reserve districts,each with a district bank.

A) three
B) eight
C) twelve
D) twenty
E) fifty

Question 12

When the federal government incurs a budget deficit,it will

A) mint more coins and spend them.
B) create money out of thin air.
C) impose a special tax on all income earners.
D) borrow money from the Federal Reserve System by issuing securities.
E) borrow money from the public by issuing government securities.

Question 13

Which of the following statements is false?

A) The Fed serves as the lender of last resort for banks.
B) The Fed serves as a fiscal agent for the U.S. Treasury.
C) A major responsibility of the Fed is to control the nation's money supply.
D) The federal government is the Fed's banker.

Question 14

William Jennings Bryan,Secretary of State at the time of the passage of the Federal Reserve Act,argued in favor of having ______ district banks.

A) six
B) not less than eight nor more than twelve
C) twelve
D) fifty

Question 15

Which of the following is not a major responsibility of the Fed?

A) controlling the money supply
B) serving as the federal government's banker
C) determining tax rates
D) acting as a lender of last resort

Question 16

The funds the Fed receives from selling government securities

A) are deposited in a commercial bank.
B) disappear into thin air.
C) are turned over to the Office of Management and Budget in Washington, D.C.
D) are deposited in the U.S. Treasury.

Question 17

Which of the following is not a major responsibility of the Fed?

A) supplying the economy with paper money
B) providing check-clearing services
C) supervising member banks
D) serving as fiscal agent for the Treasury
E) All of the above are major responsibilities of the Fed.

Question 18

When a check is written on an account at Bank A and deposited in Bank B,the reserve account of __________ will rise and reserves of the entire banking system will __________.

A) Bank A; rise
B) Bank A; remain constant
C) Bank B; rise
D) Bank B; remain constant

Question 19

The three members of the commission that originally drew up the boundaries of the Federal Reserve Districts and the locations of the district banks were the

A) Comptroller of the Currency, the Secretary of the Treasury, and the Secretary of Agriculture.
B) Secretary of State, the Secretary of the Treasury, and the Speaker of the House of Representatives.
C) Secretary of State, the Secretary of Commerce, and the Vice President.
D) Secretary of the Treasury, the Secretary of Commerce, and the Vice President.

Question 20

When the Fed is acting as fiscal agent for the Treasury,it will

A) buy securities from the Treasury, thereby providing the Treasury with money to pay the government's bills.
B) receive and process bids for Treasury securities in preparation for the Treasury's auction of securities.
C) serve as a lender of last resort.
D) supply the Treasury with paper money whenever the Treasury does not have enough funds to meet its bills.
E) supervise the Treasury by examining its books.

Question 21

When one commercial bank borrows from another commercial bank,it pays the __________ rate.

A) discount
B) bank interest
C) federal funds
D) prime
E) none of the above

Question 22

The interest rate that a commercial bank pays when it borrows from the Fed is the __________ rate.

A) discount
B) exchange
C) federal
D) bank

Question 23

The Fed can change the money supply by changing

A) the required reserve ratio.
B) marginal income tax rates.
C) federal excise taxes.
D) unemployment benefits.

Question 24

Suppose the Fed forecasts a reduction in excess reserve holdings by banks.It might offset the effect of this on the money supply by

A) buying government securities.
B) lowering the required reserve ratio.
C) lowering the discount rate.
D) selling government securities.
E) a, b, and c

Question 25

An open market purchase by the Fed

A) decreases the supply of money.
B) increases the supply of money.
C) decreases the demand for money.
D) increases the demand for money.

Question 26

The larger the simple deposit multiplier,

A) the higher the required reserve ratio.
B) the higher the discount rate.
C) the larger the change in the money supply for a given change in deposits.
D) the less likely the Fed will be to use its monetary policy tools.

Question 27

The lower the discount rate relative to the federal funds rate,the more likely a commercial bank will borrow from

A) another commercial bank instead of the Fed.
B) the Fed instead of another commercial bank.
C) the U.S. Treasury instead of either the Fed or another commercial bank.
D) the public.

Question 28

A commercial bank can receive a loan from another commercial bank in the

A) federal funds market.
B) bank loan market.
C) Fed market.
D) discount market.

Question 29

If banks are currently holding zero excess reserves and the Fed lowers the required reserve ratio,which of the following will happen?

A) Banks will have a reserve deficiency.
B) Banks will have positive excess reserves.
C) Banks will extend fewer loans.
D) Banks will call in some of their loans to meet the reserve deficiency.

Question 30

An "open market operation" is said to occur when the Fed

A) arranges for the merger of two banks.
B) changes the interest rate at which it lends reserves.
C) transfers reserves between banks.
D) buys or sells government securities.

Question 31

If banks are currently holding zero excess reserves and the Fed raises the required reserve ratio,which of the following will happen?

A) Banks will have a reserve deficiency.
B) Banks will have positive excess reserves.
C) Banks will begin to extend more loans.
D) Banks will begin to extend more credit.
E) b and d

Question 32

When a commercial bank borrows from the Fed,

A) the reserves of the bank fall.
B) the bank can make more loans.
C) it must be because the bank is not meeting its reserve requirements.
D) the money supply falls.

Question 33

The word that best describes the relationship between the required reserve ratio and the money supply is

A) direct.
B) constant.
C) inverse.
D) roundabout.

Question 34

Suppose the Fed forecasts a reduction in cash leakages.It might offset the effect of this on the money supply by

A) buying government securities.
B) selling government securities.
C) lowering the required reserve ratio.
D) lowering the discount rate.

Question 35

If the Fed purchases government securities from a commercial bank,which of the following will happen?

A) The Fed will increase the bank's reserves on deposit at the Fed.
B) The Fed will decrease the bank's reserves on deposit at the Fed.
C) The assets (government securities) of the Fed will decrease.
D) The assets (government securities) of the Fed will increase.
E) a and d

Question 36

The original boundaries for the Federal Reserve districts were determined based on

A) Congressional district boundaries.
B) population distributions obtained from the census.
C) trade boundaries.
D) state lines.
E) none of the above

Question 37

Which of the following will increase the money supply?

A) an increase in the discount rate (relative to the federal funds rate)
B) a decrease in the required reserve ratio
C) an open market sale by the Fed
D) a and c
E) b and c

Question 38

The sale of a government security by the Fed

A) decreases the supply of money.
B) increases the supply of money.
C) decreases the demand for money.
D) increases the demand for money.

Question 39

If the Fed wants to increase the money supply through an open market operation,it will

A) purchase government securities.
B) sell government securities.
C) first purchase, then sell, government securities.
D) lend more reserves to commercial banks.

Question 40

Suppose the Fed sells a $50,000 U.S.Treasury security to Martha,a member of the public.If Martha writes a check to the Fed in order to buy this security,the money in her checking account will be transferred to

A) the Fed, and now the Fed will have $50,000 more in reserves than it had before.
B) her bank, and now her bank will have $50,000 more in reserves than it had before.
C) the Fed, and now it is as if the money doesn't exist.
D) the Treasury, and now the Treasury will have $50,000 more in reserves than it had before.

Question 41

The Federal Open Market Committee (FOMC)is composed of the seven members of the Board of Governors,

A) the president of the New York Federal Reserve District Bank, and four of the remaining 11 Federal Reserve District Bank presidents who rotate on an annual basis.
B) and five state governors who rotate on an annual basis.
C) four Federal Reserve District Bank presidents who rotate on an annual basis, and the head of the Senate Banking Committee.
D) and the Secretary of the Treasury.

Question 42

An open market sale by the Fed will

A) increase bank reserves.
B) increase currency held by the public or vault cash.
C) increase the money supply.
D) reduce the money supply.

Question 43

When the Fed purchases securities from a bank,it __________ reserves and ____________ the money supply.

A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
E) has no impact on; has no impact on

Question 44

The Board of Governors of the Federal Reserve

A) is made up of seven members.
B) is a group of advisers reporting to the President.
C) is located in New York City.
D) members are appointed to four-year terms by the President and confirmed by the Senate.
E) all of the above

Question 45

When the Fed sells government securities to a bank,the

A) bank's reserves increase.
B) bank's reserves decrease.
C) bank's reserves do not change.
D) securities are an asset for the bank.
E) b and d

Question 46

The required reserve ratio is set by the

A) U.S. Congress.
B) President of the United States.
C) Secretary of the Treasury.
D) Federal Reserve.
E) Director of Monetary Affairs.

Question 47

If the Fed were to increase the discount rate so that it was much higher than the federal funds rate,eventually

A) reserves would decrease and the money supply would decrease.
B) reserves would increase and the money supply would increase.
C) reserves would decrease and the money supply would increase.
D) reserves would increase and the money supply would decrease.
E) there is no impact on reserves or the money supply.

Question 48

When a bank obtains a loan from the Fed,it follows that the

A) simple deposit multiplier rises.
B) bank (itself) can create more loans.
C) bank's reserves decrease.
D) bank's reserves remain unchanged.
E) none of the above

Question 49

The Federal Reserve System

A) is the central bank of the United States.
B) controls the money supply.
C) is the lender of last resort.
D) is the fiscal agent for the Treasury.
E) all of the above

Question 50

Which of the following is not a monetary policy tool of the Fed?

A) changing the required reserve ratio
B) changing the discount rate
C) setting the price level and the market rate of interest
D) conducting open market operations

Question 51

When the Fed sells government securities to a bank,the securities will be

A) an asset for the bank.
B) a liability for the bank.
C) both an asset and a liability for the bank.
D) neither an asset nor a liability for the bank.

Question 52

When Bank A obtains a loan from the Fed,the

A) discount rate is probably higher than the federal funds rate.
B) bank's reserves increase.
C) simple deposit multiplier decreases.
D) b and c
E) none of the above

Question 53

Which of the following will decrease the money supply?

A) an increase in the discount rate (relative to the federal funds rate)
B) an increase in the required reserve ratio
C) an open market purchase by the Fed
D) a and b
E) a, b, and c

Question 54

The Fed

A) clears checks.
B) holds depository institutions' reserves.
C) is the government's banker.
D) supplies Federal Reserve Notes.
E) all of the above

Question 55

If the Fed ______________________,the money supply will ultimately __________.

A) raises the required reserve ratio from 8 percent to 10 percent; decrease
B) lowers the required reserve ratio from 10 percent to 8 percent; increase
C) lowers the required reserve ratio from 10 percent to 8 percent; decrease
D) raises the required reserve ratio from 8 percent to 10 percent; increase
E) a and b

Question 56

The Federal Open Market Committee (FOMC)

A) has six members.
B) conducts open market operations.
C) is the policy-making body within the Treasury.
D) is the governing body of the Federal Reserve System.
E) a, b, and c

Question 57

When commercial banks borrow from other commercial banks,the immediate impact is that reserves in the banking system

A) increase.
B) decrease.
C) are unaffected.
D) first increase, then decrease.
E) first decrease, then increase.

Question 58

When the Fed increases the required reserve ratio,a bank's

A) required reserves are unaffected.
B) required reserves are increased.
C) required reserves are decreased.
D) excess reserves are decreased.
E) b and d

Question 59

When the Fed increases the required reserve ratio,a bank's

A) excess reserves are unaffected.
B) excess reserves are increased.
C) excess reserves are decreased.
D) required reserves are decreased.
E) b and d

Question 60

To decrease the money supply,the Fed may

A) buy government securities in the open market.
B) decrease the discount rate.
C) increase the required reserve ratio.
D) b and c
E) all of the above

Question 61

Which of the following actions is most likely to lead to an increase in the money supply?

A) Fed purchases of government securities
B) an increase in the required reserve ratio
C) an increase in the discount rate
D) none of the above

Question 62

Open market purchases of government securities

A) are designed to increase trading on the stock exchange.
B) generally decrease the money supply.
C) always decrease the money supply.
D) cause bank reserves to increase.
E) all of the above

Question 63

The banking system currently holds $20 billion in required reserves and zero excess reserves.The Fed lowers the required reserve ratio from 15 percent to 12.5 percent.Assuming that there are no cash leakages,the resulting change in checkable deposits (or the money supply)is approximately

A) $2.7 billion.
B) $1.5 billion.
C) $2.0 billion.
D) $12.5 billion.
E) $26.6 billion.

Question 64

Which of the following Fed actions will decrease the money supply?

A) an open market purchase of Treasury bills
B) an increase in the required reserve ratio
C) a decrease in the discount rate relative to the federal funds rate
D) all of the above
E) none of the above

Question 65

A Federal Reserve Bank is located in which of the following cities?

A) Detroit
B) Baltimore
C) Minneapolis
D) Seattle
E) Cincinnati

Question 66

Which of the following is not a responsibility of the Fed?

A) supervising member banks
B) serving as the lender of last resort
C) issuing government securities
D) providing check-clearing services
E) supplying the economy with Federal Reserve Notes

Question 67

The Fed has been called "the lender of last resort" because it

A) is the biggest bank in the country.
B) is the only lender to the federal government.
C) serves as the last place to acquire loans for banks suffering cash management, or liquidity, problems.
D) a and b
E) all of the above

Question 68

The discount rate is the interest rate

A) banks pay on certificates of deposit.
B) the Fed pays on reserves held by banks.
C) the Fed charges when it lends reserves to banks.
D) banks charge their loan customers.
E) on short-term Treasury securities.

Question 69

If a bank has zero excess reserves and one of its creditworthy customers applies for a loan,the bank may be able to grant the loan if it can

A) apply some of its loan repayments to obtain the funds for the new loan.
B) obtain extra funds in the federal funds market.
C) obtain extra funds by borrowing from the Fed.
D) any of the above
E) b or c

Question 70

There are __________ Federal Reserve Districts.

A) seven
B) eleven
C) twelve
D) fourteen

Question 71

Federal Reserve Notes held by the Fed are considered part of the

A) money supply.
B) bank reserves.
C) both of the above
D) none of the above

Question 72

The Federal Reserve System came into existence with the Federal Reserve Act of

A) 1877.
B) 1933.
C) 1965.
D) 1913.
E) 1922.

Question 73

In controlling the nation's money supply,the Fed is obligated to seek the advice of

A) the Congress.
B) the President of the United States.
C) the Treasury.
D) a and b
E) none of the above

Question 74

Which of the following will not increase the money supply in the United States?

A) lowering the required reserve ratio
B) Fed purchases of government securities on the open market
C) lowering the discount rate relative to the federal funds rate
D) Fed sales of government securities on the open market
E) none of the above

Question 75

A bank is less likely to borrow from the central bank when the __________ falls relative to the __________.

A) discount rate; required reserve ratio
B) excess reserve; required reserves
C) discount rate; federal funds rate
D) federal funds rate; discount rate

Question 76

Which of the following Fed actions will increase the money supply?

A) open market purchases of Treasury notes
B) an increase in the required reserve ratio
C) an increase in the discount rate
D) all of the above
E) none of the above

Question 77

One of the Fed's functions is to be the government's banker.This means that the

A) Fed issues government securities.
B) Fed extends loans to the government whenever it spends more than it collects in tax revenues.
C) government's checking account is at the Fed.
D) all of the above

Question 78

In the federal funds market,

A) banks make loans to the Fed.
B) banks make loans to other banks.
C) the Fed makes short-term loans to banks.
D) the Fed makes long-term loans to banks.

Question 79

The lower the required reserve ratio,

A) the less money that can be loaned at each round of the lending process.
B) the larger the simple deposit multiplier.
C) the smaller the simple deposit multiplier.
D) the fewer excess reserves there are at each round of the simple deposit multiplier process.
E) a, c, and d

Question 80

Assuming no cash leakages and no excess reserves held by banks,a required reserve ratio of 0 percent would mean that the simple deposit multiplier is

A) 0.
B) 1.
C) 10.
D) 100.
E) infinity.