Deck 4: The U.S. Federal Reserve and the Creation of Money

Question 1

________ is that item which serves as a numeraire, or unit of account or the unit that is used to measure wealth.

A) An asset
B) Money
C) A widget
D) A good or service

Answer 1

B

Question 2

________ is defined as M₁ plus all dollars held in time and savings accounts at banks and thrift institutions, plus all dollars invested in retail money market mutual funds, plus some additional accounts such as overnight repurchase agreements.

A) M₀
B) M₂
C) M₃
D) L

Answer 2

B

Question 3

The United States has a ________, which means that a bank must hold or "reserve" some portion of the funds that savers deposit in a form approved by the Fed.

A) fractional reserve banking system
B) required reserve ratio
C) total reserves
D) excess bank reserves

Answer 3

A

Question 4

________ is oversight of the main payment and settlement systems in the U.K. that are used for many types of financial transaction - from paying wages and credit card bills to the settlement of transactions between financial institutions.

A) Risk Payment Systems
B) Crisis Oversight
C) Risk Oversight
D) Oversight of Payment Systems

Question 5

The most important agent in the money supply process is the ________.

A) Federal Reserve System
B) Federal Reserve
C) Fed
D) All of these

Question 6

One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, a central bank is sometimes referred to as a ________.

A) financial authority
B) treasury authority
C) bank authority
D) monetary authority

Question 7

The Fed's most powerful instrument is its authority to conduct ________, which means that the Fed may buy and sell, in open debt markets, government securities for its own account.

A) reserve requirements
B) open market repurchase agreements
C) open market operations
D) discount rate

Question 8

The ________ role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries.

A) marginal
B) secondary
C) primary
D) tertiary

Question 9

The process of creating a money supply, the ________, can be generalized to the monetary aggregates beyond M₁.

A) money divisor
B) cash divisor
C) asset multiplier
D) money multiplier

Question 10

The Fed often employs variants of simple open market purchases and sales, and these are called ________.

A) the trading agreements of the Federal Reserve Bank of New York.
B) the repurchase agreement (or repo) and the reverse repo.
C) matched sale or a matched sale-purchase transaction
D) open market operations

Question 11

The ratio of the money supply to the economy's income (as reflected by the gross national product or some similar measure) is known as the ________ in circulation.

A) speed of cash
B) medium of exchange
C) M₃
D) velocity of money

Question 12

________ is developing and coordinating information sharing within the Bank, with the FSA and HM Treasury, and with authorities internationally to ensure future financial crises are handled and managed effectively.

A) Risk Assessment
B) Crisis management
C) Risk Reduction
D) Oversight of Payment Systems

Question 13

Created in 1913, the ________ is the government agency responsible for the management of the U.S. monetary and banking systems.

A) Board of Governors
B) European Central Bank
C) Fed
D) Group of 8

Question 14

The creation of the money supply, and changes in it, is a complex interaction of four parties. Which of the below is NOT one of these parties?

A) insurers
B) the Fed
C) savers
D) banks

Question 15

Which of the below statements is FALSE?

A) The Fed has little regulatory power over the nation's depository institutions, especially commercial banks.
B) From time to time, critics charge that the Fed guards its autonomy by accommodating either the White House or Congress (or both) far too much.
C) Securitization permits commercial banks to change what once were illiquid consumer loans of several varieties into securities.
D) An important feature of the Fed is that, by the terms of the law that created it, neither the legislative nor the executive branch of the federal government should exert control over it.

Question 16

A bank borrowing from the Fed is said to use the ________, and these loans are backed by the bank's collateral. The rate of interest on these loans is the ________.

A) discount window; LIBOR rate
B) open market operations; discount rate
C) Fed window; discount rate
D) discount window; repo rate

Question 17

Which of the following does the central bank of the United Kingdom identify as its role in maintaining financial stability?

A) Risk Assessment
B) Risk Enhancement
C) Oversight of Crisis System
D) Crisis Payment System

Question 18

The Fed has several tools by which it influences, indirectly and to a greater or lesser extent, the amount of money in the economy and the general level of interest rates. Which of the below is NOT one of these tools?

A) reserve requirements
B) open market operations
C) open market repurchase agreements
D) the compound rate

Question 19

In addition to the individual country central banks, there is the ________, which came into being on January 1, 1999, and is responsible for the implementing monetary policy for the member countries of the European Union.

A) European Monetary Authority
B) American Central Bank
C) European Central Bank
D) Japanese Monetary Authority

Question 20

Other assets that do not function in the role of medium of exchange have many properties in common with the numeraire. These properties include which of the below?

A) safety
B) multiplicative
C) low liquidity
D) All of these

Question 21

The Fed provides reserves to banks and also requires banks to hold, as reserves, a portion of the deposits that the public holds at the banks. The banks, playing their key role in the money multiplier, lend the remainder of the deposits (or most of it) to borrowers at an interest rate that exceeds that of demand deposits. For any one bank, the remainder equals deposits less required reserves, which can be expressed as deposits times ________.

A) (1 - ).
B) (1 - required reserve ratio).
C) (1 × required reserve ratio).
D) .

Question 22

Shifts in the dollar's exchange rates affects which of the below?

A) It affects the prices of domestic and imported goods.
B) It affects the revenues of U.S. companies.
C) It affects the wealth of all investors in the country.
D) All of these

Question 23

Although the G8 can concur on economic and financial policies and establish objectives, compliance is voluntary.

Question 24

In the United States, the medium of exchange encompasses currency, which is issued by the Treasury or the Fed, and demand deposits, which support payment by means of checks and are held at depository institutions such as commercial banks.

Question 25

There is widespread agreement that the central bank should be independent of the government so that decisions of the central bank will not be influenced for long-term business purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.

Question 26

In a reverse repo (also known as a matched sale or a matched sale-purchase transaction), the Fed sells securities and makes a commitment to buy them back at a higher price later.

Question 27

The most basic monetary aggregate is the fiscal base.

Question 28

Suppose the Fed's required reserve ratio is 12%. Further suppose that the Fed buys $50 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, with Bank A. Bank A's reserve account with the Fed has increased by $50 million and so have its (demand) deposits, its total reserves, and the overall level of M₁. How much has required reserves risen?

A) $50 million
B) $44 million
C) $10 million
D) $6 million

Question 29

If the Fed thinks the dollar's value is ________ and a foreign currency's is too low, it can purchase some of the foreign currency with its own supply of dollars.

A) excessively undervalued
B) a fair value
C) too high
D) too low

Question 30

Drains from the money creation process increase the multiplier effect of any increase in reserves.

Question 31

There is general agreement that the discount rate is the most effective tool at the Fed's disposal and its use in monetary policy has diminished over time.

Question 32

Suppose the Fed's required reserve ratio (REQ) is 10%. Further suppose that the Fed buys $25 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, in her bank increasing her bank's reserve account (∆R) with the Fed by $25 million as well as its demand deposits, its total reserves, and the overall level of M₁. The total demand deposits created (∆TDD) are $25 million.

Question 33

Assume the Fed's required reserve ratio is 12%. Further assume that the Fed buys $10 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, in his bank. His bank's reserve account with the Fed has increased by $10 million and so have its (demand) deposits, its total reserves, and the overall level of M₁. However, required reserves have risen only by $1.2 million. This leaves an additional $8.8 million that the bank is free and eager to invest in order to improve its income.

Question 34

The level of interest rates ________ affects the size of the ________ and, hence, the amount of that any increase in reserves will produce.

A) negatively; money multiplier
B) positively; money multiplier
C) positively; required reserve ratio
D) negatively; required reserve ratio

Question 35

The money multiplier is ________ when households and banks do not deposit or lend.

A) totally unaffected
B) about the same
C) higher
D) lower

Question 36

The Fed provides ________ to banks and also requires banks to hold, as ________, a portion of the deposits that the public holds at the banks..

A) reserves; loans
B) loans; reserves
C) credits; reserves
D) reserves; reserves

Question 37

________ is one in which foreign transactors - of either goods or financial assets-play a negligible role.

A) A closed economy
B) An open economy
C) A domestic economy
D) A growing

Question 38

Many deposit accounts pay interest, so holding cash does not impose an opportunity cost.

Question 39

Which of the below statements is FALSE?

A) Interest rates do not influence the change in the money supply.
B) If banks were to keep some excess reserves, they would make fewer new loans and generate fewer deposits at other banks, which would affect the amount of M₁ that the Fed's purchase of securities would generate.
C) One of the important factors in a bank's decisions about excess reserves is the level of market interest rates.
D) The level of market rates shapes decisions about cash holdings.

Question 40

The Federal Reserve System consists of 12 districts covering the entire country; each district has a Federal Reserve Bank with its own president.

Question 41

The central bank of the United Kingdom, the Bank of England, describes its duties toward maintaining stability of the currency and money supply for a country or a group of countries through four measures. Name and describe two of these four measures.

Question 42

Describe the Federal Reserve System and its important feature.

Question 43

Briefly discuss the nature of a closed economy and an open economy.

Question 44

Few central banks of large economies own, or stand ready to own, a large amount of each of the world's major currencies, which are considered international reserves.

Question 45

Describe the four monetary aggregates.

Question 46

The Fed has four major tools by which it influences, indirectly and to a greater or lesser extent, the amount of money in the economy and the general level of interest rates. These tools represent the key ways that the Fed interacts with commercial banks in the process of creating money. Name and describe three of these tools.

Question 47

Dramatic evidence of the growing importance of international policy coordination on monetary matters occurred in two meetings of central bankers of the large industrial nations in the mid 1980s.

Question 48

Assume REQ is 0.15 and the behavior of banks and depositors responds to interest rates such that banks do not make all the loans they can but rather want to hold 1% of their deposits (TDD) in excess reserves (ER), with the result that the ratio,
, equals 0.01. Also assume that the interest rate is at the level where the public will hold only 75% in checkable deposits (rather than a 100% maximum) and thus 25% in cash or currency (C) such that the ratio = 0.33. With these assumptions, what is the money multiplier?

Question 49

Suppose the Fed's required reserve ratio (REQ) is 20%. Further suppose that the Fed buys $100 million of U.S. Treasury securities from a dealer, Mary Jones, who deposits the check, which is drawn on the Fed, in her bank. This deposit increases her bank's reserve account (∆R) with the Fed by $100 million as well as its demand deposits, its total reserves, and the overall level of M₁. What is the money multiplier?

Question 50

Describe the meaning of the word money.