Deck 14: The Federal Reserve System

Question 1

The creation of a Federal Reserve System was recommended by

A)The National Monetary Commission.
B)The U.S.Treasury.
C)A member of Congress.
D)The Federal Bureau of Investigation.

Answer 1

A

Question 2

The Federal Reserve holds deposits from

A)Consumers.
B)Banks.
C)The U.S.Treasury.
D)Large corporations.

Answer 2

B

Question 3

Regional Fed banks

A)Hold deposits for individuals.
B)Clear checks between private banks.
C)Participate in open market operations.
D)Insure the deposits in private banks.

Answer 3

B

Question 4

The government uses ______________ to regulate the amount of money banks lend.

A)monetary policy
B)fiscal policy
C)banking policy
D)tax cuts

Question 5

Monetary policy involves the use of money and credit controls to

A)Shift the aggregate demand curve.
B)Shift the aggregate supply curve.
C)Move the economy along the aggregate demand curve.
D)Move the economy along the aggregate supply curve.

Question 6

Monetary policy is set by the

A)Federal Open Market Committee.
B)Regional Federal Reserve banks.
C)Federal Advisory Council.
D)Board of Governors.

Question 7

Which of the following provides evidence that the Federal Reserve System is politically insulated?

A)The Fed governors are appointed by the president of the United States.
B)The Fed governors are appointed for 14-year terms and cannot be reappointed.
C)The Board of Governors is located in Washington,
D)The Fed acts as a clearinghouse between commercial banks.

Question 8

Members of the Board of Governors are

A)Elected by the people and confirmed by the president.
B)Appointed by the president and confirmed by the Senate.
C)Selected by each new president at the same time the cabinet is chosen.
D)Appointed by the Senate and confirmed by the House of Representatives.

Question 9

Members of the Federal Reserve Board of Governors are appointed for one 14-year term so that they

A)Have time to learn how the Fed operates.
B)Are more likely to make politically acceptable decisions.
C)Make their decisions based on economic,rather than political,considerations.
D)Have enough time to travel to all 12 regional banks.

Question 10

Which of the following services is performed by the regional Federal Reserve banks?

A)Holding bank reserves.
B)Bailing out or liquidating failed banks.
C)Determining open market operations.
D)Issuing government bonds.

Question 11

All of the following would be true for the banking system if there was no government regulation except

A)The money supply would be determined by individual banks.
B)Depositors would bear all the risks of bank failures.
C)The money supply would be subject to abrupt changes.
D)The banking system would be regulated by consumers.

Question 12

Which of the following is not true for members of the Federal Reserve Board of Governors?

A)They are appointed to 14-year terms by the president of the United States.
B)They are relatively immune to short-term political pressures.
C)They may not be reappointed after serving a full term.
D)They usually serve two or three terms.

Question 13

The Federal Reserve System was created by

A)The FDIC in 1929.
B)The Federal Reserve Act in 1913.
C)The U.S.Treasury in 1914.
D)The Federal Banking Authority in 1904.

Question 14

Regional Fed banks are responsible for all of the following except

A)Holding bank reserves.
B)Providing currency for private banks.
C)Providing loans to private banks.
D)Cashing checks for large nonfinancial corporations.

Question 15

The Board of Governors consists of

A)7 members,appointed for 14-year terms.
B)26 members,appointed for 2-year terms.
C)14 members,appointed for 7-year terms.
D)50 members,appointed for 7-year terms.

Question 16

Which of the following serves as the central banker for private banks in the United States?

A)The 12 Federal Reserve banks.
B)The executive branch of government.
C)The legislative branch of the government.
D)The Federal Open Market Committee.

Question 17

The use of money and credit controls to achieve macroeconomic goals is

A)Fiscal policy.
B)Monetary policy.
C)Supply-side policy.
D)Eclectic policy.

Question 18

Suppose Brian receives a check for $100 from a bank in Atlanta.He deposits the check in his account at a Dallas bank.The Dallas bank will most likely collect the $100 directly from the

A)FOMC.
B)Dallas regional Federal Reserve Bank.
C)Federal Reserve Bank in Washington,
D)Board of Governors.

Question 19

The primary method for controlling the money supply in the United States is to limit the

A)Amount of currency that is printed.
B)Amount of money that is spent by changing tax policy.
C)Amount of money that is spent by changing income transfers.
D)Volume of loans the banking system can make.

Question 20

Which of the following services is performed by the regional Federal Reserve banks?

A)Holding deposits for individuals.
B)Providing loans to individuals.
C)Providing currency to private banks.
D)Check cashing for large nonbank corporations.

Question 21

Which of the following represents the lending capacity of an individual (nonmonopoly)bank?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× multiplier.
D)1 ÷ (required reserve ratio).

Question 22

The Federal Open Market Committee meets

A)Twice per year.
B)Every four or five weeks.
C)Every week.
D)Every three months.

Question 23

The Fed can use all of the following except ____________ to change the lending capacity of the banking system.

A)the reserve requirement
B)the excess reserve requirement
C)open market operations
D)the discount rate

Question 24

Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?

A)Twelve Federal Reserve banks.
B)The executive branch of government.
C)The Federal Open Market Committee.
D)The Board of Governors of the Federal Reserve.

Question 25

All of the following are tools available to the Fed for controlling the money supply except

A)The reserve requirement.
B)The discount rate.
C)Open market operations.
D)Taxes.

Question 26

_____________ can be altered to change the lending capacity of the banking system.

A)Points charged on a typical first mortgage
B)Gold reserves
C)The reserve requirement
D)The dollar exchange rate

Question 27

Which of the following represents the money multiplier?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× multiplier.
D)1 ÷ (required reserve ratio).

Question 28

Assume the reserve requirement is 25 percent,demand deposits are $500 million,and total reserves are $32 million.If the reserve requirement is decreased to 20 percent,the banking system will experience

A)Excess reserves equal to $32 million.
B)Excess reserves equal to $68 million.
C)No change in the lending capacity.
D)A deficiency of required reserves equal to $68 million.

Question 29

The money supply (M2)includes M1 plus balances in

A)Saving accounts,money market mutual funds,and certificates of deposit over $100,000.
B)Saving accounts and money market mutual funds.
C)Saving accounts only.
D)Money market mutual funds only.

Question 30

Assume the reserve requirement is 10 percent,demand deposits are $200 million,and total reserves are $18 million.If the reserve requirement is increased to 14 percent,the banking system will have

A)Excess reserves equal to $10 million.
B)Excess reserves equal to $18 million.
C)An increase in the money multiplier.
D)A deficiency of reserves equal to $10 million.

Question 31

The minimum amount of reserves a bank is required to hold is

A)Required reserves.
B)Excess reserves.
C)Total reserves.
D)Legal reserves.

Question 32

Excess reserves are

A)Legal reserves in excess of total reserves.
B)Required reserves plus minimal reserves.
C)Bank reserves in excess of required reserves.
D)Total reserves minus deficient reserves.

Question 33

The M2 money supply is defined as

A)Currency held by the public plus transactions accounts.
B)M1 plus savings accounts.
C)M1 plus balances in most savings accounts and money market mutual funds.
D)Most balances held in savings accounts and money market mutual funds.

Question 34

The Federal Open Market Committee includes

A)All 7 governors and 5 of the regional Reserve bank presidents.
B)5 of the governors and all of the regional Reserve bank presidents.
C)12 of the regional Reserve bank presidents plus the chairman of the Fed.
D)All 12 of the governors and all 7 of the regional Reserve bank presidents.

Question 35

Which of the following represents the lending capacity of an entire banking system?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× money multiplier.
D)1 ÷ (required reserve ratio).

Question 36

Currency held by the public plus balances in transactions accounts is the definition of

A)Bank surplus.
B)M1.
C)M2.
D)Bank deficit.

Question 37

The money supply (M1)includes currency held by the public plus

A)Transactions accounts.
B)Currency held by the Fed and Treasury and transactions accounts.
C)Balances in most savings accounts and money market mutual funds.
D)Transactions accounts plus money market mutual funds.

Question 38

The Federal Open Market Committee is responsible for

A)The Fed's daily activity in financial markets.
B)Determining broad Fed policy.
C)Providing central banking services to individual banks.
D)Check cashing services for large corporations.

Question 39

The current chairman of the Federal Reserve is

A)Alan Greenspan.
B)George W.Bush.
C)Ben Bernanke.
D)Nancy Pelosi.

Question 40

Which of the following is responsible for the Fed's daily activity in financial markets?

A)The Board of Governors.
B)The House of Representatives Ways and Means Committee.
C)Bank of America.
D)The FOMC.

Question 41

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

A)Money market.
B)Commercial paper market.
C)Federal funds market.
D)Foreign exchange market.

Question 42

Discounting refers to the Fed's practice of

A)Selling securities at the federal funds rate.
B)Purchasing securities at the lowest available federal funds rate.
C)Lending reserves to private banks.
D)Lending at the prime rate.

Question 43

A change in the reserve requirement causes a change in all of the following except

A)The money multiplier.
B)The lending capacity of the banking system.
C)Excess reserves.
D)Pretax income.

Question 44

When a bank borrows money from the Federal Reserve,

A)This is a sign that the bank is insolvent.
B)Demand deposits increase for the bank.
C)Reserves increase for the bank.
D)The ability to lend decreases for the bank.

Question 45

By raising and lowering the discount rate,the Fed changes the

A)Level of required reserves held by individuals.
B)Incentive for banks to buy common stock.
C)Incentive for banks to borrow reserves.
D)Money multiplier.

Question 46

A reduction in the discount rate

A)Signals the Federal Reserve's desire for additional credit expansion.
B)Increases the cost of borrowing reserves from the Federal Reserve.
C)Discourages banks from borrowing reserves from the Fed.
D)Is consistent with a tight monetary policy.

Question 47

If excess reserves are too large,a bank is likely to

A)Buy government securities.
B)Borrow in the federal funds market.
C)Borrow reserves from the discount window.
D)All of the choices are correct.

Question 48

If a bank does not have enough reserves to satisfy the reserve requirement,it is likely to do any of the following except

A)Borrow additional reserves in the federal funds market.
B)Sell securities.
C)Borrow from the discount window at the Federal Reserve Bank.
D)Buy securities.

Question 49

The federal funds rate is the interest rate charged when

A)One bank lends reserves to another bank.
B)The Fed lends to banks.
C)The Fed lends to individuals.
D)Individual banks lend to the FeD.When a bank is deficient in reserves,it can go to the federal funds market to borrow what it needs from another bank.

Question 50

Suppose all of the banks in the Federal Reserve System have $100 billion in transactions accounts,the required reserve ratio is 0.25,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.20,the total lending capacity of the system is increased by

A)$25 billion.
B)$20 billion.
C)$10 billion.
D)$750 million.

Question 51

When the Fed raises the discount rate,all of the following result except

A)The cost of borrowing reserves for member banks increases.
B)It sends a signal that it is moving toward a slower growth rate for the money supply.
C)It sends a signal that it is reluctant to lend reserves.
D)It expands the lending capacity of the banking system.

Question 52

Which of the following is true about an increase in the discount rate?

A)It reduces the cost of reserves borrowed from the Federal Reserve.
B)It signals the Federal Reserve's desire to restrain money growth.
C)It signals the Federal Reserve's desire to support credit creation.
D)It signals the Federal Reserve's eagerness to lend additional reserves.

Question 53

Changing the reserve requirement is

A)A powerful tool that can cause abrupt changes in the money supply.
B)The most often-used tool on the part of the Fed.
C)A tool that has little impact on the money supply.
D)Effective in changing excess reserves but not the money supply.

Question 54

Suppose all of the banks in the Federal Reserve System have $500 billion in transactions accounts,the required reserve ratio is 0.30,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.25,the total lending capacity of the system is increased by

A)$1 billion.
B)$30 billion.
C)$25 billion.
D)$100 billion.

Question 55

Suppose the banks in the Federal Reserve System have $100 billion in transactions accounts,the required reserve ratio is 0.10,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.15,the deficiency of reserves would be

A)$15 billion.
B)$20 billion.
C)$5 billion.
D)$10 billion.

Question 56

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

A)Changes in the discount rate.
B)Changes in the required reserve ratio.
C)Open market operations.
D)Foreign exchange operations.

Question 57

Suppose the banks in the Federal Reserve System have $200 billion in transactions accounts,the required reserve ratio is 0.15,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.10,the amount of excess reserves would be

A)Negative $10 billion.
B)Negative $20 billion.
C)Positive $10 billion.
D)Positive $20 billion.

Question 58

If banks do not have enough reserves to satisfy the reserve requirement,they can

A)Buy securities.
B)Pay off discount loans at the Federal Reserve bank.
C)Lend additional reserves in the federal funds market.
D)Sell securities.

Question 59

All of the following are true if a bank in Los Angeles borrows federal funds from a bank in San Francisco except

A)Lending potential goes up for the Los Angeles bank.
B)Lending potential for the banking system does not change.
C)Lending potential goes down for the San Francisco bank.
D)The money multiplier increases for the banking system.

Question 60

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

A)Federal funds rate.
B)Prime rate.
C)Discount rate.
D)Commercial paper rate.

Question 61

The Fed is most likely to pursue

A)Frequent adjustment of the reserve requirement.
B)Use of open market operations as the primary mechanism to change reserves.
C)Numerous increases in the discount rate to tighten the money supply quickly.
D)Frequent changes in marginal tax rates.

Question 62

Rommel buys a bond in the amount of $2,000 with a promised interest rate of 17 percent.If the market interest rate increases to 27 percent,Rommel can sell her bond for up to

A)$1,259.26.
B)$540.00.
C)$7,407.00.
D)$11,764.71.

Question 63

Which of the following equals the current yield on a bond?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× the money multiplier.
D)Annual interest payment ÷ current market price of the bonD.The annual interest payment divided by the current market price of the bond equals the current rate of return.

Question 64

If the Fed wants to sell more government bonds than people are willing to buy,then the Fed should

A)Decrease the price it asks for the bonds.
B)Switch to another type of monetary policy lever.
C)Switch to fiscal policy.
D)Encourage a government agency to buy the bonds.

Question 65

If the annual interest rate printed on the face of a bond is 16 percent,the face value of the bond is $1,000,and the current market price of the bond is $200,what is the current yield on the bond?

A)5.5 percent.
B)200.0 percent.
C)16.0 percent.
D)80.0 percent.

Question 66

If the annual interest rate printed on the face of a bond is 25 percent,the face value of the bond is $1,000,and the current market price of the bond is $700,what is the current yield on the bond?

A)25.5 percent.
B)20.5 percent.
C)35.7 percent.
D)25.0 percent.

Question 67

Tony buys a bond in the amount of $500 with a promised interest rate of 15 percent.If the market interest rate decreases to 5 percent,Tony can sell his bond for up to

A)$500.
B)$250.
C)$1,500.
D)$1,250.

Question 68

The choice of how and where to hold idle funds is

A)An executive Fed decision.
B)A Fed funds decision.
C)A discount decision.
D)A portfolio decision.

Question 69

The rate of return on a bond is the

A)Annual interest payment.
B)Discount rate.
C)Yield.
D)Federal funds rate.

Question 70

Open market operations involve the Fed

A)Buying or selling government bonds.
B)Buying or selling shares of stock.
C)Borrowing money from a bank.
D)Lending money to individuals.

Question 71

If market interest rates rise,the selling price of existing bonds in the market will,ceteris paribus,

A)Rise.
B)Fall.
C)Not change.
D)Change unpredictably.

Question 72

When the Fed buys bonds from the public,it

A)Decreases the flow of reserves to the banking system.
B)Increases the flow of reserves to the banking system.
C)Decreases the money supply.
D)Decreases the discount rate.

Question 73

When the Fed wishes to increase the reserves of the member banks,it

A)Buys securities.
B)Raises the reserve requirement.
C)Raises the discount rate.
D)Sells securities.

Question 74

Shoffner buys a bond in the amount of $1,000 with a promised interest rate of 18 percent.If the market interest rate decreases to 3 percent,Shoffner can sell his bond for up to

A)$5,000.
B)$6,000.
C)$3,000.
D)$2,000.

Question 75

Through open market operations,the Fed is able to influence

A)The stock market but not the bond market.
B)Automatic stabilizers.
C)Portfolio decisions.
D)Real output but not the price level.

Question 76

A bond is a

A)Ownership share in a private company.
B)Promise to repay borrowed funds.
C)Certification that a bank has met the Fed's reserve requirement.
D)License to use the Fed's discount window.

Question 77

The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is known as

A)Fiscal policy.
B)Federal funds operations.
C)Open market operations.
D)Zero coupon bonding.

Question 78

If the annual interest rate printed on the face of a bond is 12 percent,the face value of the bond is $1,000,and the current market price of the bond is $1,200,what is the current yield on the bond?

A)10.0 percent.
B)12.0 percent.
C)8.5 percent.
D)5.0 percent.

Question 79

If the annual interest rate printed on the face of a bond is 7 percent,the face value of the bond is $1,000,and the current market price of the bond is $250,what is the current yield on the bond?

A)25 percent.
B)14 percent.
C)28 percent.
D)18 percent.

Question 80

Which of the following is the tool used most frequently by the Fed?

A)The reserve requirement.
B)Open market operations.
C)The discount rate.
D)The fed funds rate.