Deck 19: The Instruments of Central Bankin

Question 1

The deposit expansion multiplier is increased if the Federal Reserve

A) buys government securities.
B) sells government securities.
C) lowers reserve requirements.
D) raises reserve requirements.

Answer 1

C

Question 2

A limitation of the discount rate as a policy tool is that the initiative for its use rests with

A) commercial banks.
B) consumers.
C) the U.S. Treasury.
D) state governments.

Answer 2

A

Question 3

Reserve requirements apply to

A) FDIC-insured banks only.
B) nationally chartered banks only.
C) Federal Reserve member banks only.
D) all commercial banks.

Answer 3

D

Question 4

Since being originally set in 1913, bank reserve requirements have

A) not been changed.
B) been changed only once.
C) been changed on numerous occasions.
D) been changed on a daily basis.

Question 5

When a bank borrows from the Federal Reserve the bank

A) receives a new deposit of legal reserves at the Federal Reserve.
B) creates a new checkable deposit payable to the Federal Reserve.
C) normally will do so because it has excess reserves.
D) loses reserves equal to the amount of the loan.

Question 6

Reserve requirements apply to

A) life insurance companies.
B) investment banks.
C) credit unions.
D) stock brokers.

Question 7

Excess reserves immediately increase if

A) reserve requirements increase.
B) reserve requirements decrease.
C) the discount rate increases.
D) the discount rate decreases.

Question 8

Reserve requirements apply to

A) demand deposits.
B) business-owned time deposits.
C) business-owned savings deposits.
D) Reserve requirements apply to all of the above.

Question 9

__________ the required reserve ratio will __________ the potential for multiple expansion.

A) Raising; increase
B) Lowering; decrease
C) Raising; decrease
D) None of the above.

Question 10

Which of the following institutions can not borrow from the Federal Reserve at the discount window?

A) Thrift institutions
B) Member banks
C) Nonmember banks
D) Life insurance companies

Question 11

Which of the following institutions is not subject to Federal Reserve's reserve requirements?

A) A state-chartered commercial bank
B) A savings and loan association
C) A money market mutual fund
D) A credit union

Question 12

Which of the following institutions is not eligible to borrow from the Federal Reserve at the discount rate?

A) Federal government
B) Commercial banks
C) Credit unions
D) Mutual savings banks

Question 13

The price of reserves that are borrowed from the Federal Reserve is called the

A) discount rate.
B) federal funds rate.
C) LIBOR.
D) prime rate.

Question 14

Which of the following institutions is eligible to borrow from the Federal Reserve at the discount rate?

A) Property and casualty insurance companies
B) Money market mutual funds
C) Credit unions
D) Investment banks

Question 15

Reserve requirements are highest for

A) transactions deposits.
B) bank borrowings from foreign branches.
C) federal funds.
D) business time deposits.

Question 16

The primary function of reserve requirements is to serve as

A) a source of bank liquidity.
B) an instrument of monetary control.
C) a means of reducing bank profits.
D) a means of controlling the amount of currency in the banking system.

Question 17

Excess reserves immediately decrease if

A) reserve requirements increase.
B) reserve requirements decrease.
C) the discount rate increases.
D) the discount rate decreases.

Question 18

Which of the following institutions is eligible to borrow from the Federal Reserve at the discount rate?

A) Federal government
B) Savings and loan institutions
C) Money market mutual funds
D) Life insurance companies

Question 19

The deposit expansion multiplier is decreased if the Federal Reserve

A) buys government securities.
B) sells government securities.
C) lowers reserve requirements.
D) raises reserve requirements.

Question 20

If a commercial bank borrows from the Federal Reserve, the price it pays is

A) zero, there is no payment.
B) the prime rate.
C) the federal funds rate.
D) the discount rate.

Question 21

Which of the following is an interest rate determined by the supply and demand for loans among commercial banks?

A) The discount rate
B) The federal funds rate
C) The prime rate
D) The commercial paper rate

Question 22

A good example of using the discount rate to serve the lender of last resort role for the financial system occurred during the

A) savings and loan crisis of the 1980s.
B) stock market crash of 1987.
C) sharp rise in government deficits during the 1980s.
D) developing-country debt crisis of the 1980s.

Question 23

Which of the following is an administered interest rate set by the Federal Reserve?

A) The discount rate
B) The federal funds rate
C) The prime rate
D) The commercial paper rate

Question 24

A change in the discount rate is likely to occur

A) after a change in the Treasury bill rate.
B) after a change in the Treasury bond rate.
C) before a change in the federal funds rate.
D) before a change in the inflation rate.

Question 25

Which of the following interest rates is usually below other money market rates?

A) Discount rate
B) Prime rate
C) Federal funds rate
D) Treasury note rate

Question 26

Which of the following statements is incorrect?

A) When market rates are changing, the discount rate adjusts immediately.
B) Money market interest rates tend to respond quickly to Federal Reserve open market operations.
C) The discount rate may be above or below other money market interest rates at a given point in time.
D) All of the above are true.

Question 27

A sign that the Federal Reserve is moving to raise interest rates would be

A) an increase in bank reserves.
B) large purchases of Treasury securities by the Federal Reserve.
C) a widening gap between the Treasury bill yield and the discount rate.
D) a narrowing gap between the Treasury bill yield and the discount rate.

Question 28

Immediately after the Federal Reserve buys government securities,

A) bank excess reserves rise.
B) bank excess reserves fall.
C) bank capital rises.
D) bank capital falls.

Question 29

When the Federal Reserve sells $100 worth of government securities, bank reserves

A) rise by $100.
B) rise by $100 times the deposit expansion multiplier.
C) fall by $100.
D) fall by $100 times the deposit expansion multiplier.

Question 30

A __________ discount rate makes it __________ advantageous to sell securities to obtain additional reserves.

A) higher; less
B) lower; more
C) higher; more
D) None of the above.

Question 31

If the Federal Reserve eliminated all reserve requirements the most likely result would be

A) a large number of depository institution failures because they would not have enough liquidity.
B) the Federal reserve would be unable to control the money supply.
C) banks would no longer be able to clear checks at the Federal Reserve because there would be no required reserves.
D) the size of the money multiplier might fluctuate considerably making the Federal Reserve's job of controlling the money supply more difficult.

Question 32

As a tool of monetary policy the effectiveness of the discount rate is __________ because __________.

A) Limited; banks will not borrow reserves from the Fed as long as they have ample excess reserves no matter how low the discount rate goes
B) Limited; banks will borrow reserves from the Fed whenever they need them as long as they have a reserve deficiency no matter how high the discount rate goes
C) very effective; changes in the discount rate leads changes in money market rates and thus assures that the injections and withdrawals of reserves from the banking system desired by the Fed will occur
D) very effective; banks will predictably increase borrowings from the Federal Reserve when the discount rate decreases and decrease borrowings when the discount rate increases

Question 33

The ultimate source of liquidity in a modern industrial economy is the

A) government Treasury.
B) central bank.
C) capital market.
D) liquidity market.

Question 34

Which of the following is a primary policy tool of the Federal Reserve?

A) The federal funds rate
B) Open market operations
C) The prime rate
D) The money supply

Question 35

Recently, new discount window lending procedures set a penalty rate that is normally __________ short-term market interest rates.

A) just below
B) above
C) approximately equal to
D) None of the above.

Question 36

A sign that the Federal Reserve is moving to lower interest rates would be

A) a reduction in bank reserves.
B) an increase in margin requirements.
C) a widening gap between the Treasury bill yield and the discount rate.
D) a narrowing gap between the Treasury bill yield and the discount rate.

Question 37

One method used by the Federal Reserve to prevent abuse of the discount facility is

A) higher bank taxes.
B) higher reserve requirements.
C) tighter bank surveillance.
D) selling fewer government securities to the banks involved.

Question 38

The Federal Reserve views commercial bank use of the discount window as

A) something to be used only by commercial banks.
B) completely up to the borrower.
C) a privilege, not a right for eligible borrowers.
D) something to be used only in financial panics.

Question 39

Open market operations are

A) seldom used by the Federal Reserve because they have such a large impact on bank Reserves.
B) seldom used by the Federal Reserve because they have little impact on bank reserves.
C) used frequently by the Federal Reserve but not as often as changes in the discount rate.
D) the primary method used by the Federal Reserve to alter bank reserves.

Question 40

Which of the following is an administered interest rate set by commercial banks?

A) The discount rate
B) The federal funds rate
C) The prime rate
D) The commercial paper rate

Question 41

The money market rate observed most closely by the Open Market Account Manager is the

A) Treasury bill rate.
B) commercial paper rate.
C) discount rate.
D) federal funds rate.

Question 42

A repurchase agreement of government securities by the Fed

A) permanently increases bank reserves.
B) temporarily increases bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question 43

Assume that the M1 multiplier is 2.5. If the Federal Reserve purchases $200 worth of government securities, the money supply will

A) rise by $200.
B) rise by $500.
C) fall by $200.
D) fall by $500.

Question 44

A reverse repurchase agreement of government securities by the Fed

A) permanently increases bank reserves.
B) temporarily increases bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question 45

A matched sale-purchase agreement of government securities by the Fed

A) permanently increases bank reserves.
B) temporarily increases bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question 46

An indication to the Open Market Account Manager that commercial banks are experiencing a liquidity surplus would be a

A) falling federal funds rate.
B) rising federal funds rate.
C) falling discount rate.
D) rising discount rate.

Question 47

When the Federal Reserve sells $500 worth of government securities, the money supply

A) rises by $500.
B) rises by more than $500.
C) falls by $500.
D) falls by more than $500.

Question 48

When the Federal Reserve buys $200 worth of government securities, the money supply

A) rises by $200.
B) rises by more than $200.
C) falls by $200.
D) falls by more than $200.

Question 49

An indication to the Open Market Account Manager that commercial banks are experiencing a liquidity shortage would be a

A) falling federal funds rate.
B) rising federal funds rate.
C) falling discount rate.
D) rising discount rate.

Question 50

An outright purchase of government securities by the Fed

A) permanently increases bank reserves.
B) temporarily increase bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question 51

Assume that the M1 multiplier is 3 and the Federal Reserve sells $100 million worth of government securities. Bank reserves will

A) rise by $100 million.
B) fall by $100 million.
C) fall by $300 million.
D) fall by $33.33 million.

Question 52

A sound policy to combat a temporary liquidity surplus in the banking system would be

A) a reduction in the discount rate.
B) a decrease in the discount rate.
C) the purchase of government securities by the Fed under a repurchase agreement.
D) the sale of government securities by the Fed under a repurchase agreement.

Question 53

An outright sale of government securities by the Fed

A) permanently increases bank reserves.
B) temporarily increases bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question 54

A sound policy to combat a temporary liquidity shortage in the banking system would be

A) a reduction in the discount rate.
B) a decrease in the discount rate.
C) the purchase of government securities by the Fed under a repurchase agreement.
D) the sale of government securities by the Fed under a repurchase agreement.

Question 55

If the Federal Reserve sells $20 million worth of government securities and the M1 multiplier is 2.5. Bank reserves will

A) fall by $20 million.
B) fall by $50 million.
C) fall by $16 million.
D) fall by $8 million.

Question 56

Assume that the M1 multiplier is 4. If the Federal Reserve purchases $200 worth of government securities, the money supply will

A) rise by $200.
B) rise by $800.
C) fall by $200.
D) fall by $800.