Deck 4: The Federal Reserve System, Monetary Policy, and Interest Rates

Question 1

The primary policy tool used by the Fed to meet its monetary policy goals is

A)changing the discount rate.
B)changing reserve requirements.
C)devaluing the currency.
D)changing bank regulations.
E)open market operations.

Answer 1

E

Question 2

The seven members of the Board of Governors of the Federal Reserve System serve 14-year nonrenewable terms. Each Board member is appointed by the president and confirmed by the Senate.

Answer 2

True

Question 3

Federal Reserve interest rate decisions can be vetoed by the U.S. president or the Congress.

Answer 3

False

Question 4

Ceteris paribus,if the Fed was targeting the quantity of money supplied and money demand dropped,the Fed would likely ______________. If the Fed was instead targeting interest rates and money demand dropped,the Fed would likely _______________.

A)increase the money supply; do nothing
B)do nothing; decrease the money supply
C)decrease the money supply; do nothing
D)do nothing; increase the money supply
E)increase the money supply; decrease the money supply

Question 5

The _____________ is a network linking over 9,000 banks with the Federal Reserve that is used to transfer deposits and make loan payments between participants.

A)Fedwire
B)ACH
C)CHIPS
D)NASDAQ
E)SWIFT

Question 6

Nationally chartered banks are required to become members of the Federal Reserve System.

Question 7

The major asset of the Federal Reserve is

A)U.S. Treasury securities.
B)depository institution reserves.
C)currency outside banks.
D)vault cash of commercial banks.
E)gold and foreign exchange.

Question 8

The monetary base is the amount of coin and currency in circulation plus reserves.

Question 9

The Federal Reserve System is charged with

A)regulating securities exchanges.
B)conducting monetary policy.
C)providing payment and other services to a variety of institutions.
D)setting bank prime rates.
E)conducting monetary policy and providing payment and other services to a variety of institutions.

Question 10

The _______________ is a nationwide network jointly operated by the Fed and private institutions that electronically process credit and debit transfers of funds.

A)Fedwire
B)ACH
C)CHIPS
D)NASDAQ
E)SWIFT

Question 11

If the FOMC wished to generate faster economic growth,they could issue a policy directive to the Federal Reserve Board Trading Desk to purchase U.S. government securities.

Question 12

Four seats on the Federal Open Market Committee (FOMC)are allocated to Federal Reserve Bank presidents on an annual rotating basis.

Question 13

The major liability of the Federal Reserve is

A)U.S. Treasury securities.
B)depository institution reserves.
C)currency outside banks.
D)vault cash of commercial banks.
E)gold and foreign exchange.

Question 14

The discount rate is the rate that

A)banks charge for loans to corporate customers.
B)banks charge to lend foreign exchange to customers.
C)banks charge each other on loans of excess reserves.
D)banks charge securities dealers to finance their inventory.
E)the Federal Reserve charges on loans to commercial banks.

Question 15

The Fed funds rate is the rate that

A)banks charge for loans to corporate customers.
B)banks charge to lend foreign exchange to customers.
C)the Federal Reserve charges on emergency loans to commercial banks.
D)banks charge each other on loans of excess reserves.
E)banks charge securities dealers to finance their inventory.

Question 16

About 34 percent of all U.S. banks are members of the Federal Reserve System.

Question 17

An increase in Treasury securities held by the Fed leads to a decrease in the money supply.

Question 18

Federal Reserve Board members are appointed by the U.S. president and confirmed by the Senate for a nonrenewable 14-year term.

Question 19

Which of the following is the major monetary policy making body of the U.S. Federal Reserve System?

A)FOMC
B)OCC
C)FRB bank presidents
D)U.S. Congress
E)Group of Eight

Question 20

The major asset of the Federal Reserve is currency outside banks and the major liability is U.S. Treasury securities.

Question 21

In the area of bank supervision,which of the following are functions of the Federal Reserve Banks?
I) Examinations of state member banks
II) Approval of member bank and bank holding company acquisitions
III) Deposit insurance

A)I only
B)I and II only
C)II and III only
D)I and III only
E)I,II,and III

Question 22

The Fed changes reserve requirements from 10 percent to 7 percent,thereby creating $900 million in excess reserves. The total change in deposits (with no drains)would be

A)$3,000 million.
B)$15,625 million.
C)$12,857 million.
D)$3,795 million.
E)none of the options.

Question 23

How do Federal Reserve Banks generate income?
Do they require supplemental funding from Congress?

Question 24

A bank has $770 million in checkable deposits. The bank has $85 million in reserves. The bank's required reserves are _____________ and its excess reserves are _____________.

A)$85 million; $0
B)$770 million; $85 million
C)$89 million; $21 million
D)$685 million; $8.5 million
E)$77 million; $8 million

Question 25

If the Fed is targeting interest rates and money demand increases,an appropriate policy response would be to

A)increase reserve requirements.
B)increase the discount rate.
C)buy U.S. Treasury securities from government bond dealers.
D)increase government spending.
E)none of the options

Question 26

Recently,oil prices have risen in the United States,generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand,the Fed could

A)intervene in the currency markets to push the value of the dollar down.
B)decrease the discount rate.
C)lower the target Fed funds rate.
D)lower the target money supply growth rate.
E)reduce reserve requirements at banks.

Question 27

Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10 percent. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?

A) $48.00 million
B) $54.20 million
C) $56.33 million
D) $57.10 million
E) $60.00 million

Question 28

The major monetary policy-making arm of the Federal Reserve is the

A)Board of Governors.
B)Council of Federal Reserve Bank presidents.
C)Office of the Comptroller of the Currency.
D)Federal Reserve Bank of New York.
E)none of the options

Question 29

The Check 21 Act,effective in October 2004,does which of the following?

A)Allows bank customers to better take advantage of bank float
B)Requires banks to immediately clear all customer deposits
C)Prohibits the Fed from being involved in check clearing to prevent unfair competition with private check clearing agencies
D)Authorizes the use of an electronic image to facilitate paperless check clearing
E)Eliminates all fees on checking

Question 30

Currently the Fed sets monetary policy by targeting

A)the Fed funds rate.
B)the prime rate.
C)the level of non-borrowed reserves.
D)the level of borrowed reserves.
E)the stock market.

Question 31

A decrease in reserve requirements could lead to an

A)increase in bank lending.
B)increase in the money supply.
C)increase in the discount rate.
D)increase in bank lending and an increase in the money supply.
E)increase in bank lending and an increase in the discount rate.

Question 32

The Fed increases bank reserves in the system by $75 million. If there are no drains,the expected change in bank deposits is

A)$82.5 million.
B)$945 million.
C)$750 million.
D)$1,500 million.
E)$655 million.

Question 33

Before 2003 the discount window loan rate was set

A)below the target Fed funds rate.
B)above the target Fed funds rate.
C)equal to the target Fed funds rate.
D)equal to the repurchase rate.

Question 34

The Federal Reserve does all but which one of the following?

A)Conducts monetary policy
B)Supervises and regulates bank activities
C)Serves as the commercial bank for the U.S. Treasury
D)Operates check clearing and wire transfer facilities
E)Insures deposits

Question 35

What are the four major functions of the Federal Reserve System?

Question 36

If the Fed wishes to stimulate the economy,it could
I) buy U.S. government securities.
II) raise the discount rate.
III) lower reserve requirements.

A)I and III only
B)II and III only
C)I and II only
D)II only
E)I,II,and III

Question 37

The 12 Federal Reserve Banks perform what functions?

Question 38

The Fed changes reserve requirements from 10 percent to 14 percent,thereby eliminating $750 million in excess reserves. The total change in deposits (with no drains)would be (rounded)

A)$7.917 billion.
B)$6.630 billion.
C)$5.357 billion.
D)$4.934 billion.
E)none of the options.

Question 39

From October 1983 to July 1993,the Federal Reserve targeted

A)the Fed funds rate.
B)borrowed reserves.
C)nonborrowed reserves.
D)M1.
E)M3.

Question 40

The Fed offers three types of discount window loans. ______________ credit is offered to small institutions with demonstrable patterns of financing needs,_____________ credit is offered for short-term temporary funds outflows,and _____________ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems.

A)Seasonal; extended; adjustment
B)Extended; adjustment; seasonal
C)Adjustment; extended; seasonal
D)Seasonal; primary; secondary
E)Adjustment; seasonal; extended

Question 41

What does the 2004 Check 21 law allow?
Why was this law passed?
Does it benefit the customer or banks?
Explain.

Question 42

What are the main responsibilities of the FOMC?

Question 43

Why did the Fed switch from increasing rates prior to 2007 to reducing interest rates in 2007 and 2008?

Question 44

Explain how a change in open market operations can affect a new college graduate.

Question 45

What supervisory and regulatory authority does the Fed have under current law?

Question 46

Why do changes in reserve requirements have less predictable effects on the money supply in comparison to changes in open market operations?

Question 47

Is there a trade-off between controlling domestic inflation and maintaining a sustainable pattern of international trade?

Question 48

Suppose that oil prices hit an all-time high of $200 a barrel,driving U.S. inflation up to 7 percent per year. At the same time,weak U.S. growth and increasing foreign competition has generated unacceptably high levels of unemployment in the United States. You are the chair of the Federal Reserve. What do you suggest?

Question 49

How have recent changes in discount window credit programs affected the use of this tool for monetary policy?

Question 50

The Fed wishes to expand the money supply. What three things can it do?
Which has the most predictable effects?
Be specific.

Question 51

Explain how the deposit multiplier works.