Deck 18: Changes in the Monetary Base

Question 1

The Fed's largest asset is

A)reserves of member banks.
B)reserves of nonmember banks.
C)securities.
D)loans to banks.

Answer 1

securities.

Question 2

In April 2006, about how much in securities did the Federal Reserve hold?

A)$786 million
B)$7.86 billion
C)$786 billion
D)$786 trillion

Answer 2

$786 billion

Question 3

An open market purchase

A)reduces the Fed's holdings of securities, but an open market sale increases the Fed's holdings of securities.
B)increases the Fed's holdings of securities, but an open market sale reduces the Fed's holdings of securities.
C)reduces the Fed's holdings of securities, as does an open market sale.
D)increases the Fed's holdings of securities, as does an open market sale.

Answer 3

increases the Fed's holdings of securities, but an open market sale reduces the Fed's holdings of securities.

Question 4

The part of bank reserves deposited at the Fed are

A)assets for banks and liabilities for the Fed.
B)assets for the Fed and liabilities for banks.
C)assets for both the Fed and banks.
D)liabilities for both the Fed and banks.

Question 5

The Fed's largest liability is

A)currency outstanding.
B)securities.
C)reserve accounts of member banks.
D)U.S. Treasury deposits.

Question 6

Most of the Fed's portfolio of securities consists of

A)U.S. Treasury securities.
B)securities issued by foreign governments.
C)securities issued by state and local governments in the United States.
D)corporate bonds.

Question 7

Items in the process of collection are generated by

A)open market operations.
B)discount loans.
C)the Fed's check-clearing role.
D)spending by the Treasury from its Fed accounts.

Question 8

On the Fed's balance sheet an item in the process of collection

A)is an asset.
B)is a liability.
C)represents funds the Fed has promised to pay to a bank that has presented a check to be cleared.
D)represents an overdue discount loan to a commercial bank.

Question 9

In addition to U.S. Treasury securities, the Fed's portfolio of securities contains

A)corporate stock.
B)corporate bonds.
C)bankers' acceptances.
D)commercial paper.

Question 10

In April 2006, discount loans by the Fed amounted to about

A)$0.1 billion.
B)$1 billion.
C)$10 billion.
D)$100 billion.

Question 11

Which of the following is NOT a Federal Reserve asset?

A)The Fed's holdings of foreign exchange
B)The Federal Reserve building in Washington, D.C.
C)Shares of stock purchased in the Federal Reserve system by member banks
D)The computer systems used in the Federal Reserve district banks

Question 12

How does the Fed acquire its holdings of securities?

A)Through open market operations
B)As a result of defaults by banks on discount loans
C)As contributions by the U.S. Treasury aimed at enabling the Fed to meet its operating expenses
D)As contributions by member banks when they first join the system

Question 13

Special Drawing Rights are issued by

A)the U.S. Treasury.
B)the Federal Reserve.
C)the United Nations.
D)the International Monetary Fund.

Question 14

On the Fed's balance sheet, the Fed's holdings of foreign exchange reserves

A)is an asset.
B)is a liability.
C)represents promises by the Fed to make loans to foreign governments.
D)consists of gold bars.

Question 15

The currency outstanding account on the Fed's balance sheet

A)is a liability.
B)is an asset.
C)represents chiefly the coins minted and issued by the U.S. Treasury.
D)includes only that currency held by commercial banks.

Question 16

The primary reason the Fed makes discount loans to banks is to

A)carry out monetary policy.
B)help increase bank profitability.
C)earn interest.
D)help banks overcome short-term liquidity problems.

Question 17

The balance in the Gold and SDR certificate account on the Fed's balance sheet increases when

A)the Treasury acquires SDRs.
B)the Fed buys gold.
C)the Fed sells gold.
D)the U.S. mint issues gold coins.

Question 18

The bulk of the Fed's holdings of U.S. Treasury currency consists of

A)Treasury paper currency.
B)coins.
C)Federal Reserve Notes.
D)Treasury bills.

Question 19

The balance in the Gold and SDR certificate account on the Fed's balance sheet increases when

A)the Fed buys gold.
B)the Fed sells gold.
C)the Treasury buys gold.
D)the U.S. mint issues gold coins.

Question 20

Which of the following statements is correct?

A)The Fed completely controls the volume of discount loans.
B)Although the Fed does not completely control the volume of discount loans, it influences the amount by setting the discount rate.
C)Although the Fed does not completely control the volume of discount loans, it influences the amount through open market operations.
D)The volume of discount loans the Fed makes each year is a constant amount fixed under terms of the Federal Reserve Act.

Question 21

Federal Reserve float is defined as

A)the excess of total deposits by depository institutions over required reserves.
B)the liquid funds the Fed has available to lend to banks.
C)cash items in the process of collection minus deferred availability cash items.
D)deferred availability cash items minus cash items in the process of collection.

Question 22

Why aren't Treasury deposits with the Fed part of the monetary base?

A)Because they are currency and currency is not included in the monetary base
B)Because no deposits at the Fed are included in the monetary base
C)Because they aren't assets of either the nonbank public or banks
D)Because the Fed is unable to exercise effective control over their size

Question 23

Increases in which of the following items from the Fed's balance sheet will result in increases in the monetary base?

A)U.S. Treasury deposits
B)Discount loans
C)Other Federal Reserve liabilities and capital account
D)Foreign and other deposits

Question 24

Increases in which of the following items from the Fed's balance sheet will result in decreases in the monetary base?

A)U.S. Treasury deposits
B)U.S. Treasury currency outstanding
C)Federal Reserve float
D)Discount loans

Question 25

Where would shares of stock in the Federal Reserve System purchased by the Fed's member banks be included on the Fed's balance sheet?

A)They would be included on the balance sheets of the member banks, but not included on the balance sheet of the Fed.
B)They would be included under "Other Federal Reserve Assets and Capital Account."
C)They would be included under "Deferred Availability Cash Items."
D)They would be included under "Other Federal Reserve Assets."

Question 26

On the Fed's balance sheet, a deferred availability cash item

A)represents funds not yet collected by the Fed from banks against which checks have been drawn.
B)is an asset.
C)is a liability.
D)represents taxes due to the Federal government but not yet collected.

Question 27

Which is the correct expression for currency in circulation?

A)Federal Reserve Notes outstanding + Treasury currency outstanding - banks' vault cash
B)Federal Reserve Notes outstanding + Treasury currency outstanding + banks' vault cash
C)Federal Reserve Notes outstanding + banks' vault cash - Treasury currency outstanding
D)Treasury currency outstanding - (Federal Reserve Notes outstanding + banks' vault cash)

Question 28

Deposits by depository institutions with the Fed

A)are an asset to the Fed but a liability to the depository institutions.
B)are a liability to the Fed but an asset to the depository institutions.
C)represent all of the depository institutions reserves.
D)receive interest at market rates.

Question 29

Which of the following is true of the Fed's balance sheet?

A)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets.
B)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed liabilities.
C)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets plus the total of other Fed liabilities.
D)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets minus the total of other Fed liabilities.

Question 30

The currency outstanding account on the Fed's balance sheet

A)represents coins minted and issued by the Treasury and held by the Fed.
B)is an asset.
C)represents Federal Reserve Notes.
D)represents coins minted and issued by the U.S. Treasury and held by the commercial banking system.

Question 31

The monetary base will increase for all of the following reasons EXCEPT

A)increase in discount loans.
B)increase in Federal Reserve Float.
C)increase in securities held by Fed.
D)increase in Treasury deposits at the Fed.

Question 32

The $300 million in U.S. Treasury notes dating back to Civil War issues and still outstanding are called

A)Federal Reserve Notes.
B)greenbacks.
C)lobster tails.
D)scrip.

Question 33

Which of the following holds a deposit account at the Fed?

A)The state of New York
B)The FDIC
C)The city of Los Angeles
D)The city of New York

Question 34

What percentage of the nation's currency is made up of Federal Reserve Notes?

A)1%
B)10%
C)90%
D)100%

Question 35

The terms on the right-hand side of the Fed's balance sheet

A)represent the Fed's assets.
B)represent the net worth of the Fed.
C)represent uses of the monetary base.
D)equal the difference between the value of the Fed's assets and the value of its liabilities.

Question 36

In August 2006, the average value of the monetary base was about

A)$800 million.
B)$8 billion.
C)$800 billion.
D)$8 trillion.

Question 37

Decreases in which of the following items from the Fed's balance sheet will result in increases in the monetary base?

A)Securities
B)Gold and SDR certificates
C)U.S. Treasury currency outstanding
D)U.S. Treasury deposits

Question 38

The Treasury typically

A)deposits receipts from taxes in its accounts in commercial banks.
B)deposits receipts from taxes in its account at the Fed.
C)pays for its expenditures from its accounts at commercial banks.
D)borrows from the Fed to finance its expenditures.

Question 39

Which of the following is a correct expression for the monetary base?

A)B = C + D
B)B = C + R
C)B = R + D
D)B = R + M

Question 40

Most reserves tned to consist of

A)nonborrowed reserves.
B)borrowing from the Fed.
C)free reserves.
D)excess reserves.

Question 41

If Treasury currency outstanding increases, the monetary base will

A)increase, provided the increase in currency is held by banks.
B)increase, provided the increase in currency is held by the public.
C)increase whether the increase in currency is held by banks or by the public.
D)decrease.

Question 42

Treasury currency outstanding

A)is a liability of the Fed.
B)is an asset of the Fed.
C)is not an item on the Fed's balance sheet.
D)consists primarily of Federal Reserve notes.

Question 43

If the Treasury sells $2 million in gold, the Fed's gold and SDR certificate account will

A)fall by $2 million, as will the monetary base.
B)fall by $2 million, whereas the monetary base will rise by $2 million.
C)rise by $2 million, as will the monetary base.
D)rise by $2 million, whereas the monetary base will fall by $2 million.

Question 44

When the federal government makes a purchase

A)the Fed writes a check for the amount.
B)the Treasury writes a check drawn on one of its accounts at commercial banks.
C)the Treasury writes a check drawn on its account at the Fed.
D)the Office of the Purchaser General writes a check drawn on its account with the Treasury.

Question 45

If the Fed purchases a new computer system for $50 million, the monetary base will

A)rise by $50 million.
B)fall by $50 million.
C)be unchanged.
D)either rise or fall depending upon whether the Fed purchases the computer system by writing a check or by paying cash.

Question 46

If the Fed purchases $10 billion of U.S. Treasury bills, the monetary base will increase by

A)$10 billion.
B)$10 billion times the money multiplier.
C)an amount that depends on the ratio of excess reserves to checkable deposits.
D)an amount that depends on the ratios of excess reserves to checkable deposits and currency to checkable deposits.

Question 47

The "Member Bank Reserve Changes" data published weekly in The Wall Street Journal is most useful for

A)information on sources of change in the monetary base.
B)gauging whether a particular bank is likely to fail.
C)gauging the extent to which a particular bank is indebted to the Fed.
D)forecasting interest rates.

Question 48

Over time, the primary cause of increases in the money supply is increases in the

A)monetary base.
B)money multiplier.
C)required reserve ratio.
D)discount rate.

Question 49

If the Treasury buys $2 million in gold, the monetary base will

A)fall by $2 million.
B)rise by $2 million.
C)rise by $2 million times the money multiplier.
D)be unchanged.

Question 50

When a bank presents a check to the Fed for clearing, the Fed promises to credit the bank for the amount

A)as soon as the Fed is able to present the check to the payor bank.
B)immediately.
C)within two business days.
D)within six months.

Question 51

If the Treasury mints more coins and sends them to the Fed,

A)the monetary base will rise.
B)the monetary base will fall.
C)the monetary base will be unaffected.
D)the monetary base may rise or fall depending upon whether the public's demand for coins has risen or fallen.

Question 52

If Federal Reserve float increases by $2 billion, the monetary base will increase by

A)$2 billion.
B)$2 billion times the money multiplier.
C)from zero to $2 billion, depending on the fraction of the increase in float that banks hold as excess reserves.
D)zero; fluctuations in float have no effect on the base.

Question 53

The Treasury's account at the Fed is known as

A)the Tax and Loan Account.
B)the General Account.
C)the Disbursement Account.
D)the Big Account.

Question 54

Suppose a substantial snowstorm in the Northeast slows down the check-clearing process. The likely result will be

A)the monetary base will increase.
B)the monetary base will decrease.
C)deferred availability cash items will increase relative to cash items in the process of collection.
D)bank reserves will fall.

Question 55

If the Fed purchases $100 million worth of euros, the monetary base will

A)decrease by $100 million.
B)increase by $100 million.
C)decrease by $100 million times the money multiplier.
D)remain unchanged.

Question 56

Which of the following is true of Federal Reserve float?

A)It is typically zero.
B)The amount of cash items in the process of collection typically exceeds the amount of deferred availability cash items.
C)The amount of deferred availability cash items typically exceeds the amount of cash items in the process of collection.
D)Over long periods of time, float is a significant source of change in the monetary base.

Question 57

If the volume of discount loans increases by $2 billion, the monetary base will increase by

A)$2 billion times the money multiplier.
B)$2 billion divided by the money multiplier.
C)$2 billion.
D)an amount that can be determined only if the ratio of excess reserves to checkable deposits is known.

Question 58

If the Fed credits the payee bank on a check for $10,000 before it debits the payor bank,

A)the reserves of the payee bank will have risen by $10,000, but the monetary base will have been unaffected.
B)the reserves of the payor bank will have risen by $10,000, but the monetary base will have been unaffected.
C)the monetary base will have fallen by $10,000.
D)the reserves of the payee bank and the monetary base will each have risen by $10,000.

Question 59

If Treasury currency outstanding decreases, the monetary base will

A)be unaffected.
B)increase.
C)decrease.
D)decrease, provided that the decline in currency represents a net decrease in the public's holdings.

Question 60

When a check for $10,000 is initially presented to the Fed for clearing, the initial impact on the Fed's balance sheet is that

A)cash items in the process of collection falls by $10,000 and deferred availability cash items rises by $10,000.
B)cash items in the process of collection and deferred availability cash items both rise by $10,000.
C)cash items in the process of collection rises by $10,000 and deferred availability cash items falls by $10,000.
D)cash items in the process of collection and deferred availability cash items both fall by $10,000.

Question 61

If the Treasury purchases a new computer system and pays the computer vendor with a check for $100,000 drawn on the Treasury's account with the Fed,

A)the reserves of the banking system will fall by $100,000.
B)the Fed's assets will increase by $100,000.
C)the Fed's liabilities will increase by $100,000.
D)the monetary base will increase by $100,000.

Question 62

In what year did the Treasury-Federal Reserve Accord take place?

A)1913
B)1951
C)1975
D)1998

Question 63

Financing government spending by selling bonds to the nonbank public

A)will increase the monetary base.
B)will decrease the monetary base.
C)will leave the monetary base unaffected.
D)will increase the monetary base if the bonds are paid for in currency, but will decrease it if they are paid for by check.

Question 64

Which of the following statements is correct?

A)Whenever the federal government runs a budget deficit, the monetary base increases.
B)Whenever the U.S. Treasury sells securities, the monetary base increases.
C)Whenever the Fed sells securities, the monetary base increases.
D)When the Fed helps finance a federal budget deficit, the monetary base increases.

Question 65

Monetizing the debt refers to

A)the Treasury selling securities for currency.
B)the Treasury paying its bills by printing currency.
C)the Fed purchasing Treasury securities to finance budget deficits.
D)the federal government foregoing an interest payment on the national debt.

Question 66

What is the most important source of change in the monetary base?

A)Fluctuations in Treasury spending
B)Changes in the volume of discount loans
C)Changes in the volume of Fed holdings of securities
D)Changes in the value of the money multiplier

Question 67

When a bank joins the Federal Reserve System,

A)the Fed's capital account and the bank's deposits with the Fed increase, but the monetary base falls.
B)the Fed's capital account increases, but the bank's deposits with the Fed and the monetary base fall.
C)the Fed's capital account, the bank's deposits with the Fed, and the monetary base all fall.
D)the Fed's capital account, the bank's deposits with the Fed, and the monetary base all increase.

Question 68

Which of the following is the correct statement of the government budget constraint?

A)Federal budget deficit = change in Treasury securities held by public + increase in monetary base
B)Federal budget deficit = change in Treasury securities held by public - increase in monetary base
C)Federal budget deficit = increase in monetary base - change in Treasury securities held by public
D)Federal budget deficit = change in reserves of banking system + change in currency outstanding

Question 69

In the United States, budget deficits are financed by

A)the Fed borrowing from the general public.
B)the Fed borrowing from banks.
C)the Treasury selling securities.
D)Congress borrowing from foreign governments.

Question 70

As a result of the Treasury-Federal Reserve Accord,

A)the Fed was no longer required to maintain the interest rate on short-term Treasury securities.
B)the Fed agreed to maintain the interest rate on short-term Treasury securities.
C)the Treasury was given a larger role in the formulation of monetary policy.
D)the Fed was given a larger role in the formulation of fiscal policy.

Question 71

In the United States, federal government expenditures and tax rates are determined by

A)the Federal Reserve.
B)the President, in consultation with his cabinet.
C)Congress.
D)the President and Congress.

Question 72

What do the media generally mean when they use the phrase "printing money" in relation to the financing of the federal budget deficit?

A)The Treasury printing currency, rather than relying on tax revenue, to finance federal spending
B)The Federal Reserve printing currency and sending it to the Treasury for use in financing federal spending
C)The bank and nonbank public purchasing Treasury securities
D)The Federal Reserve purchasing Treasury securities

Question 73

If the Bank of England's deposit account with the Fed increases by $1 million, the monetary base will

A)increase by $1 million times the dollar/pound exchange rate prevailing on that day.
B)decrease by $1 million times the dollar/pound exchange rate prevailing on that day.
C)decrease by $1 million.
D)increase by $1 million.

Question 74

Financing government spending by raising taxes

A)will increase the monetary base.
B)will decrease the monetary base.
C)will leave the monetary base unaffected.
D)will increase the monetary base if the taxes are paid in currency, but will decrease it if they are paid for by check.

Question 75

To minimize the impact of its transactions on the monetary base, the Treasury

A)times its payments from its account at the Fed to match its withdrawals from local banks.
B)makes purchases only on a few days per year.
C)times most of its purchases for mid-April, when it receives most of its tax receipts.
D)attempts to make roughly the same dollar value of purchases each business day.

Question 76

What was the source of controversy between the Treasury and the Fed during the years immediately after World War II?

A)The Fed wanted the Secretary of the Treasury removed from his position on the Fed's Board of Governors.
B)The Fed wanted out of the agreement that it would peg the interest rate on short-term Treasury securities.
C)The Fed wanted the Treasury to increase its contribution to the Fed's operating expenses.
D)The Fed wanted the Treasury to begin paying interest on the Fed's holdings of Treasury securities.

Question 77

The accounts the Treasury has in local commercial banks are called

A)the General Accounts.
B)Treasury debit accounts.
C)Treasury credit accounts.
D)Treasury tax and loan accounts.

Question 78

Research has indicated that countries in which the central bank has the most independence experience

A)slower growth rates of the money supply.
B)faster growth rates of the money supply.
C)no difference in the growth rate of the money supply.
D)higher budget deficits.

Question 79

About what percentage of the federal budget deficits of the 1980s and early 1990s did the Fed monetize?

A)0%
B)10%
C)75%
D)100%

Question 80

Which of the following means of financing federal government spending will increase the monetary base?

A)Raising the corporate income tax
B)Raising the personal income tax
C)Selling bonds to the public
D)Selling bonds to the Fed