Question 1

The Fed's largest asset is
A)reserves of member banks.
B)reserves of nonmember banks.
C)securities.
D)loans to banks.

Accepted Answer

The Fed's largest asset is securities, which includes US Treasury bonds, municipal bonds, and mortgage-backed 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

Accepted Answer

The Federal Reserve is known to hold a large portfolio of securities, and the amount held in April 2006 was in the hundreds of billions. Choice C, $786 billion, is the only option in this answer set that fits that criteria. Choices A and B are too small, and choice D is an astronomically large amount that would not make sense for the Federal Reserve's holdings.

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.

Accepted Answer

An open market purchase refers to the Fed buying securities from financial institutions, thereby increasing the Fed's holdings of securities. Conversely, an open market sale refers to the Fed selling securities to financial institutions, thereby reducing the Fed's holdings of securities. Therefore, choice B is the correct answer.

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.

Accepted Answer

The part of bank reserves deposited at the Fed are considered assets for banks because they represent funds that banks can use or loan out. For the Federal Reserve (Fed), these deposits are liabilities because they are funds the Fed owes back to the 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.

Accepted Answer

Currency outstanding is the largest liability on the Federal Reserve's balance sheet. This includes all the Federal Reserve notes (paper money) that are in circulation.

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.

Accepted Answer

The majority of the Fed's portfolio consists of U.S. Treasury securities.

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.

Accepted Answer

The Fed's check-clearing role generates items in the process of collection. When checks are deposited in banks, the funds are not immediately transferred to the account of the person or business receiving the payment. Instead, the checks go through a clearing process facilitated by the Federal Reserve. During this process, the Fed collects the funds from the bank that the check was drawn on and delivers them to the bank where the check was deposited. The funds are considered "in the process of collection" during this time.

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.

Accepted Answer

An item in the process of collection on the Fed's balance sheet is an asset. It represents funds that have been credited to the Fed's account by another bank but have not yet been fully collected. Once the funds are collected, the item in the process of collection is removed from the Fed's balance sheet.

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.

Accepted Answer

The Fed's portfolio includes bankers' acceptances, which are short-term debt instruments used in international trade. They do not hold corporate stocks or bonds, and while they can engage in commercial paper under certain circumstances, it is not a standard component of their portfolio.

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.

Accepted Answer

In April 2006, discount loans by the Federal Reserve were approximately $0.1 billion, indicating a relatively low level of direct lending to banks through its discount window during that period.

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

Accepted Answer

Shares of stock purchased in the Federal Reserve system by member banks are not considered an asset of the Federal Reserve. Instead, they represent a required investment by member banks into the Federal Reserve System, essentially serving as a membership fee, and are recorded as an asset on the banks' balance sheets, not the Federal Reserve's.

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

Accepted Answer

The primary way the Federal Reserve acquires its holdings of securities is through open market operations, in which the Fed buys or sells government securities on the open market to adjust the money supply, influence interest rates, and pursue its monetary policy objectives. The other answer choices are not accurate ways the Fed acquires its securities.

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.

Accepted Answer

Special Drawing Rights (SDRs) are issued by the International Monetary Fund (IMF) to member countries. SDRs are a form of international reserve assets that can be used by countries to settle debts and make international payments. They are not issued by the U.S. Treasury or the Federal Reserve, nor are they issued by the United Nations.

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.

Accepted Answer

The Fed's holdings of foreign exchange reserves are considered an asset on their balance sheet. These reserves are typically made up of foreign currencies and are held by central banks around the world. The Fed holds these reserves as a way to facilitate international trade and provide liquidity to foreign governments and central banks.

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.

Accepted Answer

The currency outstanding account on the Fed's balance sheet is considered a liability because it represents the amount of currency (paper money and coins) that has been issued into circulation and is owed back to the holders.

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.

Accepted Answer

The primary reason the Fed makes discount loans to banks is to help banks overcome short-term liquidity problems. This is intended to ensure the stability of the banking system and prevent potential bank failures. The other options listed may be secondary benefits or consequences of discount loans, but they are not the primary reason for making such loans.

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.

Accepted Answer

When the Treasury acquires Special Drawing Rights (SDRs), it increases the balance in the Gold and SDR certificate account on the Fed's balance sheet.

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.

Accepted Answer

The answer of The bulk of the Fed's holdings of...

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.

Accepted Answer

The balance in the Gold and SDR certificate account increases when the Treasury buys gold, as the account reflects the Treasury's gold holdings.

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.

Accepted Answer

The Fed does not completely control the volume of discount loans, but it does influence the amount by setting the discount rate. Banks may borrow more or less depending on their immediate liquidity needs and the cost of borrowing from other sources. Open market operations can also influence the amount of discount loans indirectly by affecting the overall level of reserves in the banking system. However, the Fed does not fix a constant amount of discount loans to be made each year under the terms of the Federal Reserve Act.

Quiz 18: Changes in the Monetary Base

The Fed's largest asset is

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

An open market purchase

The part of bank reserves deposited at the Fed are

The Fed's largest liability is

Most of the Fed's portfolio of securities consists of

Items in the process of collection are generated by

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

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

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

Which of the following is NOT a Federal Reserve asset?

How does the Fed acquire its holdings of securities?

Special Drawing Rights are issued by

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

The currency outstanding account on the Fed's balance sheet

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

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

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

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

Which of the following statements is correct?