Question 1

In September 2012, the Argentinian central bank increased its benchmark interest rate via open market operations. The bank must have sold securities.

Accepted Answer

When a central bank increases its benchmark interest rate via open market operations, it typically sells securities in order to decrease the money supply and increase borrowing costs.

Question 2

Once interest rates reach zero, the Fed has no further options for fighting recessions.

Accepted Answer

The Fed can still use unconventional monetary policies, such as quantitative easing and forward guidance, even when interest rates are at or near zero.

Question 3

The Blue Book is used by the Board of Governors and the Federal Open Market Committee to help create monetary policy.

Accepted Answer

The Blue Book is a staff report prepared by the Federal Reserve, but it is not used by the Board of Governors or the Federal Open Market Committee to create monetary policy. Instead, it is used to provide information and analysis to support their decision-making process.

Question 4

The U.S. Treasury is the central bank of the United States.

Accepted Answer

The U.S. Treasury is not the central bank of the United States. The Federal Reserve serves as the central bank, responsible for controlling the money supply and setting monetary policy. The U.S. Treasury, on the other hand, is responsible for managing the federal government's finances, collecting taxes, and issuing government bonds.

Question 5

Quantitative easing refers to regular open market operations by the Fed to increase the money supply.

Accepted Answer

Quantitative easing is a specific type of monetary policy used by central banks to inject money into the economy by purchasing longer-term securities from the open market, beyond regular open market operations.

Question 6

The Federal Open Market Committee oversees the buying and selling of government securities.

Accepted Answer

This is true, the Federal Open Market Committee (FOMC) is responsible for setting monetary policy in the United States, which includes overseeing the buying and selling of government securities such as treasury bonds and notes.

Question 7

There are 50 Federal Reserve regional banks, one for each state.

Accepted Answer

There are 12 Federal Reserve regional banks, each serving a designated geographic district within the United States.

Question 8

The 12 regional Federal Reserve banks serve as the banker for the U.S. Treasury.

Accepted Answer

This is correct. The 12 regional Federal Reserve banks do serve as the banker for the U.S. Treasury, which involves activities such as processing government payments and issuing and redeeming government securities.

Question 9

The Federal Open Market Committee has 12 members.

Accepted Answer

The Federal Open Market Committee (FOMC) has 12 voting members, consisting of the seven members of the Board of Governors of the Federal Reserve System and five of the 12 Reserve Bank presidents. However, all 12 Reserve Bank presidents participate in FOMC meetings and contribute to the Committee's discussions and decisions.

Question 10

The discount window or discount rate gives banks a buffer in the reserves market against unexpected day-to-day fluctuations in the demand and supply of reserves.

Accepted Answer

The discount window allows banks to borrow reserves from the central bank to manage short-term liquidity needs, providing a buffer against unexpected fluctuations in reserve demand and supply.

Question 11

In June 2013, the Bank of Japan announced that it was continuing its easy money policy through open market operations. The Bank must have decided to continue to sell securities.

Accepted Answer

The Bank of Japan's easy money policy involves buying securities to increase the money supply, not selling them.

Question 12

In September 2013, the Fed was waiting for a pattern of economic improvement in the data before winding down its bond purchases. This wait for a signal about the economy's condition is known as decision lag.

Accepted Answer

This is known as "forward guidance," a communication strategy used by the Federal Reserve to influence expectations about future monetary policy actions, not decision lag. Decision lag refers to the time it takes for policy makers to recognize the need for action and to implement it.

Question 13

Experience in this country and abroad suggests that independent central banks are better at fighting inflation than are politically controlled banks.

Accepted Answer

Studies and empirical evidence have shown that independent central banks have been more successful in maintaining price stability and controlling inflation compared to politically controlled banks. This is because independent central banks are able to make monetary policy decisions based on economic fundamentals rather than short-term political considerations.

Question 14

During the financial panic in late 2008, the Fed changed the allocation of assets in its balance sheet away from Treasury bonds toward bank assets.

Accepted Answer

This statement is true. During the financial panic in late 2008, the Fed changed the allocation of assets in its balance sheet by purchasing more mortgage-backed securities and other bank assets instead of Treasury bonds. This was done in an effort to increase liquidity in the banking system and stabilize financial markets.

Question 15

One of the responsibilities of the Federal Reserve Bank is to serve as the banker for the U.S. Treasury.

Accepted Answer

This is true. The Federal Reserve Bank acts as the fiscal agent for the U.S. Treasury, handling a variety of financial transactions for the government, including processing payments, issuing and redeeming government securities, and managing the nation's debt.

Question 16

The Fed's discount rate is now lower than the federal funds rate in order to increase loans to member banks.

Accepted Answer

The Fed's discount rate is typically set higher than the federal funds rate to encourage banks to borrow from each other rather than directly from the Fed.

Question 17

The Federal Reserve consists of 12 regional banks overseen by the Board of Governors.

Accepted Answer

The Federal Reserve consists of 12 regional banks that are overseen by the Board of Governors located in Washington, D.C.

Question 18

The Board of Governors of the Federal Reserve consists of 12 members who are appointed by the president.

Accepted Answer

The Board of Governors of the Federal Reserve consists of 7 members, not 12, who are appointed by the President of the United States and confirmed by the Senate.

Question 19

The Fed's Board of Governors is made up of the heads of the 12 regional districts.

Accepted Answer

The Fed's Board of Governors is made up of seven members who are appointed by the President and confirmed by the Senate. The regional district heads serve on the Federal Reserve Banks, which have their own separate Boards of Directors.

Question 20

The Fed can independently target both the money supply and the interest rate.

Accepted Answer

The Fed can target either the money supply or the interest rate, but not both simultaneously, due to the inverse relationship between them.

Quiz 12: Money Creation and the Federal Reserve