Question 1

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

Accepted Answer

The Federal Open Market Committee consists of the seven members of the Federal Reserve's Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the other 11 Federal Reserve banks.

Question 2

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic?

Accepted Answer

Bank panics typically result in a decrease in bank reserves and checking account balances, as well as potentially requiring individual banks to shrink the value of loans they made. A recession may also occur as a result of a bank panic. However, there is no reason why required reserves would increase in this scenario.

Question 3

Of the three primary tools the Federal Reserve uses to conduct monetary policy, the tool used most often is

Accepted Answer

Open market operations, which involve the buying and selling of government securities on the open market, are the most commonly utilized tool by the Federal Reserve to influence the money supply and interest rates.

Question 4

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

Accepted Answer

Acting as a lender of last resort means the central bank provides funds to banks experiencing a bank run to prevent them from failing due to a lack of liquidity. Printing money may lead to inflation, which can be damaging to the economy. Raising the discount rate and increasing the required reserve ratio are tools the central bank can use to reduce the money supply and control inflation, but they are not effective in addressing a bank run.

Question 5

The seven members of the Board of Governors of the Federal Reserve are appointed by

Accepted Answer

The seven members of the Board of Governors of the Federal Reserve are appointed by the President and confirmed by the Senate.

Question 6

The sale of Treasury securities by the Federal Reserve will, in general

Accepted Answer

When the Federal Reserve sells Treasury securities, it collects payment in the form of reserves from banks. This decreases the quantity of reserves held by banks, which can lead to a decrease in the money supply as banks may have less funds to lend out.

Question 7

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

Accepted Answer

The three main monetary policy tools used by the Federal Reserve to manage the money supply are open market operations, discount policy, and reserve requirements. Open market operations involve buying or selling government securities, discount policy refers to interest rates charged to banks borrowing from the Fed, and reserve requirements are the amount of money that banks are required to hold in reserve. Choice A is incorrect because tax rates and government spending are tools of fiscal policy, not monetary policy. Choice B is incorrect because it only includes tools of fiscal policy. Choice D is incorrect because the exchange rate of the dollar against foreign currencies is not one of the main tools of monetary policy used by the Fed.

Question 8

If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a

Accepted Answer

A bank panic occurs when there is a widespread loss of confidence in the banking system, leading to a run on multiple banks. This can result in a liquidity crisis and potentially cause the collapse of the financial system.

Question 9

The purchase of Treasury securities by the Federal Reserve will, in general

Accepted Answer

The purchase of Treasury securities by the Federal Reserve increases the reserves of the banks, hence increasing the quantity of reserves held by banks. This, in turn, will likely lead to an increase in the money supply through the money multiplier effect where the banks can lend out more money.

Question 10

Open market operations refer to the purchase or sale of ________ to control the money supply.

Accepted Answer

Open market operations refer to the purchase or sale of U.S. Treasury securities by the Federal Reserve to control the money supply. This is one of the primary tools used by the Federal Reserve to influence monetary policy. The purchase or sale of these securities affects the amount of money in circulation and the cost of borrowing, which in turn can impact economic growth and inflation.

Question 11

Suppose that the required reserve ratio is 10 percent and you withdraw $25,000 from Comerica Bank. What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply?

Accepted Answer

The answer of Suppose that the required reserve ratio is...

Question 12

Banks keep ________ of checking deposits as reserves because on a typical day withdrawals ________ deposits.

Accepted Answer

Banks keep less than 100% of checking deposits as reserves because, typically, the total amount of withdrawals is about the same as the total amount of deposits, allowing banks to manage liquidity while also using deposits for loans and investments.

Question 13

Suppose a bank has the following balance sheet:
  If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

Accepted Answer

The answer of Suppose a bank has the following balance...

Question 14

Suppose you deposit $4,000 in currency into your checking account at Bank of America. Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent.
a. Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet.
b. Suppose that Bank of America makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank of Boston. Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston, after the check has been cleared. On the T-account for Bank of America, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

Accepted Answer

The answer of Suppose you deposit $4,000 in currency into...

Question 15

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

Accepted Answer

The establishment of the Federal Deposit Insurance Corporation (FDIC) helps prevent future bank panics by providing insurance on deposits up to a certain amount, therefore reassuring depositors that their money is safe even if a bank fails. This helps prevent runs on banks and the spread of panic throughout the banking system. The other options listed (open market operations, fractional reserve banking, and a required reserve ratio of 100%) are all tools used by the Federal Reserve to regulate the money supply and manage inflation, but they do not directly address the problem of bank panics.

Question 16

Suppose the Federal Reserve purchases $10,000 of Treasury bonds from you and that you deposit the $10,000 into your checking account deposit at Bank Y. Assume that Bank Y has no excess reserves at the time you make your deposit and that the required reserve ratio is 20 percent.
a. Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet.
b. Suppose that Bank Y makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank Y's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank Z. Show the effect of these transactions on the balance sheet of Bank Y and Bank Z, after the check has been cleared. On the T-account for Bank Y, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

Accepted Answer

The answer of Suppose the Federal Reserve purchases $10,000 of...

Question 17

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

Accepted Answer

Insuring deposits in the banking system is not a function of the Federal Reserve System, instead it is performed by another agency called the Federal Deposit Insurance Corporation (FDIC).

Question 18

Suppose that the bank has the following balance sheet:
  If the required reserve ratio is 10 percent, what is the maximum the bank can loan out? Suppose the bank makes this loan and the borrower spends the money, which is deposited in a different bank. Show the impact of these transactions on the bank's balance sheet.

Accepted Answer

The answer of Suppose that the bank has the following...

Question 19

The Federal Reserve was established in 1913 to

Accepted Answer

The Federal Reserve was established primarily to serve as a lender of last resort to banks during times of financial crisis, in order to prevent widespread bank panics and failures. While the Fed does have tools to influence inflation and stimulate the economy, those were not the primary purposes for its creation. Requiring banks to hold reserves is also a function of the Fed, but again, not its primary purpose.

Question 20

If the central bank can act as a lender of last resort during a banking panic, banks can

Accepted Answer

When the central bank acts as a lender of last resort, it provides funds to banks facing a liquidity shortage. This allows the banks to satisfy customer withdrawal needs, which helps to restore confidence in the banking system. Option A is incorrect because calling in loans could exacerbate the panic by causing borrowers to default, and it would reduce the banks' assets. Option C is incorrect because borrowing more money from the central bank would increase the banks' reserves, not lower them. Additionally, the central bank would likely place restrictions on how much the banks may borrow to avoid moral hazard problems. Option D is incorrect because encouraging the public to directly borrow from the central bank would bypass the commercial banking system, making it even more difficult for the banks to meet their customers' needs.

Quiz 25: Money, Banks, and the Federal Reserve System

The Federal Open Market Committee consists of the seven members of the , the president of the Federal Reserve Bank of New York, and .