Question 1

Early in our nation's history, people generally accepted the importance of a central bank authority.

Accepted Answer

Early in the nation's history, the idea of a central bank was a subject of significant debate and controversy, with figures like Alexander Hamilton advocating for it while others like Thomas Jefferson and James Madison were opposed, reflecting a lack of general acceptance.

Question 2

By the time of the Civil War, the efficient banking system of the United States was the envy of the rest of the world.

Accepted Answer

Before the Civil War, the United States did not have a unified, efficient banking system; it was rather fragmented and varied by state, lacking the centralized structure that would be envied by the world. The National Banking Acts of 1863 and 1864, passed during the Civil War, were significant steps towards creating a more unified and efficient system.

Question 3

Thomas Jefferson proposed the establishment of the first central bank in the United States.

Accepted Answer

Thomas Jefferson was actually opposed to the establishment of a central bank in the United States. It was Alexander Hamilton who proposed and championed the creation of the First Bank of the United States in 1791.

Question 4

A series of bank failures and a cash shortage in 1907 led to the establishment of the Federal Reserve System in 1913.

Accepted Answer

This statement is true. The panic of 1907 highlighted the need for a lender of last resort and a more stable banking system, leading to the creation of the Federal Reserve System in 1913.

Question 5

In the early 1800s, the United States allowed banks to issue different kinds of currencies.

Accepted Answer

This is true. From the late 1700s to the mid-1800s, there was no centralized currency system in the United States, and banks were allowed to issue their own currencies. This led to a multitude of different currencies circulating in the country, which could make transactions confusing and difficult. The creation of a national currency became a priority in the mid-1800s, leading to the establishment of the National Banking System in 1863.

Question 6

The U.S. government is concerned about inflationary pressures that seem to be building within the nation. Restricting the growth of money supply provides an effective strategy to reduce these inflationary pressures.

Accepted Answer

A basic cause of inflation is a rapid increase in the supply of money, where "too much money is chasing too few goods." When the money supply increases too rapidly, the extra money in circulation increases the demand for goods relative to supply, causing inflationary pressures to build.

Question 7

Prior to the Civil War, the United States had two unsuccessful attempts at a central bank.

Accepted Answer

The United States had two unsuccessful attempts at a central bank prior to the Civil War: the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836).

Question 8

A central bank allows individual banks to deposit and to borrow funds.

Accepted Answer

This is true. Individual banks may deposit excess funds with the central bank, and may also borrow from it when needed.

Question 9

Yesterday it was reported that the U.S. was clearly experiencing an economic downturn. A strategy the Fed may enact if the nation is facing recession is to buy government securities in open-market operations.

Accepted Answer

The Fed commonly relies on open-market operations, which consists of buying and selling U.S. government securities, to increase or decrease the money supply. The Fed buys securities when it wants to stimulate the economy, which loosens the supply of money.

Question 10

Great news! The Fed just announced that the discount rate will rise by as much as 1% over the next three months. This will make it easier for Sean, the owner of a laser engraving business, to borrow money for that new piece of equipment he needs.

Accepted Answer

If the Fed increases the discount rate, the rate that it charges member banks to borrow money, the banks will increase the rate that they charge their customers, deterring companies from borrowing money.

Question 11

When the value of the dollar increases relative to the euro, the number of U.S. dollars needed to purchase a block of Dutch cheese increases.

Accepted Answer

A rising value for the dollar relative to another nation's currency means that Americans can buy more of that nation's goods with dollars.

Question 12

Alexander Hamilton persuaded Congress to create a central bank.

Accepted Answer

Alexander Hamilton was a strong proponent of a centralized government and believed that a national bank was necessary for economic stability. He succeeded in convincing Congress to establish the First Bank of the United States in 1791.

Question 13

If the owners of Spokes Bicycles are trying to sell state-of-the-art bicycles into the Japanese market, they are likely to sell more bicycles if the dollar has strength against the Japanese yen.

Accepted Answer

A strong dollar means that you would need more Japanese yen in exchange for one dollar. If your bicycle sells for $500, it will take more than 500 yen to buy the bicycle in Japan.

Question 14

The Fed has just reduced the reserve requirement from 14% to 12%. Bigbux Bank holds $650 million in deposits. It will need to become more conservative with its lending procedures because it now must hold $78 million in reserves.

Accepted Answer

Reducing the reserve requirement would increase lending ability. The reserve requirement specifies the amount of reserves (vault cash or deposits with the Federal Reserve district bank) a bank must hold as a percentage of its deposits. Thus, if the reserve requirement is 12 percent, banks must hold reserves equal to 12 percent of deposits. In this case, 12 percent of $650 million is $78 million.

Question 15

Bigbux Bank holds $300 million in deposits from their customers. If the Fed sets the reserve requirement at 12 percent, Springfield must hold $24 million in cash at the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.

Accepted Answer

The reserve requirement specifies the amount of reserves (vault cash or deposits with the Federal Reserve district bank) a bank must hold as a percentage of its deposits. Thus, if the reserve requirement is 12 percent, banks must hold reserves equal to 12 percent of deposits. In this case, 12 percent of $300 million is $36 million.

Question 16

Newspapers in the nation of Hasalot report a significant increase in money supply during the past few months. This information indicates that Hasalot may experience a serious recession in the near future.

Accepted Answer

An increase in the money supply tends to stimulate spending, deterring a recessionary climate. The increased spending is more likely to create inflationary pressures in Hasalot because there will be more money available to buy the same amount of goods and services.

Question 17

The United States first established a central bank in 1913 by establishing the Federal Reserve System.

Accepted Answer

The answer of The United States first established a central...

Question 18

Recently, the Fed announced a reduction in the discount rate and the reserve requirement. These actions clearly suggest that the Fed intends to decrease the money supply.

Accepted Answer

Reducing the reserve requirement will free up funds and encourage banks to make more loans. Reducing the discount rate will enable banks to borrow funds from the Fed at lower cost, thus also encouraging banks to make more loans. Thus, both policies are likely to increase the money supply.

Question 19

Next month, Bigbux Bank plans to increase the amount of new loans it makes. As a member bank of the Federal Reserve, Commerce can borrow from the Fed. Bigbux will charge the customer an interest amount greater than the discount rate.

Accepted Answer

Federal Reserve member banks borrow money from the Federal Reserve Bank. The discount rate is the rate of interest the Fed charges when it loans funds to member banks.

Question 20

When the U.S. was still a colony of Great Britain, land banks were created to lend money to farmers.

Accepted Answer

Land banks were indeed established in the American colonies to lend money to farmers, offering an early form of credit by using land as security for loans. This helped farmers to finance their operations when traditional forms of credit were not available or were too costly.

Quiz 20: Money, Financial Institutions, and the Federal Reserve