Question 1

Suppose the banking system's nonborrowed reserves total $100 billion with total legal reserves standing at $125 billion. What must borrowed reserves be?
A) $225 billion
B) $125 billion
C) $100 billion
D) $75 billion
E) $25 billion

Accepted Answer

Borrowed reserves are calculated by subtracting nonborrowed reserves from total legal reserves. Therefore, $125 billion - $100 billion = $25 billion.

Question 2

Suppose the banking system's nonborrowed reserves total $75 billion with total legal reserves standing at $98 billion. The Fed buys $5 billion of securities in the open market. What will happen to the level of borrowed reserves?
A) The level of borrowed reserves will fall to $18 billion
B) The level of borrowed reserves will rise to $80 billion
C) The level of borrowed reserves will fall to $93 billion
D) The level of borrowed reserves will rise to $23 billion
E) Borrowed reserves will be unaffected

Accepted Answer

When the Fed buys $5 billion of securities in the open market, it increases the banking system's reserves by $5 billion. If nonborrowed reserves were $75 billion and total reserves were $98 billion, then borrowed reserves were $23 billion ($98 billion - $75 billion). After the Fed's purchase, nonborrowed reserves increase to $80 billion ($75 billion + $5 billion), so total reserves increase to $103 billion. Since the question asks about the level of borrowed reserves after the purchase and implies that the total legal reserves change due to the Fed's action, the borrowed reserves remain at $23 billion, not directly affected by the transaction. However, the premise of the question and the options provided seem to suggest an expectation of a direct calculation or impact on borrowed reserves, which might not align with the explanation given. The correct interpretation based on the provided options and the typical understanding of such transactions would be that borrowed reserves are indirectly affected because the increase in nonborrowed reserves reduces the need for borrowed reserves. However, none of the options accurately reflects this scenario based on the standard calculation, suggesting a potential misunderstanding in the framing of the question and answer options.

Question 3

Borrowed reserves are defined as reserves that have been borrowed:
A) From other banks through the Federal funds market
B) From the discount windows at the Federal Reserve banks
C) Through repurchase agreements with government securities dealers
D) From life insurance companies' policy reserves
E) From money market mutual funds

Accepted Answer

Borrowed reserves refer to the funds that banks borrow directly from the Federal Reserve, typically through the discount window, to meet reserve requirements or manage liquidity. Options A, C, D, and E involve borrowing from sources other than the Federal Reserve.

Question 4

The so-called "operating objectives" of central bank policy are:
A) The money supply and consumer spending
B) Money market interest rates and currency prices
C) The discount rate and deposit reserve requirements
D) Open market operations
E) None of the above

Accepted Answer

Central banks often focus on money market interest rates and currency prices as operating objectives to influence economic conditions.

Question 5

The public's spending decisions appear to be most affected by:
A) Short-term interest rates
B) The Federal Reserve's discount rate
C) Growth of the L measure of the nation's money supply
D) Common stock prices
E) None of the above

Accepted Answer

The answer of The public's spending decisions appear to be...

Question 6

The money market indicator that usually feels the first impact from Federal Reserve policy moves is the:
A) Treasury bill rate
B) Federal Reserve's discount rate
C) Federal funds rate
D) Bank CD rate
E) None of the above

Accepted Answer

The Federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. It is the primary tool used by the Federal Reserve to influence monetary policy and is usually the first to reflect changes in Fed policy.

Question 7

When the Fed follows its federal funds interest-rate targeting procedure and sells securities:
A) The Fed funds rate tends to decline
B) The Fed funds rate tends to rise
C) It must immediately replenish its supply of securities
D) The stock market tends to rise
E) None of the above

Accepted Answer

When the Federal Reserve sells securities, it effectively reduces the amount of reserves banks have available to lend to each other. This reduction in supply of reserves leads to an increase in the federal funds rate, as banks are willing to pay more to borrow reserves to meet their reserve requirements.

Question 8

Borrowing at the Federal Reserve discount window is:
A) Common for most banks
B) A requirement of membership in the Federal Reserve System
C) Requires paying a higher interest rate
D) An alternative to Treasury borrowing
E) A privilege, not a right

Accepted Answer

Borrowing at the Federal Reserve discount window is considered a privilege, not a right, as it is intended to provide liquidity support to banks in times of need, rather than being a regular source of funding.

Question 9

If the Federal Reserve raises its discount rate, many observers regard this as a signal that the Fed is pushing for tighter credit conditions and market participants may respond by reducing their borrowings and curtailing their spending plans. The effect as described above is called the:
A) Announcement effect
B) Cost effect
C) Substitution effect
D) All of the above
E) None of the above

Accepted Answer

The announcement effect refers to the market's reaction to news or policy changes announced by central banks or other authoritative bodies. In this case, when the Federal Reserve raises its discount rate, it signals a move towards tighter monetary policy, which can lead to reduced borrowing and spending as market participants anticipate higher costs for credit. This reaction is based on the announcement itself, rather than the direct impact of the policy change.

Question 10

Which of the following is not related to the central banks' goal of controlling inflation?
A) Setting target inflation rates
B) Setting target inflation rate ranges
C) Pursuing price stability
D) Controlling deflation
E) None of the above

Accepted Answer

All options (A through D) are related to the central banks' goal of controlling inflation. Setting target inflation rates or ranges, pursuing price stability, and controlling deflation are all strategies or objectives that central banks may use or aim for in their efforts to manage inflation.

Question 11

Frictional unemployment which arises from temporary unemployment of jobseekers who are either new to the workforce or who are in transition from one job to another, is also referred to as:
A) Full employment level of unemployment
B) Natural rate of unemployment
C) Unemployment exceeding 10%
D) A and B above
E) None of the above

Accepted Answer

Frictional unemployment is also referred to as the natural rate of unemployment, which is the level of unemployment that exists even when the economy is at full employment.

Question 12

When the unemployment rate equals the natural rate, then the economy's labor resources are thought to be at:
A) The full employment level of unemployment
B) Frictional unemployment
C) Inefficient
D) A and B above
E) None of the above

Accepted Answer

The answer of When the unemployment rate equals the natural...

Question 13

Using statistical methods the Federal Reserve creates a measure of what the level of the real GDP would be if the economy were fully utilizing its economic resources of capital, labor and entrepreneurial talent in an efficient manner and this is referred to as:
A) GDP gap
B) Potential GDP
C) Potential employment
D) All of the above
E) None of the above

Accepted Answer

Potential GDP refers to the level of output that an economy can achieve when it is fully utilizing its resources, including capital, labor, and entrepreneurial talent, in an efficient manner. This concept is used to assess the productive capacity of an economy and to guide monetary and fiscal policy decisions.

Question 14

When the nation's economy is producing less output in the form of goods and services, generating lower incomes and creating fewer jobs, which is underperforming relative to its capability, it is referred to as:
A) A low GDP gap
B) A high GDP gap
C) A negative GDP gap
D) A and C above
E) None of the above

Accepted Answer

A negative GDP gap refers to the situation where the economy is underperforming, producing less output, generating lower incomes, and creating fewer jobs than its potential or capability. This term accurately describes the economic condition mentioned.

Question 15

Typically, the lowest discount rate charged by the Federal Reserve is for:
A) Prime rate
B) Secondary rate
C) Seasonal rate
D) Interbank rate
E) None of the above

Accepted Answer

The Seasonal rate is typically the lowest discount rate charged by the Federal Reserve, designed to help smaller banks manage seasonal fluctuations in their loans and deposits.

Question 16

The United States Congress started to alter or repeal many of the Depression era regulations put in place on banking in:
A) 1970
B) 1980
C) 1990
D) 2000
E) None of the above

Accepted Answer

The process of altering or repealing many of the Depression-era banking regulations began in the 1980s, notably with the Depository Institutions Deregulation and Monetary Control Act of 1980.

Question 17

Temporary unemployment of jobseekers, who are either new to the workforce or who are in transition from one job to another is referred to as the:
A) Natural rate of unemployment
B) Frictional unemployment
C) Full employment level of unemployment
D) All of the above
E) None of the above

Accepted Answer

The answer of Temporary unemployment of jobseekers, who are either...

Question 18

Describe the effects of the credit crisis of 2007-2009 on the powers and policies of the Federal Reserve.

Accepted Answer

The answer of Describe the effects of the credit crisis...

Question 19

What are the principal economic goals of the Federal Reserve System? How could the Fed cause changes
 in the rate of inflation? In unemployment and economic growth? In the nation's balance-of-payments position?

Accepted Answer

The answer of What are the principal economic goals of...

Question 20

Describe the trade-offs that appear to exist among the nation's economic goals. How do these trade-offs influence the central bank's ability to achieve the nation's economic goals?

Accepted Answer

The answer of Describe the trade-offs that appear to exist...

Quiz 13: Central Banking and Monetary Policy: Exploring Tools and Strategies

Suppose the banking system's nonborrowed reserves total $100 billion with total legal reserves standing at $125 billion. What must borrowed reserves be?

Suppose the banking system's nonborrowed reserves total $75 billion with total legal reserves standing at $98 billion. The Fed buys $5 billion of securities in the open market. What will happen to the level of borrowed reserves?

Borrowed reserves are defined as reserves that have been borrowed:

The so-called "operating objectives" of central bank policy are:

The public's spending decisions appear to be most affected by:

The money market indicator that usually feels the first impact from Federal Reserve policy moves is the:

When the Fed follows its federal funds interest-rate targeting procedure and sells securities:

Borrowing at the Federal Reserve discount window is:

If the Federal Reserve raises its discount rate, many observers regard this as a signal that the Fed is pushing for tighter credit conditions and market participants may respond by reducing their borrowings and curtailing their spending plans. The effect as described above is called the:

Which of the following is not related to the central banks' goal of controlling inflation?

Frictional unemployment which arises from temporary unemployment of jobseekers who are either new to the workforce or who are in transition from one job to another, is also referred to as:

When the unemployment rate equals the natural rate, then the economy's labor resources are thought to be at:

Using statistical methods the Federal Reserve creates a measure of what the level of the real GDP would be if the economy were fully utilizing its economic resources of capital, labor and entrepreneurial talent in an efficient manner and this is referred to as:

When the nation's economy is producing less output in the form of goods and services, generating lower incomes and creating fewer jobs, which is underperforming relative to its capability, it is referred to as:

Typically, the lowest discount rate charged by the Federal Reserve is for:

The United States Congress started to alter or repeal many of the Depression era regulations put in place on banking in:

Temporary unemployment of jobseekers, who are either new to the workforce or who are in transition from one job to another is referred to as the:

Describe the effects of the credit crisis of 2007-2009 on the powers and policies of the Federal Reserve.

What are the principal economic goals of the Federal Reserve System? How could the Fed cause changes in the rate of inflation? In unemployment and economic growth? In the nation's balance-of-payments position?

Describe the trade-offs that appear to exist among the nation's economic goals. How do these trade-offs influence the central bank's ability to achieve the nation's economic goals?