Question 1

When a commercial bank borrows from a Federal Reserve bank,

Accepted Answer

When a commercial bank borrows from a Federal Reserve bank, the commercial bank's reserves increase, which in turn increases its lending ability. This is because the borrowed funds count as reserves, allowing the bank to lend out more money without violating reserve requirements. Therefore, option B is the correct answer. Option A is incorrect because the commercial bank's reserves actually increase, not decrease. Option C is incorrect because borrowing from the Federal Reserve does not automatically impact the money supply. Option D is incorrect because the net worth of the bank is not necessarily related to its decision to borrow from the Federal Reserve.

Question 2

Which of the following lists two things that both increase the money supply?

Accepted Answer

Open market purchases involve the Fed buying securities, which injects money into the economy and increases the money supply. Lowering the reserve requirement ratio allows banks to lend more money, which also increases the money supply.

Question 3

The federal funds market is the market where

Accepted Answer

The federal funds market is a market where commercial banks with excess reserves lend to other commercial banks in need of reserves. These loans are made overnight, and the interest rate that is charged on these loans is known as the federal funds rate. This market is used by banks to manage their liquidity and meet reserve requirements set by the Federal Reserve. It is not a market for the federal government to raise funds, nor does the Federal Reserve make loans to commercial banks in this market. Commercial banks also do not make loans to the Federal Reserve in this market.

Question 4

Which of the following lists two things that both decrease the money supply?

Accepted Answer

The answer of Which of the following lists two things...

Question 5

When the Fed sells Treasury Bonds on the open market, it will tend to

Accepted Answer

When the Fed sells Treasury Bonds on the open market, it withdraws money from the economy which leads to a decrease in the money supply. This decrease in the money supply increases the demand for money which leads to an increase in interest rates. Therefore, choice A is correct. Option B and option D are the opposites of A and C respectively, and are not valid in this case. Option C is incorrect as selling Treasury Bonds would withdraw money from the economy, leading to a decrease in the interest rate.

Question 6

An increase in the discount rate impacts the money supply because it

Accepted Answer

An increase in the discount rate increases the cost of borrowing from the Federal Reserve, reducing the incentive for commercial banks to borrow and decreasing the money supply. It does not impact the interest yield on new issues of U.S. securities or directly expand the money supply.

Question 7

Suppose the Treasury sells $10 billion of newly issued Treasury bills to the Fed and uses the proceeds to increase government spending by $10 billion. How will this affect the money supply and the national debt?

Accepted Answer

By selling Treasury bills to the Fed, the Treasury will inject $10 billion into the economy, increasing the money supply. However, this also increases the national debt as the Treasury has to pay interest on the borrowed funds from the Fed. Thus, both the money supply and the national debt will increase.

Question 8

Under current policy, the Fed ties the discount rate to the

Accepted Answer

Under current policy, the Fed ties the discount rate to the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Therefore, the discount rate is directly influenced by the federal funds rate, making choice C the best answer.

Question 9

If the Federal Reserve wants to increase the availability of money and credit, it can

Accepted Answer

Lowering the discount rate makes it cheaper for banks to borrow money from the Federal Reserve, which in turn increases the availability of money and credit in the economy. Raising the reserve requirement would have the opposite effect, as it would require banks to hold more of their deposits in reserve, thus reducing the amount of money they have available to lend. Selling government bonds to the public would also tend to reduce the availability of money and credit, as it would drain funds from the banking system. Encouraging banks to increase their prime lending rate would have little effect on the availability of money and credit, as it would simply increase the cost of borrowing for borrowers.

Question 10

Commercial banks can borrow reserves directly from the Fed at the

Accepted Answer

The discount rate is the interest rate at which commercial banks can borrow reserves directly from the Federal Reserve. The prime interest rate is the interest rate that banks charge their most credit-worthy customers, and the federal funds rate is the interest rate at which banks lend and borrow reserves from each other. The real interest rate is the nominal interest rate adjusted for inflation.

Question 11

Which of the following lists two things that both decrease the money supply?

Accepted Answer

Both making open market sales and raising the reserve requirement ratio decrease the money supply. Making open market sales means the Fed is selling bonds to banks, which decreases banks' reserves and therefore their ability to lend out money. Raising the reserve requirement ratio means banks have to hold more reserves in proportion to their deposits, which also decreases their ability to lend out money.

Question 12

Other things constant, if the Fed decreased the discount rate,

Accepted Answer

If the Fed decreases the discount rate, it becomes cheaper for commercial banks to borrow from the Fed. As a result, banks are likely to reduce their excess reserves and become more willing to lend money to customers, which could stimulate economic growth.

Question 13

When the Fed lowers the discount rate, it makes it

Accepted Answer

When the Fed lowers the discount rate, it reduces the cost of borrowing for banks from the Fed, making it cheaper and easier for banks to obtain additional reserves by borrowing from the Fed. This can lead to an increase in lending by banks and stimulate economic growth. Lowering the discount rate does not affect the difficulty of accepting deposits or extending loans for banks.

Question 14

In recent years, the Fed has generally set the discount rate

Accepted Answer

The discount rate is typically set higher than the federal funds rate for most banks, which means that it is the interest rate charged by the Fed to commercial banks for short-term loans. It is used as a tool to control the supply of money in circulation in the economy. A higher discount rate makes it more expensive for banks to borrow money from the Fed, which can help to reduce inflationary pressures in the economy.

Question 15

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

Accepted Answer

Buying U.S. securities on the open market would increase the money supply as the Fed would be injecting money into the economy. Increasing reserve requirements would restrict the amount of money banks can lend out, thus contracting the money supply. Raising the discount rate would make it more expensive for banks to borrow from the Fed, also contracting the money supply. Selling U.S. securities on the open market would decrease the money supply as the Fed would be taking money out of the economy.

Question 16

The interest rate in the federal funds market

Accepted Answer

The interest rate in the federal funds market is determined by the market forces of supply and demand. When banks with excess reserves lend to banks in need of additional reserves, the interest rate will tend to rise when the quantity demanded exceeds the quantity supplied. Similarly, if the Fed sells bonds and reduces reserves available to banks, the interest rate will tend to fall. Therefore, option B is the correct choice.

Question 17

Which of the following lists two things that both decrease the money supply?

Accepted Answer

Raising the discount rate and making open market sales both decrease the money supply.

Choice A is incorrect as making open market purchases would increase the money supply. 
Choice C is incorrect as lowering the discount rate would increase the money supply. 
Choice D is incorrect as making open market purchases would increase the money supply.

Question 18

If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate

Accepted Answer

The Fed controls the federal funds interest rate through its policy of open market operations. This involves buying and selling government securities in the open market, which affects the supply of money and the interest rates at which banks lend each other funds overnight. By buying securities, the Fed increases the money supply and lowers interest rates, while selling securities reduces the money supply and raises interest rates. Therefore, if the Fed wants to shift towards a more expansionary policy, it can announce that it will buy securities in the open market to lower interest rates.

Question 19

Which of the following lists two things that both increase the money supply?

Accepted Answer

When the Fed buys bonds, it injects money into the economy, increasing the money supply. Lowering the discount rate makes it cheaper for banks to borrow from the Fed, encouraging them to borrow more money and increasing the amount of money in circulation. Both of these actions increase the money supply.

Question 20

Which of the following lists two things that both increase the money supply?

Accepted Answer

Lowering the discount rate makes it cheaper for banks to borrow money from the central bank, which leads to more lending and ultimately an increase in the money supply. Making open market purchases involves the central bank buying government securities from commercial banks, which puts more money into circulation and also leads to an increase in the money supply.

Quiz 13: A : Money and the Banking System

When a commercial bank borrows from a Federal Reserve bank,

Which of the following lists two things that both increase the money supply?

The federal funds market is the market where

Which of the following lists two things that both decrease the money supply?

When the Fed sells Treasury Bonds on the open market, it will tend to

An increase in the discount rate impacts the money supply because it

Suppose the Treasury sells $10 billion of newly issued Treasury bills to the Fed and uses the proceeds to increase government spending by $10 billion. How will this affect the money supply and the national debt?

Under current policy, the Fed ties the discount rate to the

If the Federal Reserve wants to increase the availability of money and credit, it can

Commercial banks can borrow reserves directly from the Fed at the

Which of the following lists two things that both decrease the money supply?

Other things constant, if the Fed decreased the discount rate,

When the Fed lowers the discount rate, it makes it

In recent years, the Fed has generally set the discount rate

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

The interest rate in the federal funds market

Which of the following lists two things that both decrease the money supply?

If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate

Which of the following lists two things that both increase the money supply?

Which of the following lists two things that both increase the money supply?