Question 1

The Fed prefers to change reserve requirements rather than to use open market operations.

Accepted Answer

The statement is false. The Fed actually prefers to use open market operations to adjust monetary policy, rather than changing reserve requirements. Open market operations involve buying or selling government securities in order to influence the supply of money and credit in the economy. Changing reserve requirements, on the other hand, involves adjusting the amount of funds that banks are required to hold in reserve, which can be more cumbersome and less flexible.

Question 2

The Federal Open Market Committee directs open market operations by buying and selling government securities which are the primary instruments of exercising monetary policy.

Accepted Answer

This statement is true. The FOMC buys and sells government securities as a way of influencing interest rates and the money supply, which in turn impacts the broader economy.

Question 3

The Federal Reserve act required that ALL national banks were to become members of the Fed.

Accepted Answer

This is stated in Section 2 of the Federal Reserve Act of 1913.

Question 4

The United States was one of the last major industrial nations to adopt a permanent system of central banking.

Accepted Answer

The Federal Reserve System, the central banking system of the United States, was established in 1913, long after other major industrial nations had established their own central banks.

Question 5

Empirical evidence shows that in countries where central banks are relatively independent from their governments, there has been higher inflation and lower economic growth rates than in countries where central banks are closely tied to their governments.

Accepted Answer

Empirical evidence actually suggests the opposite - countries where central banks are more independent from their governments have generally had lower inflation and higher economic growth rates.

Question 6

When reserves are added to the banking system, depository institutions may expand their lending but are not forced to do so.

Accepted Answer

When reserves are added to the banking system, depository institutions have the ability to expand their lending, but they are not required to do so. The decision to lend out new funds ultimately depends on a variety of factors such as the demand for loans, the creditworthiness of potential borrowers, and the overall economic climate.

Question 7

The seven members of the Federal Reserve Board of Governors are responsible for the establishment of monetary policy.

Accepted Answer

The seven members of the Federal Reserve Board of Governors are responsible for formulating and implementing monetary policy.

Question 8

The Federal Reserve has no power to regulate the overseas activities of member banks and bank holding companies.

Accepted Answer

The Federal Reserve has the authority to regulate the international activities of member banks and bank holding companies, ensuring they comply with U.S. banking laws and regulations even when operating abroad.

Question 9

Banks with large transaction account balances hold the same percentage of reserves as all other banks.

Accepted Answer

Banks with larger transaction account balances often hold a lower percentage of reserves compared to smaller banks because they can manage liquidity more efficiently through the financial markets and have better access to external funding sources.

Question 10

The Fed discount rate is the interest rate that a bank must pay to borrow from its regional Federal Reserve Bank.

Accepted Answer

This statement is true. The Fed discount rate is the interest rate that banks must pay to borrow from their regional Federal Reserve Bank, and it can be used as a tool to influence the economy by adjusting the cost of borrowing for banks.

Question 11

The closer to the required minimum the banking system maintains its reserves, the tighter the control the Fed has over the money creation process through its other instruments.

Accepted Answer

When the banking system maintains its reserves closer to the required minimum, it leaves less room for excess reserves which results in tighter control by the Fed over the money creation process using its other tools such as open market operations and reserve requirements.

Question 12

The Fed lending rate to depository institutions was consistently lower than the bank prime lending rate during the 19771980-1994 2009 period.

Accepted Answer

During the period mentioned, the Fed lending rate to depository institutions was consistently lower than the bank prime lending rate.

Question 13

Banks are required by the Fed to hold reserves equal to a part of their deposits as part of the fractional reserve system of the U.S.banking system.

Accepted Answer

Banks are required to hold reserves as a percentage of their deposits as part of the fractional reserve system implemented by the Federal Reserve.

Question 14

Member banks of the Federal Reserve System may not borrow from the Fed.

Accepted Answer

Member banks of the Federal Reserve System are allowed to borrow from the Fed through the discount window.

Question 15

Although not provided for in the original organization of the Fed, open market operations have become the most important and effective means of monetary control.

Accepted Answer

Open market operations involve the buying and selling of government securities in the open market, which affects the money supply and interest rates, making it the most important and effective means of monetary control. Although not explicitly provided for in the original organization of the Fed, open market operations have become a crucial tool for achieving the Fed's monetary policy objectives.

Question 16

A major weakness of the banking system under the National Banking Acts was that the money supply could not be easily expanded or contracted to meet changing seasonal needs and/or changes in economic activity.

Accepted Answer

The National Banking Acts required banks to hold a certain amount of gold or government bonds in reserve as a way to limit inflation and stabilize the money supply, but this also meant that the money supply could not be easily adjusted in response to changes in economic activity.

Question 17

Open market operations are similar to discount operations in that they increase or decrease bank reserves at the initiative of the Fed.

Accepted Answer

The answer of Open market operations are similar to discount...

Question 18

The essential requirements of a well-functioning financial system include an efficient national payments system, a flexible money supply, and a lending/borrowing mechanism to help alleviate liquidity problems when they arise.

Accepted Answer

These are indeed essential requirements of a well-functioning financial system.

Question 19

The ability to change reserve requirement is a powerful tool the Fed uses frequently.

Accepted Answer

The Federal Reserve does not frequently change reserve requirements; it is a tool used infrequently compared to other monetary policy tools like open market operations or adjusting the discount rate.

Question 20

If excess reserves are near zero, then a reduction of a bank's reserves will cause the system to loosen credit.

Accepted Answer

If excess reserves are near zero, banks are already utilizing most of their reserves to support their lending activities. A reduction in reserves would therefore lead to a contraction of credit rather than loosening.

Quiz 4: Federal Reserve System