Question 1

Which of the following is not true with respect to the Federal Reserve Act of 1913?

Accepted Answer

The Federal Reserve Act of 1913 established twelve districts, not fourteen, each with a Federal Reserve Bank.

Question 2

All commercial banks are required to be members of the Fed.

Accepted Answer

Not all commercial banks are required to be members of the Federal Reserve System; membership is mandatory for national banks, but optional for state-chartered banks.

Question 3

When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.

Accepted Answer

When the Trading Desk sells Treasury securities, it actually removes reserves from the banking system, leading to a decrease in the supply of funds. This typically results in an increase in the federal funds rate and other interest rates, not a decrease.

Question 4

Most of the Fed's income is transferred to the U.S. Department of Justice.

Accepted Answer

Most of the Fed's income is transferred to the U.S. Treasury, not the Department of Justice.

Question 5

To increase the money supply growth, the Fed could

Accepted Answer

None of the options listed would increase the money supply growth. Selling government securities in the secondary market would decrease the money supply, increasing the primary credit lending rate would decrease lending and therefore decrease the money supply, and increasing the reserve requirement ratio would decrease the amount of money that banks can lend out, thus reducing the money supply. To increase the money supply growth, the Fed would typically engage in activities such as buying government securities or lowering the reserve requirement ratio.

Question 6

____ is (are) not a component of the Fed as it exists today.

Accepted Answer

The U.S. Department of Commerce is not a component of the Fed as it exists today. The other options listed are all components of the Fed.

Question 7

When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.

Accepted Answer

When the Fed buys Treasury bills, it increases demand for them, which pushes their prices up. Since the yield (interest rate) of a bond moves inversely to its price, yields go down.

Question 8

Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.

Accepted Answer

This is correct according to the Federal Reserve Act.

Question 9

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

Accepted Answer

To increase the money supply, the Fed would purchase government securities through open market operations. Option A states the correct action to increase the money supply. Options B and C suggest actions that would decrease the money supply.

Question 10

To increase the money supply, the Trading Desk would be instructed to sell government securities.

Accepted Answer

To increase the money supply, the Trading Desk would be instructed to buy government securities, not sell them. When the Trading Desk buys government securities, it injects money into the economy, increasing the money supply.

Question 11

Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.

Accepted Answer

The Fed primarily controls the money supply through open market operations, which involve the buying and selling of government securities. Adjustment of the primary credit lending rate is one of the tools that can be used to influence the money supply, but it is not the most common means.

Question 12

The advisory committee making recommendations to the Fed about economic and banking related issues is the

Accepted Answer

The Federal Advisory Council (FAC) is the advisory committee that provides recommendations to the Federal Reserve about economic and banking related issues. The Consumer Advisory Council and Thrift Institutions Advisory Council are also advisory committees, but they focus on consumer and thrift institution issues respectively, rather than economic and banking issues in general.

Question 13

____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.

Accepted Answer

The answer of ____ includes only currency held by the...

Question 14

To increase the money supply, the Fed may increase the reserve requirement ratio.

Accepted Answer

Increasing the reserve requirement ratio would decrease the money supply, not increase it. To increase the money supply, the Fed would typically use tools such as open market operations or decreasing the discount rate.

Question 15

Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

Accepted Answer

This is correct. The Beige Book is a report that provides a summary of economic conditions based on information collected from each of the twelve Federal Reserve districts. Each district bank is responsible for reporting its regional conditions, which are then consolidated into the Beige Book.

Question 16

The Fed's primary goal has historically been to add liquidity to the mortgage market by continuously purchasing mortgage-backed securities.

Accepted Answer

The Fed's primary goal is to promote maximum employment, stable prices, and moderate long-term interest rates. While it may purchase mortgage-backed securities as part of its monetary policy operations, this is not its primary goal.

Question 17

When the Fed sells securities, the total funds of commercial banks ____ by the market value of securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.

Accepted Answer

When the Fed sells securities, it decreases the reserves of commercial banks, which in turn decreases their ability to lend and create money. This results in a decrease in the total funds available in the economy, leading to a tightening of money supply growth. Therefore, option D is the correct choice.

Question 18

The advisory committee offering views on issues related to credit unions is the

Accepted Answer

The Thrift Institutions Advisory Council provides views on issues related to credit unions, as it represents savings and loan associations, savings banks, and credit unions.

Question 19

The ____ consists of seven members, each of whom is appointed by the president of the United States.

Accepted Answer

The Board of Governors is the group consisting of seven members that is appointed by the president of the United States. The Federal Open Market Committee (FOMC) and Federal Advisory Council are both related to the Federal Reserve, but do not consist of seven members appointed by the president.

Question 20

____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.

Accepted Answer

The credit extended by the Fed to financial institutions that may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness is known as primary credit. Secondary credit is also extended by the Fed to depository institutions that are not eligible for primary credit, but with higher interest rates and additional requirements. Tertiary credit is used for emergency situations and carries the highest interest rates and most extensive requirements.

Quiz 4: Functions of the Fed