Question 1

Open market operations refer to the purchase or sale of ________ to control the money supply.

Accepted Answer

Open market operations refer to the purchase or sale of U.S. Treasury securities by the Federal Reserve to control the money supply.

Question 2

Banks keep ________ of checking deposits as reserves because on a typical day withdrawals ________ deposits.

Accepted Answer

Banks keep less than 100% of checking deposits as reserves because, typically, the total amount of withdrawals is about the same as the total amount of deposits, allowing banks to manage liquidity while also using deposits for loans and investments.

Question 3

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

Accepted Answer

The Federal Open Market Committee consists of the seven members of the Federal Reserve's Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the other 11 Federal Reserve banks. Choice A is incorrect because the Council of Economic Advisors is not part of the Federal Reserve system. Choice C is incorrect because there are only 12 Federal Reserve banks in total, and the president of the Federal Reserve Bank of New York is already part of the FOMC. Choice D is also incorrect because there is no U.S. Banking Committee.

Question 4

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

Accepted Answer

The establishment of the Federal Deposit Insurance Corporation (FDIC) provides insurance to depositors in the case of a bank failure. This helps to prevent bank runs and panics, as individuals are reassured that their deposits are protected. The other options listed may also contribute to preventing bank panics, but the establishment of the FDIC is the most direct solution.

Question 5

Suppose that the required reserve ratio is 10 percent and you withdraw $25,000 from Comerica Bank. What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply?

Accepted Answer

The answer of Suppose that the required reserve ratio is...

Question 6

Suppose that the bank has the following balance sheet:
  If the required reserve ratio is 10 percent, what is the maximum the bank can loan out? Suppose the bank makes this loan and the borrower spends the money, which is deposited in a different bank. Show the impact of these transactions on the bank's balance sheet.

Accepted Answer

The answer of Suppose that the bank has the following...

Question 7

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic?

Accepted Answer

In a bank panic, it is unlikely that required reserves would increase. In fact, it is more likely that the central bank would decrease required reserves to help alleviate the panic and prevent a further contraction of the money supply. The other choices are all potential consequences of a bank panic.

Question 8

Suppose a bank has the following balance sheet:
  If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

Accepted Answer

The answer of Suppose a bank has the following balance...

Question 9

If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a

Accepted Answer

The scenario described is a classic description of a bank panic, where fear and uncertainty about the stability of one bank can lead to a larger crisis across the entire financial system.

Question 10

The seven members of the Board of Governors of the Federal Reserve are appointed by

Accepted Answer

The seven members of the Board of Governors of the Federal Reserve are appointed by the President of the United States and confirmed by the Senate.

Question 11

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

Accepted Answer

The three main monetary policy tools used by the Federal Reserve to manage the money supply are open market operations (buying and selling of government securities), discount policy (setting the interest rate at which banks can borrow from the Fed), and reserve requirements (the amount of funds banks must hold in reserve against deposits). Options A, B, and D are incorrect as they either include fiscal policy tools (tax rates, government spending, and transfer payments) or irrelevant factors (exchange rate of the dollar).

Question 12

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

Accepted Answer

Acting as a lender of last resort means that the central bank provides loans to banks that are facing a bank run, giving them enough liquidity to stay afloat and meet their obligations to depositors. This helps prevent the bank run from turning into a full-blown banking crisis. Printing money, raising the discount rate, and increasing the required reserve ratio are all possible actions a central bank could take, but they are not as effective in dealing with a bank run.

Question 13

If the central bank can act as a lender of last resort during a banking panic, banks can

Accepted Answer

If the central bank is acting as a lender of last resort during a banking panic, it can provide banks with the necessary funds to satisfy customers' withdrawal needs. This helps to maintain the public's faith in the banking system and can eventually restore stability to the financial system. Therefore, option B is the best choice. Option A is incorrect because calling in loans during a panic could exacerbate the situation. Option C is incorrect because borrowing more money would increase reserves and help to alleviate the panic. Option D is incorrect because it suggests encouraging the public to bypass the banks and go directly to the central bank, which would undermine the banks' stability and worsen the situation.

Question 14

The Federal Reserve was established in 1913 to

Accepted Answer

The primary purpose of the Federal Reserve was to act as a lender of last resort to prevent bank panics and stabilize the banking system. While the Fed does have tools to control inflation, stimulate the economy, and regulate banks, these were not its original primary purpose.

Question 15

The main tool that the Federal Reserve uses to conduct monetary policy is

Accepted Answer

Open market operations involve the buying and selling of government securities by the Federal Reserve, which affects the supply of money in circulation in the economy. This is the main tool used by the Federal Reserve to influence interest rates and manage monetary policy. While discount policy, reserve requirements, and acting as the lender of last resort are also important tools, they are not as widely used or as effective in controlling the money supply. Check clearing is not a tool used by the Federal Reserve to conduct monetary policy.

Question 16

The purchase of Treasury securities by the Federal Reserve will, in general,

Accepted Answer

The purchase of Treasury securities by the Federal Reserve increases the reserves of the banks, which in turn increases the quantity of reserves held by banks. This can potentially increase the money supply through the credit multiplier effect.

Question 17

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

Accepted Answer

The Federal Reserve System does not insure deposits in the banking system. This is a function of the Federal Deposit Insurance Corporation (FDIC).

Question 18

Suppose you deposit $4,000 in currency into your checking account at Bank of America. Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent.
a. Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet.
b. Suppose that Bank of America makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank of Boston. Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston, after the check has been cleared. On the T-account for Bank of America, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

Accepted Answer

The answer of Suppose you deposit $4,000 in currency into...

Question 19

The sale of Treasury securities by the Federal Reserve will, in general,

Accepted Answer

When the Federal Reserve sells Treasury securities, the buyers pay for those securities with reserves held at banks. This reduces the quantity of reserves in the banking system, which can lead to a decrease in the money supply as banks have less money to lend out. Therefore, the correct answer is D, which states that the sale of Treasury securities by the Federal Reserve will decrease the quantity of reserves held by banks.

Question 20

Suppose the Federal Reserve purchases $10,000 of Treasury bonds from you and that you deposit the $10,000 into your checking account deposit at Bank Y. Assume that Bank Y has no excess reserves at the time you make your deposit and that the required reserve ratio is 20 percent.
a. Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet.
b. Suppose that Bank Y makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank Y's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank Z. Show the effect of these transactions on the balance sheet of Bank Y and Bank Z, after the check has been cleared. On the T-account for Bank Y, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

Accepted Answer

The answer of Suppose the Federal Reserve purchases $10,000 of...

Quiz 25: Money, Banks, and the Federal Reserve System