Question 1

The major asset of the Federal Reserve is

Accepted Answer

U.S. Treasury securities are the major asset of the Federal Reserve because they purchase these securities as part of their monetary policy operations to control the money supply and interest rates.

Question 2

The major liability of the Federal Reserve is

Accepted Answer

Currency outside banks is the major liability of the Federal Reserve.

Question 3

A decrease in reserve requirements could lead to an

Accepted Answer

When reserve requirements are decreased, banks are required to hold less money in their reserves and are able to lend out more money. This increases the availability of money in the economy, which leads to an increase in the money supply. Therefore, both options A and B are correct. However, a decrease in reserve requirements would not lead to an increase in the discount rate, so options C and E are incorrect.

Question 4

From October 1983 to July 1993,the Federal Reserve targeted

Accepted Answer

During this period, the Federal Reserve targeted borrowed reserves as part of its monetary policy strategy, shifting focus from previous targets such as the Fed funds rate or monetary aggregates like M1 and M3. This approach allowed for more direct control over the banking system's demand for reserve balances at the Fed.

Question 5

If the Fed is targeting interest rates and money demand increases,an appropriate policy response would be to

Accepted Answer

When the Fed targets interest rates and there is an increase in money demand, buying U.S. Treasury securities from government bond dealers is an appropriate policy response. This action injects liquidity into the banking system, helping to maintain the target interest rate despite the increased demand for money.

Question 6

The Fed increases bank reserves in the system by $75 million. If there are no drains,the expected change in bank deposits is

Accepted Answer

The expected change in bank deposits is equal to the reserve ratio multiplied by the increase in bank reserves. Assuming a reserve ratio of 10%, the expected change in bank deposits would be 0.10 x $75 million = $7.5 million. However, this $7.5 million increase in deposits would then be subject to further lending and redeposit, which could result in a total expected change in bank deposits of $750 million.

Question 7

The major monetary policy-making arm of the Federal Reserve is the

Accepted Answer

The major monetary policy-making arm of the Federal Reserve is the Federal Open Market Committee (FOMC), which is not listed among the choices.

Question 8

Before 2003 the discount window loan rate was set

Accepted Answer

Before 2003, the discount window loan rate was typically set below the target Federal funds rate. This was part of the Federal Reserve's monetary policy tools to provide liquidity to banks at a lower cost, encouraging borrowing and lending activities.

Question 9

In the area of bank supervision,which of the following are functions of the Federal Reserve Banks?
I. Examinations of state member banks
II. Approval of member bank and bank holding company acquisitions
III. Deposit insurance

Accepted Answer

I. Examinations of state member banks is a function of the Federal Reserve Banks.
II. Approval of member bank and bank holding company acquisitions is also a function of the Federal Reserve Banks.
III. Deposit insurance is a function of the Federal Deposit Insurance Corporation (FDIC), not the Federal Reserve Banks. Therefore, choice C and D can be eliminated. 
Therefore, the best choice is B, which includes both functions of the Federal Reserve Banks.

Question 10

The Fed offers three types of discount window loans. ________ credit is offered to small institutions with demonstrable patterns of financing needs,________ credit is offered for short-term temporary funds outflows,and ________ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems.

Accepted Answer

Seasonal credit is for small institutions with predictable financing needs, primary credit is for short-term temporary funds outflows, and secondary credit is for troubled institutions with severe liquidity issues.

Question 11

Assume oil prices rise in the United States,generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand,the Fed could

Accepted Answer

The Fed lowering the target money supply growth rate can help control inflation by reducing the amount of money circulating in the economy, which can help dampen price increases, including those initiated by rising oil prices. Other options like decreasing the discount rate, lowering the Fed funds rate, or reducing reserve requirements would actually stimulate the economy, potentially exacerbating inflation. Intervening in currency markets to devalue the dollar could make imports, including oil, more expensive, further increasing inflationary pressures.

Question 12

Currently the Fed sets monetary policy by targeting

Accepted Answer

The Federal Reserve uses open market operations, such as buying or selling government securities, to adjust the supply of reserves in the banking system and influence the federal funds rate, which is the interest rate banks charge each other for overnight loans. By targeting the federal funds rate, the Fed indirectly influences other short-term interest rates, such as the prime rate, which is the rate banks charge to their best customers. Therefore, A) the Fed funds rate is the best choice for how the Fed sets monetary policy.

Question 13

The Fed funds rate is the rate that

Accepted Answer

The Fed funds rate is the rate that banks charge each other on loans of excess reserves. It is set by supply and demand in the overnight lending market and is often used as a benchmark for other interest rates.

Question 14

The Fed changes reserve requirements from 10 percent to 14 percent,thereby eliminating $750 million in excess reserves. The total change in deposits (with no drains)would be (rounded)

Accepted Answer

The reserve requirements have increased by 4 percentage points (14% - 10% = 4%). This means that for every $100 deposited, banks need to hold $14 in reserve instead of $10. Hence, the excess reserves that banks had, $750 million, would now be required to be held as reserves.

Using the money multiplier formula:

Money Multiplier = 1/ Reserve Requirement

Before:
MM = 1/0.1 = 10

After:
MM = 1/0.14 = 7.14

The decrease in the money multiplier shows that the banks can now lend out less money for every $1 deposited.

Total Change in Deposits = (Decrease in Excess Reserves) x (Money Multiplier)

= (-750 million) x (7.14)

= -$5.355 billion

(Rounded to the nearest billion, the answer is $5.357 billion)

Question 15

The Fed changes reserve requirements from 10 percent to 7 percent,thereby creating $900 million in excess reserves. The total change in deposits (with no drains)would be

Accepted Answer

We can use the money multiplier formula to find the change in deposits:
Change in Deposits = Excess Reserves * Money Multiplier
Money Multiplier = 1 / Reserve Ratio
Before the change: Money Multiplier = 1 / 0.1 = 10
After the change: Money Multiplier = 1 / 0.07 = 14.29
Excess Reserves = $900 million
Change in Deposits = $900 million * 14.29 = $12,857 million
Therefore, the total change in deposits would be $12,857 million, which corresponds to choice C.

Question 16

Which of the following is the major monetary policy-making body of the U.S. Federal Reserve System?

Accepted Answer

FOMC (Federal Open Market Committee) is the major monetary policy-making body of the U.S. Federal Reserve System. It consists of members from the Federal Reserve Board of Governors and Federal Reserve Bank presidents. They are responsible for setting monetary policy by deciding on interest rates and establishing monetary targets. The OCC (Office of the Comptroller of the Currency) is a regulatory agency that oversees and supervises banks. The FRB (Federal Reserve Bank) presidents are members of the FOMC, but the FOMC is the primary decision-making body. The U.S. Congress is responsible for fiscal policy, not monetary policy. The Group of Eight is an international organization that addresses global economic issues.

Question 17

The Check 21 Act,effective in October 2004,does which of the following?

Accepted Answer

The Check 21 Act authorizes the use of an electronic image (rather than the physical paper check) to facilitate paperless check clearing. This means that banks can scan and transmit electronic images of checks in place of the physical checks themselves, which can speed up the clearing process and reduce costs.

Question 18

Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10 percent. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?

Accepted Answer

The answer of Bank A has an increase in deposits...

Question 19

If the Fed wishes to stimulate the economy,it could
I. buy U.S. government securities.
II. raise the discount rate.
III. lower reserve requirements.

Accepted Answer

Buying U.S. government securities injects more money into the economy, which can stimulate economic activity. Lowering reserve requirements allows banks to lend out more of their deposits, which can also stimulate economic activity. Raising the discount rate, on the other hand, makes it more expensive for banks to borrow money from the Fed, which can slow economic activity.

Question 20

The discount rate is the rate that

Accepted Answer

The discount rate is the interest rate that the Federal Reserve charges on loans to commercial banks. It is used as a tool for controlling the money supply and influencing economic activity. Banks can borrow from the Fed when they need additional reserves to meet their reserve requirements or to cover temporary shortages. By changing the discount rate, the Fed can encourage or discourage borrowing and investment by banks, which can have an impact on the overall economy.

Quiz 4: The Federal Reserve System, monetary Policy, and Interest Rates