Question 1

The U.S. Constitution assigns responsibility for monetary policy to&#10;A) The Executive Branch&#10;B) Congress&#10;C) The Treasury&#10;D) The Federal Reserve

Accepted Answer

Congress&#10;

Question 2

Federal Reserve System contains&#10;A) 12 Reserve Banks&#10;B) Board of Governors&#10;C) Federal Open Market Committee (FOMC)&#10;D) All of the above

Accepted Answer

The Federal Reserve System includes 12 Reserve Banks, a Board of Governors, and the Federal Open Market Committee (FOMC), making all of the above statements correct.

Question 3

The number of persons with the title of &#34;Governor&#34; in the Federal Reserve System&#10;A) Was 13 prior to the mid-1930s&#10;B) Has been 7 since the mid-1930s&#10;C) Is 1, like many other central banks&#10;D) Both a and b

Accepted Answer

The Federal Reserve System has 12 regional Federal Reserve Banks, each with its own governor. The Board of Governors of the Federal Reserve System, which is the central banking authority of the United States, has seven members, including the Chairman of the Board.

Question 4

Which of the following is not a feature of Federal Reserve independence?&#10;A) Selection of the final goals of monetary policy&#10;B) 14-year terms of Board members&#10;C) Outside the congressional appropriations process&#10;D) Exempt from General Accountability Office (GAO) audit of monetary policy

Accepted Answer

The Federal Reserve does not select the final goals of monetary policy; these goals are established by Congress. The Federal Reserve's independence mainly pertains to its operational autonomy to achieve these goals, such as controlling inflation and maximizing employment.

Question 5

Which of the following is not an instrument of monetary policy?&#10;A) Reserve requirements&#10;B) Margin requirements on stocks&#10;C) Discount policy&#10;D) Open market operations

Accepted Answer

Margin requirements on stocks are not an instrument of monetary policy; they are a tool used by regulatory authorities to control the amount of credit that can be created in the stock market. Monetary policy instruments include reserve requirements, discount policy, and open market operations, which are used by central banks to control the money supply and interest rates.

Question 6

The FOMC implements its policies by&#10;A) Changing the discount rate&#10;B) Changing reserve requirements&#10;C) Affecting nonborrowed reserves&#10;D) Affecting Federal Reserve float

Accepted Answer

The FOMC (Federal Open Market Committee) primarily implements its monetary policy by affecting nonborrowed reserves through open market operations, which influence the federal funds rate.

Question 7

Which of the following transactions will add to the supply of reserves in the banking system?&#10;A) An outright sale of securities by the Fed&#10;B) A reverse RP&#10;C) An RP&#10;D) None of the above

Accepted Answer

An RP (Repurchase Agreement) involves the Fed buying securities with an agreement to sell them back at a later date. This action adds reserves to the banking system by increasing the cash available to banks.

Question 8

Which of the following was not an original responsibility of the Federal Reserve?&#10;A) Issue currency (Federal reserve notes)&#10;B) Conduct monetary policy&#10;C) Smooth seasonal variations in credit availability and interest rates&#10;D) Limit the extent of banking panics (financial crises)

Accepted Answer

The Federal Reserve was originally created to address banking panics and to smooth seasonal variations in credit availability and interest rates, but conducting monetary policy became a more prominent role later on.

Question 9

Absent action by the (Open Market) Desk, an increase in the public's holdings of currency will&#10;A) Increase the supply of reserves&#10;B) Reduce the supply of reserves&#10;C) Leave the supply of reserves unchanged&#10;D) Not enough information to be able to answer

Accepted Answer

When the public increases its holdings of currency, it means that more cash is being held by individuals rather than being deposited in banks. This reduces the amount of cash banks have on hand, which in turn decreases their reserves. Therefore, the supply of reserves in the banking system is reduced.

Question 10

Equilibrium in the market for reserves is achieved when&#10;A) The discount rate equals the interest rate paid on excess reserves&#10;B) Required reserves plus excess reserves equals nonborrowed plus borrowed reserves&#10;C) Borrowed reserve are zero&#10;D) The discount rate is below the interest rate paid on excess reserves

Accepted Answer

Equilibrium in the market for reserves is achieved when the total reserves held by banks (required reserves plus excess reserves) equal the total reserves available in the banking system (nonborrowed plus borrowed reserves). This balance ensures that banks have enough reserves to meet their required reserves and any additional reserves they wish to hold, without creating excess demand or supply in the market for reserves.

Deck 12: Central Banking and the Federal Reserve