Deck 13: Central Banks and the Federal Reserve System

Question 1

Economists believe that countries recently suffering hyperinflation have experienced

A)reduced growth.
B)increased growth.
C)reduced prices.
D)lower interest rates.

Answer 1

reduced growth.

Question 2

Price stability is desirable because

A)inflation creates uncertainty,making it difficult to plan for the future.
B)everyone is better off when prices are stable.
C)price stability increases the profitability of the Fed.
D)it guarantees full employment.

Answer 2

inflation creates uncertainty,making it difficult to plan for the future.

Question 3

Even if the Fed could completely control the money supply,monetary policy would have critics because

A)the Fed is asked to achieve many goals,some of which are incompatible with others.
B)the Fed's goals do not include high employment,making labor unions a critic of the Fed.
C)the Fed's primary goal is exchange rate stability,causing it to ignore domestic economic conditions.
D)it is required to keep Treasury security prices high.

Answer 3

the Fed is asked to achieve many goals,some of which are incompatible with others.

Question 4

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor.Economists call this level of unemployment the

A)frictional level of unemployment.
B)structural level of unemployment.
C)natural rate level of unemployment.
D)Keynesian rate level of unemployment.

Question 5

The most common definition that monetary policymakers use for price stability is

A)low and stable deflation.
B)an inflation rate of zero percent.
C)high and stable inflation.
D)low and stable inflation.

Question 6

Explain the time-inconsistency problem.What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?

Question 7

The time-inconsistency problem with monetary policy tells us that,if policymakers use discretionary policy,there is a higher probability that the ________ will be higher,compared to policy makers following a behavior rule.

A)inflation rate
B)unemployment rate
C)interest rate
D)foreign exchange rate

Question 8

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy

A)using a nominal anchor.
B)using a strict and inflexible rule.
C)on a discretionary,day-by-day basis.
D)using a flexible,discretionary rule.

Question 9

Unemployment resulting from a mismatch of workers' skills and job requirements is called

A)frictional unemployment.
B)structural unemployment.
C)seasonal unemployment.
D)cyclical unemployment.

Question 10

Inflation results in

A)ease of planning for the future.
B)ease of comparing prices over time.
C)lower nominal interest rates.
D)difficulty interpreting relative price movements.

Question 11

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect,then the central bank must be trying to

A)boost output in the short run.
B)constrain output in the short run.
C)constrain prices.
D)boost prices in the short run.

Question 12

A nominal variable,such as the inflation rate or the money supply,which ties down the price level to achieve price stability is called ________ anchor.

A)a nominal
B)a real
C)an operating
D)an intermediate

Question 13

A nominal anchor promotes price stability by

A)outlawing inflation.
B)stabilizing interest rates.
C)keeping inflation expectations low.
D)keeping economic growth low.

Question 14

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

A)moral hazard
B)time-inconsistency
C)nominal-anchor
D)rational-expectation

Question 15

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability.Such a variable is called a nominal

A)anchor.
B)benchmark.
C)tether.
D)guideline.

Question 16

The theory that monetary policy conducted on a discretionary,day-by-day basis leads to poor long-run outcomes is referred to as the

A)adverse selection problem.
B)moral hazard problem.
C)time-inconsistency problem.
D)nominal-anchor problem.

Question 17

When workers voluntarily leave work while they look for better jobs,the resulting unemployment is called

A)structural unemployment.
B)frictional unemployment.
C)cyclical unemployment.
D)underemployment.

Question 18

A central feature of monetary policy strategies in all countries is the use of a nominal anchor,which is a nominal variable that monetary policymakers use as an

A)operating target,such as the federal funds interest rate.
B)intermediate target,such as the federal funds interest rate.
C)intermediate target to achieve an ultimate goal such as price stability.
D)operating target to achieve an ultimate goal such as exchange rate stability.

Question 19

High unemployment is undesirable because it

A)results in a loss of output.
B)always increases inflation.
C)always increases interest rates.
D)reduces idle resources.

Question 20

Monetary policy is considered time-inconsistent because

A)of the lag times associated with the implementation of monetary policy and its effect on the economy.
B)policymakers are tempted to pursue discretionary policy that is more contractionary in the short run.
C)policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.
D)of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

Question 21

The three largest Federal Reserve banks (New York,Chicago,and San Francisco)combined hold more than ________ percent of the assets of the Federal Reserve System.

A)25
B)33
C)50
D)67

Question 22

The First Bank of the United States

A)was disbanded in 1811 when its charter was not renewed.
B)had its charter renewal vetoed in 1832.
C)was fundamental in helping the Federal Government finance the War of 1812.
D)None of the above.

Question 23

The Second Bank of the United States

A)was disbanded in 1811 when its charter was not renewed.
B)had its charter renewal vetoed in 1832.
C)is considered to be the primary cause of the bank panic of 1907.
D)None of the above.

Question 24

Each Federal Reserve bank has nine directors.Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.

A)three; six
B)four; five
C)five; four
D)six; three

Question 25

Which of the following is NOT an entity of the Federal Reserve System?

A)Federal Reserve Banks
B)The Comptroller of the Currency
C)The Board of Governors
D)The Federal Open Market Committee

Question 26

What makes the Federal Reserve so unique compared to other central banks around the world is its

A)centralized structure.
B)decentralized structure.
C)regulatory functions.
D)monetary policy functions.

Question 27

Which set of goals can,at times,conflict in the short run?

A)High employment and economic growth.
B)Interest rate stability and financial market stability.
C)High employment and price level stability.
D)Exchange rate stability and financial market stability.

Question 28

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________.

A)price stability; short run
B)price stability; long run
C)reducing business-cycle fluctuations; short run
D)reducing business-cycle fluctuations; long run

Question 29

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

A)primary
B)dual
C)secondary
D)hierarchical

Question 30

Which of the following is an entity of the Federal Reserve System?

A)The U.S.Treasury Secretary
B)The FOMC
C)The Comptroller of the Currency
D)The FDIC

Question 31

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking:

A)the First Bank of the United States and the Second Bank of the United States.
B)the First Bank of the United States and the Central Bank of the United States.
C)the First Central Bank of the United States and the Second Central Bank of the United States.
D)the First Bank of North America and the Second Bank of North America.

Question 32

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

A)the First Bank of the United States had failed to serve as a lender of last resort.
B)the Second Bank of the United States had failed to serve as a lender of last resort.
C)the Federal Reserve System had failed to serve as a lender of last resort.
D)a central bank was needed to prevent future panics.

Question 33

Having interest rate stability

A)allows for less uncertainty about future planning.
B)leads to demands to curtail the Fed's power.
C)guarantees full employment.
D)leads to problems in financial markets.

Question 34

The Federal Reserve System was created to

A)make it easier to finance budget deficits.
B)promote financial market stability.
C)lower the unemployment rate.
D)promote rapid economic growth.

Question 35

The primary goal of the European Central Bank is

A)price stability.
B)exchange rate stability.
C)interest rate stability.
D)high employment.

Question 36

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate,and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.

A)increase; more
B)increase; less
C)decrease; more
D)decrease; less

Question 37

Supply-side economic policies seek to

A)raise interest rates through contractionary monetary policy.
B)increase federal government expenditures.
C)increase consumption expenditures by increasing taxes.
D)increase saving and investment using tax incentives.

Question 38

The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers,________ are leaders from industry,and ________ are to represent the public interest and are not allowed to be officers,employees,or stockholders of banks.

A)5; 2; 2
B)2; 5; 2
C)4; 2; 3
D)3; 3; 3

Question 39

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate.

A)primary
B)dual
C)secondary
D)hierarchical

Question 40

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

A)quasi-public; private commercial banks in the district where the Reserve Bank is located
B)public; private commercial banks in the district where the Reserve Bank is located
C)quasi-public; Board of Governors
D)public; Board of Governors

Question 41

Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to ________ percent annually.

A)four
B)five
C)six
D)eight

Question 42

The Federal Open Market Committee usually meets ________ times a year.

A)four
B)six
C)eight
D)twelve

Question 43

The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its

A)concern over declining Fed membership.
B)belief that all banking regulations should be eliminated.
C)belief that interest rate ceilings were too high.
D)belief that depositors had to become more knowledgeable of banking operations.

Question 44

The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________ term.

A)one-year
B)two-year
C)four-year
D)eight-year

Question 45

Which of the following are not current duties of the Board of Governors of the Federal Reserve System?

A)Setting margin requirements,the fraction of the purchase price of the securities that has to be paid for with cash.
B)Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.
C)Approving the discount rate "established" by the Federal Reserve banks.
D)Representing the United States in negotiations with foreign governments on economic matters.

Question 46

Banks subject to reserve requirements set by the Federal Reserve System include

A)only nationally chartered banks.
B)only banks with assets less than $100 million.
C)only banks with assets less than $500 million.
D)all banks whether or not they are members of the Federal Reserve System.

Question 47

All ________ are required to be members of the Fed.

A)state chartered banks
B)nationally chartered banks
C)banks with assets less than $100 million
D)banks with assets less than $500 million

Question 48

While the discount rate is "established" by the regional Federal Reserve Banks,in truth,the rate is determined by

A)Congress.
B)the president of the United States.
C)the Senate.
D)the Board of Governors.

Question 49

There are ________ members of the Board of Governors of the Federal Reserve System.

A)5
B)7
C)12
D)19

Question 50

Which of the following are duties of the Board of Governors of the Federal Reserve System?

A)Setting margin requirements,the fraction of the purchase price of the securities that has to be paid for with cash.
B)Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.
C)Regulating credit with the approval of the president under the Credit Control Act of 1969.
D)All governors advise the president of the United States on economics policy.

Question 51

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

A)Board of Governors.
B)chairman of the Board of Governors.
C)Federal Open Market Committee.
D)Open Market Advisory Council

Question 52

Prior to 1980,member banks left the Federal Reserve System due to

A)the high cost of discount loans.
B)the high cost of required reserves.
C)a desire to avoid interest rate regulations.
D)a desire to avoid credit controls.

Question 53

The Depository Institutions Deregulation and Monetary Control Act of 1980

A)established higher reserve requirements for nonmember than for member banks.
B)established higher reserve requirements for member than for nonmember banks.
C)abolished reserve requirements.
D)established uniform reserve requirements for all banks.

Question 54

Members of the Board of Governors are

A)chosen by the Federal Reserve Bank presidents.
B)appointed by the newly elected president of the United States,as are cabinet positions.
C)appointed by the president of the United States and confirmed by the Senate as members resign.
D)never allowed to serve more than 7-year terms.

Question 55

Each governor on the Board of Governors can serve

A)only one nonrenewable fourteen-year term.
B)one full nonrenewable fourteen-year term plus part of another term.
C)only one nonrenewable eight-year term.
D)one full nonrenewable eight-year term plus part of another term.

Question 56

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

A)Philadelphia
B)Boston
C)San Francisco
D)New York

Question 57

An important function of the regional Federal Reserve Banks is

A)setting reserve requirements.
B)clearing checks.
C)determining monetary policy.
D)setting margin requirements.

Question 58

Which of the following functions are not performed by any of the twelve regional Federal Reserve Banks?

A)Check clearing
B)Conducting economic research
C)Setting interest rates payable on time deposits
D)Issuing new currency

Question 59

Of all commercial banks,about ________ percent belong to the Federal Reserve System.

A)17
B)22
C)37
D)52

Question 60

The Federal Reserve Bank of ________ plays a special role in the Federal Reserve System because it houses the open market desk.

A)Boston
B)New York
C)Chicago
D)San Francisco

Question 61

Members of Congress are able to influence monetary policy,albeit indirectly,through their ability to

A)withhold appropriations from the Board of Governors.
B)withhold appropriations from the Federal Open Market Committee.
C)propose legislation that would force the Fed to submit budget requests to Congress,as must other government agencies.
D)instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve.

Question 62

The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the

A)beige book.
B)green book.
C)blue book.
D)black book.

Question 63

Under the European System of Central Banks,the Governing Council is similar in structure to the ________ of the Federal Reserve System.

A)Board of Governors
B)Federal Open Market Committee
C)Federal Reserve Banks
D)Federal Advisory Council

Question 64

The Federal Open Market Committee consists of the

A)five senior members of the seven-member Board of Governors.
B)seven members of the Board of Governors and seven presidents of the regional Fed banks.
C)seven members of the Board of Governors and five presidents of the regional Fed banks.
D)twelve regional Fed bank presidents and the chairman of the Board of Governors.

Question 65

Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy,all ________ provide input.

A)three; ten
B)five; ten
C)three; twelve
D)five; twelve

Question 66

The research document given to the Federal Open Market Committee that contains the forecast of national economic variables for the next two years is called the

A)beige book.
B)green book.
C)blue book.
D)black book.

Question 67

Explain two concepts of central bank independence.Is the Fed politically independent? Why do economists think central bank independence is important?

Question 68

Members of the Executive Board of the European System of Central Banks are appointed to ________ year,nonrenewable terms.

A)four
B)eight
C)ten
D)fourteen

Question 69

The research document given to the Federal Open Market Committee that contains forecasts of the money aggregates conditional on different monetary policy stances is called the

A)beige book.
B)green book.
C)blue book.
D)black book.

Question 70

The Federal Open Market Committee's "balance of risks" is an assessment of whether,in the future,its primary concern will be

A)higher exchange rates or higher unemployment.
B)higher inflation or a stronger economy.
C)higher inflation or a weaker economy.
D)lower inflation or a stronger economy.

Question 71

Instrument independence is the ability of ________ to set monetary policy ________.

A)the central bank; goals
B)Congress; goals
C)Congress; instruments
D)the central bank; instruments

Question 72

Under the European System of Central Banks,the National Central Banks have the same role as the ________ of the Federal Reserve System.

A)Board of Governors
B)Federal Open Market Committee
C)Federal Reserve Banks
D)Federal Advisory Council

Question 73

Goal independence is the ability of ________ to set monetary policy ________.

A)the central bank; goals
B)Congress; goals
C)Congress; instruments
D)the central bank; instruments

Question 74

The ability of a central bank to set monetary policy goals is

A)political independence.
B)goal independence.
C)policy independence.
D)instrument independence.

Question 75

The ability of a central bank to set monetary policy instruments is

A)political independence.
B)goal independence.
C)policy independence.
D)instrument independence.

Question 76

Under the European System of Central Banks,the Executive Board is similar in structure to the ________ of the Federal Reserve System.

A)Board of Governors
B)Federal Open Market Committee
C)Federal Reserve Banks
D)Federal Advisory Council

Question 77

Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System?

Question 78

Who are the voting members of the Federal Open Market Committee and why is this committee important? Where does the power lie within this committee?

Question 79

The majority of members of the Federal Open Market Committee are

A)Federal Reserve Bank presidents.
B)members of the Federal Advisory Council.
C)presidents of member banks.
D)the seven Federal Reserve governors.

Question 80

Although neither ________ nor the ________ are officially set by the Federal Open Market Committee,decisions concerning these policy tools are effectively made by the committee.

A)margin requirements; discount rate
B)margin requirements; federal funds rate
C)reserve requirements; discount rate
D)reserve requirements; federal funds rate