Question 1

COPING WITH A STOCK MARKET CRASH: BLACK MONDAY, 1987
How did the Fed successfully respond to the major stock market crash in 1987?
On October 19, 1987, known as "Black Monday," the Dow Jones index of the stock market fell a dramatic 22.6 percent in one
day. Similar declines were felt in other indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms found themselves much less
wealthy. The public began to worry that banks and other financial institutions—to protect their own
loans and investments—would call in borrowers’’ existing loans and stop making new ones. A sharp drop in available credit
could, conceivably, plunge the economy into a deep recession.
Alan Greenspan had just become chairman of the Federal Reserve that year. As a sophisticated economist with historical
knowledge of prior financial crises, he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide liquidity to the economy and the
financial system. Banks were told that the Fed would let them borrow liberally. In fact, the Fed provided liquidity to such an
extent that interest rates even fell. As a result of Greenspan’s action, "Black Monday" did not cause a recession in the United
States.
-The potentially catastrophic impact of the dramatic drop in stock values on October 19, 1987, known as "Black Monday," was countered by the Fed through:

Accepted Answer

The Fed successfully responded to the major stock market crash in 1987 by providing massive provisions of liquidity to banks, letting them borrow liberally and even causing interest rates to fall. This prevented a potential recession from occurring in the United States.

Question 2

Which of the following is an example of a fiat money?

Accepted Answer

Fiat money is a currency that has value only because of government regulation or law. A $20 bill is an example of fiat money because its value is determined by the government and is not backed by a physical commodity like gold or silver.

Question 3

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
-According to Application 4, which investment company was in danger of collapse in March 2008 because the market believed that the company made a lot of investment mistakes?

Accepted Answer

According to Application 4, Bear Stearns was in danger of collapse in March 2008 because the market believed that the company made a lot of investment mistakes.

Question 4

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
-According to Application 4, the reason why the FED allowed large currency swaps with other central banks was to:

Accepted Answer

According to Application 4, the FED allowed large currency swaps with other central banks to provide foreign banks with dollars to lend when needed, ultimately increasing liquidity in the global financial system.

Question 5

In the U.S., the Federal Reserve gets directives regarding the conduct of monetary policy from:

Accepted Answer

The Federal Reserve is an independent agency that makes its own decisions regarding the conduct of monetary policy. While it does report to Congress and is subject to oversight, it is not directed by any of the choices presented.

Question 6

When the manager of a department store attaches price tags on his products, he is using money as a:

Accepted Answer

A unit of account is a standard unit in which prices can be stated and the value of goods and services can be compared. When the manager attaches price tags on his products, he is using money as a unit of account. The other options, such as a medium of exchange, refer to the function of money in facilitating transactions, which is not necessarily demonstrated by attaching price tags.

Question 7

Which of the following assets is easiest to make transactions with?

Accepted Answer

Currency is the easiest asset to use for transactions as it is physical cash that can be used directly for purchases without needing to be converted or accessed through a financial institution.

Question 8

Commercial banks:

Accepted Answer

Commercial banks are financial intermediaries that accept deposits from customers and then lend those funds to borrowers, earning interest on the loans. They also offer various other services, such as checking accounts and credit cards. They are not nonprofit organizations and do not print money or conduct monetary policy.

Question 9

Money:

Accepted Answer

Money is anything that is regularly used in exchange, not just coins and currency. Income refers to the earnings one receives from work or investments, while the balance of credit cards represents debt and not actual currency.

Question 10

When you pay $12 for the pizza that you ordered for dinner, you are using money as a (an):

Accepted Answer

When you pay for the pizza, you are using money as a medium of exchange - exchanging the money for the pizza. Money serves as a medium to facilitate transactions between the buyer and the seller. A store of value refers to the ability of money to hold its purchasing power over time, an investment good refers to a good purchased to generate income or increase in value, and a unit of account refers to the standardized unit in which prices are quoted. While money can serve all of these functions, when paying for a pizza, the primary function being fulfilled is that of a medium of exchange.

Question 11

The most basic measure of money in the U.S. is:

Accepted Answer

M1 is the most basic measure of money in the U.S. It includes currency (both paper and coin) in circulation outside of banks, traveler's checks, demand deposits, and other checkable deposits at banks and credit unions. It does not include savings accounts or time deposits, which are part of M2 and M3, respectively. M4 is not a recognized measure of money in the U.S.

Question 12

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
-According to Application 4, by buying commercial paper or extending short term loans to corporations, the Fed is applying which of its primary functions to private corporations?

Accepted Answer

The Fed's role as lender of last resort involves providing short-term loans to private corporations or banks during times of financial distress. Buying commercial paper or extending short term loans to corporations is an example of this function in action.

Question 13

-Refer to Table 13.1. First Commercial Bank's total loans equal $ _______.

Accepted Answer

The answer of 
-Refer to Table 13.1. First Commercial Bank's...

Question 14

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions:
-According to Application 4, the solution that the Fed came up with to prevent the collapse of Bear Stearns was to:

Accepted Answer

The solution that the Fed came up with to prevent the collapse of Bear Stearns was to sell Bear Sterns to JP Morgan Chase and Co.

Question 15

Recall Application 3, "The Financial System Under Stress: September 11, 2001," to answer the following questions:
-To avoid a financial crisis after September 11, 2001, any policy by the implemented Fed must:

Accepted Answer

In order to avoid a financial crisis after September 11, 2001, the implemented Fed had to increase the amount of money in circulation. This was done to stimulate economic activity and provide liquidity to financial markets. Decreasing the amount of money in circulation or increasing the debt of the US treasury could have worsened the financial situation. Additionally, there is no requirement for the policy to be approved by the President of the United States in this situation.

Question 16

Suppose that the required reserve ratio is 0.25. If a customer withdraws $10 million from a bank, then the money supply could potentially:

Accepted Answer

When a customer withdraws $10 million, the bank must reduce its reserves by $2.5 million (0.25 x $10 million) to maintain the required reserve ratio. This leads to a decrease in the bank's ability to lend by $7.5 million ($10 million - $2.5 million). Therefore, the money supply could potentially decrease by $30 million if all banks experienced the same level of withdrawals. However, if the banks were able to borrow from each other or the Federal Reserve to maintain their required reserves, the decrease in the money supply could be less than $30 million but it cannot increase. Therefore, the only possible answer is D.

Question 17

Suppose the required reserve ratio is 10%. A $10 million deposit allows commercial banks to create a maximum total of _______ in deposits.

Accepted Answer

With a 10% reserve ratio, banks must keep $1 million in reserves for a $10 million deposit, allowing them to lend out $9 million. This process can continue, creating a money multiplier effect, resulting in a maximum of $100 million in total deposits.

Question 18

Recall Application 2, "The Growth in Excess Reserves" to answer the following questions:
-Based on what you learned from the application, the Fed can increase incentives for banks to lend less and decrease the money supply by:

Accepted Answer

Raising the interest rate for excess reserves would increase the opportunity cost of holding excess reserves, therefore, incentivizing banks to lend less and decrease the money supply. Lowering the reserve requirement would increase the amount of reserves banks are required to hold, which would incentivize banks to hold onto excess reserves and also decrease the money supply. Lowering the interest rate for excess reserves would decrease the opportunity cost of holding excess reserves, therefore, incentivizing banks to hold onto more excess reserves and potentially increase the money supply. Therefore, choices B and C would have the opposite effect of what is desired.

Question 19

How much does a bank earn if it leaves assets in the form of reserves?

Accepted Answer

Banks earn a small positive rate of interest on their reserves held with the Federal Reserve. This rate is known as the interest on excess reserves (IOER) and is currently set at 0.10%. Options A, B, and D are not relevant to the earnings from reserves.

Question 20

The president of which of the following district banks of the Federal Reserve System is always on the FOMC?

Accepted Answer

The president of the New York district bank is always on the FOMC as the New York district bank is considered the most important and influential due to its proximity to Wall Street and the concentration of financial institutions in the region. While the presidents of the other district banks do rotate on and off the FOMC, the New York district bank president is a permanent member.

Quiz 13: Money and the Banking System

Which of the following is an example of a fiat money?

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions: -According to Application 4, which investment company was in danger of collapse in March 2008 because the market believed that the company made a lot of investment mistakes?

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions: -According to Application 4, the reason why the FED allowed large currency swaps with other central banks was to:

In the U.S., the Federal Reserve gets directives regarding the conduct of monetary policy from:

When the manager of a department store attaches price tags on his products, he is using money as a:

Which of the following assets is easiest to make transactions with?

Commercial banks:

Money:

When you pay $12 for the pizza that you ordered for dinner, you are using money as a (an) :

The most basic measure of money in the U.S. is:

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions: -According to Application 4, by buying commercial paper or extending short term loans to corporations, the Fed is applying which of its primary functions to private corporations?

-Refer to Table 13.1. First Commercial Bank's total loans equal $ _______.

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions: -According to Application 4, the solution that the Fed came up with to prevent the collapse of Bear Stearns was to:

Recall Application 3, "The Financial System Under Stress: September 11, 2001," to answer the following questions: -To avoid a financial crisis after September 11, 2001, any policy by the implemented Fed must:

Suppose that the required reserve ratio is 0.25. If a customer withdraws $10 million from a bank, then the money supply could potentially:

Suppose the required reserve ratio is 10%. A $10 million deposit allows commercial banks to create a maximum total of _______ in deposits.

Recall Application 2, "The Growth in Excess Reserves" to answer the following questions: -Based on what you learned from the application, the Fed can increase incentives for banks to lend less and decrease the money supply by:

How much does a bank earn if it leaves assets in the form of reserves?

The president of which of the following district banks of the Federal Reserve System is always on the FOMC?