Question 1

The Federal Reserve System can be described as a bank for bankers.

Accepted Answer

The Federal Reserve System, also known as the Fed, is a central bank that provides services to other banks, such as loans and electronic payment processing. This makes it a bank for bankers, as it primarily serves financial institutions rather than individuals or businesses directly.

Question 2

Monetary policy is the system of actions taken by the Fed to influence the money supply.

Accepted Answer

Monetary policy refers to the actions taken by the Federal Reserve to influence the availability and cost of money and credit in the economy. This includes setting interest rates, adjusting reserve requirements for banks, and engaging in open market operations.

Question 3

Central bank independence refers to the central bank's ability to make decisions without political interference.

Accepted Answer

Central bank independence is a widely accepted concept in economics that emphasizes the need for a central bank to be free of political influence or control. This independence allows the central bank to pursue its monetary policy goals, such as controlling inflation or promoting economic growth, without the fear of political pressure.

Question 4

As the federal funds rate rises, the banks' opportunity cost of holding excess reserves falls.

Accepted Answer

The opposite is true. As the federal funds rate rises, the banks' opportunity cost of holding excess reserves increases because they can earn more interest by loaning out the funds instead.

Question 5

If the Federal Reserve Bank wants to lower the supply of money, it sells government bonds from its portfolio to the public in the nation's bond markets.

Accepted Answer

When the Federal Reserve Bank sells government bonds from its portfolio to the public in the nation's bond markets, it drains money from the economy and lowers the money supply.

Question 6

Unconventional monetary policies include massive lending to banks and open-market purchases of assets other than Treasury bills.

Accepted Answer

Unconventional monetary policies have included measures such as quantitative easing, which involves buying government and private sector securities, and direct lending to banks, among others. These policies go beyond the traditional tool of adjusting short-term interest rates.

Question 7

Open-market operations is the purchase and sale of U.S.government bonds by the Federal Reserve Bank.

Accepted Answer

Open-market operations involve the purchase and sale of U.S. government bonds by the Federal Reserve Bank. This is a key tool used by the Fed to implement monetary policy and influence the money supply in the economy.

Question 8

When someone asks how much money you made this year, they are using the term "money" correctly.

Accepted Answer

The answer of When someone asks how much money you...

Question 9

The Fed's founders viewed the Fed as a means of maintaining the money supply during economic contractions and as a lender of last resort.

Accepted Answer

This is accurate according to the Federal Reserve's official history. The Fed was created in 1913 to serve as a "lender of last resort" to prevent bank failures during economic downturns, as well as to control the money supply through monetary policy.

Question 10

The Federal Reserve Bank was modeled after the European Central Bank.

Accepted Answer

The Federal Reserve Bank, established in 1913, was modeled after various national banking systems but not directly after the European Central Bank (ECB), which was established later in 1998.

Question 11

Money and income are used interchangeably by noneconomists but mean different things.

Accepted Answer

Money refers to the actual currency or assets like coins, bills, and assets that can be used for payment. Income, on the other hand, refers to the money or monetary value a person or entity receives for their work, investments or any other source.

Question 12

The Federal Reserve Open Market Committee includes the seven members of the Board of Governors, presidents of 5 of the 12 district banks, and the Secretary of the Treasury.

Accepted Answer

The Federal Reserve Open Market Committee (FOMC) includes the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other district banks on a rotating basis, but not the Secretary of the Treasury.

Question 13

Open-market operations affect the supply of reserves.

Accepted Answer

Open-market operations refer to the buying and selling of government securities by the central bank in order to influence the supply of reserves in the economy. Therefore, these operations directly affect the supply of reserves.

Question 14

Money is a concept that has a certain value at a point in time.

Accepted Answer

Money is a concept that represents a certain value at a specific point in time, whether it be in the form of currency, investments, or assets. This value can fluctuate over time due to various economic factors such as inflation, market trends, and supply and demand.

Question 15

If the Federal Reserve wants to increase the supply of money, it creates dollars and uses them to purchase government bonds from the public in the nation's bond markets.

Accepted Answer

This is known as open market operations, which is one of the tools used by the Federal Reserve to change the money supply in the economy. By purchasing government bonds, the Federal Reserve injects new money into the system and increases the supply of money.

Question 16

Open-market operations are easy for the Federal Reserve to conduct and are therefore the tool of monetary policy that the Federal Reserve uses most often.

Accepted Answer

Open-market operations involve buying or selling government securities, which can be easily conducted by the Federal Reserve. Therefore, it is the most commonly used tool for monetary policy.

Question 17

If the Fed purchases $100,000 of government bonds, and the reserve requirement is 20 percent, the maximum increase in the money supply is $ 500,000.

Accepted Answer

If the Fed purchases $100,000 of government bonds, this increases the reserves of the banks by $100,000. However, since the reserve requirement is 20%, banks only need to hold $20,000 in reserves and can lend out the remaining $80,000. This lending creates new deposits, which can potentially circulate through the economy and increase the money supply. Using the money multiplier formula, the maximum increase in the money supply can be calculated as follows:

Maximum Increase in Money Supply = (1/Required Reserve Ratio) x Initial Increase in Reserves
= (1/0.20) x $100,000
= $500,000

Therefore, the statement is true.

Question 18

The central bank in the United States is known as the Federal Reserve System.

Accepted Answer

The central bank in the United States is commonly referred to as the Federal Reserve or the Fed for short, and the official name is the Federal Reserve System.

Question 19

The United States was among the first of the modern industrial nations to establish a central banking system.

Accepted Answer

The Federal Reserve System, the central banking system of the United States, was established in 1913, which was relatively late compared to central banks in Europe, such as the Bank of England (established in 1694) or the Banque de France (established in 1800).

Question 20

The federal funds rate is the short-term interest rate that banks charge one another for loans.

Accepted Answer

The federal funds rate is indeed the short-term interest rate that banks charge one another for loans.

Quiz 29: Monetary Policy: Conventional and Unconventional