Question 1

The Fed's purchases of long-term Treasury securities during the credit crisis were intended to

Accepted Answer

The Fed's purchases of long-term Treasury securities were part of a quantitative easing strategy aimed at reducing long-term interest rates to stimulate economic activity.

Question 2

All commercial banks are required to be members of the Fed.

Accepted Answer

Not all commercial banks are required to be members of the Federal Reserve System; membership is mandatory for national banks, but optional for state-chartered banks.

Question 3

To increase the money supply, the Trading Desk would be instructed to sell government securities.

Accepted Answer

To increase the money supply, the Trading Desk would be instructed to buy government securities, which injects money into the banking system.

Question 4

When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.

Accepted Answer

When the Fed buys Treasury bills, it increases demand for them, which pushes their prices up. Since the yield (interest rate) of a bond moves inversely to its price, yields go down.

Question 5

The ____ meets with the Board of Governors twice a year and offers views on the economic circumstances and financial services needs of consumers and communities.

Accepted Answer

The Community Advisory Council meets with the Board of Governors twice a year to offer views on the economic circumstances and financial services needs of consumers and communities, reflecting its role in providing feedback from a consumer perspective.

Question 6

When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.

Accepted Answer

When the Trading Desk sells Treasury securities, it actually removes reserves from the banking system, leading to a decrease in the supply of funds. This typically results in an increase in the federal funds rate and other interest rates, not a decrease.

Question 7

When the Fed purchases _______, it is attempting to directly stimulate the housing market.

Accepted Answer

When the Federal Reserve purchases mortgage-backed securities, it directly influences the housing market by lowering interest rates on mortgages, making borrowing cheaper for homebuyers. This action is intended to stimulate housing demand and, by extension, the broader economy.

Question 8

To increase money supply growth, the Fed could

Accepted Answer

To increase money supply growth, the Fed would buy government securities in the secondary market (not sell), decrease the primary credit rate (not increase), and decrease the reserve requirement ratio (not increase). Therefore, none of the provided options are correct actions for increasing money supply growth.

Question 9

The euro has been adopted by all of the major countries of Western Europe, including Switzerland and the United Kingdom.

Accepted Answer

Switzerland and the United Kingdom have not adopted the euro; Switzerland uses the Swiss franc, and the United Kingdom, despite leaving the EU, used the British pound during its membership and continues to do so.

Question 10

The Fed's primary goal has historically been to add liquidity to the mortgage market by continuously purchasing mortgage-backed securities.

Accepted Answer

The Fed's primary goal is to promote maximum employment, stable prices, and moderate long-term interest rates. While it may purchase mortgage-backed securities as part of its monetary policy operations, this is not its primary goal.

Question 11

Adjustment of the primary credit rate is the most common means by which the Fed controls the money supply.

Accepted Answer

The most common means by which the Federal Reserve controls the money supply is through open market operations, which involve the buying and selling of government securities.

Question 12

In December 2008, during the credit crisis, the Fed raised the target for the federal funds rate as a range between 2.5 and 3.5 percent and maintained the federal funds rate within this range until the end of 2015 in order to stimulate the economy.

Accepted Answer

During the credit crisis in December 2008, the Federal Reserve actually lowered the target for the federal funds rate to a range of 0 to 0.25 percent to stimulate the economy, not raised it.

Question 13

To increase the money supply, the Fed may increase the reserve requirement ratio.

Accepted Answer

Increasing the reserve requirement ratio would actually decrease the money supply, as it would require banks to hold more funds in reserve and thus reduce the amount they can lend out.

Question 14

Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

Accepted Answer

The Beige Book is a report published by the Federal Reserve, compiled from information gathered by the twelve Federal Reserve district banks, detailing current economic conditions in each district.

Question 15

The advisory committee making recommendations to the Fed about economic and banking issues is the

Accepted Answer

The Federal Advisory Council is the correct answer because it is composed of representatives from the banking industry who meet with the Federal Reserve Board to discuss economic and banking issues.

Question 16

The advisory committee offering views on issues related to credit unions is the

Accepted Answer

The Community Depository Institutions Advisory Council (CDIAC) advises the Federal Reserve on issues related to community depository institutions, which include credit unions among other small financial institutions.

Question 17

The FOMC's decisions on monetary policy are rarely unanimous as one or more members usually dissent.

Accepted Answer

The answer of The FOMC's decisions on monetary policy are...

Question 18

When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.

Accepted Answer

When the Federal Reserve (Fed) sells securities, it effectively removes money from the banking system, leading to a decrease in the total funds available to commercial banks. This action is a form of monetary policy tightening, as it reduces the money supply, aiming to control inflation and stabilize the economy.

Question 19

____ includes currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.

Accepted Answer

M2 includes all of M1 (currency held by the public and checking deposits) plus savings accounts, small time deposits, money market deposit accounts, and a few other types of accounts. M1 is more narrowly focused on currency and checking accounts, while M3 includes M2 plus large time deposits, institutional money market funds, and other larger liquid assets.

Question 20

During the credit crisis, the Fed took the unprecedented step of intervening in the stock markets to prevent the stock prices of major commercial banks from declining by more than 10 percent from the previous quarter.

Accepted Answer

During the credit crisis, the Federal Reserve's interventions primarily focused on providing liquidity to banks, lowering interest rates, and purchasing securities to stabilize financial markets, rather than directly intervening to prevent stock prices of commercial banks from declining by a specific percentage.

Quiz 4: Functions of the Fed