Question 1

________ is that item which serves as a numeraire, or unit of account or the unit that is used to measure wealth.

Accepted Answer

Money is the item that serves as a numeraire or a unit of account, as it is the commonly accepted means of exchange and unit of measurement for goods and services. While assets, goods, and services can have value and contribute to wealth, they do not necessarily serve as the unit of account. A widget is a specific type of good, and not a general concept.

Question 2

________ is defined as M₁ plus all dollars held in time and savings accounts at banks and thrift institutions, plus all dollars invested in retail money market mutual funds, plus some additional accounts such as overnight repurchase agreements.

Accepted Answer

M₂, also known as M2 money supply, includes M1 and adds savings deposits, money market mutual funds and other time deposits. It is a broader measure of money supply that includes more liquid financial assets than M1.

Question 3

The United States has a ________, which means that a bank must hold or "reserve" some portion of the funds that savers deposit in a form approved by the Fed.

Accepted Answer

The United States operates under a fractional reserve banking system, where banks are required to keep a fraction of their deposits in reserve, in a form that is approved by the Federal Reserve. This system allows banks to lend out a portion of the deposits they receive, while still ensuring they have enough reserves to meet withdrawal demands.

Question 4

________ is oversight of the main payment and settlement systems in the U.K. that are used for many types of financial transaction - from paying wages and credit card bills to the settlement of transactions between financial institutions.

Accepted Answer

The passage clearly states that the oversight being referred to is of the "main payment and settlement systems in the U.K." and "used for many types of financial transaction." Therefore, the most appropriate choice is "Oversight of Payment Systems." Choices A, B, and C do not accurately reflect the specific type of oversight being described in the passage.

Question 5

The most important agent in the money supply process is the ________.

Accepted Answer

The Federal Reserve System, also known as the Fed, is the most important agent in the money supply process. Therefore, all of the choices (A, B, and C) are correct.

Question 6

One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, a central bank is sometimes referred to as a ________.

Accepted Answer

A central bank is primarily responsible for implementing monetary policy in order to achieve its goals, which often include promoting price stability and economic growth. Therefore, a central bank is commonly referred to as a "monetary authority."

Question 7

The Fed's most powerful instrument is its authority to conduct ________, which means that the Fed may buy and sell, in open debt markets, government securities for its own account.

Accepted Answer

The Fed's most powerful instrument is its authority to conduct open market operations, which involves buying and selling government securities in open debt markets for its own account. This allows the Fed to directly influence the money supply and interest rates in the economy. Reserve requirements and the discount rate are also tools that the Fed can use to impact the money supply and interest rates, but they are not as powerful or flexible as open market operations. Open market repurchase agreements are a type of open market operation where the Fed buys securities with a commitment to sell them back to the seller at a later date, but this is not the Fed's most powerful instrument.

Question 8

The ________ role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries.

Accepted Answer

The primary role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries. This includes controlling inflation, managing interest rates, and regulating the banking system. The other options, marginal, secondary, and tertiary, do not accurately describe the main role of a central bank.

Question 9

The process of creating a money supply, the ________, can be generalized to the monetary aggregates beyond M₁.

Accepted Answer

The process of creating a money supply is known as the money multiplier, which involves banks using excess reserves to lend out and create more money in the economy. This process can be generalized to create broader measures of the money supply beyond M₁, such as M₂ and M₃.

Question 10

The Fed often employs variants of simple open market purchases and sales, and these are called ________.

Accepted Answer

The Fed uses repurchase agreements (repos) and reverse repos as tools to manage the money supply and influence short-term interest rates, which are variants of open market operations.

Question 11

The ratio of the money supply to the economy's income (as reflected by the gross national product or some similar measure) is known as the ________ in circulation.

Accepted Answer

The ratio of the money supply to the economy's income is known as the velocity of money. It measures the rate at which money is exchanged or changes hands within an economy. It is calculated by dividing the nominal gross domestic product (GDP) by the money supply.

Question 12

________ is developing and coordinating information sharing within the Bank, with the FSA and HM Treasury, and with authorities internationally to ensure future financial crises are handled and managed effectively.

Accepted Answer

Crisis management is the process of developing and coordinating information sharing within an organization and with external stakeholders to prevent and mitigate the impact of future crises. This includes working with regulatory authorities and international organizations to share best practices and lessons learned, and to develop effective strategies for managing financial risk. Risk assessment, risk reduction, and oversight of payment systems are all important components of effective crisis management, but they are not the primary focus of this function.

Question 13

Created in 1913, the ________ is the government agency responsible for the management of the U.S. monetary and banking systems.

Accepted Answer

The Fed (Federal Reserve System) was created in 1913 and is responsible for managing the U.S. monetary and banking systems. The Board of Governors, which is part of the Fed, oversees the operations of the system. The European Central Bank (ECB) is the central bank for the eurozone and is responsible for managing the monetary policy of the European Union. The Group of 8 (G8) is an intergovernmental economic organization that includes eight of the world's leading economies.

Question 14

The creation of the money supply, and changes in it, is a complex interaction of four parties. Which of the below is NOT one of these parties?

Accepted Answer

The creation and changes in the money supply involves the Federal Reserve (the Fed) through monetary policy, commercial banks through lending and deposit creation, and savers (as a source of deposits). Insurers do not play a direct role in the creation of the money supply.

Question 15

Which of the below statements is FALSE?

Accepted Answer

The statement "The Fed has little regulatory power over the nation's depository institutions, especially commercial banks" is false. The Fed has significant regulatory power over depository institutions, including commercial banks, through its supervisory and examination authority.

Question 16

A bank borrowing from the Fed is said to use the ________, and these loans are backed by the bank's collateral. The rate of interest on these loans is the ________.

Accepted Answer

The answer of A bank borrowing from the Fed is...

Question 17

Which of the following does the central bank of the United Kingdom identify as its role in maintaining financial stability?

Accepted Answer

The central bank of the United Kingdom, the Bank of England, identifies risk assessment as part of its role in maintaining financial stability, which involves monitoring and evaluating risks to the financial system.

Question 18

The Fed has several tools by which it influences, indirectly and to a greater or lesser extent, the amount of money in the economy and the general level of interest rates. Which of the below is NOT one of these tools?

Accepted Answer

The compound rate is not a tool used by the Fed to influence the amount of money in the economy and interest rates. Reserve requirements, open market operations, and open market repurchase agreements are all tools used by the Fed.

Question 19

In addition to the individual country central banks, there is the ________, which came into being on January 1, 1999, and is responsible for the implementing monetary policy for the member countries of the European Union.

Accepted Answer

The European Central Bank (ECB) is responsible for implementing monetary policy for the member countries of the European Union. It came into being on January 1, 1999, and is independent of individual country central banks. Options A, B, and D do not accurately describe the central bank responsible for implementing monetary policy for the European Union.

Question 20

Other assets that do not function in the role of medium of exchange have many properties in common with the numeraire. These properties include which of the below?

Accepted Answer

Other assets that do not function as a medium of exchange may share properties such as safety with the numeraire. Multiplicativity and liquidity are not necessarily common properties shared with the numeraire.

Quiz 4: The U.S. Federal Reserve and the Creation of Money