Question 1

Monetary policy actions are determined by the

Accepted Answer

The Federal Open Market Committee (FOMC) is responsible for determining monetary policy actions in the United States. The FOMC is made up of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The committee meets several times throughout the year to assess the state of the economy and set policies related to interest rates, money supply, and other monetary tools. The New York Federal Reserve Bank is one of the twelve regional banks that make up the Federal Reserve System and plays a key role in implementing the decisions made by the FOMC. The President of the United States does not have direct control over monetary policy, although the chair of the Federal Reserve is appointed by the President and confirmed by the U.S. Senate. The U.S. Congress has oversight responsibilities for the Federal Reserve, but does not directly determine monetary policy actions.

Question 2

The Board of Governors of the Federal Reserve System is

Accepted Answer

The Board of Governors of the Federal Reserve System is composed of seven members who are appointed by the President and approved by the Senate.

Question 3

Explain the role of financial intermediation.

Accepted Answer

The answer of Explain the role of financial intermediation....

Question 4

Which of the following describes a moral hazard problem?

Accepted Answer

Moral hazard is a post-contractual problem where one party has information that allows them to act in an opportunistic manner and take advantage of the other party. This can happen when one party is insulated from risk and therefore has less incentive to act in the best interest of the other party.

Question 5

When you make a purchase at a retail store by giving your bank an instruction to transfer funds directly from your bank account to the store's bank account, you have most likely made the purchase using

Accepted Answer

When you transfer funds directly from your bank account to the store's bank account, this is known as a debit card transaction. It is not a cash transaction because no physical cash is exchanged, and it is not a loan or credit transaction because you are not borrowing money or using credit to make the purchase.

Question 6

Which of the following is NOT a part of the Federal Reserve System?

Accepted Answer

The Federal Deposit Insurance Corporation (FDIC) is a separate government agency that provides insurance for deposits in banks and savings institutions. It is not a part of the Federal Reserve System.

Question 7

Let us suppose that you apply for a loan with a bank. You tell the bank that you are going to remodel your kitchen, but after you get the loan you go to Las Vegas to gamble with the money. Your behavior is an example of

Accepted Answer

Moral hazard refers to the behavior of the borrower after obtaining the loan, where they may take on undue risk or engage in reckless behavior because they do not bear the full consequences of their actions. In this case, the borrower has misled the bank about the intended use of the loan and engaged in a behavior that was not part of the original agreement, which is an example of moral hazard. Adverse selection refers to the problem of imperfect information before the loan is given, where the bank may not have access to all relevant information to assess the creditworthiness of the borrower. Direct and indirect credit allocation relate to how credit is assigned to specific sectors or industries, which is not relevant to this scenario.

Question 8

The possibility that a borrower might engage in riskier behavior after a loan is made is called

Accepted Answer

Moral hazard refers to the possibility that a borrower might take on more risk after a loan is made because they do not fully bear the consequences of their actions. This can lead to higher default rates and other negative consequences for lenders. Adverse selection refers to the situation where borrowers who are most likely to default are the ones who are most likely to seek out a loan, which can also increase default rates. Liability aversion refers to the tendency of individuals to avoid taking on legal responsibilities, which is not directly related to the behavior of borrowers after a loan is made. The risk of default is a general term that encompasses the possibility that borrowers will not be able to repay their loans, but it does not specifically refer to the behavior of borrowers after a loan is made.

Question 9

Suppose you and your friend are in a shopping mall and you borrow $100 from your friend to pay for a pair of shoes that you purchase in a shop. This is an example of

Accepted Answer

Direct financing involves borrowing funds directly from a lender, such as a friend or family member, without going through a financial intermediary. In this case, you borrowed $100 directly from your friend to pay for the shoes, which is an example of direct financing.

Question 10

The Federal Open Market Committee (FOMC)

Accepted Answer

The Federal Open Market Committee (FOMC) is responsible for setting monetary policy in the United States, which includes influencing the future growth of the money supply. This is done by purchasing or selling government securities in the open market, which affects the level of reserves that banks hold and thus influences their ability to lend money.

Question 11

The function that banks perform by obtaining funds from households, businesses, and governments and lending these funds to other households, businesses, and governments is known as

Accepted Answer

The function described is that of financial intermediation, where banks act as intermediaries between those who have surplus funds and those who need funds. Banks obtain funds from households, businesses, and governments (who have surplus funds) and provide loans or credit to other households, businesses, and governments (who need funds). This function helps to allocate funds efficiently and effectively in an economy.

Question 12

When you use a debit card to purchase a pair of jeans, you are

Accepted Answer

When you use a debit card to purchase a pair of jeans, you are giving your bank an instruction to transfer funds directly from your bank account to the store's bank account. Debit cards do not create loans, repurchase agreements or any other financial arrangements between the bank and the seller.

Question 13

Who appoints the Federal Reserve System's Board of Governors?

Accepted Answer

The Board of Governors is appointed by the President of the United States and confirmed by the Senate.

Question 14

The part of the Federal Reserve System that determines monetary policy actions is the

Accepted Answer

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that determines monetary policy actions, such as setting interest rates and adjusting the money supply. The other options listed are not directly involved in setting monetary policy.

Question 15

Suppose you borrow $1,000 from your bank to pay for a bike. This is an example of

Accepted Answer

Borrowing money from a bank is an example of indirect financing, as the bank acts as an intermediary between the saver and the borrower. The bank takes funds from savers and lends them to borrowers, charging interest on the loan. Direct financing would be when the borrower obtains the funds directly from the saver, such as through bonds or stocks. Moral hazard and transaction costs are not relevant to this scenario.

Question 16

Which of the following is TRUE of the Federal Reserve System?
I. It was established in the early 1980s.
II. It serves as the central bank of the United States.

Accepted Answer

The Federal Reserve System was not established in the early 1980s, but rather in 1913. It serves as the central bank of the United States, making statement II true. Therefore, the correct answer is choice B.

Question 17

The current chair of the Board of Governors of the Federal Reserve is

Accepted Answer

Alan Greenspan served as the Chair of the Board of Governors from 1987-2006, John Snow never held the position, and Henry Paulson served as Treasury Secretary, not Chair of the Board of Governors. Janet Yellen served as Chair from 2014-2018.

Question 18

The central bank for the United States is

Accepted Answer

The Federal Reserve System, commonly known as the Fed, is the central bank of the United States. It was created by Congress in 1913 to provide the nation with a safe, flexible, and stable monetary and financial system. The other options listed are private banks and do not serve as the central bank for the United States.

Question 19

Adverse selection refers to the

Accepted Answer

The answer of Adverse selection refers to the
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Question 20

Which of the following is NOT a reason that people tend to deposit their funds with banks rather than lend their funds directly to other individuals?

Accepted Answer

Depositing funds with a bank provides individuals with the benefit of easy access to their funds in case of any emergency or unforeseen expenses, thus avoiding liquidity problems. Adverse selection, asymmetric information, and moral hazard problems are common reasons why individuals tend to deposit their funds with banks rather than lending directly to others.

Quiz 14: Money Banking and Central Banking