Question 1

A banking panic is an episode in which:
A) depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.
B) commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations.
C) commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate.
D) depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.

Accepted Answer

A banking panic is characterized by depositors rushing to withdraw their deposits from the banking system due to news or rumors of possible bankruptcy of one bank. This can lead to a cascade of bank failures and a broader banking crisis.

Question 2

The central bank of the United States is:
A) Bank of America.
B) Bank of the United States.
C) Bank One.
D) the Federal Reserve System.

Accepted Answer

The Federal Reserve System is the central bank of the United States, responsible for conducting monetary policy, supervising and regulating financial institutions, and maintaining the stability and efficiency of the payment system. While banks such as Bank of America and Bank One are large commercial banks, they are not the central bank of the United States. The Bank of the United States was the country's first central bank, but it was dissolved in 1836.

Question 3

The Federal Reserve System is:
A) a group of twelve commercial banks.
B) the central bank of the United States.
C) the agency of the U.S. government that insures commercial bank deposits.
D) the branch of the U.S. Treasury that keeps the U.S. gold reserves.

Accepted Answer

The Federal Reserve System is the central bank of the United States, responsible for conducting monetary policy and providing financial services to the government and banks.

Question 4

The Federal Reserve System first began operations in:
A) 1789.
B) 1865.
C) 1914.
D) 1934.

Accepted Answer

The Federal Reserve System began operations on December 23, 1914, after being signed into law by President Woodrow Wilson earlier that year.

Question 5

The Federal Reserve consists of ______ regional Banks, ______ governors on the Board of Governors, and ______ voting members of the Federal Open Market Committee.
A) 7; 12; 12
B) 12; 7; 12
C) 12; 7; 19
D) 14; 7; 21

Accepted Answer

The Federal Reserve consists of 12 regional Banks, 7 governors on the Board of Governors, and 12 voting members of the Federal Open Market Committee.

Question 6

During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio ______ and the amount of currency held by the public ____, while the money supply ______.
A) increased; increased; increased
B) decreased; decreased; decreased
C) increased; increased; decreased
D) decreased; decreased; increased

Accepted Answer

The answer of During the Great Depression in the United...

Question 7

The federal funds rate is the interest rate on short-term loans made by:
A) the Federal Reserve to commercial banks.
B) the federal government to the Federal Reserve.
C) the Federal Reserve to the federal government.
D) commercial banks to other commercial banks.

Accepted Answer

The answer of The federal funds rate is the interest...

Question 8

The U.S. Congress instituted a system of deposit insurance for banks in:
A) 1934.
B) 1789.
C) 1865.
D) 1913.

Accepted Answer

The U.S. Congress instituted the Federal Deposit Insurance Corporation (FDIC) in 1934, which provides deposit insurance to protect depositors in case of bank failures. Prior to this, there was no widespread deposit insurance system in place, and bank failures were common during economic downturns.

Question 9

Financial markets pay close attention to changes in the federal funds rate because these changes:
A) directly affect a large volume of loans.
B) indicate the Fed's plans for monetary policy.
C) indicate commercial bank lending policies.
D) directly affect the interest payments on the national debt.

Accepted Answer

The Fed frequently sets its monetary policy in the form of a target for the federal funds rate; therefore, this rate is closely watched in financial markets.

Question 10

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:
A) conducting open-market operations.
B) changing the Federal Reserve discount rate.
C) changing bank reserve requirement ratios.
D) changing interest rates.

Accepted Answer

Open-market operations are the most important tool used by the Federal Reserve to influence the supply of bank reserves. This involves the purchase or sale of government securities in the open market, which affects the amount of reserves held by banks. It is also the most convenient and flexible tool, as the Fed can quickly adjust the amount of securities it buys or sells in response to changing economic conditions. The discount rate and reserve requirement ratios also impact bank reserves, but they are not as important or flexible as open-market operations. Changing interest rates can indirectly affect bank reserves, but it is not a direct tool used by the Federal Reserve.

Question 11

The Federal Open Market Committee makes decisions about ______ policy.
A) monetary
B) fiscal
C) banking
D) deposit insurance

Accepted Answer

The Federal Open Market Committee (FOMC) is responsible for making monetary policy decisions in the United States, such as setting short-term interest rates and managing the money supply. Fiscal policy refers to government spending and tax policies, which are determined by Congress and the President. Banking policy and deposit insurance are overseen by other government agencies, such as the Federal Reserve and the Federal Deposit Insurance Corporation.

Question 12

Deposit insurance is a system in which the government guarantees that:
A) depositors will not lose any money even if their bank goes bankrupt.
B) people can have deposits at commercial banks.
C) commercial banks will not go bankrupt.
D) commercial banks will not lose any deposits.

Accepted Answer

Deposit insurance guarantees that depositors will not lose any money even if their bank goes bankrupt. This provides a safety net for individuals and businesses to keep their funds in a bank without fear of losing them in the event of a bank failure.

Question 13

For the past 40 years, the Federal Reserve has expressed policy in terms of a target value for:
A) bank reserves.
B) the Federal Reserve discount rate.
C) the federal funds rate.
D) open market operations.

Accepted Answer

The Federal Reserve has used the federal funds rate as a policy tool since the 1980s to achieve its monetary policy objectives. The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight, and it is used as a benchmark for various other interest rates, such as mortgage rates and credit card rates. The Fed sets a target range for the federal funds rate and uses open market operations, such as buying or selling Treasury securities, to achieve the desired level of the rate. Therefore, the correct choice is (C) the federal funds rate.

Question 14

The Board of Governors consists of ______ governors appointed for staggered ___-year terms.
A) 5; 12
B) 5; 14
C) 7; 12
D) 7; 14

Accepted Answer

The Board of Governors of the Federal Reserve System consists of 7 governors appointed for staggered 14-year terms.

Question 15

The two main responsibilities of the Federal Reserve System are to ______ and to ______.
A) apprehend counterfeiters; regulate the stock market
B) enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar
C) insure bank deposits; print currency
D) conduct monetary policy; oversee financial markets

Accepted Answer

The Federal Reserve System's main responsibilities are to conduct monetary policy and oversee financial markets. Monetary policy involves managing the money supply and interest rates to achieve economic goals such as low inflation and full employment. The Federal Reserve also oversees financial markets to ensure they are stable and functioning properly. The other answer choices are not accurate descriptions of the Federal Reserve's responsibilities.

Question 16

Bank depositors will not lose their deposits in a banking panic if:
A) there is fractional reserve banking.
B) there is 100% reserve banking.
C) there is a central bank.
D) the actual reserve/deposit ratio equal to the desired reserve/deposit ratio.

Accepted Answer

In a 100% reserve banking system, all deposits are backed by an equal amount of reserves, meaning that even in a banking panic, depositors will not lose their deposits. In fractional reserve banking, banks loan out a portion of the deposits as well as maintaining reserves, which means that if there is a significant withdrawal of deposits, banks may not have enough reserves to meet all withdrawals and depositors may lose some or all of their deposits. The presence of a central bank can help to stabilize the banking system during a panic, but it does not guarantee that depositors will not lose their deposits. The actual reserve/deposit ratio equal to the desired reserve/deposit ratio is ideal for maintaining stability in the banking system, but it does not prevent the possibility of a panic and depositors losing their deposits.

Question 17

One of the serious drawbacks of the deposit insurance system instituted in the United States is that:
A) bank failures continue to occur regularly.
B) the system took away the Federal Reserve's ability to conduct open-market operations.
C) the system took away the Federal Reserve's ability to change reserve requirements.
D) if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

Accepted Answer

The deposit insurance system in the United States provides protection to depositors in case of bank failures. However, if insured intermediaries such as banks make bad loans or engage in risky behavior, the losses may still have to be covered by taxpayers. This creates a moral hazard problem, where banks have less incentive to make safe and responsible lending decisions knowing that their losses will be covered by insurance.

Question 18

A higher real interest rate ______ saving and ______ consumption spending.
A) increases; increases
B) increases; decreases
C) does not change; does not change
D) decreases; increases

Accepted Answer

A higher real interest rate increases the return on saving, leading to an increase in saving. At the same time, borrowing becomes more expensive, leading to a decrease in consumption spending. Therefore, a higher real interest rate increases saving and decreases consumption spending, which is best represented by option B.

Question 19

The interest rate that commercial banks charge each other for very short-term loans is called the:
A) prime rate.
B) federal funds rate.
C) Federal Reserve discount rate.
D) commercial paper rate.

Accepted Answer

The interest rate that commercial banks charge each other for very short-term loans is called the federal funds rate. The prime rate is the interest rate banks offer to their most creditworthy customers, the Federal Reserve discount rate is the interest rate at which commercial banks borrow from the Federal Reserve, and the commercial paper rate is the rate at which large corporations borrow short-term funds directly from investors.

Question 20

The seven Fed governors, the president of the Federal Reserve Bank of New York, and four of the presidents of the other regional Federal Reserve Banks constitute the:
A) National Monetary Commission.
B) Board of Governors.
C) Federal Open Market Committee.
D) Federal Reserve System.

Accepted Answer

The Federal Open Market Committee (FOMC) is the decision-making body of the Federal Reserve System responsible for open market operations, which involve buying and selling of U.S. Treasury securities. The FOMC consists of the seven governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Federal Reserve Bank presidents on a rotating basis.

Quiz 12: Short-Term Economics Fluctuations: An Introduction

A banking panic is an episode in which:

The central bank of the United States is:

The Federal Reserve System is:

The Federal Reserve System first began operations in:

The Federal Reserve consists of regional Banks, governors on the Board of Governors, and __ voting members of the Federal Open Market Committee.

During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio and the amount of currency held by the public , while the money supply .

The federal funds rate is the interest rate on short-term loans made by:

The U.S. Congress instituted a system of deposit insurance for banks in:

Financial markets pay close attention to changes in the federal funds rate because these changes:

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

The Federal Open Market Committee makes decisions about ______ policy.

Deposit insurance is a system in which the government guarantees that:

For the past 40 years, the Federal Reserve has expressed policy in terms of a target value for:

The Board of Governors consists of ____ governors appointed for staggered _-year terms.

The two main responsibilities of the Federal Reserve System are to and to .

Bank depositors will not lose their deposits in a banking panic if:

One of the serious drawbacks of the deposit insurance system instituted in the United States is that:

A higher real interest rate saving and consumption spending.

The interest rate that commercial banks charge each other for very short-term loans is called the:

The seven Fed governors, the president of the Federal Reserve Bank of New York, and four of the presidents of the other regional Federal Reserve Banks constitute the: