Question 1

When the Fed makes a discount loan, the impact on the Banking System's balance sheet is:

Accepted Answer

When the Fed makes a discount loan, it increases the reserves of the banking system, similar to the effect of an open market purchase, which also increases reserves.

Question 2

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 3

An open market sale of U.S.Treasury securities by the Fed will cause the Banking System's balance sheet to show:

Accepted Answer

The answer of An open market sale of U.S.Treasury securities...

Question 4

Which of the following have the same impact on the Fed's balance sheet?

Accepted Answer

An open market purchase and an increase in loans by the Fed to banks both expand the Fed's balance sheet by increasing assets. An open market purchase increases the Fed's holdings of securities, while an increase in loans to banks increases the Fed's loan assets.

Question 5

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect:

Accepted Answer

When the Fed makes a discount loan, it increases its assets by the amount of the loan (as it is lending money) and its liabilities increase because it credits the reserve accounts of the borrowing banks, which are liabilities for the Fed.

Question 6

An open market sale of U.S.Treasury securities by the Fed will cause the Fed's balance sheet to show:

Accepted Answer

An open market sale of U.S. Treasury securities by the Fed will decrease the asset of securities in the Fed's balance sheet (as they are selling these securities) and decrease the liability of reserves (as banks will be using their reserves to purchase the securities). Therefore, choice A is the best choice.

Question 7

When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect:

Accepted Answer

When the Fed makes a discount loan, it increases the reserves (assets) of the banking system and simultaneously increases the liabilities (the loan from the Fed).

Question 8

Harry gets $1000 in currency from his grandfather when he graduates from college.He deposits these funds into his checking account.What is the impact on the monetary base of Harry's deposit?

Accepted Answer

The monetary base does not change when Harry deposits his $1,000 into his checking account because the physical currency is simply transferred from being held by Harry to being held by the bank. The overall amount of currency in circulation plus reserves held by the bank remains the same.

Question 9

Harry gets $1000 in currency from his grandfather when he graduates from college.He deposits these funds into his checking account.Considering Harry's personal balance sheet, his assets:

Accepted Answer

When Harry received the $1000 in currency, his assets increased by $1000. Depositing it into his checking account does not change the total value of his assets, just the form (from cash to bank balance).

Question 10

When an individual withdraws funds from a checking account the:

Accepted Answer

When an individual withdraws funds from a checking account, the bank's balance sheet shrinks because the bank's liabilities decrease. However, the size of the Fed's balance sheet is not affected because the reserves held by the bank, which are the Fed's liabilities, decrease to offset the decrease in the bank's liabilities. Therefore, the size of the Fed's balance sheet remains the same.

Question 11

During the 2007-2009 financial crisis which of the following became the largest component of assets on the Fed's balance sheet:

Accepted Answer

During the 2007-2009 financial crisis, mortgage backed securities became the largest component of assets on the Fed's balance sheet, as the Fed purchased large quantities of these securities as part of its quantitative easing program to stabilize financial markets and stimulate economic growth.

Question 12

To obtain a discount loan from the Fed, a commercial bank must:

Accepted Answer

To obtain a discount loan from the Fed, a commercial bank must provide collateral. This collateral serves as security for the loan and helps ensure that the bank will repay the loan. The Fed may accept a variety of assets as collateral, such as Treasury securities, high-grade corporate bonds, and certain types of loans. The other options listed are not requirements for obtaining a discount loan from the Fed; however, commercial banks are subject to regular examinations regardless of whether they obtain a discount loan.

Question 13

Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by:

Accepted Answer

The answer of Over the two-year period during which the...

Question 14

The term for turning reserves into bank deposits is called:

Accepted Answer

The process of turning reserves into bank deposits is called multiple deposit creation, where a single deposit can generate several loans and subsequent deposits. Discounting is the process of selling a debt instrument to a third party for less than its face value. Balance sheet adjustment is a general term for modifying a company's financial position. Spreading refers to the practice of allocating costs or revenues across different periods or accounts.

Question 15

Consider a $2 billion open market purchase of U.S.Treasury securities by the Federal Reserve.The Fed's balance sheet will specifically show:

Accepted Answer

When the Fed purchases $2 billion worth of U.S. Treasury securities, it will increase the asset category of securities by $2 billion in its balance sheet. Simultaneously, to finance this purchase, the Fed will increase the liability category of reserves by $2 billion, which represents the increase in the amount of money that commercial banks hold at the Fed. Therefore, the correct answer is D, which is the option that says "An increase in the asset category of securities and the liability category of reserves by $2 billion."

Question 16

The Fed sells German bonds to commercial banks.Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

Accepted Answer

When the Fed sells German bonds to commercial banks, it is essentially exchanging one asset (the bonds) for another (cash). This reduces the Fed's assets (the bonds are removed from its balance sheet) and also reduces its liabilities (as the cash paid by the banks is removed from the banking system's reserves, which are a liability on the Fed's balance sheet). For the commercial banks, the total value of assets and liabilities does not change; they simply swap one asset (cash) for another (the bonds).

Question 17

Consider a $2 billion open market purchase of U.S.Treasury securities by the Federal Reserve.The Banking System's balance sheet will specifically show:

Accepted Answer

When the Federal Reserve conducts an open market purchase of U.S. Treasury securities, it pays for the securities by increasing the reserves of the banking system. The $2 billion that the Federal Reserve spends on the securities becomes a liability of the Federal Reserve, but the $2 billion increase in reserves becomes an asset of the banking system. Therefore, the balance sheet of the banking system would show no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.

Question 18

Tom decides to withdraw $300 out of his checking account.The impact of this transaction on the Fed's balance sheet will be:

Accepted Answer

When Tom withdraws $300 from his checking account, the bank will decrease its reserve account by $300 and increase the currency in circulation by $300. This will result in a decrease of reserves liability and an increase in currency liability on the Fed's balance sheet. However, there will be no change in the total assets or total liabilities of the Fed. Hence, the correct choice is A.

Question 19

The Fed purchases German bonds from commercial banks.Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

Accepted Answer

When the Fed purchases German bonds from commercial banks, the Fed's assets increase because it has acquired bonds. However, this also increases the liabilities of the Fed as it has to credit the accounts of the commercial banks. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes as the commercial banks have sold their bonds to the Fed but received cash in exchange, which is reflected in their reserve accounts. Thus, only option B correctly describes the impact on the balance sheets of both the Fed and the banking system.

Question 20

Mary decides to withdraw $500 out of her checking account.The impact of this transaction on the Banking System's balance sheet will be to:

Accepted Answer

When Mary withdraws $500, both the bank's reserves and checkable deposits decrease by $500.

Quiz 17: The Central Bank Balance Sheet and the Money Supply Process