Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20–61
217. A significant decrease in the money supply tends to:
A. reduce the supply of gold held by the federal government.
B. create shortages that would cause prices of goods and services to rise.
C. send the economy into a recession.
D. reduce the size of the federal government’s deficit.
Feedback: A decrease in the money supply tends to depress spending. If the money supply
decreased substantially, spending could decline enough to send the economy into a recession.
218. When the Fed increases the reserve requirement, banks:
A. must increase the dollar volume of loans they make to customers.
B. must pay more to borrow from the Fed.
C. have fewer funds available for lending.
D. will find their balance sheets temporarily out of balance.
Feedback: The reserve requirement specifies the amount of reserves a bank must hold as a
percentage of its deposits. An increase in the reserve requirement means that banks must hold
more reserves, leaving them with fewer funds available for loans.
219.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20–62
When the Fed increases the discount rate, banks:
A. must purchase more government securities.
B. must pay a higher rate when they borrow from the Fed.
C. will lower the rate they charge to borrowers.
D. must hold a greater amount of funds in reserve against deposits.
Feedback: The discount rate is the rate of interest the FED charges when it makes loans to
banks.
220. Which of the following represents one way the Fed increases the amount of money in
circulation?
A. Reduce taxes
B. Raise the discount rate
C. Buy government securities
D. Increase the reserve requirement
Feedback: The major tools of monetary policy are the reserve requirement, open-market
operations, and the discount rate. The Fed does not have the authority to cut taxes.
221.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
When the Fed buys U.S. government securities, the:
A. size of the federal deficit falls.
B. discount rate rises.
C. money supply increases.
D. banking system loses reserves.
Feedback: When the Fed buys and sells government securities, it is engaging in open-market
operations. When the Fed buys government securities, the money it pays for these securities
enters circulation, resulting in an increase in the supply of money.
222. Bob read a newspaper story that indicated a dramatic increase in money market
accounts and certificates of deposit during the last three months. The story reported that
all other major components of the U.S. money supply remained unchanged. Based on this
information, Bob can conclude that for the past quarter:
A. both the M-1 and M-2 money supplies were stable.
B. the M-1 money supply has increased, but the M-2 money supply was stable.
C. the M-2 money supply has increased, but the M-1 money supply was stable.
D. both the M-1 and the M-2 money supplies have increased.
Feedback: The M-1 definition of the money supply consists of currency, checking account
deposits, and travelers’ checks. Since all of these components remained stable in size, the M-1
money supply must have remained stable. The M-2 definition includes everything in the M-1
definition, but it also includes other components such as funds held in certificates of deposit
and money market accounts. Since CDs and money market accounts grew dramatically, and
no other components decreased, the M-2 money supply must have increased.
20–68
231. Which of the following reduces the costs involved with the Federal Reserve’s check-
clearing role?
A. A decrease in the use of the barter system
B. A reduction in the Fed’s discount rate
C. An increase in the reserve requirement
D. An increase in the use of debit cards
Feedback: The use of debit cards and electronic transfers of money reduce the number of
checks written. Fewer checks written will reduce the overall costs of the Fed’s check-clearing
activities.
232. When Mr. Smith in Quince Orchard, MD uses a check to buy a tractor from Mr.
Brown in Austin, TX, __________ different banks are involved in the transaction.
A. 4
B. 12
C. 15
D. no
Feedback: Mr. Brown would deposit the check in his local bank in TX. The local bank would
then deposit the check in the Federal Reserve Bank in Dallas. The Federal Reserve Bank in
Dallas sends the check to the Federal Reserve Bank in Richmond, which then forwards the
check to Mr. Smith’s local bank in MD. Mr. Smith’s bank deducts the amount from his
account and then the payment is sent back through the system until eventually Mr. Brown’s
account is credited. Four banks are involved in the transaction.
233.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20–69
Early settlers of the New World relied heavily on barter because:
A. they found barter more convenient than the use of money.
B. strict laws limited the number of coins that could be brought into the colonies.
C. money had not yet evolved.
D. they wanted to protest against British control of the banking system.
234. ________ persuaded Congress to establish the first central bank in the United States.
A. Benjamin Franklin
B. David Farragaut
C. Franklin Roosevelt
D. Alexander Hamilton
235. Historically, there was ________ a central bank in the U.S.
A. very little resistance to
B. resistance to
C. insufficient funding of
D. disinterest in
236.
20–70
237. The banking panic of 1907 and the resulting cash shortage led to the formation of the:
A. Federal Reserve System.
B. Comptroller of the Currency.
C. gold standard for currency, and the establishment of a gold repository at Fort Knox.
D. FDIC.
238. Under the Federal Reserve Act of 1913:
A. membership in the Federal Reserve System was made voluntary for all banks.
B. federally chartered banks were required to join the Federal Reserve System.
C. membership in the Federal Reserve System was required of all banks that had deposits
of more than $1 million.
D. all banks were required to hold reserves equal to at least 50 percent of their deposits.
20–71
239. As a response to the bank failures of the ________, a system of federal deposit
insurance was established to strengthen the banking system.
A. Civil War
B. wildcat banking crisis of the 1880s
C. Great Depression
D. banking crisis of the early 1980s
240. Which of the following historical events motivated Congress to establish the Federal
Reserve System?
1913. One of the functions of the Fed was to serve as a “lender of last resort” during panics,
lending reserves to banks so that cash shortages did not arise.
241.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
The Federal Reserve fulfills its role as a “lender of last resort” when it loans funds to:
A. small businesses that are unable to obtain loans from other sources.
B. banks during banking emergencies.
C. major corporations that are on the verge of bankruptcy.
D. the federal government when deficits exceed borrowing limits set by Congress.
Feedback: The Federal Reserve was established in the wake of the banking panic of 1907 and
the resulting cash shortage. The Fed was intended to be a “lender of last resort” in such
emergencies, standing ready to provide liquidity to banks when runs by nervous depositors
depleted their reserves.
242. One of the most important aspects of the banking legislation passed during the 1930s
established:
A. the Federal Reserve System.
B. the gold standard for currency.
C. the Comptroller of the currency.
D. federal deposit insurance.
Feedback: In the wake of banking failures during the early years of the Great Depression,
Congress passed legislation in 1933 and 1935 to strengthen the U.S. banking system. One of
the most important elements of this legislation was the establishment of federal deposit
insurance.
20–74
245. A __________ is a profit-seeking organization that receives deposits from individuals
and corporations and uses some of these deposits to make loans.
A. credit union
B. Federal Reserve Bank
C. commercial bank
D. consumer finance company
246. Commercial banks primarily serve two types of customers:
A. depositors and borrowers.
B. commercial clients and residential clients.
C. secured creditors and unsecured creditors.
D. short-term borrowers and long-term borrowers.
247. Which of the following represents the technical name for a checking account?
A. Free deposit
B. Variable annuity
C. Demand deposit
D. Certificate of deposit
248.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
The technical name for a savings account is a:
A. time deposit.
B. demand deposit.
C. deferred account.
D. retained income account.
249. A time deposit that earns interest is a _______________.
A. certificate of deposit
B. passbook account
C. discount deposit
D. NOW account
250. Traditionally, banks provide loans to individuals and companies according to the
recipient’s ______________.
A. future earnings potential
B. family history
C. volume of credit already established
D. creditworthiness
