STA: DISC: Monetary and fiscal policy TOP: The Federal Reserve System
KEY: Bloom’s: Comprehension
102. Which of the following is primarily responsible for controlling the money supply in the United States?
a.
the U.S. Congress
b.
the Board of Governors of the Federal Reserve System
c.
the U.S. Treasury
d.
the Council of Economic Advisors
103. Open-market purchases by the Fed make the money supply
a.
increase, which tends to increase the value of money.
b.
increase, which tends to decrease the value of money.
c.
decrease, which tends to decrease the value of money.
d.
decrease, which tends to increase the value of money.
104. A bank finds itself short of required reserves and therefore borrows from another commercial bank.
The interest rate on this loan is
a.
zero.
b.
the prime rate.
c.
the discount rate.
d.
the federal funds rate.
e.
the required reserve ratio.
105. The federal funds rate is the interest rate paid when
a.
the Federal Reserve makes loans to member banks.
b.
taxpayers pay overdue taxes.
c.
one bank borrows reserves from another bank.
d.
banks make loans to the federal government.
e.
the federal debt is refinanced.
106. The main purpose of the Fed is to
a.
serve as the bankers’ bank for member banks.
b.
regulate interest rates.
c.
print Federal Reserve Notes.
d.
regulate financial institutions.
e.
maintain the proper functioning of our money system.
107. The Federal Reserve System is owned by
a.
federal government agencies such as the Treasury.
b.
the Congress of the United States.
c.
the banks that are members of the Federal Reserve System.
d.
anyone who buys stock over the counter.
e.
people who have deposits in member banks.
108. The major overall purpose of the Federal Reserve System is to
a.
keep the discount rate flexible.
b.
insure the deposits of persons holding funds with banking institutions.
c.
regulate the money supply and, thereby, provide a monetary climate that is in the best
interest of the economy.
d.
regulate the levels of excess reserves held by member banking institutions.
109. In response to the recession of 2008-2009, the Fed doubled its asset holdings from $925 billion at
mid-year 2008 to more than $2 trillion by mid-year 2009. This policy
a.
reduced the reserves available to banks, leading to a larger money supply.
b.
reduced the reserves available to banks, causing the money supply to decline.
c.
increased the reserves available to banks, leading to a larger money supply.
d.
increased the reserves available to banks, causing the money supply to decline.
110. During 2008-2013, the Fed initiated several rounds of “quantitative easing.” Under this policy, the
Fed
a.
increased its purchases of financial assets and thereby injected additional reserves into the
banking system.
b.
increased its purchases of financial assets, which reduced the reserves available to the
banking system.
c.
reduced its purchases of financial assets and thereby injected additional reserves into the
banking system.
d.
reduced its purchases of financial assets and thereby reduced the quantity of reserves
available to the banking system.
111. Which of the following is correct?
a.
The Federal Reserve is responsible for conducting monetary policy.
b.
The U.S. Treasury controls the money supply through its buying and selling of U.S.
securities.
c.
The Treasury is a monetary agency with responsibilities very similar to those of the Fed.
d.
The Federal Reserve System issues U.S. securities.
112. Which of the following is responsible for decision making regarding the purchase and sale of bonds by
the Fed?
a.
the chairman of the Board of Governors of the Federal Reserve System
b.
the Federal Open Market Operations Committee
c.
the U.S. Secretary of Treasury
d.
the president, with the advice and consent of the chairman of the Council of Economic
Advisers.
113. The primary source of revenue for the Federal Reserve is
a.
the interest earned on the bonds held by the Fed.
b.
its annual appropriation from Congress.
c.
the interest earned on discount loans to banks.
d.
the dividends earned on the stocks held by the Fed.
114. Which of the following would cause the money supply in the United States to expand?
a.
a decrease in reserve requirements
b.
an increase in the discount rate
c.
the sale of bonds by a Federal Reserve bank
d.
an increase in the world supply of gold
115. Which of the following would cause the money supply in the United States to decrease?
a.
an increase in reserve requirements
b.
a decrease in the discount rate
c.
a purchase of bonds by the Federal Reserve
d.
an increase in the world supply of gold
116. When reserve requirements are increased, the
a.
excess reserves of commercial banks will decrease.
b.
excess reserves of commercial banks will increase.
c.
U.S. Treasury will have to borrow additional funds.
d.
money supply will rise.
117. If the required reserve ratio were decreased,
a.
the money supply would tend to decrease, but the outstanding loans of banks would tend
to increase.
b.
both the money supply and the outstanding loans of banks would tend to decrease.
c.
the money supply would tend to increase, but the outstanding loans of banks would tend to
decrease.
d.
both the money supply and the outstanding loans of banks would tend to increase.
118. Which of the following will increase the excess reserves of commercial banks?
a.
a reduction in the reserve requirement ratio
b.
an increase in the discount rate
c.
the sale of government bonds by the Fed to the public
d.
the sale of government bonds by the Treasury to the public
119. Suppose the Fed bought $150 million of U.S. securities from the public. The reserve requirement is 20
percent, and there are no initial excess reserves. A few weeks later, if the public’s holdings of currency
are constant and the banks have loaned all excess reserves, the money supply will increase by
a.
$150 million.
b.
$300 million.
c.
$600 million.
d.
$750 million.
120. Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20
percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both
before and after the transaction, the total impact on the money supply will be a
a.
$100 million decrease.
b.
$500 million increase.
c.
$500 million decrease.
d.
$100 million increase.
121. Which of the following is the primary tool the Fed uses to control the supply of money?
a.
the discount rate
b.
the reserve requirements
c.
open market operations
d.
the 30-year home-mortgage interest rate
122. Open market operations is the
a.
tool most often used by the Fed to alter the money supply.
b.
least effective tool the Fed has to alter the money supply.
c.
tool used by the Treasury to raise tax revenues.
d.
tool used by the Fed to regulate stock market activities.
123. If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
a.
It will give the bank new reserves.
b.
It will write the bank a check.
c.
It will transfer cash to the bank’s vault.
d.
It will take reserves from another bank.
124. If the Fed lends to member banks, what happens to reserves and the money supply?
a.
Reserves increase and the money supply decreases.
b.
Both increase.
c.
Reserves decrease and the money supply increases.
d.
Both decrease.
125. If the Fed raises the discount rate, what happens to reserves and the money supply?
a.
Reserves increase and the money supply decreases.
b.
Both increase.
c.
Reserves decrease and the money supply increases.
d.
Both decrease.
126. When the required reserve ratio is lowered,
a.
the money multiplier increases, and the amount of excess reserves increases in the banking
system.
b.
the money multiplier decreases, and the amount of excess reserves increases in the
banking system.
c.
the money multiplier decreases, and the amount of excess reserves decreases in the
banking system.
d.
the money multiplier increases, and the amount of excess reserves decreases in the
banking system.
e.
there is no change in either the money multiplier or the amount of excess reserves in the
banking system.
127. The term “open market operations” refers to the
a.
loan-making activities of commercial banks.
b.
effect of expansionary monetary policy on interest rates.
c.
operation of competitive markets in the banking industry as the result of deregulation.
d.
buying and selling of government securities by the Federal Reserve.
128. Which of the following indicates the primary mechanism by which the money supply expands?
a.
The U.S. Treasury prints additional currency.
b.
The Fed purchases additional bonds, which increases the reserves available to the banking
system.
c.
The public decides to hold more currency rather than checking deposits.
d.
The U.S. government purchases additional gold.
129. If the Federal Reserve is engaging in open market operations designed to expand the money supply, it
is probably
a.
selling government securities to banks.
b.
selling government securities to the public.
c.
buying government securities from the public.
d.
encouraging banks to exchange their Fed deposits for currency.
130. Which of the following is correct?
a.
Federal Reserve purchases of securities will increase the reserves available to commercial
banks.
b.
Federal Reserve purchases of securities exert upward pressure on interest rates in the short
run.
c.
The Federal Reserve System determines the ratio of currency held by the public to the
money supply (M1).
d.
Federal Reserve purchases of securities will decrease the reserves available to commercial
banks.
131. Suppose the Fed purchases $100 million of U.S. government securities from the public. How will this
affect the money supply and the national debt?
a.
The money supply will increase; the national debt will decline.
b.
The money supply will decline; the national debt will increase.
c.
The money supply will increase; the national debt will be unaffected.
d.
The money supply will decrease; the national debt will be unaffected.
132. Which of the following actions would the Fed undertake if it wants to follow a more restrictive
monetary policy?
a.
sell some of its holdings of government bonds
b.
decrease government expenditures
c.
urge the Treasury to sell more U.S. securities
d.
reduce the reserve requirements
133. Which of the following would be most appropriate if the Federal Reserve wanted to increase the
money supply in order to stimulate the economy?
a.
buy U.S. securities
b.
force the Treasury to reduce the national debt
c.
raise the discount rate
d.
increase the reserve requirements
134. Suppose that during a period of inflation, the Fed reduced its holdings of U.S. securities from $600
billion to $580 billion. This indicates that the Fed was
a.
seeking to reduce the money supply to decrease inflation.
b.
trying to force Congress to decrease taxes.
c.
expanding the money supply and stimulating employment.
d.
expanding the money supply, even though the existing inflation suggested a restrictive
policy would be more appropriate.
135. If the Fed purchases government securities from the public, the
a.
money supply will decrease.
b.
reserves of commercial banks will decrease.
c.
required reserves ratio will increase.
d.
monetary base will increase.
136. The sale of government securities by the Fed will cause
a.
a decrease in both the monetary base and the money supply.
b.
an increase in both the monetary base and the money supply.
c.
an increase in the monetary base but no change in the money supply.
d.
a decrease in the monetary base but no change in the money supply.
137. The discount rate is the interest rate
a.
commercial banks charge their low-risk customers for a loan.
b.
savings and loan associations pay for using savings deposit funds.
c.
the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000
or more.
d.
the Federal Reserve charges banking institutions for borrowing its funds.
138. Commercial banks can borrow reserves directly from the Fed at the
a.
prime interest rate.
b.
federal funds rate.
c.
discount rate.
d.
real interest rate.
139. When a commercial bank borrows from a Federal Reserve bank,
a.
the commercial bank’s reserves are reduced.
b.
the commercial bank’s lending ability is increased.
c.
the money supply automatically declines.
d.
the net worth of the bank will decline, indicating that the bank is having financial
difficulties.
140. If the Federal Reserve wants to increase the availability of money and credit, it can
a.
lower the discount rate.
b.
raise the reserve requirements.
c.
sell government bonds to the public.
d.
encourage banks to increase their prime lending rate.
141. When the Fed lowers the discount rate, it makes it
a.
cheaper for banks to borrow from each other.
b.
cheaper for banks to obtain additional reserves by borrowing from the Fed.
c.
more difficult for banks to accept deposits.
d.
more difficult for banks to extend loans.
142. Other things constant, if the Fed decreased the discount rate,
a.
the earnings of the Fed would increase.
b.
the incentive of commercial banks to borrow from the Fed would be reduced.
c.
the prime interest rate would automatically decline.
d.
commercial banks probably would reduce their excess reserves and be more willing to
extend additional loans.
143. In recent years, the Fed has generally set the discount rate
a.
lower than the federal funds rate to help financially troubled banks get more solvent.
b.
higher than the interest rate on 30-year fixed-rate mortgage loans.
c.
higher than the federal funds rate for most banks.
d.
equal to the rate of inflation.
144. Under current policy, the Fed ties the discount rate to the
a.
prime rate.
b.
AAA corporate bond rate.
c.
federal funds rate.
d.
long-term government bond rate.
145. An increase in the discount rate impacts the money supply because it
a.
makes it more attractive for commercial banks to borrow from the Federal Reserve.
b.
decreases the interest yield on new issues of U.S. securities.
c.
reduces the incentive of commercial banks to borrow from the Federal Reserve.
d.
increases the Federal Reserve’s earnings and, thereby, expands the money supply.
146. The federal funds market is the market where
a.
the federal government raises funds to cover its budget deficit.
b.
the Federal Reserve System makes loans to commercial banks.
c.
commercial banks with excess reserves make loans to commercial banks seeking reserves.
d.
commercial banks make loans to the Federal Reserve.
147. The interest rate in the federal funds market
a.
is determined by the imposition of price controls imposed by the Fed.
b.
will tend to rise when the quantity of funds demanded by banks seeking additional
reserves exceeds the quantity supplied by banks with excess reserves.
c.
will tend to fall if the Fed sells bonds and, thereby, reduces the reserves available to banks.
d.
is an interest rate that is largely unaffected by the policies of the Fed.
148. If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
a.
increase the reserve requirements.
b.
buy U.S. securities on the open market.
c.
raise the discount rate.
d.
sell U.S. securities on the open market.
149. If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to
change the federal funds interest rate. The Fed controls the federal funds interest rate
a.
by imposing legal restrictions that prohibit exchanges at interest rates other than the ones
designated by the Fed.
b.
by having the U.S. Treasury fix this interest rate
c.
through its policy of open market operations.
d.
by altering the size of the federal budget deficit or surplus.
150. Which of the following lists two things that both increase the money supply?
a.
the Fed buys bonds and lowers the discount rate.
b.
the Fed buys bonds and raises the discount rate.
c.
the Fed sells bonds and lowers the discount rate.
d.
the Fed sells bonds and raises the discount rate.
151. Which of the following lists two things that both increase the money supply?
a.
raise the discount rate and make open market purchases
b.
raise the discount rate and make open market sales
c.
lower the discount rate and make open market purchases
d.
lower the discount rate and make open market sales
152. Which of the following lists two things that both increase the money supply?
a.
make open market purchases and raise the reserve requirement ratio
b.
make open market purchases and lower the reserve requirement ratio
c.
make open market sales and raise the reserve requirement ratio
d.
make open market sales and lower the reserve requirement ratio
153. Which of the following lists two things that both decrease the money supply?
a.
lower the discount rate and raise the reserve requirement ratio
b.
lower the discount rate and lower the reserve requirement ratio
c.
raise the discount rate and raise the reserve requirement ratio
d.
raise the discount rate and lower the reserve requirement ratio
154. Which of the following lists two things that both decrease the money supply?
a.
raise the discount rate and make open market purchases
b.
raise the discount rate and make open market sales
c.
lower the discount rate and make open market purchases
d.
lower the discount rate and make open market sales
155. Which of the following lists two things that both decrease the money supply?
a.
make open market purchases and raise the reserve requirement ratio
b.
make open market purchases and lower the reserve requirement ratio
c.
make open market sales and raise the reserve requirement ratio
d.
make open market sales and lower the reserve requirement ratio
156. When the Fed sells Treasury Bonds on the open market, it will tend to
a.
decrease the money supply and raise interest rates.
b.
decrease the money supply and lower interest rates.
c.
increase the money supply and raise interest rates.
d.
increase the money supply and lower interest rates.
157. How did the Fed’s conduct of open market operations change during the economic crisis of 2008?
a.
Open market operations are no longer the most common tool that the Fed utilizes.
b.
The Fed now buys and sells a broader range of assets than only government securities.
c.
The Federal Open Market Committee cannot act without the approval of the Treasury.
d.
The Fed now must have adequate funds available before purchasing government securities.
158. Under the Term Auction Facility (TAF), the rate that a depository institution pays on a loan from the
Fed is determined by
a.
the federal funds rate.
b.
the discount rate.
c.
the real rate of interest.
d.
a bidding process allocating the funds to those willing to pay the highest rates.
159. In its conduct of open market operations, the Fed now buys and sells
a.
only U.S. government securities.
b.
only mortgage-backed securities issued by large investment banks.
c.
a wide range of assets including the stock shares of large banks, domestic automobile
manufacturers, and high-technology business firms.
d.
a wide range of assets including corporate bonds and mortgage-backed securities.
160. During the economic crisis of 2008, the Fed acquired the authority to
a.
pay interest to commercial banks on their reserves.
b.
determine the size of the budget deficit or surplus of the Federal Government.
c.
require the Treasury to print and issue additional currency.
d.
purchase gold in sufficient amounts to back the U.S. dollar.
161. If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
a.
increase the interest rate paid on excess reserves encouraging banks to extend more loans.
b.
decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
c.
decrease the interest rate paid on excess reserves encouraging banks to hold excess
reserves rather than extend more loans.
d.
increase the interest rate paid on excess reserves encouraging banks to hold excess reserves
rather than extend more loans.
162. If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
a.
increase the interest rate paid on excess reserves encouraging banks to extend more loans.
b.
decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
c.
decrease the interest rate paid on excess reserves encouraging banks to hold excess
reserves rather than extend more loans.
d.
increase the interest rate paid on excess reserves encouraging banks to hold excess reserves
rather than extend more loans.
163. During the financial crisis of 2008, Fed policy
a.
caused the monetary base to shrink significantly.