48) If the reserve ratio is 0.9, the money multiplier will be 10.
49) When one individual writes a check to another individual the money supply will not be
changed.
50) Explain liabilities and assets as they relate to a bank’s balance sheet.
51) Explain why depositing cash into a checking account does not change the money supply.
52) Suppose that someone deposits $10,000 into a bank. Assuming a reserve requirement ratio of
20%, what will be the eventual increase in checking account balances?
53) Why is the money multiplier in the United States smaller than the inverse of the required
reserve ratio?
54) Explain why the money supply does not change when one individual writes a check to
another.
16.3 A Banker’s Bank: The Federal Reserve
1) The Federal Reserve was created in
A) 1893.
B) 1913.
C) 1921.
D) 1933.
2) Which of the following serves as the central bank for the United States?
A) the Federal Reserve System
B) the Treasury Department
C) the Federal Deposit Insurance Corporation
D) the Congress
3) The Federal Reserve System was created by the
A) U.S. Treasury.
B) President.
C) Congress.
D) Supreme Court.
4) When checks are exchanged between banks, the Fed oversees the banks to ensure the
appropriate funds have been transferred. This is known as
A) check kiting.
B) check clearing.
C) check floating.
D) check balancing.
5) Which of the following is NOT a subgroup of the Federal Reserve System?
A) the Federal Reserve Banks
B) the Federal Funds Market
C) the Board of Governors
D) the Federal Open Market Committee
6) There are ________ Federal Reserve Banks located in different parts of the United States.
A) 10
B) 12
C) 15
D) 50
7) Members of the Federal Reserve Board of Governors
A) are appointed to 4 year terms.
B) are confirmed by the House of Representatives.
C) frequently need to deal with political pressures.
D) are members of the Federal Open Market Committee.
8) The chairman of the Federal Reserve Board of Governors
A) sits on the Federal Open Market Committee.
B) is appointed by the President and confirmed by the Treasury.
C) serves a fourteen year term as chairman.
D) is always the president of the Federal Reserve Bank of New York.
9) The group responsible for deciding on monetary policy is the
A) Federal Open Market Committee.
B) Board of Governors only.
C) Federal Advisory Council.
D) group of 12 Federal Reserve Bank presidents only.
10) The voting members of the Federal Open Market Committee are
A) all of the members of the Board of Governors and all of the presidents of the 12 Federal
Reserve banks.
B) all of the members of the Board of Governors and five of the presidents of the 12 Federal
Reserve banks.
C) the presidents of the 12 Federal Reserve banks and three members of the Board of Governors.
D) only the members of the Board of Governors.
11) The president of the ________ Federal Reserve Bank is always a member of the FOMC.
A) Minneapolis
B) Boston
C) Washington, D.C.
D) New York
12) There are ________ members of the FOMC.
A) 5
B) 7
C) 12
D) 19
13) The purpose of having the members of the Board of Governors of the Federal Reserve serve
fourteen-year terms is to
A) ensure that the governors become well-experienced at policymaking.
B) insulate the governors’ policy decisions from the influence of presidential elections and
politics.
C) promote unity of opinion from shared time together.
D) establish long-standing ties with high-level officials of other nations’ central banks.
14) The Federal Reserve is ________ the U.S. Treasury.
A) independent of
B) a part of
C) a creation of
D) under the control of
15) Studies by economists have tended to show that countries with more independent central
banks have
A) more inflation.
B) less inflation.
C) higher unemployment.
D) lower unemployment.
16) The Federal Reserve System is the central bank of the United States.
17) Monetary policy refers to the actions taken by the Treasury Department to set the level of the
money supply.
18) In practice, the Board of Governors and the chairperson of the Federal Reserve have the real
control over monetary policy.
19) Every country in the world has an independent central bank.
20) Headquartered in Washington, D.C., the Board of Governors of the Federal Reserve
determines monetary policies and strategies based on the state of the economy.
21) The Federal Reserve is a branch of the Treasury Department, and is therefore subject to
significant government control.
22) List four of the Federal Reserve’s key functions.
23) List and explain the three subgroups of the Federal Reserve System.
24) Describe the relationship between the Federal Reserve and the legislative and executive
branches of the U.S. government.
16.4 What the Federal Reserve Does During a Financial Crisis
Recall the Application about how the Fed kept the U.S. financial system in operation
following the attacks of September 11, 2001, to answer the following question(s). To help
prevent financial firms from defaulting on their debts, the Fed took several steps to provide
additional funds to the financial system, including allowing banks to borrow more,
increasing the difference between the credits and debits it extended while serving as a
clearinghouse for checks, purchasing government securities, and providing dollars to
foreign central banks. Together, these actions increased the credit extended by the Fed by
over $90 billion.
1) Recall the application. Immediately following the attacks of September 11, 2001, the Fed
provided additional funds to the financial system. On September 12, banks borrowed $45.5
BILLION dollars, up from $99 million the previous week. This was an example of the Fed acting
as a
A) medium of exchange.
B) unit of account.
C) store of value.
D) lender of last resort.
2) Recall the application. Following the attacks of September 11, 2001, the Fed effectively put an
additional $20 billion into the banking system by increasing the difference between the credits
and debits it extended while serving as a clearinghouse for checks. The difference between the
credits and debits extended by the Federal Reserve is called the
A) Federal Reserve balance sheet.
B) federal funds rate.
C) Federal Reserve float.
D) federal deficit.
3) Recall the application. Following the attacks of September 11, 2001, the Federal Reserve
purchased government securities, putting $30 billion in the hands of private citizens and their
banks. By extending cash to banks during the potential financial crisis following the September
11 attacks, the Fed was attempting to
A) fend off a financial panic.
B) decrease the federal deficit.
C) reduce potential inflation.
D) decrease net exports.
Recall the Application about the Fed’s response to the collapse of the investment house
Bear Stearns as well as its handling of the 2008 financial crisis with respect to other
financial institutions to answer the following question(s).
4) Recall the application. The Fed increased its lending by hundreds of billions of dollars to
financial institutions as a response to the ongoing financial crisis. This increase in loans to
financial institutions increased the supply of money in the economy. When the supply of money
increases, the money supply curve will
A) shift to the right, increasing the interest rate.
B) shift to the right, decreasing the interest rate.
C) shift to the left, increasing the interest rate.
D) shift to the left, decreasing the interest rate.
5) Recall the Application. In response to the financial crisis, the Fed implemented a new policy
in which it began to pay interest on deposits held at the Fed. This move would ________
deposits held at the Fed and ________ the Fed’s ability to make loans.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
6) Recall the application. The Fed responded to the financial crisis by continuing to develop new
programs. One example of this was its announcement that it would now purchase commercial
paper, which is the short-term debt of corporations. This is an example of the Fed acting as a
A) medium of exchange.
B) lender of last resort.
C) store of value.
D) unit of account.