Chapter 4—Functions of the Fed
1. Which of the following is not a major component of the Federal Reserve System?
a.
member banks
b.
Federal Open Market Committee
c.
Securities and Exchange Commission
d.
Board of Governors
2. As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial
products and services.
a.
Federal Advisory Committee
b.
Federal Open Market Committee
c.
Consumer Financial Protection Bureau
d.
Board of Governors
3. Which of the following is not an activity of Fed district banks?
a.
clearing checks
b.
replacing old currency
c.
providing loans to depository institutions
d.
acting as an intermediary to match up lenders and borrowers in the stock market
4. All ____ are required to be members of the Federal Reserve System.
a.
state banks
b.
national banks
c.
savings and loan associations
d.
finance companies
e.
A and B
5. The ____ is made up of seven individual members, and each member is appointed by the president of
the U.S.
a.
Board of Governors
b.
Federal Reserve district bank
c.
Federal Open Market Committee (FOMC)
d.
Securities and Exchange Commission
6. Which of the following is currently a main role of the Federal Reserve’s Board of Governors?
a.
regulating commercial banks
b.
regulating foreign trade
c.
controlling monetary policy
d.
A and C
7. Members of the Board of Governors serve 14-year nonrenewable terms.
a. True
b. False
8. With regard to monetary policy, which of the following is under direct control of the Federal Reserve’s
Board of Governors?
a.
revise reserve requirements for depository institutions
b.
authorize changes in the amount of borrowing by the Treasury
c.
monitor the stock market for insider trading
d.
monitor the derivatives market for illegal trading strategies
9. The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.
a.
federal funds
b.
prime
c.
primary credit lending
d.
real
10. Which of the following is an action that the Fed uses to increase or decrease the money supply?
a.
buying or selling Treasury securities in the secondary market
b.
adjusting the tax rate imposed on income earned on Treasury securities
c.
adjusting the coupon rate on Treasury bonds
d.
selling Treasury securities in the primary market
11. The Policy Directive is provided by Board of Governors to the FOMC.
a. True
b. False
12. Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.
a.
increase; purchased
b.
increase; sold
c.
decrease; purchased
d.
A and B
13. The purchase of government securities by someone other than the Fed results in
a.
an overall increase in funds among commercial banks.
b.
an overall decrease in funds among commercial banks.
c.
offsetting changes in funds at commercial banks.
d.
an increase in securities maintained by the Fed.
14. As the supply of funds in the banking system ____, the federal funds rate ____.
a.
increases; declines
b.
increases; increases
c.
declines, declines
d.
none of the above
15. Repurchase agreements are purchased by the Fed to
a.
temporarily decrease the aggregate level of bank funds.
b.
permanently increase the aggregate level of bank funds.
c.
permanently decrease the aggregate level of bank funds.
d.
temporarily increase the aggregate level of bank funds.
16. When open market operations are used to ____ bank funds, the yield on debt instruments ____.
a.
reduce; decreases
b.
reduce; increases
c.
increase; increases
d.
none of the above
17. ____ open market operations offset the impact of other conditions that affect the level of funds.
a.
Active
b.
Passive
c.
Dynamic
d.
Defensive
18. The main monetary policy goal of most central banks is to stabilize the value of the local currency
against foreign currencies.
a. True
b. False
19. The primary credit lending rate changes in accordance with changes in the federal funds rate.
a. True
b. False
20. ____ credit may be used for any purpose and is available only to depository institutions that meet
specific requirements for financial soundness.
a.
Primary
b.
Secondary
c.
Tertiary
d.
None of the above
21. To decrease money supply, the Fed could ____ the reserve requirement ratio.
a.
increase
b.
stabilize
c.
reduce
d.
eliminate
22. The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money
supply.
a.
lower; less
b.
lower; greater
c.
greater; less
d.
B and C
23. The ____ is directly responsible for controlling money supply growth.
a.
Federal Advisory Council
b.
FOMC
c.
Board of Governors
d.
President of the United States
24. Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in
a maximum change in the money supply of
a.
$150 million.
b.
$1 billion.
c.
$1 million.
d.
$22.5 million.
25. The form of money consisting of currency held by the public and checkable deposits at depository
institutions is called
a.
M1.
b.
M2.
c.
M3.
d.
MMDA.
26. The Monetary Control Act of 1980 subjected
a.
only member banks to the reserve requirements set by the Fed.
b.
only S&Ls to the reserve requirements set by the Fed.
c.
all depository institutions to the reserve requirements set by the Fed.
d.
only national banks to reserve requirements set by the Fed.
27. The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for
member commercial banks.
a. True
b. False
28. The voting members of the Federal Open Market Committee consist of the Board of Governors plus
the
a.
President of the United States.
b.
Presidents of the 12 Fed district banks.
c.
Presidents of 5 Fed district banks.
d.
Federal Advisory Council.
29. The Board of Governors is composed of
a.
seven members appointed by the President of the United States.
b.
the 12 presidents of Fed district banks.
c.
the Federal Open Market Committee, plus the Federal Advisory Council.
d.
the Federal Open Market Committee, plus the President of the United States.
30. The ____ is directly responsible for setting reserve requirements.
a.
Federal Advisory Council
b.
FOMC
c.
Board of Governors
d.
President of the United States
31. The ____ is directly responsible for conducting monetary policy.
a.
Federal Advisory Council
b.
FOMC
c.
Senate
d.
President of the United States
32. Based on a 2003 policy, the primary credit lending rate is set
a.
lower than the federal funds rate.
b.
lower than the prevailing Treasury bill rate.
c.
lower than the expected inflation rate.
d.
above the federal funds rate.
33. A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.
a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
A and C
34. The ____ consists of seven members, each of whom is appointed by the President of the United States.
a.
Federal Open Market Committee (FOMC)
b.
Federal Advisory Council
c.
Board of Governors
d.
none of the above
35. Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations
by buying $200 million worth of Treasury securities. Assuming that banks use all funds except
required reserves to make loans and that the public does not store any cash, the money supply should
____ by about ____.
a.
increase; $200 million
b.
increase; $1.67 billion
c.
decrease; $200 million
d.
decrease; $1.67 billion
36. The federal funds rate is the rate at which the Fed lends money directly to member banks.
a. True
b. False
37. When the Fed purchases securities, the total funds of commercial banks ____ by the market value of
securities purchased by the Fed. This activity initiated by the FOMC’s policy directive is referred to as
a(n) ____ of money supply growth.
a.
increase; loosening
b.
decrease; tightening
c.
decrease; loosening
d.
increase; tightening
e.
none of the above
38. The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will
____ the federal funds rate to a new targeted level set by the FOMC.
a.
buy; decrease
b.
sell; increase
c.
buy; increase
d.
sell; decrease
e.
A and B
39. Which of the following statements is incorrect with respect to a single European monetary policy?
a.
It allows for more consistent economic conditions across the countries.
b.
It prevents any participating European country from solving local economic problems with
its own unique monetary policy.
c.
A policy used in a particular period may not affect the participating countries equally,
since they all have the same currency.
d.
Each participating country will still be able to apply its own fiscal policy (tax and
government expenditure decisions).
e.
All of the above are true with respect to a single European monetary policy.
40. Since 2003, the Fed’s rate on short-term loans to depository institutions is referred to as the
a.
discount rate.
b.
primary credit lending rate.
c.
Federal funds rate.
d.
prime rate
41. ____ credit extended by the Fed to financial institutions may be used for any purpose and is available
only to depository institutions that satisfy specific criteria reflecting financial soundness.
a.
Primary
b.
Secondary
c.
Tertiary
d.
None of the above
42. Most of the Fed’s income is transferred to the U.S. Department of Justice.
a. True
b. False
43. All commercial banks are required to be members of the Fed.
a. True
b. False
44. Each member of the Board of Governors is appointed by the president of the United States and serves
a nonrenewable 14-year term.
a. True
b. False
45. Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these
reports are consolidated to compose the Beige Book.
a. True
b. False
46. When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in
the banking system. Consequently, the federal funds rate decreases along with other interest rates.
a. True
b. False
47. Adjustment of the primary credit lending rate is the most common means by which the Fed controls
the money supply.
a. True
b. False
48. To increase the money supply, the Trading Desk would be instructed to sell government securities.
a. True
b. False
49. To increase the money supply, the Fed may increase the reserve requirement ratio.
a. True
b. False
50. Which of the following is not true with respect to the Federal Reserve Act of 1913?
a.
It established reserve requirements for member commercial banks.
b.
It specified fourteen districts across the United States as well as a city in each district
where a Federal Reserve district bank was to be established.
c.
Each district focused on its particular district, without much concern for other districts.
d.
All of the above are true.
51. ____ is (are) not a component of the Fed as it exists today.
a.
The Federal Advisory Council
b.
The Board of Governors
c.
National banks
d.
The U.S. Department of Commerce
e.
All of the above are components of the Fed.
52. The advisory committee making recommendations to the Fed about economic and banking related
issues is the
a.
Consumer Advisory Council.
b.
Thrift Institutions Advisory Council.
c.
Federal Advisory Council.
d.
none of the above
53. The advisory committee offering views on issues related to credit unions is the
a.
Consumer Advisory Council.
b.
Thrift Institutions Advisory Council.
c.
Federal Advisory Council.
d.
none of the above
54. If the Fed desires to ____ the money supply using open market operations, it would instruct the trading
desk to ____ government securities.
a.
increase; purchase
b.
increase; sell
c.
decrease; purchase
d.
Answers B and C are correct.
55. When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure
on their prices and ____ pressure on their yields.
a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
56. To increase the money supply growth, the Fed could
a.
sell government securities in the secondary market.
b.
increase the primary credit lending rate.
c.
increase the reserve requirement ratio.
d.
all of the above
e.
none of the above
57. When the Fed sells securities, the total funds of commercial banks ____ by the market value of
securities sold by the Fed. This activity initiated by the FOMC’s policy directive is referred to as a
____ of money supply growth.
a.
increase; loosening
b.
decrease; loosening
c.
increase; tightening
d.
decrease; tightening
e.
none of the above
58. ____ includes only currency held by the public and checking deposits as well as savings accounts and
small time deposits, money market deposit accounts, and some other items.
a.
M1
b.
M2
c.
M3
d.
None of the above
59. The ____ consists of seven members, each of whom is appointed by the president of the United States.
a.
Federal Open Market Committee (FOMC)
b.
Federal Advisory Council
c.
Board of Governors
d.
none of the above
60. The Fed’s primary goal has historically been to add liquidity to the mortgage market by continuously
purchasing mortgage-backed securities.
a. True
b. False
61. When the Fed purchases _______, it is attempting to directly stimulate the housing market.
a.
commercial paper
b.
short-term Treasury securities
c.
mortgage-backed securities
d.
consumer loans
62. The Fed’s purchases of long-term Treasury securities in recent years were intended to:
a.
reduce long-term interest rates.
b.
reduce interest rates on credit cards and consumer loans.
c.
increase the federal funds rate.
d.
restore confidence in the market for these securities.
63. A criticism of the Fed’s actions during the credit crisis is that it:
a.
did not attempt to increase the liquidity of the debt markets.
b.
focused too much on financial institutions.
c.
allowed Bear Stearns to fail and file for bankruptcy.
d.
periodically raised the primary credit rate.
64. Which of the following did the Fed not do during the credit crisis?
a.
purchase mortgage-backed securities
b.
purchase commercial paper
c.
reduce the targeted federal funds rate
d.
prevent depository institutions from obtaining funding through the discount window