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True / False
1. The Board of Governors of the Federal Reserve serves on a larger policy-making group called the House Banking
Committee.
a.
True
b.
False
2. To expand the money supply the Fed could lower the required reserve ratio, lower the discount rate, or purchase
government securities.
a.
True
b.
False
3. The smaller the required reserve ratio, the larger the simple deposit multiplier.
a.
True
b.
False
4. Although the Fed can destroy money, it is impossible for the Fed to create money out of thin air.
a.
True
b.
False
5. Members of the Board of Governors of the Federal Reserve are appointed by the President and approved by the Senate
to serve a 14-year term.
a.
True
b.
False
6. To decrease the money supply, the Fed may sell government securities or lower taxes.
a.
True
b.
False
7. The interest rate that the Fed charges when it lends reserves to banks is called the federal funds rate.
a.
True
b.
False
8. To limit political influence on Fed policy, the terms of the Fed Board of Governors are staggered so that one new
appointment is made every four years to coincide with the presidential elections.
a.
True
b.
False
9. The Fed can change the federal funds rate by issuing an order, but it cannot change the discount rate this way.
a.
True
b.
False
10. The Fed is one of the largest departments within the U.S. Treasury.
a.
True
b.
False
11. Controlling the nation's money supply is the most important duty of the Federal Reserve.
a.
True
b.
False
12. The president of the Federal Reserve District Bank of New York holds a permanent seat on the Federal Open Market
Committee.
a.
True
b.
False
13. There is an inverse relationship between the required reserve ratio and the money supply.
a.
True
b.
False
14. The discount rate is sometimes also known as the primary credit rate.
a.
True
b.
False
15. In 2007, the Fed began using an additional monetary policy tool called the term auction facility program.
a.
True
b.
False
16. When the Federal Reserve system was being created, some people thought that there should be as few district banks as
possible to enhance efficiency and for ease of operation.
a.
True
b.
False
17. The boundaries of the Federal Reserve districts were determined based on trade patterns between cities.
a.
True
b.
False
18. The Federal Open Market Committee (FOMC) meets on the first Tuesday of each month.
a.
True
b.
False
19. When the Federal Open Market Committee (FOMC) votes on policy, it does so in the following order: the chair votes
first, the vice chair votes second, and the remaining FOMC members vote based on their seniority at the Fed.
a.
True
b.
False
20. The Federal Reserve Bank of Minneapolis once chartered a small airplane to deliver money to a commercial bank that
was experiencing a “mad run” on the bank.
a.
True
b.
False
21. When the Fed was created, its governing body was called the Federal Reserve Board, but it was later officially
renamed the Board of Governors of the Federal Reserve System.
a.
True
b.
False
22. Lowering the required reserve ratio raises the simple deposit multiplier.
a.
True
b.
False
23. The interest rate that the Fed pays on reserves acts as a ceiling on the federal funds rate.
a.
True
b.
False
24. A discount loan is a loan the Federal Reserve makes to a commercial bank.
a.
True
b.
False
25. To deal with the financial crisis of 2007-2009, the Fed extended its lender of last resort function to include institutions
other than banks.
a.
True
b.
False
26. Under free banking, banks are regulated by the Federal Reserve.
a.
True
b.
False
27. Both open market purchases and quantitative easing are directed at increasing reserves in the banking system and
increasing the money supply.
a.
True
b.
False
Multiple Choice
28. The Federal Reserve System is the
a.
federal government agency that collects taxes and spends these receipts on tanks, bridges, government
employees' salaries, etc.
b.
company that delivers packages to your front door.
c.
central bank of the United States.
d.
federal government agency that collects and disseminates all the economic data that economists are interested
in.
29. The Federal Reserve System began operations in
a.
1834.
b.
1896.
c.
1914.
d.
1935.
30. The Board of Governors of the Federal Reserve is comprised of
a.
seven persons, each appointed to a seven-year term.
b.
seven persons, each appointed to a fourteen-year term.
c.
fourteen persons, each appointed to a seven-year term.
d.
twelve persons, each appointed to a seven-year term.
e.
twelve persons, each appointed to a fourteen-year term.
31. The United States is divided into __________ Federal Reserve districts, each with a district bank.
a.
three
b.
eight
c.
twelve
d.
twenty
e.
fifty
32. The Board of Governors of the Federal Reserve is part of a larger policy-making group called the
a.
Senate Banking Committee.
b.
Federal Deposit Insurance Corporation.
c.
American Banking Association.
d.
Federal Open Market Committee.
33. Which of the following is not a major responsibility of the Fed?
a.
supplying the economy with paper money
b.
providing check-clearing services
c.
supervising member banks
d.
serving as fiscal agent for the Treasury
e.
All of the above are major responsibilities of the Fed.
34. Which of the following is not a major responsibility of the Fed?
a.
controlling the money supply
b.
serving as the federal government's banker
c.
determining tax rates
d.
acting as a lender of last resort
35. Which of the following statements is false?
a.
The Fed serves as the lender of last resort for banks.
b.
The Fed serves as a fiscal agent for the U.S. Treasury.
c.
A major responsibility of the Fed is to control the nation's money supply.
d.
The federal government is the Fed's banker.
36. When commercial banks need more Federal Reserve Notes,
a.
they call the Bureau of Engraving and Printing, which delivers the requested amount.
b.
they call the Board of Governors of the Fed, which delivers the requested amount.
c.
they ask their customers to exchange their Federal Reserve Notes for U.S. Treasury securities.
d.
they call the Treasury, which delivers the requested amount.
e.
they call their Federal Reserve District Bank, which delivers the requested amount.
37. When a check is written on an account at Bank A and deposited in Bank B, the reserve account of __________ will
rise and reserves of the entire banking system will __________.
a.
Bank A; rise
b.
Bank A; remain constant
c.
Bank B; rise
d.
Bank B; remain constant
38. The Fed
a.
can examine the books of a member bank without warning.
b.
can examine the books of a member bank after giving advance notice.
c.
can examine the books of a member bank with the bank's permission.
d.
is never allowed to see the books of a privately owned bank.
39. When we speak of the Fed's responsibility to supervise member banks, we are saying that the
a.
Fed's advisory board will help member banks manage their assets and liabilities.
b.
Fed's Open Market Committee will advise member banks regarding the purchase and sale of government
securities.
c.
Fed's Board of Governors will advise member banks regarding the appropriate interest rates to be charged on
various loans.
d.
Fed will advise member banks regarding the nature of loans and compliance with regulations.
e.
Fed will advise member banks about the proper control of each individual bank's money supply.
40. Open Market Operations are conducted by
a.
the main Fed office in Washington, D.C.
b.
the U.S. Treasury on behalf of the Fed.
c.
the Federal Reserve Bank of New York.
d.
a consortium of private banks contracted by the Fed.
41. Open market operations are the
a.
buying and selling of Federal Reserve Notes in the open market.
b.
means by which the Fed supplies the economy with currency.
c.
means by which the Fed acts as the government's banker.
d.
buying and selling of government securities by the Fed.
e.
buying and selling of government securities by the Treasury.
42. If the Fed purchases government securities from commercial banks, the reserves of the banking system will
immediately
a.
increase by the amount of the purchase.
b.
increase by more than the amount of the purchase.
c.
remain constant.
d.
decrease by the amount of the purchase.
e.
decrease by more than the amount of the purchase.
43. The funds the Fed receives from selling government securities
a.
are deposited in a commercial bank.
b.
disappear into thin air.
c.
are turned over to the Office of Management and Budget in Washington, D.C.
d.
are deposited in the U.S. Treasury.
44. When the Fed is acting as fiscal agent for the Treasury, it will
a.
buy securities from the Treasury, thereby providing the Treasury with money to pay the government's bills.
b.
receive and process bids for Treasury securities in preparation for the Treasury's auction of securities.
c.
serve as a lender of last resort.
d.
supply the Treasury with paper money whenever the Treasury does not have enough funds to meet its bills.
e.
supervise the Treasury by examining its books.
45. When the federal government incurs a budget deficit, it will
a.
mint more coins and spend them.
b.
create money out of thin air.
c.
impose a special tax on all income earners.
d.
borrow money from the Federal Reserve System by issuing securities.
e.
borrow money from the public by issuing government securities.
46. William Jennings Bryan, Secretary of State at the time of the passage of the Federal Reserve Act, argued in favor of
having ______ district banks.
a.
six
b.
not less than eight nor more than twelve
c.
twelve
d.
fifty
47. The three members of the commission that originally drew up the boundaries of the Federal Reserve Districts and the
locations of the district banks were the
a.
Comptroller of the Currency, the Secretary of the Treasury, and the Secretary of Agriculture.
b.
Secretary of State, the Secretary of the Treasury, and the Speaker of the House of Representatives.
c.
Secretary of State, the Secretary of Commerce, and the Vice President.
d.
Secretary of the Treasury, the Secretary of Commerce, and the Vice President.
48. The original boundaries for the Federal Reserve districts were determined based on
a.
Congressional district boundaries.
b.
population distributions obtained from the census.
c.
trade boundaries.
d.
state lines.
e.
none of the above
49. If the Fed purchases government securities from a commercial bank, which of the following will happen?
a.
The Fed will increase the bank's reserves on deposit at the Fed.
b.
The Fed will decrease the bank's reserves on deposit at the Fed.
c.
The assets (government securities) of the Fed will decrease.
d.
The assets (government securities) of the Fed will increase.
e.
a and d
50. If the Fed wants to increase the money supply through open market operations, it will
a.
purchase government securities.
b.
sell government securities.
c.
first purchase, then sell, government securities.
d.
lend more reserves to commercial banks.
51. Suppose the Fed sells a $50,000 U.S. Treasury security to Martha, a member of the public. If Martha writes a check to
the Fed in order to buy this security, the money in her checking account will be transferred to
a.
the Fed, and now the Fed will have $50,000 more in reserves than it had before.
b.
her bank, and now her bank will have $50,000 more in reserves than it had before.
c.
the Fed, and now it is as if the money doesn't exist.
d.
the Treasury, and now the Treasury will have $50,000 more in reserves than it had before.
52. The sale of government securities by the Fed
a.
decreases the supply of money.
b.
increases the supply of money.
c.
decreases the demand for money.
d.
increases the demand for money.
53. An open market purchase by the Fed
a.
decreases the supply of money.
b.
increases the supply of money.
c.
decreases the demand for money.
d.
increases the demand for money.
54. Suppose the Fed forecasts a reduction in cash leakages. It might offset the effect of this on the money supply by
a.
buying government securities.
b.
selling government securities.
c.
lowering the required reserve ratio.
d.
lowering the discount rate.
55. Suppose the Fed forecasts a reduction in excess reserve holdings by banks. It might offset the effect of this on the
money supply by
a.
buying government securities.
b.
lowering the required reserve ratio.
c.
lowering the discount rate.
d.
selling government securities.
e.
a, b, and c
56. An "open market operation" is said to occur when the Fed
a.
arranges for the merger of two banks.
b.
changes the interest rate at which it lends reserves.
c.
transfers reserves between banks.
d.
buys or sells government securities.
57. The Fed can change the money supply by changing
a.
the required reserve ratio.
b.
marginal income tax rates.
c.
federal excise taxes.
d.
unemployment benefits.
58. If banks are currently holding zero excess reserves and the Fed lowers the required reserve ratio, which of the
following will happen?
a.
Banks will have a reserve deficiency.
b.
Banks will have positive excess reserves.
c.
Banks will extend fewer loans.
d.
Banks will call in some of their loans to meet the reserve deficiency.
59. If banks are currently holding zero excess reserves and the Fed raises the required reserve ratio, which of the
following will happen?
a.
Banks will have a reserve deficiency.
b.
Banks will have positive excess reserves.
c.
Banks will begin to extend more loans.
d.
Banks will begin to extend more credit.
e.
b and d
60. The larger the simple deposit multiplier,
a.
the higher the required reserve ratio.
b.
the higher the discount rate.
c.
the larger the change in the money supply for a given change in deposits.
d.
the less likely the Fed will be to use its monetary policy tools.
61. The word that best describes the relationship between the required reserve ratio and the money supply is
a.
direct.
b.
constant.
c.
inverse.
d.
roundabout.
62. A commercial bank can receive a loan from another commercial bank in the
a.
federal funds market.
b.
bank loan market.
c.
Fed market.
d.
discount market.
63. When one commercial bank borrows from another commercial bank, it pays the __________ rate.
a.
discount
b.
bank interest
c.
federal funds
d.
prime
e.
none of the above
64. The interest rate that a commercial bank pays when it borrows from the Fed is the __________ rate.
a.
discount
b.
exchange
c.
federal
d.
bank
65. The lower the discount rate relative to the federal funds rate, the more likely a commercial bank will borrow from
a.
another commercial bank instead of the Fed.
b.
the Fed instead of another commercial bank.
c.
the U.S. Treasury instead of either the Fed or another commercial bank.
d.
the public.
66. When a commercial bank borrows from the Fed,
a.
the reserves of the bank fall.
b.
the bank can make more loans.
c.
it must be because the bank is not meeting its reserve requirements.
d.
the money supply falls.
67. Which of the following will increase the money supply?
a.
an increase in the discount rate (relative to the federal funds rate)
b.
a decrease in the required reserve ratio
c.
an open market sale by the Fed
d.
a and c
e.
b and c
68. Which of the following will decrease the money supply?
a.
an increase in the discount rate (relative to the federal funds rate)
b.
an increase in the required reserve ratio
c.
an open market purchase by the Fed
d.
a and b
e.
a, b, and c
69. The Federal Reserve System
a.
is the central bank of the United States.
b.
controls the money supply.
c.
is the lender of last resort.
d.
handles the sale of U.S. Treasury securities.
e.
all of the above
70. The Fed
a.
clears checks.
b.
holds depository institutions' reserves.
c.
is the government's banker.
d.
supplies Federal Reserve Notes.
e.
all of the above
71. The Federal Open Market Committee (FOMC)
a.
has six members.
b.
conducts open market operations.
c.
is the policy-making body within the Treasury.
d.
is the governing body of the Federal Reserve System.
e.
a, b, and c
72. The Board of Governors of the Federal Reserve
a.
is made up of seven members.
b.
is a group of advisers reporting to the President.
c.
is located in New York City.
d.
members are appointed to four-year terms by the President and confirmed by the Senate.
e.
all of the above
73. The Federal Open Market Committee (FOMC) is composed of the seven members of the Board of Governors,
a.
the president of the New York Federal Reserve District Bank, and four of the remaining 11 Federal Reserve
District Bank presidents who rotate on an annual basis.
b.
and five state governors who rotate on an annual basis.
c.
four Federal Reserve District Bank presidents who rotate on an annual basis, and the head of the Senate
Banking Committee.
d.
and the Secretary of the Treasury.
74. When the Fed purchases securities from a bank, it __________ reserves and ____________ the money supply.
a.
decreases; decreases
b.
increases; increases
c.
decreases; increases
d.
increases; decreases
e.
has no impact on; has no impact on
75. To decrease the money supply, the Fed may
a.
buy government securities in the open market.
b.
decrease the discount rate.
c.
increase the required reserve ratio.
d.
b and c
e.
all of the above
76. When the Fed sells government securities to a bank, the securities will be
a.
an asset for the bank.
b.
a liability for the bank.
c.
both an asset and a liability for the bank.
d.
neither an asset nor a liability for the bank.
