136. Why does the president of the Federal Reserve Bank of New York hold a permanent seat on the FOMC?
a.
The New York Fed is responsible for executing open market operations.
b.
A substantial amount of financial activity takes place in New York City.
c.
The Fed Board of Governors holds its regularly scheduled meetings in New York City.
d.
The Federal Reserve Bank of New York is the original Fed district; the other eleven districts were formed later
by the Banking Act of 1935
e.
a and b
137. Which of the following statements is false?
a.
The Fed has the legal authority to create money out of thin air.
b.
There is a direct relationship between the money supply and the required reserve ratio.
c.
The Fed can cause money to disappear into thin air.
d.
The federal funds market is a market in which banks can borrow money from other banks.
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138. The Banking Act of 1935 changed the name of the _______________ to the Board of Governors of the Federal
Reserve System.
a.
Federal Open Market Committee
b.
Board of Monetary Affairs
c.
Central Bank Board
d.
Federal Reserve Board
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139. The members of the Board of Governors of the Federal Reserve are
a.
b.
c.
d.
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140. The chairman of the Board of Governors of the Fed is designated by ____________________ to serve a _______
year term as chairman.
a.
the President; four
b.
Congress; fourteen
c.
the President; twelve
d.
Congress; four
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Exhibit 13-2
Federal Reserve Action
Effect on the Money Supply
Raise the required reserve ratio
(1)
Raise the discount rate
(2)
Lower the required reserve ratio
(3)
Conduct open market sale
(4)
Lower the discount rate
(5)
Conduct open market purchase
(6)
141. Refer to Exhibit 13-2. What word (up or down) should go in the place of blank (1) and blank (2), respectively?
a.
up; up
b.
up; down
c.
down; up
d.
down; down
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142. Refer to Exhibit 13-2. What word (up or down) should go in the place of blank (3) and blank (4), respectively?
a.
up; up
b.
up; down
c.
down; up
d.
down; down
United States – BUSPROG: Analytic
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Bloom’s: Knowledge
143. Refer to Exhibit 13-2. What word (up or down) should go in the place of blank (5) and blank (6), respectively?
a.
up; up
b.
up; down
c.
down; up
d.
down; down
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144. In the United States, paper currency is printed at the
a.
Bureau of Engraving and Printing.
b.
Federal Reserve District banks.
c.
U.S. Mint.
d.
U.S. Treasury.
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145. Which of the following has never been a monetary policy tool of the Fed?
a.
open market operations
b.
the required reserve ratio
c.
the discount rate
d.
the term auction facility (TAF) program
e.
income tax rates
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146. When the Federal Open Market Committee (FOMC) votes on policy, they do so
a.
in the following order: the chair, the vice chair, the remaining FOMC members in alphabetical order.
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Bloom’s: Comprehension
b.
in order based on seniority at the Fed.
c.
in the following order: the chair, the vice chair, the remaining FOMC members by seniority at the Fed.
d.
in alphabetical order.
147. A required reserve ratio of 12 percent gives rise to a simple deposit multiplier of
a.
12.
b.
83.33.
c.
6.67.
d.
8.33.
d
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148. A required reserve ratio of 7 percent gives rise to a simple deposit multiplier of
a.
14.29.
b.
83.33.
c.
1.43.
d.
93.
e.
7.
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149. The simple deposit multiplier is
a.
the reciprocal of the required reserve ratio.
b.
always 1.
c.
the same as the required reserve ratio.
d.
different from bank to bank even if the required reserve ratio is the same for all banks.
1
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150. Lowering the required reserve ratio __________ the simple deposit multiplier which will __________ the economy’s
money supply.
a.
raises; increase
b.
raises; decrease
c.
lowers; increase
d.
lowers; decrease
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151. Raising the required reserve ratio __________ the simple deposit multiplier which will __________ the economy’s
money supply.
a.
raises; increase
b.
raises; decrease
c.
lowers; increase
d.
lowers; decrease
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152. A bank is reserve deficient when
a.
its reserves fall short of the level determined by the required reserve ratio.
b.
its excess reserves are greater than its required reserves.
c.
its required reserves are greater than its excess reserves.
d.
it purchases government securities from the Fed.
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153. If reserves increase by $4 million and the required reserve ratio is 8%, what is the resulting change in checkable
deposits (or the money supply), assuming that there are no cash leakages and that banks hold zero excess reserves?
a.
$3.2 million
b.
$3.7 million
c.
$5 million
d.
$50 million
Bloom’s: Application
154. If reserves increase by $7 million and the required reserve ratio is 12%, what is the resulting change in checkable
deposits (or the money supply), assuming that there are no cash leakages and that banks hold zero excess reserves?
a.
$0.84 million
b.
$7.95 million
c.
$5.83 million
d.
$58.33 million
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155. Which of the following describes a change that the Federal Reserve made in response to the financial crisis of 2007-
2009?
a.
The Fed extended the lender of last resort function to institutions other than banks.
b.
The Fed narrowed the scope of its open market operations, choosing to limit it to only buying Treasury
securities from banks.
c.
The Fed discontinued its term auction facility (TAF) program.
d.
all of the above
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156. The term auction facility (TAF) program was instituted by the Federal Reserve to deal with the
________________________. This program gave banks ____________ options when it comes to borrowing from the
Fed.
a.
financial crisis of 2007-2009; more
b.
Great Depression; more
c.
financial crisis of 2007-2009; fewer
d.
Great Depression; fewer
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Exhibit 13-1
Bank
Increase in Checkable
Deposits
New Required
Reserves
New Checkable Deposits
Created by Extending New
Loans
A
$0
$0
$1,000
B
$1,000
(A)
(B)
C
(C)
$90
(D)
D
$810
(E)
(F)
Assume that the required reserve ratio is 10%, that there are no cash leakages, and that banks hold zero excess reserves.
157. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000
worth of government securities from Bank A. As a result, Bank A finds itself with $1,000 in excess reserves that it lends
out and those funds end up in Bank B. What dollar value goes in blanks (A) and (B), respectively?.
a.
$100; $90
b.
$10; $90
c.
$10; $990
d.
$100; $900
158. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000
worth of government securities from Bank A. As a result, Bank A finds itself with $1,000 in excess reserves that it lends
out and those funds end up in Bank B. The loan made by Bank B ends up in Bank C. What dollar value goes in blanks
(C) and (D), respectively?.
a.
$900; $810
b.
$90; $810
c.
$110; $700
d.
$700; $110
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Bloom’s: Application
159. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000
worth of government securities from Bank A. As a result, Bank A finds itself with $1,000 in excess reserves that it lends
out and those funds end up in Bank B. The loan made by Bank B ends up in Bank C, and the loan made by bank C ends
up in Bank D. What dollar value goes in blanks (E) and (F), respectively?.
a.
$729; $81
b.
$81; $729
c.
$10; $800
d.
$700; $110
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Bloom’s: Application
160. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000
worth of government securities from Bank A. At the end of this process of money creation, what is the total amount of
new checkable deposits?
a.
$1,000,000
b.
$1,000
c.
$10,000
d.
$100,000
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161. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000
worth of government securities from Bank A. At the end of this process of money creation, what equation would be used
to determine the total amount of new checkable deposits?
a.
simple deposit multiplier x change in reserves resulting from the initial injection of funds
b.
1/r x change in reserves resulting from the initial injection of funds
c.
r x change in reserves resulting from the initial injection of funds
d.
1/r
e.
a or b
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162. Suppose that the current federal funds rate is above the federal funds target rate. In order to lower the federal funds
rate the Fed will ________________ securities on the open market which will ________________ the supply of reserves
in the market for reserves, pushing the rate closer to the target rate.
a.
sell; increase
b.
purchase; increase
c.
purchase; decrease
d.
sell; decrease
b
1
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b
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163. When a bank repays a _________________ loan, the Fed _____________________ the bank’s reserve account.
a.
overnight; subtracts the repayment from
b.
overnight; adds the repayment to
c.
discount; adds the repayment to
d.
discount; subtracts the repayment from
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164. Suppose that the current federal funds rate is below the federal funds target rate. In order to raise the federal funds
rate the Fed will ________________ securities on the open market which will ________________ the supply of reserves
in the market for reserves, pushing the rate closer to the target rate.
a.
sell; increase
b.
purchase; increase
c.
purchase; decrease
d.
sell; decrease
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165. Suppose that the Fed undertakes an open market purchase of $5 million worth of securities from a bank. If the
required reserve ratio is 12%, what is the resulting change in checkable deposits (or the money supply), assuming that
there are no cash leakages and that banks hold zero excess reserves?
a.
$4.17 million
b.
$7.95 million
c.
$5.68 million
d.
$41.67 million
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166. Suppose that the Fed undertakes an open market purchase of $1 million worth of securities from a bank. If the
required reserve ratio is 9%, what is the resulting change in checkable deposits (or the money supply), assuming that there
are no cash leakages and that banks hold zero excess reserves?
a.
$11.11 million
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b.
$9 million
c.
$1.09 million
d.
$90 million
167. Suppose that the Fed undertakes an open market sale, selling $1 million worth of securities to a bank. If the required
reserve ratio is 8%, checkable deposits (or the money supply), would _______________ by ________________ million,
assuming that there are no cash leakages and that banks hold zero excess reserves.
a.
rise; $12.5
b.
decline; $8
c.
decline; $12.5
d.
rise; $8
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168. Suppose that the Fed undertakes an open market sale, selling $3 million worth of securities to a bank. If the required
reserve ratio is 11%, checkable deposits (or the money supply), would _______________ by ________________ million,
assuming that there are no cash leakages and that banks hold zero excess reserves.
a.
rise; $27
b.
decline; $33
c.
decline; $27
d.
rise; $33
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169. In its current execution of monetary policy, the Fed does not usually have a specific _____________ target, but
rather it tries to target a specific ________________.
a.
money supply; federal funds rate
b.
federal funds rate; money supply
c.
money supply; discount rate
d.
required reserves ratio; discount rate
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170. The federal funds rate and the quantity demanded of reserves have a(n) ____________ relationship. This is because
as the federal funds rate moves down, it becomes _______________ for banks to hold reserves, encouraging banks to
hold ____________ in reserves to guard against checkable deposit withdrawals.
a.
inverse; more expensive; more
b.
direct; more expensive; less
c.
inverse; cheaper; more
d.
direct; cheaper; more
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Appendix C
171. Which of the following is false?
a.
Under free banking, banks would not be subject to any special regulations beyond those which are required of
other businesses.
b.
Under free banking, banks would be allowed to issue their own currency.
c.
The government would largely control the actions of banks under free banking.
d.
The market forces would raise or lower the money supply under free banking.
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172. Under a free banking arrangement, when people increase the demand for money a process would begin which would
end with a(n) _________________ in the supply of money, ______________ government intervention.
a.
increase; with some
b.
decrease; with some
c.
decrease; without the need for
d.
increase; without the need for
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Appendix C
173. If the Fed _____________________, the money supply will ultimately __________.
a.
raises the discount rate relative to the federal funds rate; decrease
b.
lowers the discount rate relative to the federal funds rate; increase
c.
lowers the discount rate relative to the federal funds rate; decrease
d.
raises the discount rate relative to the federal funds rate; increase
e.
a and b
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174. With quantitative easing, the Fed purchases _____________________. With open market operations, the Fed
purchases ______________________________.
a.
short-term and long-term government securities, as well as private sector bonds and securities; short-term
government securities
b.
short-term government securities, only; long-term government securities, only
c.
long-term government securities, only; short-term government securities, only
d.
government securities, only; private sector bonds and securities
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175. When the Fed engages in quantitative easing, it alters ______________________ and when the Fed makes open
market purchases it alters _______________________.
a.
short-term interest rates; long-term interest rates
b.
long-term interest rates; short-term interest rates
c.
the required reserve ratio; income tax rates
d.
income tax rates; the required reserve ratio
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176. The supply curve of reserves has two kinks in it: one at the _________________ and the other at the
____________________ rate.
a.
interest rate that the Fed pays on reserves; discount
b.
federal funds rate; discount
c.
prime rate; discount
d.
discount rate; federal funds rate
177. The corridor is the ________________ section of the ______________________ curve of reserves in the federal
funds market.
a.
vertical; demand
b.
horizontal; demand
c.
vertical; supply
d.
horizontal; supply
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Appendix C
178. The demand for reserves curve in the federal funds market is
a.
horizontal.
b.
vertical.
c.
upward sloping.
d.
downward sloping.
d
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Appendix C
Essay
179. List and describe the three major monetary policy tools the Federal Reserve can use to increase the money
supply. Be specific in your response regarding which direction the tool would need to change in order for the money
supply to grow.
(called an open market purchase). As the Fed makes open market purchases, the money paid
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Appendix C
180. Summarize the history of how the Federal Reserve came to have twelve districts.
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181. List and describe five of the eight major functions or responsibilities of the Fed.
banker, and serving as the lender of last resort, and handling the sale of U.S. Treasury
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182. What is the name and make-up of the policymaking group that has the authority to conduct open market operations?
Describe how the use of open market operations helps to increase or decrease the money supply.
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183. Explain the major differences between the Federal Reserve and the U.S. Treasury.
184. Explain the difference between the discount rate and the federal funds rate. If the Fed wants to lower one of these
rates, which one can the Fed change by issuing an order? Describe in detail how the Fed helps to lower the other rate.
185. Suppose that the federal funds rate and the discount rate are equal initially at 3%. If the discount rate is then lowered
to 2.5%, to whom will a bank be more likely to go for a loan: the Federal Reserve or another bank? Explain your answer
in detail, and be sure to mention the impact that this situation would have on the money supply..
186. Discuss in detail the three things mentioned in the text that the Federal Reserve did to deal with the 2007-2009
financial crisis.
187. Use the simple deposit multiplier to help show why the money supply increases when the Fed lowers the required
reserve ratio (r).