1. Which of the following government agencies oversees monetary policy in the U.S.?
a.
The Federal Reserve System
b.
Congress
c.
The Treasury Department
d.
The Federal Trade Commission
e.
The Department of Commerce
2. The Federal Reserve System was created in 1913, through the Federal Reserve Act, by the:
a.
U.S. President.
b.
Judiciary.
c.
Congress.
d.
International Monetary Fund.
e.
State governments.
Easy
MACR.BOYE.16.65 – ch. 13, 1
United States – Monetary and Fiscal Policy
The Federal Reserve System
Knowledge
3. The Federal Reserve System divides the U.S. into _____ districts.
a.
5
b.
21
c.
6
d.
12
e.
17
d
Easy
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
Knowledge
4. The Board of Governors of the Federal Reserve is:
a.
appointed by the president, and each governor serves a 7-year term.
b.
appointed by the president, and each governor serves a 14-year term.
c.
elected by Congress, and each governor serves a 10-year term.
Easy
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
Knowledge
d.
elected by Congress, and each governor serves a 4-year term.
e.
elected by Congress, and each governor serves a 7-year term
5. Which of following policies of the Congress was aimed to place the Fed above politics and maintain continuity in the
policymaking process?
a.
b.
c.
d.
e.
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
6. Who is the second most powerful person in the U.S.?
a.
The Fed chairman
b.
The Vice President
c.
The Secretary of State
d.
The speaker of the House of Representatives
e.
The Attorney General
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
7. For how long is the chairman of the board of governors of the Fed appointed and by whom?
a.
Appointed for two years by all the other governors
b.
Appointed for two years by the governor of the New York district branch
c.
Appointed for two years by the president of the United States
d.
Appointed for four years by all the other governors
e.
Appointed for four years by the president of the United States
MACR.BOYE.16.65 – ch. 13, 1
United States – Monetary and Fiscal Policy
The Federal Reserve System
8. Each district bank of the Fed comprises of nine board of directors of which three are appointed by the:
a.
Federal Reserve System member banks.
b.
President.
c.
Attorney General.
d.
Board of Governors of the Fed.
e.
Congress.
d
Moderate
MACR.BOYE.16.65 – ch. 13, 1
United States – Monetary and Fiscal Policy
The Federal Reserve System
Knowledge
9. Which of the following is the official policy-making body of the Federal Reserve System?
a.
Federal Advisory Council
b.
The U.S. Treasury
c.
The Federal Open Market Committee
d.
The Board of Governors
e.
The Federal Reserve district banks
Moderate
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
Knowledge
10. The Federal Open Market Committee consists of:
a.
the 12-member Board of Governors.
b.
seven members of the Board of Governors and five district presidents.
c.
the president of the New York district bank and the members of the Council of Economic Advisers.
d.
the chairman of the Board of Governors and five district presidents.
e.
seven members of the Board of Governors and a nine-member board of directors of the district banks.
b
Moderate
MACR.BOYE.16.65 – ch. 13, 1
Easy
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
Knowledge
11. The President of which of the following district banks of the Fed is perpetually present on the Federal Open Market
Committee?
a.
The New York Fed
b.
The Seattle Fed
c.
The Boston Fed
d.
The Chicago Fed
e.
The Atlanta Fed
MACR.BOYE.16.65 – ch. 13, 1
United States – Monetary and Fiscal Policy
The Federal Reserve System
12. Which of the following is a function of the Fed?
a.
Printing foreign currency
b.
Determining the level of government spending
c.
Distributing welfare benefits
d.
Administrating the Social Security fund
e.
Ensuring that banks operate in a sound and prudent manner
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
13. Identify the correct statement.
a.
District banks of the Fed hold reserves in the form of deposits at the Fed.
b.
Commercial banks in each district make loans to the Fed.
c.
The Fed sells U.S. government securities for the U.S. Treasury.
d.
The district banks of the Fed print money and supply currency to the Fed.
e.
The Fed holds the reserves of the commercial banks but it does not issues checks.
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
14. During the Christmas holiday season, the Fed increases the supply of currency to:
The Federal Reserve System
a.
ensure that checks are cleared quickly.
b.
meet the demand for cash withdrawals from banks.
c.
stabilize the value of the dollar against other currencies.
d.
decrease the value of bonds.
e.
control inflation.
15. Which of the following statements is incorrect?
a.
The Federal Reserve Open Market Committee determines fiscal policy actions for the Congress.
b.
The Board of Governors of the Federal Reserve is appointed, not elected.
c.
The Federal Reserve System was designed to be independent of the executive branch of the government.
d.
The chairman of the Board of Governors serves a four-year term.
e.
The Federal Reserve districts are distributed geographically to serve the particular interests of each region.
MACR.BOYE.16.65 – ch. 13, 1
The Federal Reserve System
Knowledge
16. Which of the following is the ultimate goal of monetary policy?
a.
Complete removal of income inequality
b.
Economic growth with price stability
c.
Free trade
d.
Balanced budget
e.
Economic welfare
b
Easy
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
Knowledge
17. Which of the following is an intermediate target of the Fed’s policies?
a.
Exchange rate
b.
Unemployment
c.
Money supply
d.
Interest rate
b
Moderate
MACR.BOYE.16.65 – ch. 13, 1
United States – Monetary and Fiscal Policy
The Federal Reserve System
Knowledge
e.
Inflation
18. The quantity theory of money asserts that:
a.
changes in nominal GDP are inversely related to changes in the velocity of money.
b.
changes in money supply are positively related to changes in the velocity of money.
c.
changes in the money supply are unrelated to changes in the price level.
d.
changes in the output level are unrelated to changes in the price level.
e.
changes in the money supply are directly related to changes in nominal GDP.
Easy
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
Knowledge
19. If M = quantity of money, V = velocity of money, P = price level, and Q = the quantity of output, then the equation of
exchange will be defined as:
a.
MV = PQ
b.
MQ = PV
c.
MP = VQ
d.
MV = P/Q
e.
MQ = V/P
Easy
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
Knowledge
20. According to the equation of exchange, if the money supply is $800 million, real GDP is $3,000 million, and nominal
GDP is $4,000 million, then the velocity of money is equal to:
a.
3.5.
b.
1.7.
c.
10.3.
d.
5.
e.
2.
Challenging
Easy
MACR.BOYE.16.66 – ch. 13, 2
Implementing Monetary Policy
Knowledge
21. The velocity of money is:
a.
the purchasing power of money.
b.
the value of a dollar in relation to foreign currency.
c.
the average number of times each dollar is spent on final goods and services in a given year.
d.
the average length of time it takes for a dollar of income to be spent.
e.
the total amount of money that is in circulation for consumption spending.
Moderate
MACR.BOYE.16.66 – ch. 13, 2
Implementing Monetary Policy
Knowledge
22. If the money supply is $80 billion, the velocity of money is 5, and real GDP is $320 billion, then the price level
equals:
a.
51.20.
b.
20.
c.
4.
d.
2.75.
e.
1.25.
Challenging
MACR.BOYE.16.66 – ch. 13, 2
Implementing Monetary Policy
Application
23. After the year 2000, the FOMC changed some of its operating procedures. In particular, it stopped setting:
a.
explicit interest rates for commercial banks to charge.
b.
explicit ranges for money growth targets.
c.
explicit number of government bonds to be bought and sold.
d.
standardized real GDP targets.
e.
explicit numbers for the targeted natural rates of unemployment.
b
MACR.BOYE.16.66 – ch. 13, 2
Implementing Monetary Policy
MACR.BOYE.16.66 – ch. 13, 2
Implementing Monetary Policy
Application
24. Which of the following is assumed to be constant in the quantity theory of money?
a.
The money supply
b.
Real GDP
c.
The price level
d.
The velocity of money
e.
Nominal GDP
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
25. If a percentage decrease in money supply is followed by a proportional percentage decrease in prices and output, this
means that:
a.
the velocity of money is constant.
b.
the economy is in a recession.
c.
the velocity of money has fallen.
d.
real GDP is constant.
e.
the economy is not at maximum capacity
MACR.BOYE.16.66 – ch. 13, 2
United States – Reflective Thinking
Implementing Monetary Policy
26. Suppose that the Fed decides to decrease the money supply by 0.87 percent. If the velocity of money is constant, then
the quantity theory of money predicts that:
a.
nominal GDP will remain unchanged.
b.
the quantity of output will rise by 0.87 percent.
c.
nominal GDP will fall by 0.87 percent.
d.
the price level will fall by 0.87 percent.
e.
real GDP will fall by 0.87 percent.
MACR.BOYE.16.66 – ch. 13, 2
United States – Reflective Thinking
Implementing Monetary Policy
27. Assume that the Fed increases the money supply when there is substantial unemployment in the economy. According
to the quantity theory of money, if velocity is constant, then:
a.
the price level will decrease.
b.
real GDP will decrease.
c.
nominal GDP will increase.
d.
nominal GDP will decrease.
e.
real GDP will remain constant while price level will decrease.
28. The interest rate that banks pay for borrowing overnight from other banks is called:
a.
bank rate.
b.
target rate.
c.
federal funds rate.
d.
real interest rate.
e.
prime lending rate.
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
29. Which of the following statements about inflation targeting is true?
a.
Inflation targeting allows the central bank to achieve multiple goals like low unemployment and economic
growth.
b.
Inflation targeting has not been adopted by the Fed.
c.
A central bank that adopts inflation targeting is intrinsically dependent on fiscal policy.
d.
Inflation targeting decreases the perceived uncertainty derived from the central bank’s course of action.
e.
Inflation targeting increases the uncertainty associated with the central bank’s course of action.
d
MACR.BOYE.16.66 – ch. 13, 2
United States – Reflective Thinking
Implementing Monetary Policy
30. In order to use inflation targeting, a central bank must:
a.
be independent of fiscal policy.
b.
be dependent on fiscal policy.
c.
focus on money supply.
Moderate
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
Comprehension
d.
focus on unemployment.
e.
focus on stable exchange rates.
31. Which of the following is true of the federal funds rate?
a.
It is the interest rate that one bank charges another for overnight lending.
b.
It is the interest rate that the Federal Reserve Bank charges commercial banks for borrowing money.
c.
It is the interest rate you earn in your saving account.
d.
It is the interest rate the bank charges business firms for borrowing money.
e.
It is the interest rate that a domestic bank charges a foreign bank for borrowing money.
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
32. Which of the following actions of the Fed will increase money supply in the U.S. directly?
a.
Purchase U.S. government bonds
b.
Increase the federal funds rate
c.
Increase the reserve requirement
d.
Increase the discount rate
e.
Ban sales of private mutual funds
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
33. The sum of the coins and currencies in the bank’s vault and its deposit in the Fed is called:
a.
vault cash.
b.
transaction deposits.
c.
legal reserves.
d.
required reserves.
e.
loanable funds.
MACR.BOYE.16.66 – ch. 13, 2
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
34. For a bank to have lending power, its required reserves must:
a.
be smaller than its legal reserves.
b.
exceed its legal reserves.
c.
be smaller than its excess reserves.
d.
exceed its excess reserves.
e.
exceed its vault cash.
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
35. When a bank’s excess reserves are zero:
a.
its required reserves exceed its legal reserves.
b.
its liabilities exceed its assets.
c.
its liabilities must be lower than its assets.
d.
its required reserves equal its legal reserves.
e.
it cannot meet its reserve requirement.
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
36. Suppose a bank has $850 million in vault cash and a deposit in the Fed of $100 million. If the bank’s required reserves
equal $500 million, then the bank has excess reserves of:
a.
$100 million.
b.
$350 million.
c.
$400 million.
d.
$450 million.
e.
$500 million.
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
37. Which of the following will be observed if the Fed raises the reserve requirement?
a.
The deposit expansion multiplier will fall
b.
The discount rate will decline
c.
The interest rate ceilings will fall
d.
Excess reserves will increase
e.
Money supply will increase
MACR.BOYE.16.67 – ch. 13, 3
United States – Reflective Thinking
Implementing Monetary Policy
38. Assume that banks lend out all their excess reserves. Currently, the legal reserves that banks must hold equal $11.5
billion. If the Federal Reserve decreases its reserve requirement from 10 percent to 5 percent, then there is potential for
the whole banking system to raise the money supply by:
a.
$11.5 billion.
b.
$230 billion.
c.
$115 billion.
d.
$57.5 billion.
e.
$575 billion.
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
39. If funds are being loaned from one commercial bank’s excess reserves on deposit with the Federal Reserve to another
commercial bank’s deposit account at the Fed, the transaction is taking place in:
a.
the discount market.
b.
the currency exchange market.
c.
the federal funds market.
d.
the open market.
e.
the reserves market
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
40. The rate of interest that the Federal Reserve charges on loans to member banks is the:
a.
open market rate.
b.
federal funds rate.
c.
discount rate.
d.
prime interest rate.
e.
reserve lending rate.
41. A decrease in the discount rate:
a.
increases reserve holdings of the commercial banks.
b.
leads to an increase in the interbank rate charged by commercial banks.
c.
lowers the cost of borrowing from the Fed.
d.
causes an increase in the federal funds rate.
e.
decreases the money supply.
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
42. The buying and selling of government bonds by the FOMC constitutes:
a.
an open market operation.
b.
a federal funds adjustment.
c.
a discount rate adjustment.
d.
a change in the reserve requirement.
e.
sterilization of the money supply
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
43. When the Federal Open Market Committee buys government securities:
a.
the reserve requirement of banks decrease.
b.
the reserve deposits of banks decrease.
c.
the excess reserves of banks increase.
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
d.
the federal funds rate increases.
e.
the legal reserves of banks decrease.
44. If the FOMC purchases government bonds priced at $5,000 from a bond dealer who banks at National Bank, and if the
reserve requirement is 20 percent, then the required reserves of National Bank:
a.
increase by $5,000.
b.
increase by $4,000.
c.
increase by $1,000.
d.
decrease by $5,000.
e.
decrease by $1,000.
Moderate
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
45. Assume that a bank holds legal reserves of $800, the required reserves are $400 and total deposit is $4,000. If the
government purchases bonds worth $200, excess reserves will increase by _____.
a.
$420
b.
$180
c.
$100
d.
$80
e.
$40
b
Challenging
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
46. Suppose Fed’s purchase of government bonds results in a $120,000 increase in the excess reserves of a particular
bank. What would be the applicable reserve requirement for the whole banking system to be able to expand the money
supply by $600,000?
a.
10 percent
b.
12 percent
c.
16 percent
d.
20 percent
Moderate
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
Knowledge
e.
25 percent
Table 13.1
Balance Sheet
Assets
Liabilities
Vault Cash
$ 1,150
Checking Accounts
$11,300
Reserve Deposits
$ 1,650
Savings Accounts
$ 3,200
Loans
$11,700
Total Assets
$14,500
Total Liabilities
$14,500
Assume that this is the balance sheet of the only bank in this economy and that
the money supply is entirely kept by the bank in either a checking or a savings
account.
47. Refer to Table 13.1. Given a reserve requirement of 8 percent, what is the amount of excess reserves?
a.
$2,800
b.
$224
c.
$936
d.
$1,640
e.
-$256
d
Moderate
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
48. Refer to Table 13.1. Given a reserve requirement of 8 percent, what is the maximum potential increase in the money
supply?
a.
$20,500
b.
$2,800
c.
$224
d.
$11,700
e.
$35,000
Challenging
MACR.BOYE.16.67 – ch. 13, 3
United States – Reflective Thinking
Application
d
Challenging
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
49. Refer to Table 13.1. Given a reserve requirement of 8 percent, what is the increase in required reserves when the
government purchases $400 worth of government securities?
a.
$400
b.
$224
c.
$32
d.
$256
e.
$5,000
50. Refer to Table 13.1. Assume a reserve requirement of 8 percent. What is the maximum potential increase in the money
supply from the Fed’s purchase of $400 worth of government securities?
a.
$62,500
b.
$2,800
c.
$3,200
d.
$4,600
e.
$400
d
Challenging
MACR.BOYE.16.67 – ch. 13, 3
United States – Reflective Thinking
Implementing Monetary Policy
Application
The table given below shows the assets and liabilities of the National Bank. Assume that this is the only bank in the
economy.
Table 13.2
Balance Sheet of National Bank
Assets
Liabilities
Vault Cash
$1,725
Deposits
$5,450
Deposit in Fed
$425
Loans
$3,300
Total Assets
$5,450
Total Liabilities
$5,450
51. Refer to Table 13.2 and calculate the legal reserves of the bank.
a.
$425
b.
$5,450
c.
$1,725
d.
$2,150
e.
$1,500
d
Moderate
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
52. Refer to Table 13.2. If the reserve requirement is 10 percent, calculate the maximum amount of loanable funds
available with the bank.
a.
$1,605
b.
$1,180
c.
$545
d.
$5,450
e.
$2,150
Moderate
Implementing Monetary Policy
Application
53. Refer to Table 13.2. If the reserve requirement is 10 percent, how much can the whole banking system expand the
money supply?
a.
$21,500
b.
$54,500
c.
$11,800
d.
$16,050
e.
$5,450
d
Challenging
Implementing Monetary Policy
Application
54. Refer to Table 13.2. Calculate the change in the bank’s excess reserves if the reserve requirement is decreased from
10% to 5%.
a.
+$272.5
b.
+$236
c.
-$2,360
d.
-$1877.5
e.
-$3,210
Challenging
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Application
55. Refer to Table 13.2. If the Fed increased the reserve requirement from 10 percent to 25 percent, the money supply in
the whole banking system could now potentially:
a.
decrease by $12,900.
b.
decrease by $1,272.50.
c.
increase by $7,875.
d.
decrease by $7,875.
e.
increase by $3,150.
MACR.BOYE.16.67 – ch. 13, 3
United States – Reflective Thinking
Implementing Monetary Policy
56. Which of the following monetary policies will increase money supply?
a.
An increase in the discount rate
b.
An increase in the reserve requirement
c.
Open market purchases by the Fed
d.
The Fed selling government bonds
e.
An increase in the federal funds rate
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
57. The aggregate demand curve will shift outward and to the right when the Federal Reserve undertakes which of the
following monetary policies?
a.
Open market purchases of government securities
b.
An increase in the discount rate
c.
An increase in the reserve requirement
d.
A reduction in loans to the U.S. Treasury
e.
A more lenient supervision of savings and loan institutions
United States – Reflective Thinking
United States – Reflective Thinking
Implementing Monetary Policy
58. The process of buying financial assets to stimulate the economy when the central bank target interest rate is near or at
zero and the interest rate cannot be lowered further is called:
a.
bond-trading.
b.
quantitative bidding.
c.
open market purchase.
d.
quantitative easing.
e.
open market sale.
59. All the following affect short-run operating targets of the FOMC, except:
a.
the federal funds rate.
b.
the rate of inflation.
c.
the budget deficit.
d.
the foreign exchange rate.
e.
the growth of real GDP.
Easy
MACR.BOYE.16.67 – ch. 13, 3
Implementing Monetary Policy
Knowledge
60. Which of the following is the latest short run operating target specified to the New York Fed by the FOMC directives?
a.
The federal funds rate
b.
The primary lending rate
c.
Quantitative easing
d.
Legal reserves
e.
The bank rate
Easy
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy
61. The FOMC carries out its policies through directives to the bond-trading desk at the:
a.
Federal Reserve Bank of Dallas.
b.
Chicago Fed.
d
Easy
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Knowledge
c.
Federal Reserve of Philadelphia.
d.
Los Angeles Fed.
e.
Federal Reserve Bank of New York.
62. The supply of the U.S. dollar on the foreign exchange market is generated by:
a.
demand for U.S. exports.
b.
the U.S. demand for the products and financial assets of other countries.
c.
the U.S. demand for domestic goods and services.
d.
foreign demand for U.S. products.
e.
foreign demand for U.S. financial assets.
MACR.BOYE.16.68 – ch. 13, 4
Implementing Monetary Policy
63. The supply curve of U.S. dollars in the foreign exchange market is:
a.
downward-sloping because it is negatively related to U.S. exports.
b.
downward-sloping because it is negatively related to U.S. imports.
c.
upward-sloping because it is positively related to U.S. exports.
d.
upward-sloping because it is positively related to U.S. imports.
e.
horizontal because it is unrelated to foreign demand for U.S. goods and services.
MACR.BOYE.16.68 – ch. 13, 4
Implementing Monetary Policy
64. Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange
market?
a.
U.S. firms purchasing raw materials from Japan
b.
U.S. speculators expecting the value of the German mark to rise
c.
The Fed intervening in the foreign exchange market and devaluing the dollar
d.
Speculative outflows of money from the United States to Britain because of higher interest rates in Britain
e.
Japanese cars becoming more popular in the United States
MACR.BOYE.16.67 – ch. 13, 3
United States – Monetary and Fiscal Policy
Implementing Monetary Policy