30) Money market mutual funds sell shares to investors and use the money to buy
A) mortgage-backed securities.
B) foreign currency.
C) short-term securities.
D) overseas assets through foreign direct investment.
31) As was demonstrated in 2007, firms in the shadow banking system
A) were very vulnerable to bank runs.
B) were protected from financial ruin by federal deposit insurance.
C) were well insulated from bank runs.
D) were more insulated from the financial crisis than were commercial banks.
32) In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system
through the Troubled Asset Relief Program (TARP) by
A) allowing domestic banks to be taken over by foreign banks.
B) permitting banks to sell commercial bonds to the Federal Reserve Bank.
C) allowing banks to double any outstanding claims for federal deposit insurance reimbursements.
D) providing funds to banks in exchange for stock.
33) A fractional reserve banking system is one in which banks hold less than 100 percent of ________ as
reserves.
A) loans
B) deposits
C) securities
D) shareholder equity
34) A central bank can help stop a bank panic by
A) raising the required reserve ratio.
B) calling in consumer loans.
C) acting as a lender of last resort.
D) decreasing income taxes.
35) In the United States, each bank panic in the late nineteenth and early twentieth centuries was
accompanied by
A) inflation.
B) deflation.
C) a depression.
D) a recession.
36) In 1913, Congress established the Federal Reserve system with the intention of putting an end to
A) high interest rates.
B) high unemployment rates.
C) inflation.
D) bank panics.
37) Which of the following is not a major function of the Federal Reserve System?
A) lender of last resort
B) clearing checks between banks
C) setting income tax rates
D) controlling the money supply
38) Bank panics have largely disappeared in the United States because
A) banks are now required to hold a larger fraction of deposits as reserves.
B) bank loans are more closely monitored by the Federal Reserve.
C) of low interest rates.
D) of deposit insurance.
39) The real power within the Federal Reserve lies with the
A) Federal Reserve District banks.
B) Board of Governors.
C) Council of Economic Advisors.
D) Council of Monetary Advisors.
Article Summary
The European Union (EU) has initiated a program called the Bank Recovery and Resolution
Directive (BRRD), which is designed to protect taxpayers from bailing out banks during a banking
crisis, and eleven EU countries are currently under pressure to adopt these new rules or face legal
action. Under the rules, the burden of bailing out troubled banks is being placed on bank creditors,
shareholders, and possibly depositors, with governments, and therefore taxpayers, no longer being
saddled with this liability. The process is being referred to as a “bail-in”, with the legislation
advocated by the Bank of England, the European Central Bank, and the Federal Reserve.
Source: Mark O’Byrne, “Bail-Ins Coming — EU Gives Countries Two Months To Adopt Rules,”
goldcore.com, June 3, 2015.
40) Refer to the Article Summary. In 2015, the European Union initiated the BRRD program, where the
burden of bailing out troubled banks is being placed on bank creditors, shareholders, and possibly
depositors. If this program were to confiscate funds from bank deposits to assist troubled banks, the
possibility of a bank run, a situation in which ________, would likely increase.
A) a majority of the shareholders in a bank decide to sell off all their shares of stock.
B) many depositors simultaneously decide to withdraw money from a bank.
C) a majority of the bank’s loans go into default all at once.
D) a bank stops paying interest on all of its interest-bearing accounts.
41) Refer to the Article Summary. Prior to the initiation of the BRRD, the European Union had
essentially been bailing out troubled banks. In doing this, the EU was, in effect, acting as a
A) shadow bank.
B) conductor of open market operations.
C) private equity firm.
D) lender of last resort.
42) Which of the following is not a tool the Fed uses to manage the money supply?
A) open market operations
B) setting the discount rate
C) expanding and contracting deposit insurance
D) setting reserve requirements for deposits in the banking system
43) The Federal Open Market Committee consists of
A) the seven member Board of Governors of the Federal Reserve.
B) the 12 Federal Reserve Bank Presidents.
C) five of the Federal Reserve Bank Presidents.
D) the Board of Governors plus five of the Federal Reserve Bank Presidents.
44) Which of the following is (are) responsible for managing the money supply in the United States?
A) the Federal Reserve Bank of New York
B) the twelve Federal Reserve Banks
C) the Federal Open Market Committee
D) the Board of Governors
45) Open market operations refer to the buying and selling of ________ by the ________ to control the
money supply.
A) Treasury securities; Treasury Department
B) Treasury securities; Federal Reserve
C) stocks and bonds; Treasury Department
D) stocks and bonds; Federal Reserve
46) If the Federal Open Market Committee wants to decrease the money supply through open market
operations it will
A) buy U.S. Treasury Securities.
B) sell U.S. Treasury Securities.
C) increase the discount rate.
D) decrease the discount rate.
47) The primary tool the Federal Reserve uses to increase the money supply is
A) printing more money.
B) lowering the required reserve ratio.
C) buying Treasury securities.
D) lowering the discount rate.
48) The discount rate is
A) the interest rate banks charge each other for overnight loans.
B) the interest rate banks charge their best customers.
C) the interest rate the Fed charges to banks for loans from the Fed.
D) the interest rate the U.S. Treasury pays on Treasury Bills.
49) Which policy tool allows the Federal Reserve the greatest control over monetary policy?
A) the discount rate
B) open market operations
C) the reserve requirement
D) lender of last resort
50) Lowering the discount rate will
A) decrease reserves, encourage banks to make fewer loans, and decrease the money supply.
B) decrease reserves, encourage banks to make fewer loans, and increase the money supply.
C) increase reserves, encourage banks to make more loans, and increase the money supply.
D) increase reserves, encourage banks to make more loans, and decrease the money supply.
51) If the Fed buys U.S. Treasury securities, then this
A) increases reserves, encourages banks to make more loans, and increases the money supply.
B) decreases reserves, causes banks to reduce their loans, and decreases the money supply.
C) decreases reserves, causes banks to reduce their loans, and increases the money supply.
D) increases reserves, causes banks to reduce their loans, and increases the money supply.
52) If the Fed lowers the reserve requirement, then this
A) increases excess reserves, encourages banks to make more loans, and increases the money supply.
B) decreases excess reserves, causes banks to reduce their loans, and decreases the money supply.
C) decreases excess reserves, causes banks to reduce their loans, and increases the money supply.
D) increases excess reserves, causes banks to reduce their loans, and increases the money supply.
53) Which of the following tools of monetary policy is used least often?
A) open market operations
B) setting the required reserve ratio
C) setting the discount rate
D) acting as a lender of last resort
54) Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the
money supply?
A) raise the reserve requirement
B) raise the discount rate
C) buy U.S. Treasury bills
D) lower taxes
55) Which of the following describes the degree of control that the Fed has over the money supply?
A) The Fed has absolute control over the money supply.
B) The Fed has no control of the money supply.
C) The Fed has substantial control over the money supply.
D) The Fed is not concerned about the level of the money supply, and does not attempt to control it.
56) To increase the money supply, the Federal Reserve could
A) lower the discount rate.
B) decrease income taxes.
C) raise the required reserve ratio.
D) conduct an open market sale of Treasury securities.
57) To decrease the money supply, the Federal Reserve could
A) lower the discount rate.
B) raise income taxes.
C) raise the required reserve ratio.
D) conduct an open market purchase of Treasury securities.
58) An increase in the discount rate ________ bank reserves and ________ the money supply if banks
respond appropriately to the change in the rate.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
59) If a bank receives a $20 million discount loan from the Federal Reserve, then the bank‘s reserves will
A) not change.
B) increase by $20 million.
C) increase by less than $20 million.
D) increase by more than $20 million.
60) Suppose a bank has $100 million in checking account deposits with no excess reserves and the
required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 15
percent, then the bank will now have excess reserves of
A) $0.
B) -$5 million.
C) $5 million.
D) $15 million.
61) Suppose a bank has $100 million in checking account deposits with no excess reserves and the
required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 4
percent, then the bank can make a maximum loan of
A) $0.
B) $4 million.
C) $6 million.
D) $10 million.
62) Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required
reserve ratio is 5 percent. If the Federal Reserve lowers the required reserve ratio to 3 percent, then the
bank will now have excess reserves of
A) $0.
B) $2,000.
C) $3,000.
D) $5,000.
63) A financial asset is considered ________ if it can be bought or sold in a financial market.
A) a bond
B) a security
C) a stock
D) liquid
64) When a financial asset is first sold, the sale takes place in the ________ market, and subsequent sales
take place in the ________ market.
A) stock; bond
B) primary; secondary
C) investment; commercial
D) secure; risk
65) ________ sell shares to investors and use the money to buy short-term securities.
A) Mortgage-backed securities dealers
B) Hedge funds
C) Money market mutual funds
D) Shadow banks
66) In 2008, Timothy Geithner referred to investment banks, money market mutual funds, hedge funds,
and other financial firms engaged in similar activities as the
A) shadow banking system.
B) commercial banking system.
C) securitization market.
D) secondary market.
67) Banks hold 100% of their checking deposits as vault cash to ensure that bank runs do not occur.
68) A series of bank runs in a country should have no effect on M1 as money simply moves from
checking deposits to currency.
69) The Fed can change the money supply more quickly by using open market operations as compared
to discount policy.
70) The Fed has complete control over the money supply.
71) An open market purchase of Treasury securities by the Federal Reserve causes the reserves of banks
to rise.
72) If the Fed wishes to decrease the supply of money and credit, it may sell government securities, raise
the discount rate, or lower required reserve ratios.
73) The Fed was founded in 1913 to serve as lender of last resort to bankers during bank runs and
panics.
74) Describe the structure of the Fed’s Open Market Committee (FOMC). What is this committee’s
primary responsibility?
75) How do open market operations work?
76) How effective is discount policy as compared to open market operations in managing the money
supply? Explain how The Federal Reserve uses discount policy today.