56. Most decisions about implementing monetary policy are made by:
A. the chairman of the Fed only.
B. the president.
C. the president and Congress.
D. the Federal Open Market Committee.
57. How many regional banks are in the Federal Reserve System?
A. 6
B. 8
C. 12
D. 15
58. When there are no vacancies, how many people serve on the Board of Governors of the
Federal Reserve system?
A. 5
B. 7
C. 11
D. 12
59. The body that directly oversees the 12 regional Federal Reserve banks is the:
A. Federal Open Market Committee.
B. Board of Governors.
C. U.S. Congress.
D. Federal Advisory Council.
60. There are seven Governors of the Federal Reserve, who are appointed for terms of:
A. 5 years.
B. 10 years.
C. 14 years.
D. 17 years.
61. All of the following are components of the Federal Reserve system except the:
A. 12 regional Federal Reserve banks.
B. Federal Open Market Committee.
C. Federal Deposit Insurance Corporation.
D. Board of Governors.
62. Which is not a function of the Fed?
A. Conducting monetary policy
B. Serving as a lender of last resort
C. Providing financial services such as check clearing to commercial banks
D. Directly financing U.S. budget deficits
63. Explicit functions of the Fed include all the following except:
A. conducting monetary policy.
B. conducting fiscal policy.
C. providing banking services to the U.S. government.
D. serving as a lender of last resort to financial institutions.
64. The explicit functions given to the Fed by the Congress include all of the following except:
A. regulating financial institutions.
B. serving as a lender of last resort to financial institutions.
C. providing banking services to the U.S. government.
D. holding the nominal interest rate no more than 2 percent above the real interest rate.
65. The central bank in the United States does all the following except:
A. act as a financial adviser to the government.
B. loan money to corporations.
C. loan money to banks.
D. issue coin and currency.
66. Which is not something the Fed can do directly to conduct monetary policy?
A. Change the exchange rate
B. Change the reserve requirement
C. Change the discount rate
D. Execute open market operations
67. The monetary base includes:
A. currency and coin in circulation plus checkable deposits.
B. currency and coin in circulation only.
C. vault cash plus checkable deposits.
D. currency and cash plus commercial bank deposits at the Fed.
68. The monetary base is comprised of:
A. currency held by the public.
B. vault cash.
C. commercial bank deposits at the Fed.
D. all of the options listed here.
69. Open market operations are related to:
A. actions taken by the Fed to close or merge weakened banks.
B. changes in the reserve requirement.
C. changes in the discount rate.
D. the Fed’s buying and selling of government securities.
70. The primary tool of monetary policy is:
A. the discount rate.
B. the reserve requirement.
C. the prime rate.
D. open market operations.
71. If the Fed wants to increase the money supply, it can:
A. buy bonds.
B. sell bonds.
C. pass a law that interest rates rise.
D. pass a law that interest rates fall.
72. When the Fed sells bonds, the money supply:
A. expands.
B. contracts.
C. sometimes rises and sometimes falls.
D. Selling bonds does not affect the money supply.
73. Which of the following Fed actions increases the money supply?
A. Decreasing the amount of loans made to commercial banks
B. Buying government securities in the open market
C. Selling government securities in the open market
D. Increasing reserve requirements
74. Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the
money supply by 1,000 it should:
A. buy government securities worth 250.
B. buy government securities worth 400.
C. sell government securities worth 250.
D. sell government securities worth 400.
75. Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the
money supply by 1,500 it should:
A. raise the required reserve ratio to 0.2.
B. raise the discount rate by 2 percentage points.
C. buy government securities worth 600.
D. sell government securities worth 600.
76. Suppose the money multiplier in the United States is 4. If the Fed wants to expand the
money supply by 600 it should:
A. buy government securities worth 150.
B. buy government securities worth 600.
C. sell government securities worth 150.
D. sell government securities worth 600.
77. Federal Reserve sales of government securities:
A. increase bank reserves and increase the money supply.
B. decrease bank reserves and decrease the money supply.
C. decrease bank reserves and increase the money supply.
D. increase bank reserves and decrease the money supply.
78. Which of the following Fed policies would help the economy out of a recession?
A. Open market purchases of government securities
B. Open market sales of government securities
C. An increase in the discount rate
D. An increase in reserve requirements
79. The reserve requirement is the:
A. maximum ratio of reserves to deposits that a bank can have.
B. minimum ratio of reserves to deposits that a bank can have.
C. maximum level of reserves a bank can have.
D. minimum level of reserves a bank can have.
80. By law, a commercial bank is allowed to lend out of all its:
A. deposits.
B. excess reserves.
C. required reserves.
D. demand (checkable) deposits.
81. The Federal Open Market Committee:
A. makes decisions that affects excess reserves available to banks.
B. reports directly to Congress.
C. makes decisions that influence the nation’s fiscal policy.
D. determines who may buy and sell government bonds.
83. When the Fed increases the reserve requirement, it:
A. expands the money supply because banks have more available to lend.
B. expands the money supply because banks have less available to lend.
C. contracts the money supply because banks have more available to lend.
D. contracts the money supply because banks have less available to lend.
84. If the Federal Reserve reduced its reserve requirement from 6.5 percent to 5 percent aand
banks held no excess reserves, this policy would :
A. increase both the money multiplier and the money supply.
B. increase the money multiplier but decrease the money supply.
C. decrease the money multiplier but increase the money supply.
D. decrease both the money multiplier and the money supply.
85. When the Fed decreases the reserve requirement, the money supply is expected to:
A. expand and the money multiplier contract.
B. expand, as is the money multiplier.
C. contract, as is the money multiplier.
D. contract and the money multiplier expand.
86. If the Fed increases the required reserves, financial institutions would be expected to lend
out:
A. more than before, increasing the money supply.
B. less than before, decreasing the money supply.
C. more than before, decreasing the money supply.
D. less than before, increasing the money supply.
87. If the Fed decreases the reserve requirement, it will likely:
A. decrease the amount of excess reserves, which will eventually increase the money supply.
B. decrease the amount of excess reserves which will eventually decrease the money supply.
C. increase the amount of excess reserves which will eventually increase the money supply.
D. increase the amount of excess reserves which will eventually decrease the money supply.
88. Suppose the reserve requirement is 20 percent and banks hold no excess reserves. A $1
billion purchase of government securities by the Fed will:
A. increase the potential amount of checkable deposits in the banking system by $5 billion.
B. increase the potential amount of checkable deposits in the banking system by $1 billion.
C. reduce the potential amount of checkable deposits in the banking system by $1 billion.
D. reduce the potential amount of checkable deposits in the banking system by $5 billion.
89. Suppose the reserve requirement is 20 percent and banks hold no excess reserves. A $1
billion sale of government securities by the Fed will:
A. increase checkable deposits in the banking system by $5 billion.
B. increase checkable deposits in the banking system by $1 billion.
C. reduce checkable deposits in the banking system by $1 billion.
D. reduce checkable deposits in the banking system by $5 billion.
90. Suppose the reserve requirement is 5 percent. If reserves fall by 100, the money supply will
decline by:
A. 100.
B. 1,000.
C. 200.
D. 2,000.
91. Suppose the reserve requirement is 5 percent. How much would reserves need to be initially
increased to eventually increase the money supply by 1,000?
A. 25
B. 50
C. 250
D. 500
92. Which of the following is an example of an expansionary monetary policy action?
A. Raising the discount rate
B. Lowering the prime rate
C. Selling bonds
D. Reducing the reserve requirement
93. One of the reasons that expansionary monetary policy has not been as effective as expected
in recent years is that:
A. the fed funds rate was high.
B. banks were holding significant excess reserves.
C. Congress continued to run deficits.
D. potential output was rising quickly.
94. One of the reasons that expansionary monetary policy was not as effective as expected in
recent years is that banks:
A. returned reserves that the Fed added to banks.
B. loaned reserves that the Fed added to banks.
C. held onto the reserves that the Fed added to banks.
D. purchased Treasures with the reserves that the Fed added to their accounts.
95. During the 2008/09 the Fed added a new monetary tool. What is that tool?
A. The discount rate required for banks to borrow money
B. Open market operations meant to change the supply of money
C. The fed funds rate for overnight funds
D. Interest payments to banks on their bank reserves
96. The discount rate is the interest rate:
A. commercial banks charge their largest customers.
B. the Fed charges on loans to individuals.
C. the Fed charges on loans to commercial banks.
D. the interest rate commercial banks charge one another for overnight loans.
97. The discount rate refers to the:
A. lower price large institutions pay for government bonds.
B. rate of interest the Fed charges for loans to banks.
C. rate of interest the Fed charges for loans to individuals.
D. rate of interest the Fed charges for loans to government.
98. Although rarely used, which of the following is an instrument the Fed has to conduct
monetary policy?
A. The corporate income tax
B. The tax on unearned income
C. The discount rate
D. The interest rate on Treasury bonds
99. To increase the nation’s money supply, the Fed can:
A. increase the required reserve ratio.
B. decrease the discount rate.
C. increase the discount rate.
D. sell bonds.
100. To decrease the nation’s money supply, the Fed can:
A. decrease the reserve requirement.
B. decrease the discount rate.
C. increase the discount rate.
D. buy bonds.
101. When the Fed reduces the discount rate, this sends a signal to banks that the Fed wants:
A. the money supply to expand.
B. the money supply to contract.
C. the federal funds rate to increase.
D. to reduce the reserve requirement.
102. When the Fed lowered the discount rate in late 2008, the action was ultimately designed to:
A. increase the money supply.
B. increase the prime rate.
C. decrease the monetary base.
D. increase the reserve requirement.
103. Suppose the money multiplier in the United States is 3. Suppose further that if the Fed
changes the discount rate by 1 percentage point, banks initially change their reserves by 400. To
reduce the money supply by 4,200 the Fed should:
A. reduce the discount rate by 10.5 percentage points.
B. raise the discount rate by 10.5 percentage points.
C. reduce the discount rate by 3.5 percentage points.
D. raise the discount rate by 3.5 percentage points.
104. Suppose the money multiplier in the United States is 3. Suppose further that if the Fed
changes the discount rate by 1 percentage point, banks change their reserves by 300. To increase
the money supply by 2,700 the Fed should:
A. reduce the discount rate by 3 percentage points.
B. reduce the discount rate by 10 percentage points.
C. raise the discount rate by 3 percentage points.
D. raise the discount rate by 10 percentage points.
105. If the Fed simultaneously raises the discount rate and the reserve requirement, the money
supply will:
A. contract.
B. remain unchanged.
C. expand.
D. take on a value that cannot be determined from the information given.
106. If the Fed simultaneously lowers the reserve requirement and sells government bonds, the
money supply will:
A. contract.
B. remain unchanged.
C. expand.
D. move in a way that cannot be determined from the information given.
107. If the Fed simultaneously reduces the discount rate and the required reserve ratio, the
money supply will:
A. contract.
B. remain unchanged.
C. expand.
D. take on a value that cannot be determined from the information given.
108. Banks can borrow reserves from each other through:
A. the Fed funds market.
B. the Federal Open Market Committee.
C. open market purchases.
D. secondary reserves.
109. Who buys and sells in the Fed funds market?
A. Only commercial banks and depository institutions
B. All large financial institutions
C. Financial institutions and large corporations
D. Anyone with a computer and an Internet connection can participate
110. The federal funds rate is the interest rate the:
A. government charges banks for Fed funds.
B. Fed charges banks for Fed funds.
C. banks charge individual investors for Fed funds.
D. banks charge each other in the Fed funds market.
111. The interest rate banks charge each other to borrow excess reserves is called the:
A. discount rate.
B. required reserve ratio.
C. prime rate.
D. federal funds rate.
112. The federal funds rate:
A. is always slightly higher than the discount rate.
B. can never be close to zero.
C. may sometimes be targeted at zero.
D. is an intermediate target of the Fed’s monetary policy.
113. When the Fed sells bonds, the:
A. federal funds rate increases.
B. reserve requirement falls.
C. discount rate increases.
D. discount rate decreases.
114. If the level of excess reserves in the banking system drops suddenly, we might expect that
the:
A. discount rate would rise.
B. federal funds rate would rise.
C. required reserve ratio would fall.
D. prime rate would fall.
115. What tool of monetary policy would the Fed most likely use to increase the federal funds
rate from 1 percent to 1.25 percent?
A. Open-market operations