62. Criteria used to judge a central bank’s independence include each of the following, except:
a. budgetary independence.
b. long terms for members.
c. cabinet or ministry level of authority.
d. irreversible decisions.
63. The Fed‘s revenue comes:
a. from Congressional appropriation.
b. from the Department of Commerce.
c. from internally generated funds from interest on securities it holds and fees charged to banks
for payments system services.
d. solely from taxes placed on member banks.
64. Most of the Fed’s income is:
a. paid to member banks in the form of a dividend.
b. sent to the FDIC to shore up the depositor insurance fund.
c. returned to the U.S. Treasury.
d. used to build the Fed’s portfolio of securities.
65. The interest rate changes that result from the FOMC meetings:
a. can be altered only by Congress.
b. can be altered by the Secretary of the Treasury during an economic crisis.
c. cannot be changed by anyone other than the FOMC.
d. can only be altered during a time of crisis by the U.S. President.
66. A large step toward independence occurred for the Fed in 1935 when the:
a. Fed went from two to twelve districts.
b. Secretary of the Treasury and the Comptroller of the Currency were removed from the Board
of Governors.
c. Chairman of the Board of Governors was no longer a cabinet position.
d. Fed was given the ability to control its own budget.
67. During World War II, the Fed accommodated the war effort by:
a. significantly curtailing credit in the economy.
b. keeping bond prices high and interest rates low.
c. selling any Treasury securities the public did not purchase.
d. curtailing credit and keeping bond prices high.
68. Which of the following statements best completes the following: “The Fed’s independence
can only be revoked by…“?
a. The U.S. President
b. The Secretary of the Treasury
c. Congress
d. Changing the U.S. Constitution
69. The likelihood that the Fed will implement a change that will seriously harm the economy is
minimized by the fact that:
a. only bright, well-intentioned people are appointed to key roles at the Fed.
b. Congress can remove the Chairman of the Fed at any time.
c. the Board of Governors ultimately must answer to the U.S. President since he can replace
them.
d. there is decision making by committee.
70. The objectives set for the Fed by Congress are:
a. very specific; this adds to the Fed’s accountability.
b. by design, quite vague, allowing the Fed to really set its own goals.
c. specific regarding inflation, but vague on all other goals.
d. specific on the growth rate for the economy, but vague on all other objectives.
71. One valuable lesson investors should learn from the stock market behavior during the late
1990s and early 2000s is that the Fed:
a. can control the stock market.
b. can reduce the idiosyncratic risk of investing but not the systematic risk.
c. can eliminate the risk from investing.
d. cannot prevent a stock market decline.
72. Which statement best completes the following sentence; “The U.S. dollar is to the fifty
states as the euro is to…”?
a. The European Central Bank
b. The states of the European Monetary Union
c. The National Central Banks
d. The European System of Central Banks
73. The Agreement to form a European monetary union was formalized in the Treaty of:
a. Maastricht.
b. Paris.
c. Amsterdam.
d. Milan.
74. By 2017, the euro had become the currency of:
a. every country in Europe.
b. nineteen countries in Europe.
c. twenty-five countries in Europe.
d. all European countries except Great Britain.
75. Comparing the European and the U.S. central bank systems, the National Central Banks
that make up part of the European System of Central Banks resembles:
a. the U.S. Treasury.
b. the Board of Governors.
c. the FOMC.
d. the regional Federal Reserve Banks.
76. Comparing the European and the U.S. central bank systems, the Executive Board of the
European system resembles:
a. the FOMC.
b. the Board of Governors.
c. the Presidents of the regional Federal Reserve Banks.
d. the Chairman of the Board of Governors of the Fed.
77. Comparing the European and the U.S. central bank systems, the Governing Council of the
European system resembles:
a. the Board of Governors.
b. the Presidents of the Regional Federal Reserve Banks.
c. the FOMC.
d. the Chairman of the Board of Governors of the Fed.
78. Executive board members of the European System of Central Banks are appointed by:
a. a committee made up of bank presidents in the member countries.
b. a committee made up of heads of state of member countries.
c. the finance ministers of member countries.
d. the directors of the National Central Banks.
79. The Treaty of Maastricht was signed in:
a. 1999.
b. 2001.
c. 1992.
d. 1997.
80. Member countries of the Eurosystem agree to:
a. pursue independent domestic monetary policies based on what is best for their own
country, but not all member countries have adopted the euro as their currency.
b. share a common monetary policy and fiscal policy.
c. use the euro as their currency, but each country still pursues an independent monetary
policy.
d. share a common monetary policy and use the euro as their currency.
81. In the meetings of the Governing Council of the European Central Bank, formal votes are:
a. taken and published immediately.
b. not taken, since formal voting could get in the way of good policy.
c. taken but not published for five years.
d. taken and released two years after the meetings.
82. Sweden is:
a. a member of the European Union but not a member of the Euro system.
b. a member of the Euro system but not a member of the European Union.
c. not a member of the Euro system or the European Union.
d. a member of both the European Union and the Euro system.
83. France, Germany, and Italy are:
a. all members of the European Union and the Euro system.
b. all members of the Euro system but not the European Union.
c. all members of the European Union but not the Euro system.
d. not members of either the Euro system or the European Union; they have their own economic
union.
84. As of 2017, the euro had become the currency for:
a. 7 countries.
b. 12 countries.
c. 19 countries.
d. 25 countries.
85. The European Central Bank has ensured independence by appointing Executive Board
members for:
a. life.
b. eight-year non-renewable terms.
c. fourteen-year terms.
d. twenty–year terms.
86. The European Central Bank has ensured independence by:
a. explicitly forbidding the Governing Council from taking instructions from any
government.
b. making sure the ECB‘s financial interests supports member countries’ political organizations.
c. by appointing the Executive board members for life.
d. not taking votes on policy matters.
87. The ECB‘s Governing Council has price stability as a primary objective. It has defined price
stability as:
a. a zero rate of inflation.
b. an inflation rate less than 5 percent.
c. an inflation rate below, but close to, 2 percent over the medium term.
d. an inflation rate in the three to five percent range.
88. The method used by the ECB to measure inflation for meeting its objectives:
a. gives equal weight to each member country.
b. gives greater relative weight to smaller countries.
c. can result in a contractionary monetary policy being used in a country where inflation is
already very low.
d. is based on wholesale rather than retail prices.
89. The make-up of the Governing Council of the European Central Bank and the methods
used to calculate price stability for the monetary system can potentially result in:
a. small countries having undue influence on the decisions of the Council.
b. monetary policy that is well suited for some countries but ill-suited for others.
c. a policy for the median country rather than a policy well suited for any country.
d. all of the results listed are possible.
90. Based on the membership of the Eurosystem in 2017, the median country is likely to be:
a. very large.
b. fairly small.
c. Italy.
d. growing more rapidly than the others.
Short Answer Question
91. Why did it take almost 150 years before the U.S. had a permanent central bank?
92. What are the three branches that make up the Federal Reserve System?
93. Why are so few state chartered banks members of the Federal Reserve System?
94. How are the locations of the twelve regional Federal Reserve Banks and the corresponding
districts explained?
95. The Federal Reserve is the U.S. government’s bank. Identify the functions the Fed performs
in this role.
96. Why is it technically incorrect to say that the board of directors of the regional Fed banks
set the discount rate that each bank charges?
97. Why can’t two Governors of the Fed come from the same district and does this limitation
make sense today?
98. Who makes up the voting members of the Federal Reserve’s Open Market Committee?
99. In what ways do the regional Federal Reserve Banks influence monetary policy?
100. If it is the real rate of interest that savers and borrowers respond to, how does the Fed
impact a real rate by targeting a nominal rate of interest?
101. Why can it be argued that, while interest rate decisions are made by the FOMC, a
committee, the real power of the committee lies with the Chairman of the Federal Reserve
System?
102. What are the three criteria that are used to judge a central bank’s independence and how
does the Fed stack up to each of these criteria?
103. Given the democratic political structure of the United States, make an argument against the
independence granted the Federal Reserve.
104. In the mid-1930s, the Federal Reserve became more independent from political pressure.
What significant changes occurred then to increase the Fed’s independence?
105. How is accountability achieved for the Federal Reserve and is it clear?
106. Respond to the following statement with a brief explanation: “The Federal Reserve can
improve the performance of the stock market but it cannot prevent a stock market crash.”
107. Considering the three branches that make up the Federal Reserve System, identify the
corresponding branches that make up the Euro system. Be sure to state which part of the Euro
system corresponds to which part of the Federal Reserve System.
108. There are several important differences between the Fed and the European Central Bank
(ECB). What are they?
109. What is the difference between the European System of Central Banks and the Euro
system?
110. Explain why the decision to join the Euro system presents serious domestic monetary policy
issues.
111. What argument can you offer to justify the policy prohibiting formal voting during the Euro
systems Governing Council meetings?
112. In terms of the decisions coming from the Euro system’s Governing Council, explain why,
at
times, relatively small countries may be at a distinct disadvantage in terms of monetary policy
targets but perhaps have undue influence in terms of the actual policies.
113. If the current number of participating countries in the Euro system is nineteen as of 2017
and the number of large countries is four (Germany, France, Italy, and Spain), are policies likely
to favor small or large countries? Explain.
Essay Questions
114. Explain how a regulation requiring banks to keep a given percentage of deposits in an account
paying below market interest rates at the Fed is really a tax on banks.
115. Discuss whether a large private organization could function in the role of a lender of last
resort, and if it could, what potential problem(s) might arise.
116. The system of government in the U.S. has historically been one of checks and balances.
Provide examples of these checks and balances as they pertain to the Board of Governors of the
Federal Reserve and their relationship to the executive and legislative branches of government.