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Indicate whether the statement is true or false.
1. The primary credit rate is the interest rate that the Fed charges the most creditworthy depository institutions for short-
term loans.
a. True
b. False
2. During the credit crisis, the Fed took the unprecedented step of intervening in the stock markets to prevent the stock
prices of major commercial banks from declining by more than 10 percent from the previous quarter.
a. True
b. False
3. During the credit crisis, the Fed provided funding that allowed Bear Stearns, a large securities firm, to avoid bankruptcy
even though Bear Stearns was not a depository institution.
a. True
b. False
4. Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are
consolidated to compose the Beige Book.
a. True
b. False
5. The federal funds rate is the rate at which the Fed lends money directly to member banks.
a. True
b. False
6. In December 2008, during the credit crisis, the Fed raised the target for the federal funds rate as a range between 2.5
and 3.5 percent and maintained the federal funds rate within this range until the end of 2015 in order to stimulate the
economy.
a. True
b. False
7. Currently, about 90 percent of all banks in the United States are members of the Fed.
a. True
b. False
8. The FOMC’s decisions on monetary policy are rarely unanimous as one or more members usually dissent.
a. True
b. False
9. The policy directive is provided by the Board of Governors to the FOMC.
a. True
b. False
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10. Adjustment of the primary credit rate is the most common means by which the Fed controls the money supply.
a. True
b. False
11. The euro has been adopted by all of the major countries of Western Europe, including Switzerland and the United
Kingdom.
a. True
b. False
12. The Fed’s primary goal has historically been to add liquidity to the mortgage market by continuously purchasing
mortgage-backed securities.
a. True
b. False
13. All commercial banks are required to be members of the Fed.
a. True
b. False
14. The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial
banks.
a. True
b. False
15. The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign
currencies.
a. True
b. False
16. When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking
system. Consequently, the federal funds rate decreases along with other interest rates.
a. True
b. False
17. The main purpose of the Fed’s lending facility is to control the money supply.
a. True
b. False
18. To increase the money supply, the Trading Desk would be instructed to sell government securities.
a. True
b. False
19. Members of the Board of Governors serve 14-year nonrenewable terms.
a. True
b. False
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20. To increase the money supply, the Fed may increase the reserve requirement ratio.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
21. Which of the following did the Fed NOT do during the credit crisis?
a. purchase mortgage-backed securities
b. purchase commercial paper
c. reduce the targeted federal funds rate
d. raise the primary credit rate
22. The ____ is made up of seven individual members, and each member is appointed by the President of the United
States.
a. Board of Governors
b. Federal Reserve district bank
c. Federal Open Market Committee (FOMC)
d. Securities and Exchange Commission
23. When open market operations are used to ____ bank funds, the yield on debt instruments ____.
a. reduce; decreases
b. reduce; increases
c. increase; increases
d. None of these are correct.
24. With regard to monetary policy, which of the following is under the direct control of the Federal Reserve’s Board of
Governors?
a. revising reserve requirements for depository institutions
b. authorizing changes in the amount of borrowing by the Treasury
c. monitoring the stock market for insider trading
d. monitoring the derivatives market for illegal trading strategies
25. Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.
a. increase; purchased
b. increase; sold
c. decrease; purchased
d. increase; purchased AND increase; sold
26. ____ includes currency held by the public and checking deposits as well as savings accounts and small time deposits,
money market deposit accounts, and some other items.
a. M1
b. M2
c. M3
d. None of these are correct.
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27. The chief objective of the European Central Bank is ____ in the countries of the eurozone.
a. maintaining low unemployment
b. ensuring that budget deficits do not exceed certain limits
c. maintaining price and currency stability
d. None of these are correct.
28. When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices
and ____ pressure on their yields.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward
29. The form of money consisting of currency held by the public and checking deposits at depository institutions is called
a. M1.
b. M2.
c. M3.
d. MMDA.
30. The is directly responsible for controlling money supply growth.
a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States
31. Which of the following were purchased by the Fed as part of its quantitative easing during the credit crisis?
a. mortgage-backed securities
b. commercial paper
c. bonds backed by consumer loans, automobile loans, and credit card loans
d. All of the above were purchased as part of quantitative easing.
32. All ____ are required to be members of the Federal Reserve System.
a. state banks
b. national banks
c. savings and loan associations
d. finance companies
e. state banks AND national banks
33. When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by
the Fed. This activity initiated by the FOMC’s policy directive is referred to as a ____ of money supply growth.
a. increase; loosening
b. decrease; loosening
c. increase; tightening
d. decrease; tightening
e. None of these are correct.
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34. The ____ meets with the Board of Governors twice a year and offers views on the economic circumstances and
financial services needs of consumers and communities.
a. Consumer Financial Protection Bureau
b. Federal Advisory Council
c. Community Advisory Council
d. Federal Trade Commission
35. Which of the following is currently a main role of the Federal Reserve’s Board of Governors?
a. regulating commercial banks
b. regulating foreign trade
c. controlling monetary policy
d. regulating commercial banks AND controlling monetary policy
36. The Fed’s purchases of long-term Treasury securities during the credit crisis were intended to
a. reduce long-term interest rates.
b. reduce interest rates on credit cards and consumer loans.
c. increase the federal funds rate.
d. restore confidence in the market for Treasury securities.
37. Which of the following is the most likely effect when the Fed increases the supply of funds to the banking system?
a. higher interest rates offered on bank deposits
b. lower yields on debt securities
c. higher interest rates on home mortgages
d. higher interest rates on loans to businesses
38. The term “quantitative easing” refers to the Fed’s
a. purchases of only short-term Treasury securities.
b. sales of only short-term Treasury securities.
c. purchases of various types of debt securities, including risky debt securities.
d. purchases of only commodities such as gold.
39. The ____ rate is the interest rate charged on the Fed’s short-term loans to depository institutions.
a. federal funds
b. prime
c. primary credit
d. real
40. Repurchase agreements are purchased by the Fed to _________ the aggregate level of bank funds.
a. temporarily decrease
b. permanently increase
c. permanently decrease
d. temporarily increase
41. When the Fed purchases securities, the total funds of commercial banks ____ by the market value of the securities
purchased by the Fed. This activity initiated by the FOMC’s policy directive is referred to as a ____ of money supply
growth.
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a. increase; loosening
b. decrease; tightening
c. decrease; loosening
d. increase; tightening
e. None of these are correct.
42. When the Fed initiated a program to purchase commercial paper, one of its primary goals was to
a. prevent financial institutions from holding commercial paper.
b. require that financial institutions increase their holdings of commercial paper.
c. increase activity in the market for commercial paper and boost the confidence of investors in commercial paper.
d. prevent financial institutions from issuing commercial paper in the future.
43. The the reserve requirement ratio, the the ultimate effect of any initial increase in the money supply.
a. lower; less
b. lower; greater
c. greater; less
d. lower; greater AND greater; less
44. Which of the following is an action that the Fed uses to increase or decrease the money supply?
a. buying or selling Treasury securities in the secondary market
b. adjusting the tax rate imposed on income earned on Treasury securities
c. adjusting the coupon rate on Treasury bonds
d. selling Treasury securities in the primary market
45. Which of the following statements is incorrect with respect to a single European monetary policy?
a. It prevents any participating European country from solving local economic problems with its own unique
monetary policy.
b. It allows each country in Europe to use its own currency.
c. Each participating country is still able to apply its own fiscal policy (tax and government expenditure decisions).
d. All of these are true with respect to a single European monetary policy.
46. The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities to ____ the federal funds
rate to a new targeted level set by the FOMC.
a. buy; lower
b. sell; increase
c. buy; increase
d. sell; lower
e. buy; lower AND sell; increase
47. The Board of Governors is composed of
a. seven members appointed by the President of the United States.
b. the 12 presidents of Fed district banks.
c. the Federal Open Market Committee, plus the Federal Advisory Council.
d. the Federal Open Market Committee, plus the President of the United States.
48. The ____ is directly responsible for setting reserve requirements.
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a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States
49. As a result of the Financial Reform Act of 2010, the ____ was established to regulate financial products and services.
a. Federal Advisory Committee
b. Federal Open Market Committee
c. Consumer Financial Protection Bureau
d. Board of Governors
50. The ____ is directly responsible for conducting monetary policy.
a. Federal Advisory Council
b. FOMC
c. Senate
d. President of the United States
51. The purchase of government securities by someone other than the Fed results in
a. an overall increase in funds among commercial banks.
b. an overall decrease in funds among commercial banks.
c. offsetting changes in funds at commercial banks.
d. an increase in securities maintained by the Fed.
52. To increase money supply growth, the Fed could
a. sell government securities in the secondary market.
b. increase the primary credit rate.
c. increase the reserve requirement ratio.
d. All of these are correct.
e. None of these are correct.
53. Which of the following is NOT an activity of Fed district banks?
a. clearing checks
b. replacing old currency
c. providing loans to depository institutions
d. acting as an intermediary to match up lenders and borrowers in the stock market
54. If the Fed initiates a program to purchase long-term Treasury securities, it is most likely attempting to
a. reduce the rate on short-term Treasury securities.
b. reduce the rate on commercial paper.
c. reduce inflation.
d. reduce long-term interest rates.
55. The advisory committee making recommendations to the Fed about economic and banking issues is the
a. Community Advisory Council.
b. Community Depository Institutions Advisory Council.
c. Federal Advisory Council.
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d. None of these are correct.
56. ____ open market operations offset the impact of other conditions that affect the level of funds.
a. Active
b. Passive
c. Dynamic
d. Defensive
57. The voting members of the Federal Open Market Committee consist of the Board of Governors plus the
a. President of the United States.
b. presidents of the 12 Fed district banks.
c. presidents of 5 Fed district banks.
d. Federal Advisory Council.
58. To decrease the money supply, the Fed could the reserve requirement ratio.
a. increase
b. stabilize
c. reduce
d. eliminate
59. The advisory committee offering views on issues related to credit unions is the
a. Community Advisory Council.
b. Community Depository Institutions Advisory Council.
c. Federal Advisory Council.
d. Federal Open Market Committee.
60. When the Fed purchases _______, it is attempting to directly stimulate the housing market.
a. commercial paper
b. short-term Treasury securities
c. mortgage-backed securities
d. consumer loans
61. As the supply of funds in the banking system ____, the federal funds rate ____.
a. increases; declines
b. increases; increases
c. declines, declines
d. None of these are correct.
62. If the Trading Desk is instructed to increase the federal funds rate, its traders _________ securities dealers, and those
dealers’ bank account balances are __________.
a. sell Treasury securities to; reduced
b. sell Treasury securities to; increased
c. buy Treasury securities from; reduced
d. buy Treasury securities from; increased
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63. The Trading Desk’s open market operations to either reduce or increase the federal funds rate are classified as
________ because they are intended to have a lasting impact on economic conditions.
a. defensive
b. stimulative
c. substantive
d. dynamic
64. Which of the following is NOT a major component of the Federal Reserve System?
a. member banks
b. Federal Open Market Committee
c. Securities and Exchange Commission
d. Board of Governors
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Answer Key
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