Financial Markets and Institutions, 8e (Mishkin)
Chapter 9 Central Banks and the Federal Reserve System
9.1 Multiple Choice
1) Americans’ fear of centralized power and their distrust of moneyed interests explain why the
U.S. did not have a central bank until the
A) 17th century.
B) 18th century.
C) 19th century.
D) 20th century.
2) Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that
A) the Federal Reserve needed greater control over the banking system.
B) the Federal Reserve needed greater authority to deal with problem banks.
C) a central bank was needed to prevent future financial panics.
D) both A and B of the above.
3) The unusual structure of the Federal Reserve System is perhaps best explained by
A) Americans’ fear of centralized power.
B) the traditional American distrust of moneyed interests.
C) Americans’ desire to remove control of the money supply from the U.S. Treasury.
D) all of the above.
E) only A and B of the above.
4) The traditional American distrust of moneyed interests and the fear of centralized power help
to explain
A) the failures of the first two experiments in central banking in the United States.
B) the decentralized structure of the Federal Reserve System.
C) why the Board of Governors of the Federal Reserve System is not located in New York.
D) all of the above.
E) only A and B of the above.
5) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to
depositors that the American public finally became convinced that
A) the First Bank of the United States had failed to serve as a lender of last resort.
B) the Second Bank of the United States had failed to serve as a lender of last resort.
C) the Federal Reserve System had failed to serve as a lender of last resort.
D) a central bank was needed to prevent future panics.
6) Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been avoided had
A) the First Bank of the United States served its intended role of lender of last resort.
B) the Second Bank of the United States not been abolished in 1836 by President Andrew
Jackson.
C) the Second Bank of the United States served its intended role of lender of last resort.
D) the Federal Reserve served its intended role of lender of last resort.
7) The many regional Federal Reserve banks resulted from a compromise between parties
favoring
A) the establishment of a central bank and those opposed to its establishment.
B) a private central bank and those favoring a government institution.
C) the establishment of the Board of Governors in Washington, D.C., and those preferring its
establishment in New York City.
D) none of the above.
8) Which of the following is an element of the Federal Reserve System?
A) The Federal Reserve banks
B) The Board of Governors
C) The FDIC
D) All of the above
E) Only A and B of the above
9) Which of the following is an element of the Federal Reserve System?
A) The Federal Reserve banks
B) The Board of Governors
C) The FOMC
D) All of the above
10) Which of the following is not an entity of the Federal Reserve System?
A) Federal Reserve banks
B) The FDIC
C) The Board of Governors
D) The Federal Advisory Council
E) Member commercial banks
11) Which of the following functions are not performed by any of the twelve regional Federal
Reserve banks?
A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
12) Which Federal Reserve Bank president always has a vote in the Federal Open Market
Committee?
A) Philadelphia
B) New York
C) Boston
D) San Francisco
13) Each Fed bank president attends FOMC meetings; although only ________ Fed bank
presidents vote on policy, all ________ provide input.
A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
14) The ________ Fed bank, with about 25 percent of the system’s assets, is the most important
of the Federal Reserve banks.
A) Chicago
B) Los Angeles
C) Miami
D) New York
E) Washington, D.C.
15) Member commercial banks have purchased stock in their district Fed banks; the dividend
paid by that stock is limited to
A) four percent annually.
B) five percent annually.
C) six percent annually.
D) eight percent annually.
16) All ________ are required to be members of the Fed.
A) state-chartered banks
B) nationally chartered banks
C) banks with more than $100 million in assets
D) banks with more than $500 million in assets
17) Which of the following banks are required to be members of the Federal Reserve System?
A) State-chartered banks
B) Insured banks
C) Banks having over $500 million in assets
D) None of the above
18) Of all commercial banks, about ________ percent belong to the Federal Reserve System.
A) 10
B) 25
C) 33
D) 50
19) Banks subject to reserve requirements set by the Federal Reserve System include
A) only state-chartered banks.
B) only nationally chartered banks.
C) only banks with less than $100 million in assets.
D) only banks with less than $500 million in assets.
E) all banks whether or not they are members of the Federal Reserve System.
20) The Fed’s support of the Depository Institutions Deregulation and Monetary Control Act of
1980 stemmed in part from its
A) concern over declining Fed membership.
B) belief that all banking regulations should be eliminated.
C) belief that interest rate ceilings were too low.
D) belief that depositors had to become more knowledgeable about banking operations.
21) Which of the following are duties of the Board of Governors of the Federal Reserve System?
A) Setting margin requirements, the fraction of the purchase price of securities that has to be
paid for with cash.
B) Setting the maximum interest rates payable on certain types of time deposits under Regulation
Q.
C) Regulating credit with the approval of the President under the Credit Control Act of 1969.
D) None of the above has been a duty of the Board since the mid-1980s.
22) Which of the following are not duties of the Board of Governors of the Federal Reserve
System?
A) Setting margin requirements, the fraction of the purchase price of securities that has to be
paid for with cash.
B) Setting the maximum interest rates payable on certain types of time deposits under Regulation
Q.
C) Approving the discount rate “established” by the Federal Reserve banks.
D) Representing the United States in negotiations with foreign governments on economic
matters.
23) The chairman of the Board of Governors of the Federal Reserve System exercises a high
degree of control over the board
A) through his ability to set the agenda of the Board and the FOMC.
B) through his role as spokesperson for the Fed with the President and before Congress.
C) because he can veto decisions made by a majority of the other Board members.
D) because of all of the above.
E) because of only A and B of the above.
24) Members of the Board of Governors are
A) chosen by the Federal Reserve Bank presidents.
B) appointed by the newly elected president of the United States, as are cabinet positions.
C) appointed by the president of the United States and confirmed by the Senate as members
resign.
D) never allowed to serve more than seven-year terms.
25) Each member of the seven-member Board of Governors is appointed by the president and
confirmed by the Senate to serve
A) 4-year terms.
B) 6-year terms.
C) 14-year terms.
D) as long as the appointing president remains in office.
26) The Board of Governors
A) establishes, within limits, reserve requirements.
B) effectively sets the discount rate.
C) sets margin requirements.
D) does all of the above.
E) does only A and B of the above.
27) Although neither ________ nor the ________ is officially set by the Federal Open Market
Committee, decisions concerning these policy tools are effectively made by the committee.
A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate
28) Although the Federal Open Market Committee does not have formal authority to set
________ and the ________, it does possess the authority in practice.
A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate
29) Which of the following are true statements?
A) The FOMC usually meets every six weeks to set monetary policy.
B) The FOMC issues directives to the trading desk at the New York Fed.
C) Designers of the Federal Reserve Act did not envision the use of open market operations as a
monetary policy tool.
D) All of the above are true statements.
E) Only A and B of the above are true statements.
30) The Federal Open Market Committee consists of
A) the five senior members of the seven-member Board of Governors.
B) the seven members of the Board of Governors and seven presidents of the regional Fed banks.
C) the seven members of the Board of Governors and five presidents of the regional Fed banks.
D) the twelve regional Fed bank presidents and the chairman of the Board of Governors.
31) The Federal Reserve entity that determines monetary policy strategy is the
A) Board of Governors.
B) Federal Open Market Committee.
C) Chairman of the Board of Governors.
D) Shadow Open Market Committee.
32) Which of the following are true statements?
A) The FOMC usually meets every six weeks to set monetary policy.
B) The FOMC issues directives to the trading desk at the New York Fed.
C) Designers of the Federal Reserve Act did not envision the use of discount lending as a
monetary policy tool.
D) All of the above are true statements.
E) Only A and B of the above are true statements.
33) The designers of the Federal Reserve Act meant to create a central bank characterized by its
A) system of checks and balances and decentralization of power.
B) strong concentration of power in the hands of a few people.
C) inability to function as a lender of last resort.
D) responsiveness to the electorate.
34) The power within the Federal Reserve was effectively transferred to the Board of Governors
by
A) the banking legislation of the Great Depression.
B) Supreme Court decisions in the 1950s.
C) the Depository Institutions Deregulation and Monetary Control Act of 1980.
D) the Treasury-Federal Reserve Accord of 1951.
35) Factors that provide the Federal Reserve with a high degree of independence include
A) 14-year terms for members of the Board of Governors.
B) a four-year term for the chairman of the Board of Governors that is not coincident with the
president’s term of office.
C) constitutional independence from Congress and the president.
D) all of the above.
E) only A and B of the above.
36) Federal Reserve independence is thought to
A) introduce a short-term bias to monetary policymaking.
B) lead to better fiscal and monetary policy coordination.
C) introduce longer-run considerations to monetary policymaking.
D) do both A and B of the above.
37) Members of Congress are able to influence monetary policy, albeit indirectly, through their
ability to
A) withhold appropriations from the Board of Governors.
B) withhold appropriations from the Federal Open Market Committee.
C) propose legislation that would force the Fed to submit budget requests to Congress, as must
other government agencies.
D) do all of the above.
38) Although it enjoys a high degree of autonomy, the Fed is still subject to the influence of
Congress because
A) Congress can pass legislation that would restrict the Fed’s independence.
B) Congress can withhold the Fed’s budget requests.
C) Congress can remove members of the Board of Governors whose views on policy differ from
those of key members of Congress.
D) All of the above.
39) According to the textbook authors, the Fed is
A) remarkably free of the political pressures that influence other government agencies.
B) more responsive to the political pressures that influence other government agencies.
C) probably somewhat constrained in its policymaking by the congressional threat to reduce Fed
independence.
D) both A and C of the above.
40) According to the textbook authors,
A) the Fed appears to be remarkably free of the political pressures that influence other
government agencies.
B) since the president can protect the Fed from Congress, the Fed may be responsive to the
president’s policy preferences.
C) the Fed appears to be more responsive to the political pressures that influence other
government agencies.
D) both A and B of the above.
E) both B and C of the above.
41) The oldest central bank, founded in 1694, is the
A) Bank of England.
B) Deutsche Bundesbank.
C) Bank of Japan.
D) Federal Reserve System.
42) The newest central bank, which began operations in January 1999, is the
A) European Central Bank.
B) Bank of Argentina.
C) Bank of Korea.
D) Bank of New Zealand.
43) Which of the following central banks has the greatest degree of independence?
A) Bank of England
B) European Central Bank
C) Bank of Japan
D) Federal Reserve System
44) A trend in recent years is that more and more governments
A) have been granting greater independence to their central banks.
B) have been reducing the independence of their central banks to make them more accountable
for poor economic performance.
C) have mandated that their central banks give up multiple policy goals to focus strictly on
inflation.
D) have required their central banks to coordinate policies with their ministers of finance.
45) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to
maximize
A) the public’s welfare.
B) its own welfare.
C) profits.
D) conflict between the executive and legislative branches of government.