Deck 4: Functions of the Fed

Question 1

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

Answer 1

A

Question 2

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

Answer 2

D

Question 3

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 the above

Answer 3

A

Question 4

____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.

A)Primary
B)Secondary
C)Tertiary
D)None of the above

Question 5

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 the above

Question 6

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)A and B

Question 7

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.

Question 8

Members of the Board of Governors serve 14-year nonrenewable terms.

Question 9

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

Question 10

The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies.

Question 11

Of the nine directors of each Fed district bank, ____ are elected by member banks in that district.

A)0
B)9
C)6
D)3

Question 12

With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors?

A)revise reserve requirements for depository institutions
B)authorize changes in the amount of borrowing by the Treasury
C)monitor the stock market for insider trading
D)monitor the derivatives market for illegal trading strategies

Question 13

Repurchase agreements are purchased by the Fed to

A)temporarily decrease the aggregate level of bank funds.
B)permanently increase the aggregate level of bank funds.
C)permanently decrease the aggregate level of bank funds.
D)temporarily increase the aggregate level of bank funds.

Question 14

The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

A)Board of Governors
B)Federal Reserve district bank
C)Federal Open Market Committee (FOMC)
D)Securities and Exchange Commission

Question 15

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)A and B

Question 16

The primary credit lending rate changes in accordance with changes in the federal funds rate.

Question 17

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)A and C

Question 18

The Policy Directive is provided by Board of Governors to the FOMC.

Question 19

____ open market operations offset the impact of other conditions that affect the level of funds.

A)Active
B)Passive
C)Dynamic
D)Defensive

Question 20

The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.

A)federal funds
B)prime
C)primary credit lending
D)real

Question 21

Assume that the reserve requirements ratio is 15%.An initial injection of $150 million could result in a maximum change in the money supply of

A)$150 million.
B)$1 billion.
C)$1 million.
D)$22.5 million.

Question 22

The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.

A)lower; less
B)lower; greater
C)greater; less
D)B and C

Question 23

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.

Question 24

Which of the following statements is incorrect with respect to a single European monetary policy?

A)It allows for more consistent economic conditions across the countries.
B)It prevents any participating European country from solving local economic problems with its own unique monetary policy.
C)A policy used in a particular period may not affect the participating countries equally, since they all have the same currency.
D)Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions).
E)All of the above are true with respect to a single European monetary policy.

Question 25

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.

Question 26

The ____ is directly responsible for setting reserve requirements.

A)Federal Advisory Council
B)FOMC
C)Board of Governors
D)President of the United States

Question 27

A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)B and C

Question 28

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

Question 29

The ____ is directly responsible for conducting monetary policy.

A)Federal Advisory Council
B)FOMC
C)Senate
D)President of the United States

Question 30

Based on a 2003 policy, the primary credit lending rate is set

A)lower than the federal funds rate.
B)lower than the prevailing Treasury bill rate.
C)lower than the expected inflation rate.
D)above the federal funds rate.

Question 31

To decrease money supply, the Fed could ____ the reserve requirement ratio.

A)increase
B)stabilize
C)reduce
D)eliminate

Question 32

When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed.This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth.

A)increase; loosening
B)decrease; tightening
C)decrease; loosening
D)increase; tightening
E)none of the above

Question 33

The Monetary Control Act of 1980 subjected

A)only member banks to the reserve requirements set by the Fed.
B)only S&Ls to the reserve requirements set by the Fed.
C)all depository institutions to the reserve requirements set by the Fed.
D)only national banks to reserve requirements set by the Fed.

Question 34

The form of money consisting of currency held by the public and checkable deposits at depository institutions is called

A)M1.
B)M2.
C)M3.
D)MMDA.

Question 35

Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities.Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.

A)increase; $200 million
B)increase; $1.67 billion
C)decrease; $200 million
D)decrease; $1.67 billion

Question 36

The ____ consists of seven members, each of whom is appointed by the President of the United States.

A)Federal Open Market Committee (FOMC)
B)Federal Advisory Council
C)Board of Governors
D)none of the above

Question 37

Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the

A)discount rate.
B)primary credit lending rate.
C)Federal funds rate.
D)prime rate

Question 38

The federal funds rate is the rate at which the Fed lends money directly to member banks.

Question 39

The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.

Question 40

The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC.

A)buy; decrease
B)sell; increase
C)buy; increase
D)sell; decrease
E)A and B

Question 41

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

A)increase; purchase
B)increase; sell
C)decrease; purchase
D)Answers B and C are correct.

Question 42

The advisory committee making recommendations to the Fed about economic and banking related issues is the

A)Consumer Advisory Council.
B)Thrift Institutions Advisory Council.
C)Federal Advisory Council.
D)none of the above

Question 43

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

Question 44

Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

Question 45

Which of the following is not true with respect to the Federal Reserve Act of 1913?

A)It established reserve requirements for member commercial banks.
B)It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established.
C)Each district focused on its particular district, without much concern for other districts.
D)All of the above are true.

Question 46

____ is (are) not a component of the Fed as it exists today.

A)The Federal Advisory Council
B)The Board of Governors
C)National banks
D)The U.S.Department of Commerce
E)All of the above are components of the Fed.

Question 47

The ____ consists of seven members, each of whom is appointed by the president of the United States.

A)Federal Open Market Committee (FOMC)
B)Federal Advisory Council
C)Board of Governors
D)none of the above

Question 48

____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.

A)Primary
B)Secondary
C)Tertiary
D)None of the above

Question 49

All commercial banks are required to be members of the Fed.

Question 50

Most of the Fed's income is transferred to the U.S.Department of Justice.

Question 51

To increase the money supply, the Fed may increase the reserve requirement ratio.

Question 52

Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.

Question 53

To increase the money supply growth, the Fed could

A)sell government securities in the secondary market.
B)increase the primary credit lending rate.
C)increase the reserve requirement ratio.
D)all of the above
E)none of the above

Question 54

When the Fed sells securities, the total funds of commercial banks ____ by the market value of 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 the above

Question 55

Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.

Question 56

To increase the money supply, the Trading Desk would be instructed to sell government securities.

Question 57

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.

Question 58

____ includes only 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 the above

Question 59

The advisory committee offering views on issues related to, among others, credit unions is the

A)Consumer Advisory Council.
B)Thrift Institutions Advisory Council.
C)Federal Advisory Council.
D)none of the above