Quiz 18: Changes in the Monetary Base

In April 2006, about how much in securities did the Federal Reserve hold? A)$786 million B)$7.86 billion C)$786 billion D)$786 trillion

In April 2006, discount loans by the Fed amounted to about A)$0.1 billion. B)$1 billion. C)$10 billion. D)$100 billion.

The Fed's largest asset is A)reserves of member banks. B)reserves of nonmember banks. C)securities. D)loans to banks.

How does the Fed acquire its holdings of securities? A)Through open market operations B)As a result of defaults by banks on discount loans C)As contributions by the U.S. Treasury aimed at enabling the Fed to meet its operating expenses D)As contributions by member banks when they first join the system

Most of the Fed's portfolio of securities consists of A)U.S. Treasury securities. B)securities issued by foreign governments. C)securities issued by state and local governments in the United States. D)corporate bonds.

In addition to U.S. Treasury securities, the Fed's portfolio of securities contains A)corporate stock. B)corporate bonds. C)bankers' acceptances. D)commercial paper.

An open market purchase A)reduces the Fed's holdings of securities, but an open market sale increases the Fed's holdings of securities. B)increases the Fed's holdings of securities, but an open market sale reduces the Fed's holdings of securities. C)reduces the Fed's holdings of securities, as does an open market sale. D)increases the Fed's holdings of securities, as does an open market sale.

The primary reason the Fed makes discount loans to banks is to A)carry out monetary policy. B)help increase bank profitability. C)earn interest. D)help banks overcome short-term liquidity problems.

Which of the following statements is correct? A)The Fed completely controls the volume of discount loans. B)Although the Fed does not completely control the volume of discount loans, it influences the amount by setting the discount rate. C)Although the Fed does not completely control the volume of discount loans, it influences the amount through open market operations. D)The volume of discount loans the Fed makes each year is a constant amount fixed under terms of the Federal Reserve Act.

On the Fed's balance sheet an item in the process of collection A)is an asset. B)is a liability. C)represents funds the Fed has promised to pay to a bank that has presented a check to be cleared. D)represents an overdue discount loan to a commercial bank.

Items in the process of collection are generated by A)open market operations. B)discount loans. C)the Fed's check-clearing role. D)spending by the Treasury from its Fed accounts.

On the Fed's balance sheet, the Fed's holdings of foreign exchange reserves A)is an asset. B)is a liability. C)represents promises by the Fed to make loans to foreign governments. D)consists of gold bars.

Which of the following is NOT a Federal Reserve asset? A)The Fed's holdings of foreign exchange B)The Federal Reserve building in Washington, D.C. C)Shares of stock purchased in the Federal Reserve system by member banks D)The computer systems used in the Federal Reserve district banks

Special Drawing Rights are issued by A)the U.S. Treasury. B)the Federal Reserve. C)the United Nations. D)the International Monetary Fund.

The balance in the Gold and SDR certificate account on the Fed's balance sheet increases when A)the Fed buys gold. B)the Fed sells gold. C)the Treasury buys gold. D)the U.S. mint issues gold coins.

The part of bank reserves deposited at the Fed are A)assets for banks and liabilities for the Fed. B)assets for the Fed and liabilities for banks. C)assets for both the Fed and banks. D)liabilities for both the Fed and banks.

The balance in the Gold and SDR certificate account on the Fed's balance sheet increases when A)the Treasury acquires SDRs. B)the Fed buys gold. C)the Fed sells gold. D)the U.S. mint issues gold coins.

The bulk of the Fed's holdings of U.S. Treasury currency consists of A)Treasury paper currency. B)coins. C)Federal Reserve Notes. D)Treasury bills.

The Fed's largest liability is A)currency outstanding. B)securities. C)reserve accounts of member banks. D)U.S. Treasury deposits.

The currency outstanding account on the Fed's balance sheet A)is a liability. B)is an asset. C)represents chiefly the coins minted and issued by the U.S. Treasury. D)includes only that currency held by commercial banks.

The currency outstanding account on the Fed's balance sheet A)represents coins minted and issued by the Treasury and held by the Fed. B)is an asset. C)represents Federal Reserve Notes. D)represents coins minted and issued by the U.S. Treasury and held by the commercial banking system.

The Treasury typically A)deposits receipts from taxes in its accounts in commercial banks. B)deposits receipts from taxes in its account at the Fed. C)pays for its expenditures from its accounts at commercial banks. D)borrows from the Fed to finance its expenditures.

Why aren't Treasury deposits with the Fed part of the monetary base? A)Because they are currency and currency is not included in the monetary base B)Because no deposits at the Fed are included in the monetary base C)Because they aren't assets of either the nonbank public or banks D)Because the Fed is unable to exercise effective control over their size

Which of the following holds a deposit account at the Fed? A)The state of New York B)The FDIC C)The city of Los Angeles D)The city of New York

On the Fed's balance sheet, a deferred availability cash item A)represents funds not yet collected by the Fed from banks against which checks have been drawn. B)is an asset. C)is a liability. D)represents taxes due to the Federal government but not yet collected.

Where would shares of stock in the Federal Reserve System purchased by the Fed's member banks be included on the Fed's balance sheet? A)They would be included on the balance sheets of the member banks, but not included on the balance sheet of the Fed. B)They would be included under "Other Federal Reserve Assets and Capital Account." C)They would be included under "Deferred Availability Cash Items." D)They would be included under "Other Federal Reserve Assets."

Deposits by depository institutions with the Fed A)are an asset to the Fed but a liability to the depository institutions. B)are a liability to the Fed but an asset to the depository institutions. C)represent all of the depository institutions reserves. D)receive interest at market rates.

Which of the following is a correct expression for the monetary base? A)B = C + D B)B = C + R C)B = R + D D)B = R + M

The monetary base will increase for all of the following reasons EXCEPT A)increase in discount loans. B)increase in Federal Reserve Float. C)increase in securities held by Fed. D)increase in Treasury deposits at the Fed.

In August 2006, the average value of the monetary base was about A)$800 million. B)$8 billion. C)$800 billion. D)$8 trillion.

Most reserves tned to consist of A)nonborrowed reserves. B)borrowing from the Fed. C)free reserves. D)excess reserves.

Which is the correct expression for currency in circulation? A)Federal Reserve Notes outstanding + Treasury currency outstanding - banks' vault cash B)Federal Reserve Notes outstanding + Treasury currency outstanding + banks' vault cash C)Federal Reserve Notes outstanding + banks' vault cash - Treasury currency outstanding D)Treasury currency outstanding - (Federal Reserve Notes outstanding + banks' vault cash)

What percentage of the nation's currency is made up of Federal Reserve Notes? A)1% B)10% C)90% D)100%

The $300 million in U.S. Treasury notes dating back to Civil War issues and still outstanding are called A)Federal Reserve Notes. B)greenbacks. C)lobster tails. D)scrip.

The terms on the right-hand side of the Fed's balance sheet A)represent the Fed's assets. B)represent the net worth of the Fed. C)represent uses of the monetary base. D)equal the difference between the value of the Fed's assets and the value of its liabilities.

Which of the following is true of the Fed's balance sheet? A)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets. B)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed liabilities. C)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets plus the total of other Fed liabilities. D)The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets minus the total of other Fed liabilities.

Federal Reserve float is defined as A)the excess of total deposits by depository institutions over required reserves. B)the liquid funds the Fed has available to lend to banks. C)cash items in the process of collection minus deferred availability cash items. D)deferred availability cash items minus cash items in the process of collection.

Increases in which of the following items from the Fed's balance sheet will result in increases in the monetary base? A)U.S. Treasury deposits B)Discount loans C)Other Federal Reserve liabilities and capital account D)Foreign and other deposits

Increases in which of the following items from the Fed's balance sheet will result in decreases in the monetary base? A)U.S. Treasury deposits B)U.S. Treasury currency outstanding C)Federal Reserve float D)Discount loans

Decreases in which of the following items from the Fed's balance sheet will result in increases in the monetary base? A)Securities B)Gold and SDR certificates C)U.S. Treasury currency outstanding D)U.S. Treasury deposits

If the volume of discount loans increases by $2 billion, the monetary base will increase by A)$2 billion times the money multiplier. B)$2 billion divided by the money multiplier. C)$2 billion. D)an amount that can be determined only if the ratio of excess reserves to checkable deposits is known.

If the Fed purchases $10 billion of U.S. Treasury bills, the monetary base will increase by A)$10 billion. B)$10 billion times the money multiplier. C)an amount that depends on the ratio of excess reserves to checkable deposits. D)an amount that depends on the ratios of excess reserves to checkable deposits and currency to checkable deposits.

The "Member Bank Reserve Changes" data published weekly in The Wall Street Journal is most useful for A)information on sources of change in the monetary base. B)gauging whether a particular bank is likely to fail. C)gauging the extent to which a particular bank is indebted to the Fed. D)forecasting interest rates.

When a bank presents a check to the Fed for clearing, the Fed promises to credit the bank for the amount A)as soon as the Fed is able to present the check to the payor bank. B)immediately. C)within two business days. D)within six months.

Over time, the primary cause of increases in the money supply is increases in the A)monetary base. B)money multiplier. C)required reserve ratio. D)discount rate.

When a check for $10,000 is initially presented to the Fed for clearing, the initial impact on the Fed's balance sheet is that A)cash items in the process of collection falls by $10,000 and deferred availability cash items rises by $10,000. B)cash items in the process of collection and deferred availability cash items both rise by $10,000. C)cash items in the process of collection rises by $10,000 and deferred availability cash items falls by $10,000. D)cash items in the process of collection and deferred availability cash items both fall by $10,000.

If the Fed credits the payee bank on a check for $10,000 before it debits the payor bank, A)the reserves of the payee bank will have risen by $10,000, but the monetary base will have been unaffected. B)the reserves of the payor bank will have risen by $10,000, but the monetary base will have been unaffected. C)the monetary base will have fallen by $10,000. D)the reserves of the payee bank and the monetary base will each have risen by $10,000.

Suppose a substantial snowstorm in the Northeast slows down the check-clearing process. The likely result will be A)the monetary base will increase. B)the monetary base will decrease. C)deferred availability cash items will increase relative to cash items in the process of collection. D)bank reserves will fall.

Which of the following is true of Federal Reserve float? A)It is typically zero. B)The amount of cash items in the process of collection typically exceeds the amount of deferred availability cash items. C)The amount of deferred availability cash items typically exceeds the amount of cash items in the process of collection. D)Over long periods of time, float is a significant source of change in the monetary base.

If Federal Reserve float increases by $2 billion, the monetary base will increase by A)$2 billion. B)$2 billion times the money multiplier. C)from zero to $2 billion, depending on the fraction of the increase in float that banks hold as excess reserves. D)zero; fluctuations in float have no effect on the base.

If the Treasury sells $2 million in gold, the Fed's gold and SDR certificate account will A)fall by $2 million, as will the monetary base. B)fall by $2 million, whereas the monetary base will rise by $2 million. C)rise by $2 million, as will the monetary base. D)rise by $2 million, whereas the monetary base will fall by $2 million.

If the Treasury buys $2 million in gold, the monetary base will A)fall by $2 million. B)rise by $2 million. C)rise by $2 million times the money multiplier. D)be unchanged.

If the Fed purchases $100 million worth of euros, the monetary base will A)decrease by $100 million. B)increase by $100 million. C)decrease by $100 million times the money multiplier. D)remain unchanged.

If the Fed purchases a new computer system for $50 million, the monetary base will A)rise by $50 million. B)fall by $50 million. C)be unchanged. D)either rise or fall depending upon whether the Fed purchases the computer system by writing a check or by paying cash.

Treasury currency outstanding A)is a liability of the Fed. B)is an asset of the Fed. C)is not an item on the Fed's balance sheet. D)consists primarily of Federal Reserve notes.

If the Treasury mints more coins and sends them to the Fed, A)the monetary base will rise. B)the monetary base will fall. C)the monetary base will be unaffected. D)the monetary base may rise or fall depending upon whether the public's demand for coins has risen or fallen.

If Treasury currency outstanding increases, the monetary base will A)increase, provided the increase in currency is held by banks. B)increase, provided the increase in currency is held by the public. C)increase whether the increase in currency is held by banks or by the public. D)decrease.

If Treasury currency outstanding decreases, the monetary base will A)be unaffected. B)increase. C)decrease. D)decrease, provided that the decline in currency represents a net decrease in the public's holdings.

When the federal government makes a purchase A)the Fed writes a check for the amount. B)the Treasury writes a check drawn on one of its accounts at commercial banks. C)the Treasury writes a check drawn on its account at the Fed. D)the Office of the Purchaser General writes a check drawn on its account with the Treasury.

The Treasury's account at the Fed is known as A)the Tax and Loan Account. B)the General Account. C)the Disbursement Account. D)the Big Account.

If the Treasury purchases a new computer system and pays the computer vendor with a check for $100,000 drawn on the Treasury's account with the Fed, A)the reserves of the banking system will fall by $100,000. B)the Fed's assets will increase by $100,000. C)the Fed's liabilities will increase by $100,000. D)the monetary base will increase by $100,000.

To minimize the impact of its transactions on the monetary base, the Treasury A)times its payments from its account at the Fed to match its withdrawals from local banks. B)makes purchases only on a few days per year. C)times most of its purchases for mid-April, when it receives most of its tax receipts. D)attempts to make roughly the same dollar value of purchases each business day.

The accounts the Treasury has in local commercial banks are called A)the General Accounts. B)Treasury debit accounts. C)Treasury credit accounts. D)Treasury tax and loan accounts.

If the Bank of England's deposit account with the Fed increases by $1 million, the monetary base will A)increase by $1 million times the dollar/pound exchange rate prevailing on that day. B)decrease by $1 million times the dollar/pound exchange rate prevailing on that day. C)decrease by $1 million. D)increase by $1 million.

When a bank joins the Federal Reserve System, A)the Fed's capital account and the bank's deposits with the Fed increase, but the monetary base falls. B)the Fed's capital account increases, but the bank's deposits with the Fed and the monetary base fall. C)the Fed's capital account, the bank's deposits with the Fed, and the monetary base all fall. D)the Fed's capital account, the bank's deposits with the Fed, and the monetary base all increase.

What is the most important source of change in the monetary base? A)Fluctuations in Treasury spending B)Changes in the volume of discount loans C)Changes in the volume of Fed holdings of securities D)Changes in the value of the money multiplier

In the United States, federal government expenditures and tax rates are determined by A)the Federal Reserve. B)the President, in consultation with his cabinet. C)Congress. D)the President and Congress.

In the United States, budget deficits are financed by A)the Fed borrowing from the general public. B)the Fed borrowing from banks. C)the Treasury selling securities. D)Congress borrowing from foreign governments.

Which of the following statements is correct? A)Whenever the federal government runs a budget deficit, the monetary base increases. B)Whenever the U.S. Treasury sells securities, the monetary base increases. C)Whenever the Fed sells securities, the monetary base increases. D)When the Fed helps finance a federal budget deficit, the monetary base increases.

Which of the following is the correct statement of the government budget constraint? A)Federal budget deficit = change in Treasury securities held by public + increase in monetary base B)Federal budget deficit = change in Treasury securities held by public - increase in monetary base C)Federal budget deficit = increase in monetary base - change in Treasury securities held by public D)Federal budget deficit = change in reserves of banking system + change in currency outstanding

What was the source of controversy between the Treasury and the Fed during the years immediately after World War II? A)The Fed wanted the Secretary of the Treasury removed from his position on the Fed's Board of Governors. B)The Fed wanted out of the agreement that it would peg the interest rate on short-term Treasury securities. C)The Fed wanted the Treasury to increase its contribution to the Fed's operating expenses. D)The Fed wanted the Treasury to begin paying interest on the Fed's holdings of Treasury securities.

As a result of the Treasury-Federal Reserve Accord, A)the Fed was no longer required to maintain the interest rate on short-term Treasury securities. B)the Fed agreed to maintain the interest rate on short-term Treasury securities. C)the Treasury was given a larger role in the formulation of monetary policy. D)the Fed was given a larger role in the formulation of fiscal policy.

In what year did the Treasury-Federal Reserve Accord take place? A)1913 B)1951 C)1975 D)1998

What do the media generally mean when they use the phrase "printing money" in relation to the financing of the federal budget deficit? A)The Treasury printing currency, rather than relying on tax revenue, to finance federal spending B)The Federal Reserve printing currency and sending it to the Treasury for use in financing federal spending C)The bank and nonbank public purchasing Treasury securities D)The Federal Reserve purchasing Treasury securities

Monetizing the debt refers to A)the Treasury selling securities for currency. B)the Treasury paying its bills by printing currency. C)the Fed purchasing Treasury securities to finance budget deficits. D)the federal government foregoing an interest payment on the national debt.

Financing government spending by raising taxes A)will increase the monetary base. B)will decrease the monetary base. C)will leave the monetary base unaffected. D)will increase the monetary base if the taxes are paid in currency, but will decrease it if they are paid for by check.

Financing government spending by selling bonds to the nonbank public A)will increase the monetary base. B)will decrease the monetary base. C)will leave the monetary base unaffected. D)will increase the monetary base if the bonds are paid for in currency, but will decrease it if they are paid for by check.

Which of the following means of financing federal government spending will increase the monetary base? A)Raising the corporate income tax B)Raising the personal income tax C)Selling bonds to the public D)Selling bonds to the Fed

About what percentage of the federal budget deficits of the 1980s and early 1990s did the Fed monetize? A)0% B)10% C)75% D)100%

Research has indicated that countries in which the central bank has the most independence experience A)slower growth rates of the money supply. B)faster growth rates of the money supply. C)no difference in the growth rate of the money supply. D)higher budget deficits.

The monetary base rises A)whenever the federal government runs a deficit. B)whenever the federal government runs a surplus. C)whenever the federal government finances a deficit by selling bonds. D)whenever the Fed acquires some of the bonds sold by the federal government to finance the deficit.

In the early 2000s, it was recognized that Japan had A)a very low money multiplier. B)very rapid growth in the monetary base. C)very rapid growth in the money supply. D)to begin to focus on interest rates instead of the money supply.

According to the Maastricht Treaty, what is the goal of the European Central Bank? A)High employment B)To be self financing C)To finance the budget deficits of member nations D)Price stability

The Maastricht Treaty has made the European Central Bank A)dependent on the preferences of the leaders of the member nations. B)dependent on the actions of the Fed. C)dependent on the decisions approved by the European Parliament. D)independent.

In early 2001, most economists were predicting that the federal government would be running budget surpluses for the next ten years. (Note: It didn't take place!) Would these surpluses have had any impact on the ability of the Fed to control the monetary base?

What does the Treasury do with the tax funds withheld from workers' paychecks? How does the Treasury make use of these funds when making purchases for the federal government? How do these activities affect the monetary base?

How would the Fed go about "pegging" the interest rate on Treasury securities, as it did during World War II? What would be the consequences of pegging the monetary base?

An economist argues: "The only effective guarantee of low inflation is an independent central bank." Do you agree?