Question 1

Statement I: One key provision of the Depository Institutions Deregulation and Monetary Control Act of 1980 was that all depository institutions were now subject to the Fed's legal reserve requirements.
Statement II: According to the same act all thrift institutions were barred from issuing checking accounts.

Accepted Answer

Statement I is true as the Depository Institutions Deregulation and Monetary Control Act of 1980 did indeed subject all depository institutions to the Fed's legal reserve requirements. However, statement II is false as the same act actually allowed thrift institutions to issue checking accounts, which had previously been prohibited.

Question 2

Sales of government securities to banks ____ total and excess reserves and ____ the money supply.

Accepted Answer

Sales of government securities to banks by the central bank (such as the Federal Reserve in the United States) decrease both total and excess reserves in the banking system because banks pay for these securities with their reserves. This action reduces the amount of money banks have available to lend, which in turn decreases the money supply.

Question 3

The interest rate at which the Federal Reserve Banks lend to commercial banks and thrift institutions are called

Accepted Answer

The discount rate is the interest rate at which commercial banks and thrift institutions can borrow from the Federal Reserve Banks, making it the correct answer. The prime rate is the rate that banks charge their most credit-worthy customers, and the short-term rate refers to any interest rate on a short-term loan or investment. The Federal funds rate is the interest rate that banks charge each other for overnight loans of their reserve balances.

Question 4

If the Fed buys government bonds on the open market,which of the following is likely to occur?

Accepted Answer

When the Fed buys government bonds on the open market, it injects new money into the economy. This increases the reserves of banks, which in turn leads to an increase in the money supply. Hence, the correct choice is A.

Question 5

The tool the Fed uses most often to implement monetary policy is

Accepted Answer

Open market operations are the primary tool used by the Federal Reserve to implement monetary policy. This involves the buying and selling of government securities in the open market in order to influence the supply of money and credit in the economy. The other options listed are also tools that the Fed can use, but they are not used as frequently or as effectively in implementing monetary policy.

Question 6

When bond prices go up,interest rates

Accepted Answer

When bond prices go up, interest rates go down. This is because when the demand for bonds increases and their prices go up, the effective interest rate or yield on those bonds decreases. Therefore, in order to attract investors, issuers of new bonds have to offer lower interest rates.

Question 7

There was a very clear line of demarcation,which divided commercial banks and thrift institutions until the year

Accepted Answer

The line of demarcation between commercial banks and thrift institutions was very clear until the 1980s. In 1980, the Depository Institutions Deregulation and Monetary Control Act was passed, which removed many of the restrictions on thrift institutions and allowed them to compete more directly with commercial banks. This led to a blurring of the lines between the two types of institutions.

Question 8

If the Fed wants to lower interest rates,it should

Accepted Answer

When the Federal Reserve buys government securities in the open market, it increases the reserves of the banking system, leading to lower interest rates as banks have more funds to lend.

Question 9

The purpose of a tight money policy is to

Accepted Answer

A tight money policy is implemented by the government to control inflation and curb economic growth. It involves raising interest rates and restricting the availability of bank credit, which makes it more difficult for people and businesses to borrow money. This can lead to a decrease in consumer spending and business investment, which helps to slow down the economy. It is not aimed at alleviating recessions or increasing investment spending, nor does it necessarily result in budget surpluses.

Question 10

Statement I: The reserve requirement for demand deposits is higher than that for time deposits.
Statement II: The Fed is more effective in halting inflation than in ending a recession.

Accepted Answer

The answer of Statement I: The reserve requirement for demand...

Question 11

Which of the following statements is NOT true?

Accepted Answer

When the Federal Reserve Banks buy government securities from households or businesses, it actually increases the supply of money because it injects money into the economy by paying for these securities.

Question 12

An increase in the money supply will tend to

Accepted Answer

An increase in the money supply will lead to a decrease in interest rates due to an increase in the supply of loanable funds. Lower interest rates will in turn stimulate investment and consumption expenditures, leading to an increase in the equilibrium GDP. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect. Choice E is also incorrect as there will be an impact on the economy when the money supply increases.

Question 13

If the Fed buys government bonds on the open market,which of the following will occur?

Accepted Answer

When the Federal Reserve buys government bonds on the open market, it injects money into the economy, increasing the money supply. This increase in the money supply leads to a decrease in interest rates, making it cheaper to borrow money. Thus, the interest rate will fall. This can stimulate investment spending as it becomes cheaper for firms to borrow the funds they need to finance new investments.

Question 14

Which of the following will NOT happen when the Federal Reserve buys bonds from the public in the open market and cash in the hands of the public does not change?

Accepted Answer

When the Federal Reserve buys bonds from the public, it increases the reserves of commercial banks, which in turn increases the money supply. However, this does not affect the required reserve ratio, which is set by the Federal Reserve and remains unchanged. Therefore, choice A is the correct option as the required reserve ratio will not increase.

Question 15

When the Fed engages in a tight money policy,the price of government bonds tend to

Accepted Answer

When the Fed engages in a tight money policy, it reduces the money supply by raising interest rates. This makes borrowing more expensive, which in turn reduces demand for goods and services in the economy. As a result, bond prices tend to fall because investors seek higher returns on their investments due to the decreased demand for borrowing. The rise in interest rates makes newer bonds more attractive to investors, reducing demand for older bonds, which causes their price to fall.

Question 16

Statement I: Easy money tends to make our exports cheaper and our imports more expensive.
Statement II: The Fed was able to help end the recessions of 1980 and 1981 by relaxing credit and driving down interest rates.

Accepted Answer

Easy money, which involves lowering interest rates, can lead to a weaker currency, making exports cheaper and imports more expensive. The Fed's actions in the early 1980s to lower interest rates helped stimulate the economy, ending the recessions.

Question 17

Statement I: If the Fed pursued a tight money policy,investors all over the world would be attracted to the higher interest rates they could earn by purchasing U.S.bonds,corporate bonds,and other assets.
Statement II: Tight money tends to lower our net exports.

Accepted Answer

Statement I is true because a tight money policy typically involves raising interest rates to control inflation, which makes U.S. financial assets more attractive to foreign investors due to higher returns. Statement II is also true because a tight money policy, by raising interest rates, appreciates the domestic currency, making exports more expensive and imports cheaper, thus reducing net exports.

Question 18

Who does not sit on the Federal Open Market Committee?

Accepted Answer

The Secretary of the Treasury does not sit on the Federal Open Market Committee (FOMC). The FOMC consists of members from the Federal Reserve System, including the President of the New York Federal Reserve Bank, the Chairman of the Federal Reserve Board, and other Federal Reserve Board members, but not officials from the Treasury Department.

Question 19

Which is the most accurate statement?

Accepted Answer

Once a Board member has been appointed by the president and confirmed by the Senate,she or he is not answerable to the president or Congress.

Question 20

The most frequently used tool of monetary policy is

Accepted Answer

Open market operations, which involve the buying or selling of government securities by the central bank, are the most frequently used tool of monetary policy. This allows the central bank to influence the supply of money and credit in the economy. The discount rate, reserve requirements, moral suasion, and credit controls are also used by central banks, but to a lesser extent.

Quiz 14: The Federal Reserve and Monetary Policy

Sales of government securities to banks total and excess reserves and the money supply.