SIE Unit 13
To arrive at M3, one would add to M2 which of the following? A) $100,000 and larger time deposits and repurchase agreements B) Savings and checking accounts C) All currency in circulation, including coins D) Gold and silver bars held on reserve at the FR
$100,000 and larger time deposits and repurchase agreements Included in M3 but not found in M2 are time deposits of more than $100,000 and repurchase agreements with terms longer than one day.
When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates? A) Federal funds B) Discount C) Broker call loan D) Prime
Broker call loan Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).
The Federal Reserve could use which of the following to stimulate the economy? A) Buy Treasury securities from banks B) Increase government spending C) Lower taxes D) Raise the federal funds rate
Buy Treasury securities from banks Taxation and government spending are tools of the president and congress. Changing the federal funds rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising rates slows down the economy.
Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)? A) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. B) By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates. C) By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. D) By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.
By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.
Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)? A) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. B) By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates. C) By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates. D) By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.
Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Prime rate B) Margin rate C) Discount rate D) Call loan rate
Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.
Which of the following organizations engaging in open-market operations acts as agent for the U.S. Treasury Department? A) Securities Investors Protection Corporation (SIPC) B) Federal Reserve Board (FRB) C) U.S. Congress D) Securities and Exchange Commission (SEC)
Federal Reserve Board (FRB) Acting as an agent for the U.S. Treasury Department and under the direction of the Federal Open Market Committee (FOMC), the Federal Reserve Board (FRB) engages in open-market operations buying and selling Treasury securities: T-bills, notes, and bonds.
Which of the following would be the interest rate charged for overnight, uncollateralized loans negotiated between two money center banks? A) Federal funds rate B) Prime rate C) Discount rate D) Repo rate
Federal funds rate The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured loan. It is considered a barometer of the direction of short-term interest rates such as commercial paper and Treasury bills, which often move up or down roughly in parallel with the funds rate.
Which of the following benchmark interest rates is considered a barometer of the direction of short-term interest rates? A) Prime rate B) Broker call loan rate C) Discount rate D) Federal funds rate
Federal funds rate The federal funds rate is the rate that commercial money center banks charge each other for overnight loans of $1 million or more. Overnight, representing the shortest of loans, makes this rate a good indicator of the direction short-term interest rates are taking.
Certain actions taken by the Federal Reserve Board (FRB) would likely have the effect of causing interest rates to increase. Which would these be? The Federal Open Market Committee (FOMC) buying securities Raising the reserve requirements Raising the discount rate Raising the prime rate A) II and III B) I and IV C) I and III D) II and IV
II and III Raising reserve requirements, having more member deposits being held on reserve at the Fed, would lessen the money available to lend. Raising the discount rate, charging member banks more for loans, would also lessen the money available to lend. With less money available to lend, interest rates would go up.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this will do which of the following? A) Loosen the money supply B) Decrease interest rates on loans to consumers C) Increase interest rates on loans to consumers D) Have no impact on lending rates to consumers
Increase interest rates on loans to consumers When the FOMC directs that Treasury securities be sold in the open market, this will tighten the money supply; securities go into the economy, and money comes out of the economy. Less money available increases interest rates to consumers.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this will do which of the following? A) Tighten the money supply B) Increase interest rates on loans to consumers C) Have no impact on lending rates to consumers D) Lower interest rates on loans to consumers
Lower interest rates on loans to consumers When the FOMC directs that Treasury securities be purchased in the open market, this will loosen the money supply; securities come out of the economy and money goes in to the economy. More money available lowers interest rates to consumers.
A bank is likely to do which of the following when the Federal Reserve Board (FRB) eases the money supply? A) Lower the hypothecation loan rate B) Lower its prime rate C) Raise its prime rate D) Raise its broker call loan rate
Lower its prime rate The prime rate and the broker call loan rate are set by banks for loans to corporate customers and broker-dealers, respectively. If the FRB eases the money supply (makes more money available to lend), banks can charge less for loans and will lower their lending rates. The hypothecation process isn't a rate, but a percentage amount (140% of the debit balance) and will not be impacted by the Fed's action with the money supply.
Currency held by the public, including checking accounts and time deposits less than $100,000, and money market mutual funds would best be described by economists as A) M3. B) M2. C) M1. D) M4.
M2 M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.
All currency held by the public, including coins, checking accounts plus time deposits of less than $100,000, and money market mutual funds, is what economists define as A) M2. B) the money supply. C) M3. D) M1.
M2. M2 equals all of M1 (currency held by the public including coins and checking accounts) plus time deposits less than $100,000 and money market mutual funds.
For those who follow monetary theory, which is the most complete measure of the money supply? A) M1 + M2 B) M3 C) M2 D) M1
M3 M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day.
For those who follow monetary theory, which is the most complete measure of the money supply? A) M2 B) M1 C) M3 D) M1 + M2
M3 M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day.
Large time deposits of more than $100,000 are considered to be found in what part of the money supply? A) M3 B) M1 and M2 C) M2 D) M1
M3 M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.
According to economists which of the following is the correct characterization of the money supply? A) M1 includes all of M2 and M3. B) M1 plus M2 equals M3. C) M3 includes all of M1 and M2. D) M2 equals M1 plus M3.
M3 includes all of M1 and M2. M3 includes all of M1 and M2, plus time deposits of more than $100,000 and repurchase agreements with terms longer than one day. In this light, M3 is that measure of the money supply that is the most inclusive.
Match the following statement to the best expression: A well-controlled, moderately increasing money supply leads to price stability and a healthy economy. A) Balance of payments B) Socialism C) Monetarist Theory D) Keynesian Theory
Monetarist Theory Monetarists judge that a well-controlled, moderately increasing money supply leads to price stability. Price stability allows business managers (considered to be more efficient allocators of resources than the government) to plan and invest, which in turn keeps the economy healthy.
Within the money supply, which of the following are part of M2 but not M1? A) Money market mutual funds B) Checking accounts at commercial banks C) Currency in circulation D) Demand deposits at S&Ls
Money market mutual funds Money market funds are part of M2 but not M1. M2 includes everything in M1, plus time deposits and money market funds.
The Federal Reserve could do which of the following to slow the economy? A) Buy Treasury securities from banks B) Raise the discount rate C) Lower taxes D) Increase government spending
Raise the discount rate Taxation and government spending are tools of the president and congress. Changing the discount rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising rates slows down the economy. Buying treasuries injects money into the economy, speeding it up, not slowing it down.
If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur? A) Smaller banks will need to increase their lending rates for creditworthy corporate customers. B) Smaller banks will lower lending rates for creditworthy corporate customers as well. C) Smaller banks will follow by lowering the discount rate. D) Smaller banks will need to offset the lower prime rate by increasing the broker call loan rate.
Smaller banks will lower lending rates for creditworthy corporate customers as well. When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the Federal Reserve Board (FRB) (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased).
Money available to lend to corporations and consumers is impacted most in the United States by the policies of which of the following? A) The Securities and Exchange Commission (SEC) B) The National Securities Clearing Corporation (NSCC) C) The Internal Revenue Service (IRS) D) The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) The FOMC meets regularly to direct the Federal Reserve Board (FRB) to either buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful.
Which of the following has the greatest influence on the money supply within the United States? A) The Depository Trust Corporation (DTC) B) The Federal Open Market Committee (FOMC) C) The Internal Revenue Service (IRS) D) The Securities Exchange Commission (SEC)
The Federal Open Market Committee (FOMC) The Federal Reserve Board (FRB) influences the money supply by buying and selling U.S. government securities in the open market which expand or contract the money supply. The Federal Open Market Committee (FOMC) consists of the Board of Governors of the Federal Reserve System and several Reserve Bank presidents. The committee meets regularly to direct the government's open-market operations. For example, when the FOMC directs the purchase of securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply.
Which of the following has the greatest influence on the money supply within the United States? A) The Depository Trust Corporation (DTC) B) The Securities Exchange Commission (SEC) C) The Internal Revenue Service (IRS) D) The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) The Federal Reserve Board (FRB) influences the money supply by buying and selling U.S. government securities in the open market which expand or contract the money supply. The Federal Open Market Committee (FOMC) consists of the Board of Governors of the Federal Reserve System and several Reserve Bank presidents. The committee meets regularly to direct the government's open-market operations. For example, when the FOMC directs the purchase of securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply.
Which of the following entities is chiefly responsible to conduct U.S. monetary policy and maintain the stability of the financial system? A) Securities and Exchange Commission (SEC) B) The Federal Reserve Board (FRB) C) Internal Revenue Service (IRS) D) New York Stock Exchange (NYSE)
The Federal Reserve Board (FRB) The Federal Reserve is the central bank of the United States, and a special committee within the Federal Reserve System known as the Federal Open Market Committee (FOMC) sets monetary policy.
The monetarist theory proposes which of the following? A) The Federal Reserve may impact the economy by raising and lowering the discount rate. B) The federal government impacts the economy through repurchase and reverse repurchase agreements. C) The federal government can impact the economy by raising and lowering the federal funds rate. D) The Federal Reserve has a major impact on the economy by raising and lowering taxes.
The Federal Reserve may impact the economy by raising and lowering the discount rate. The Federal Reserve controls the discount rate and repurchase and reverse repurchase agreements. The federal government controls taxes and spending.
A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following? A) The federal funds rate B) The discount rate C) The broker call loan rate D) The prime rate
The broker call loan rate The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.
Which of the following is the rate of interest charged by the Federal Reserve Bank (FRB) for short-term loans to its member banks? A) The federal funds rate B) The discount rate C) The prime rate D) The broker call loan rate
The discount rate The discount rate is the rate the Federal Reserve charges for short-term loans to member banks.
When the Federal Reserve Board (FRB) wants to expand (loosen) the money supply, it will A) sell corporate securities to banks in the open market. B) sell Treasury securities to banks in the open market. C) buy corporate securities from banks in the open market. D) buy Treasury securities from banks in the open market.
buy Treasury securities from banks in the open market. When the FRB wants to expand (loosen) the money supply, it will buy Treasury securities from banks in the open market. The securities come out of the economy, and the money goes into the economy.
To expand the overall economy, the Federal Reserve Board (FRB), acting as agent for the U.S. Treasury department, will A) sell securities via open-market operations, pushing interest rates down. B) buy securities via open-market operations, pushing interest rates up. C) buy securities via open-market operations, pushing interest rates down. D) sell securities via open-market operations, pushing interest rates up.
buy securities via open-market operations, pushing interest rates down. To expand the overall economy, we want to push interest rates down by increasing the money supply. Lower interest rates make borrowing and spending easier for consumers. To increase the money supply, the FRB will buy securities via open-market operations, taking securities out of the banking system and putting money into the banking system.
The best characterization of how economists view the money supply is A) cash, loans, different forms of credit, and other liquid instruments. B) all forms of cash and liquid instruments but no forms of credit. C) savings and checking accounts and all lines of credit but not paper money or coins. D) paper money and coinage only.
cash, loans, different forms of credit, and other liquid instruments. Economists take a broad view of the money supply and include within it all cash (paper money and coins), loans, credit, and other liquid instruments, such as savings and checking accounts.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this A) stabilizes the money supply. B) increases the supply of money. C) decreases the money supply. D) is intended to hinder contraction of the money supply.
decreases the money supply. When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this decreases the supply of money. Treasury securities are going into the economy and, therefore, money is coming out—the money supply decreases.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this A) decreases the money supply. B) is intended to hinder contraction of the money supply. C) stabilizes the money supply. D) increases the supply of money.
increases the supply of money. When the FOMC directs that Treasury securities be purchased in the open market, this increases the supply of money. Treasury securities are coming out of the economy and, therefore, money is going in—the money supply increases.
The prime rate is set by A) individual banks. B) the Federal Reserve Board (FRB). C) the Securities and Exchange Commission (SEC). D) the Federal Open Market Committee (FOMC).
individual banks. The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate.
When the supply for money exceeds the demand, A) interest rates fall, making consumer borrowing more difficult. B) interest rates rise, making consumer borrowing easier. C) interest rates fall, making consumer borrowing easier. D) interest rates rise, making consumer borrowing more difficult.
interest rates fall, making consumer borrowing easier. Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the supply is greater than the demand for money, interest rates fall, making consumer borrowing easier.
When the money supply in the economy increases, A) interest rates go down, hence borrowing and spending for consumers is easier. B) interest rates go down, hence borrowing and spending for consumers is more difficult. C) interest rates go up, hence borrowing and spending for consumers is easier. D) interest rates go up, hence borrowing and spending for consumers is more difficult.
interest rates go down, hence borrowing and spending for consumers is easier. Increases in the money supply means more money is available to lend. This pushes interest rates down, hence borrowing and spending for consumers is easier.
When the demand for money exceeds the supply, A) interest rates fall, making consumer borrowing more difficult. B) interest rates rise, making consumer borrowing easier. C) interest rates fall, making consumer borrowing easier. D) interest rates rise, making consumer borrowing more difficult.
interest rates rise, making consumer borrowing more difficult. Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult.
To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board (FRB) can A) raise the discount rate. B) raise the federal funds rate. C) lower the federal funds rate. D) lower the discount rate.
lower the discount rate. Wanting to ease its monetary policy, which would allow consumers to borrow more easily, the FRB can lower the discount rate—the rate it charges its member banks for short-term loans. This frees up more money for its member banks to lend to consumers. The federal funds rate isn't one charged by the FRB but instead by large commercial banks to one another.
To prevent inflation by tightening the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) raise the discount rate. B) lower the prime rate. C) raise the reserve requirement. D) sell U.S. government securities in open-market operations.
lower the prime rate.
Tools available to the Federal Reserve Board (FRB) include A) open-market operations, setting the discount rate, and setting reserve requirements. B) setting the discount rate, enacting tax laws, and setting the Fed funds rate. C) open-market operations, setting the discount rate, and enacting tax laws. D) setting the Fed funds rate, setting the prime rate, and setting the discount rate.
open-market operations, setting the discount rate, and setting reserve requirements. While engaging in monetary policy to impact the money supply, the FRB has three tools: open-market operations, setting the discount rate, and setting reserve requirements. Tax laws are fiscal policy, and neither the prime rate nor the Fed funds rate is set by the FRB.
The Federal Reserve Board (FRB) might impact the money supply by using all of the following except A) buying or selling securities in open market. B) prime rate. C) discount rate. D) reserve requirements for member banks.
prime rate. The prime rate is set by money center banks, not the FRB. The remaining three answer choices are the tools available to the FRB to be used to impact the money supply.
To tighten its monetary policy, making it more difficult for consumers to borrow money, the Federal Reserve Board (FRB) can A) lower the federal funds rate. B) lower the discount rate. C) raise the discount rate. D) raise the federal funds rate.
raise the discount rate. Wanting to tighten its monetary policy, which would make it harder for consumers to borrow money, the FRB can raise the discount rate—the rate it charges its member banks for short-term loans. This lessens the availability of money its member banks have to lend to consumers. The federal funds rate isn't a rate charged by the FRB but instead by large commercial banks to one another.
To stimulate the economy during a recession by expanding the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) lower the discount rate. B) buy U.S. government securities in open-market operations. C) lower the reserve requirement. D) raise the federal funds rate.
raise the federal funds rate.
When the Federal Reserve Board (FRB) wants to contract (tighten) the money supply, it will A) sell corporate securities to banks in the open market. B) buy Treasury securities from banks in the open market. C) sell Treasury securities to banks in the open market. D) buy corporate securities from banks in the open market.
sell Treasury securities to banks in the open market. When the FRB wants to contract (tighten) the money supply, it will sell Treasury securities to banks in the open market. The securities go into the economy, and the money comes out of the economy.
The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically A) notably above (several percentage points) other short-term lending rates. B) notably below (several percentage points) other short-term lending rates. C) slightly below (a percentage point or so) other short-term lending rates. D) slightly above (a percentage point or so) other short-term lending rates.
slightly above (a percentage point or so) other short-term lending rates. The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates.
Tighter credit will A) slow economic expansion, preventing inflation. B) stimulate the economy, preventing expansion. C) stimulate the economy, fueling expansion. D) slow economic expansion, fueling inflation.
slow economic expansion, preventing inflation. Tighter credit means that there is less money available to lend to consumers. Less money available to lend means less consumer spending, which will slow economic growth, and helps prevent or slow inflation.
Federal Reserve member banks needing to borrow money can borrow from A) nonmember banks at the federal funds rate. B) the Federal Reserve Bank at the federal funds rate. C) the Federal Reserve Bank at the discount rate. D) member firms at the discount rate.
the Federal Reserve Bank at the discount rate. Federal Reserve member banks needing to borrow have two resources: the Federal Reserve Bank itself, which will lend to them at the discount rate, and other member banks, who will lend to one another at the federal funds rate.
A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from A) another FRB member bank at the discount rate. B) the Federal Reserve Board (FRB) at the federal funds rate. C) another FRB member bank at the prime rate. D) the Federal Reserve Board (FRB) at the discount rate.
the Federal Reserve Board (FRB) at the discount rate. A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.
A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the federal funds rate. B) the discount rate. C) the broker call loan rate. D) the prime rate.
the broker call loan rate. The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to relend to margin account customers.
The broker loan rate charged by banks is also known as A) prime rate. B) discount rate. C) federal funds rate. D) the call loan rate.
the call loan rate. The broker loan rate or call loan rate is the interest rate banks charge broker-dealers on money that broker-dealers borrow to lend to margin account customers.
Considered the most volatile of the benchmark interest rates in the economy would be A) the federal funds rate. B) the discount rate. C) the broker call loan rate. D) the prime rate.
the federal funds rate. The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.
The rate that commercial money center banks charge each other for overnight loans is A) the prime rate. B) the broker call loan rate. C) the discount rate. D) the federal funds rate.
the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.
A barometer of short-term interest rates and one that is therefore considered the most volatile interest rate in the U.S. economy is A) the federal funds rate. B) the prime rate. C) the discount rate. D) the broker call loan rate.
the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more. A barometer of the direction of short-term interest rates, which fluctuate constantly, the federal funds rate is considered the most volatile rate in the U.S. economy.
When the Federal Reserve Board (FRB) utilizes the tools available to it, it is influencing A) the federal budget. B) the amount of money raised through taxes. C) fiscal policies. D) the money supply.
the money supply. Through the use of open-market operations, affecting changes in the discount rate, and setting reserve requirements, the FRB is influencing the money supply. The money supply is the capital available for lending institutions to lend and thus consumers to borrow and spend.
