Chapter 2 Culmulative Quiz

Which of the following is a type of deduction that an owner of income-producing property can take, but a homeowner can't? Depreciation deduction Exclusion of gain from sale Mortgage interest deduction All of the above

Correct Answer: A Explanation: Depreciation deductions are available to owners of income property, such as apartment buildings or rental houses, but not to homeowners.

The Federal Reserve System was created through the: Federal Reserve Acts of 1913 and 1916 Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Glass-Steagall Act of 1933 National Bank Act of 1863

Correct Answer: A Explanation: The Federal Reserve Acts of 1913 and 1916 created the Federal Reserve System and established the nation's modern banking system.

Which of the following is set by each Federal Reserve Bank, with the approval of the Federal Reserve Board? Discount rate Federal funds rate Inflation targets Reserve requirements

Correct Answer: A Explanation: Each Federal Reserve Bank sets a discount rate for short-term loans to banks in its district. The rate is subject to approval by the Fed's Board of Governors. (The federal funds rate is not set by the Fed, although the Federal Open Market Committee sets a target rate.)

How many members of the Federal Reserve Board are there? 7 9 12 14

Correct Answer: A Explanation: The Federal Reserve's Board of Governors has seven members, each appointed by the U.S. president.

If the government wants to increase the money supply, it can: buy government securities and decrease reserve requirements buy government securities and increase reserve requirements sell government securities and decrease reserve requirements sell government securities and increase reserve requirements

Correct Answer: A Explanation: To increase the money supply, the government would buy government securities and decrease reserve requirements. Both steps would free up more funds for investment.

When the Fed buys and sells government securities, the transactions are known as: convertible sales open market operations reserve requirements secured transactions

Correct Answer: B Explanation: In its open market operations, the Fed buys or sells government securities to increase or decrease the money supply.

An unmarried taxpayer sells her principal residence and turns a large profit on the transaction. How much of the gain is excluded from taxation? $100,000 $250,000 $500,000 $1,000,000

Correct Answer: B Explanation: A taxpayer who sells her principal residence may exclude up to $250,000 in gain from the sale from her taxable income. Married taxpayers filing jointly may exclude up to $500,000.

Which of the following is not one of the responsibilities of the Federal Reserve System? Impose reserve requirements Issue interest-bearing securities Perform periodic bank examinations Regulate commercial banks

Correct Answer: B Explanation: It's the Treasury Department, not the Fed, that finances government debt by issuing interest-bearing securities. (The Fed may buy and sell government securities in open market operations, but it does not issue the securities.)

Which of the following is not a component of the federal government's fiscal policy? Debt financing Key interest rates Spending Taxation

Correct Answer: B Explanation: Spending, taxation, and debt financing are all part of the government's fiscal policy, but the Fed's efforts to influence the economy by raising and lowering key interest rates are part of the government's monetary policy.

The interest rate that banks charge each other for overnight loans is the: discount rate federal funds rate prevailing market rate prime rate

Correct Answer: B Explanation: The federal funds rate is the rate charged by banks for short-term loans to other banks. This rate is not set directly by the Fed, although the Federal Open Market Committee sets a target for the federal funds rate.

The federal government's actions in raising revenue, spending money, and managing debt are referred to as: deficit policy fiscal policy monetary policy trade policy

Correct Answer: B Explanation: The government's fiscal policy includes the steps it takes in regard to taxation, spending, and financing the deficit (managing debt).

A federal deficit occurs when, in a given year, the federal government: receives more revenue than it spends reduces the amount it spends compared with the previous year spends more than it receives in revenue spends more than it spent in the previous year

Correct Answer: C Explanation: If the federal government spends more money than it receives in revenue in a particular year, the resulting shortfall is known as the federal deficit.

When the Fed tried to control inflation by decreasing the money supply in the early 1980s: reserve requirements dropped sharply interest rates dropped sharply interest rates went up sharply it caused widespread bank failures

Correct Answer: C Explanation: Interest rates shot up in the early 1980s. The Fed's efforts to keep inflation in check by decreasing the money supply are thought to have been one of the causes of the skyrocketing rates.

The Fed's monetary policy is controlled by: Congress individual member banks the Board of Governors the Treasury Department

Correct Answer: C Explanation: The Board of Governors controls monetary policy.

If the economy grows too quickly, what is likely to be the undesirable result? Deflation Federal deficit Inflation Trade deficit

Correct Answer: C Explanation: A rapidly growing economy is likely to be accompanied by inflation, which may choke off further growth. The Fed prefers to encourage moderate growth that won't cause severe inflation.

A bank must keep a certain percentage of its deposits either in its own vault or on deposit with the Federal Reserve Bank in order to comply with the Fed's: federal funds rate targeting rules for open market operations reserve requirements fiscal policy

Correct Answer: C Explanation: The Fed imposes reserve requirements to ensure that banks always have enough funds to cover their depositors' withdrawal requests.

An unmarried homeowner may deduct mortgage interest on a loan closed in 2018 to purchase a first or second residence, up to a loan amount of: $100,000 $250,000 $500,000 $750,000

Correct Answer: D Explanation: Mortgage interest is deductible for purchase loan amounts totaling up to $750,000. If the loan or loans exceed $750,000, interest is deductible only on the first $750,000. (For a married taxpayer filing separately, the maximum is $500,000.)

The Federal Open Market Committee could try to stimulate a sluggish economy by: increasing interest rates in an effort to keep inflation in control lowering the discount rate while increasing the federal funds rate increasing certain reserve requirements and decreasing others buying government securities in an effort to reduce market interest rates

Correct Answer: D Explanation: The Federal Open Market Committee handles the Fed's open market transactions, buying and selling government securities. The committee can purchase securities to increase the amount of money in circulation, in the hope that the increase will lead to lower market interest rates, which should stimulate the economy.

Frequent and widespread bank panics led to the creation of the: mortgage interest deduction federal deficit Federal Open Market Committee Federal Deposit Insurance Corporation

Correct Answer: D Explanation: The Federal Deposit Insurance Corporation was created to protect bank depositors and prevent bank panics. The FDIC insures the money in a depositor's bank account, up to a specified limit, so that the depositor won't lose his money if the bank fails.

Which of the following is not a tool the Federal Reserve System may use to influence the economy? Interest rates Open market operations Reserve requirements Tax rates

Correct Answer: D Explanation: The Federal Reserve System does not have control over tax rates. Tax rates are determined by the legislative and executive branches, as part of the government's fiscal policy.