Federal Reserve Practice

Assume the reserve requirement is 10 percent, demand deposits are $200 million, and total reserves are $18 million. If the reserve requirement is increased to 14 percent, the banking system will have A) A deficiency of reserves equal to $10 million. B) An increase in the money multiplier. C) Excess reserves equal to $10 million. D) Excess reserves equal to $18 million.

A

The Fed is most likely to pursue A) Use of open market operations as the primary mechanism to change reserves. B) Numerous increases in the discount rate to tighten the money supply quickly. C) Frequent adjustment of the reserve requirement. D) Frequent changes in marginal tax rates.

A

The M2 money supply is defined as A) M1 plus balances in most savings accounts and money market mutual funds. B) Most balances held in savings accounts and money market mutual funds. C) Currency held by the public plus transactions accounts. D) M1 plus savings accounts.

A

A banks that has excess reserves can earn additional income by lending the money overnight A) To the Fed in the federal funds market. B) To other banks in the federal funds market. C) To the Fed at the prime rate minus 1 percent. D) To other banks at the prime rate minus 1 percent.

B

Anil buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate increases to 27 percent, Anil can sell his bond for up to A) $540.00. B) $1,259.26. C) $7,407.00. D) $11,764.71.

B

Assume an original balance sheet: The money supply (M1) in Table 14.3 is A) $80 billion. B) $120 billion. C) $20 billion. D) $40 billion.

B

In order to decrease the money supply, the Fed can A) Lower the reserve requirement, increase the discount rate, or buy bonds. B) Raise the reserve requirement, increase the discount rate, or sell bonds. C) Raise the reserve requirement, increase the discount rate, or buy bonds. D) Lower the reserve requirement, decrease the discount rate, or sell bonds.

B

The primary method for controlling the money supply in the United States is to limit the A) Amount of money that is spent by changing tax policy. B) Volume of loans the banking system can make. C) Amount of money that is spent by changing income transfers. D) Amount of currency that is printed.

B

When the Fed wishes to increase the reserves of the member banks, it A) Sells securities. B) Buys securities. C) Raises the discount rate. D) Raises the reserve requirement.

B

Assume an original balance sheet: Refer to Table 14.2. If the Fed sells $20 billion in bonds to the public, all of the following are true except A) M1 will decrease initially by $20 billion. B) M2 will expand initially by $20 billion. C) Additional increases in M1 will occur after the multiplier process. D) The public will hold $495 billion worth of bonds.

C

Assume the reserve requirement is 25 percent, demand deposits are $500 million, and total reserves are $32 million. If the reserve requirement is decreased to 20 percent, the banking system will experience A) Excess reserves equal to $32 million. B) No change in the lending capacity. C) A deficiency of required reserves equal to $68 million. D) Excess reserves equal to $68 million.

C

The Fed can decrease the federal funds rate by A) Changing the money multiplier. B) Simply announcing a lower rate because the Fed has direct control of this interest rate. C) Buying government bonds, which causes market interest rates to fall. D) Selling government bonds.

C

If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent, it should A) Sell $6 billion in bonds to the public. B) Buy $60 billion in bonds from banks. C) Sell $60 billion in bonds to the public. D) Buy $6 billion in bonds from banks.

D

If the required reserve ratio is 25 percent and the Federal Reserve sells $100,000 worth of bonds, the money supply can potentially A) Increase by $75,000. B) Increase by $400,000. C) Decrease by $75,000. D) Decrease by $400,000.

D

In order to increase the money supply, the Fed can A) Lower the reserve requirement, increase the discount rate, or buy bonds. B) Raise the reserve requirement, increase the discount rate, or sell bonds. C) Raise the reserve requirement, increase the discount rate, or buy bonds. D) Lower the reserve requirement, decrease the discount rate, or buy bonds.

D

Janette buys a bond in the amount of $500 with a promised interest rate of 15 percent. If the market interest rate decreases to 5 percent, Janette can sell her bond for up to A) $500. B) $250. C) $1,250. D) $1,500.

D

Monetary policy involves the use of money and credit controls to A) Move the economy along the aggregate supply curve. B) Shift the aggregate supply curve. C) Move the economy along the aggregate demand curve. D) Shift the aggregate demand curve.

D

The Fed can increase the federal funds rate by A) Simply announcing a higher rate because the Fed has direct control of this interest rate. B) Buying government bonds. C) Changing the money multiplier. D) Selling government bonds, which causes market interest rates to rise.

D

The Federal Open Market Committee is responsible for A) Check cashing services for large corporations. B) Determining broad Fed policy. C) Providing central banking services to individual banks. D) The Fed's daily activity in financial markets.

D

The Federal Reserve System was created by A) The FDIC in 1929. B) The Federal Banking Authority in 1904. C) The U.S. Treasury in 1914. D) The Federal Reserve Act in 1913.

D

The Federal Reserve holds deposits from A) Consumers. B) The U.S. Treasury. C) Large corporations. D) Banks.

D

The minimum amount of reserves a bank is required to hold is A) Total reserves. B) Excess reserves. C) Legal reserves. D) Required reserves.

D

The money supply (M1) includes currency held by the public plus A) Transactions accounts plus money market mutual funds. B) Balances in most savings accounts and money market mutual funds. C) Currency held by the Fed and Treasury and transactions accounts. D) Transactions accounts plus travelers checks.

D

The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is known as A) Zero coupon bonding. B) Federal funds operations. C) Fiscal policy. D) Open market operations.

D

Which of the following provides evidence that the Federal Reserve System is politically insulated? A) The Fed acts as a clearinghouse between commercial banks. B) The Fed governors are appointed by the president of the United States. C) The Board of Governors is located in Washington, D.C. D) The Fed governors are appointed for 14-year terms and cannot be reappointed.

D