Chapter 4

Members of the Federal Reserve System may include: a. commercial banks with a national charter b. credit unions c. savings and loan institutions d. all the above e. none of the above

A

One of the major weaknesses of the banking system before the Federal Reserve System was set up was: a. the arrangement for holding reserves b. the lack of a deposit insurance system c. a lack of currency and coin d. an inadequate supply of government bonds

A

The Federal Reserve System consists of all of the following components EXCEPT: a. Monetary Policy Committee b. Board of Governors c. Federal Open Market Committee d. all of the above

A

The ___________________ conducts monetary policy for the twelve European countries that adopted the euro as their common currency. a. European Central Bank b. Switzerland Central Bank c. London Central Bank d. British National Bank

A

The effect of an increase of required reserves by the Fed is: a. a decrease in loanable funds of depository institutions b. a decrease in interest rates c. an increase of excess reserves d. to stimulate activity in the home construction field

A

Under the authority of the Federal Reserve Act of 1913: a. member banks were required to purchase capital stock in the Federal Reserve Banks of their district b. member banks may not borrow from the Fed c. a formal open-market committee arrangement was established d. national banks were permitted to become members of the Fed if they could show evidence of satisfactory financial condition

A

A central bank serves the nation: a. as a source of consumer credit when otherwise not available b. by regulating money supply growth c. as a secondary source of funds for home financing d. as the strong right arm of the U.S. Treasury

B

History generally supports the contention that under the guidance of Paul Volcker, a (n) ____________ Fed policy brought down the double-digit inflation of the 1970s and the early 1980s, and the Federal Open Market Committee consistently responded to his leadership. a. loosening of b. restrictive c. expansionary d. two of the above e. none of the above

B

In addition to the clearing of checks through Federal Reserve Banks, the Fed accommodates check clearing through: a. check clearinghouses it sponsors in major cities b. its branches and a group of regional check-processing centers c. electronic transfers of funds d. the United Postal Service

B

One significant feature of DIDMCA was that it: a. expanded the ability of the Fed to influence unemployment rates b. expanded Fed control over the reserve requirements of non-member banks ' c. created the FDIC d. none of the above

B

The ___________________ conducts monetary policy for the European countries that have adopted the euro as their common currency. a. Bank of England b. European Central Bank c. Bank of Europe d. Bank of Switzerland e. none of the above

B

The members of the Fed Board of Governors are: a. elected by the member banks b. appointed by the President of the United States with the advice and consent of the Senate c. appointed by the Secretary of the Treasury d. appointed by each of the Federal Reserve banks e. none of the above

B

The percentage of deposits that must be held as reserves is called a. the bank reserve percentage b. the required reserve ratio c. the excess reserve ratio d. the fractional reserve percentage

B

The primary responsibility of the Federal Reserve System is to: a. issue currency to member banks b. regulate the growth of the money supply c. serve as a fiscal agent for the U.S. government d. regulate and conduct bank examinations

B

The two routes of check clearance include the _____________ settlement, in which the transaction takes place entirely within a single Federal Reserve district, and the _____________ settlement, in which there are relationships between banks of two Federal Reserve districts. a. interdistrict, intradistrict b. intradistrict, interdistrict c. Fed wire, District wire d. District wire, Fed wire e. none of the above

B

The Fed Board of Governors: a. is elected by the member banks b. is appointed by the Senate c. has seven members appointed for 14-year terms d. has seven members appointed for a term of 12 years

C

The discount rate is: a. the rate charged a bank's best customers b. the rate paid by large business with good credit c. the rate a bank must pay to borrow from the Fed d. none of the above

C

The five components of the Federal Reserve System include: a. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Monetary Committees. b. Nonmember banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees. c. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees. d. Member banks, Federal Reserve District Banks, Board of Governors, Federal Closed Market Committee, Advisory committees. e. none of the above

C

_________ has become the most important and effective means of monetary and credit control. a. Changing reserve requirements b. Changing the discount rate c. Open market operations d. Changing the Treasury bill rate e. none of the above

C

A (n) ____________________ is necessary for the monetary system to carry out the financial function of transferring money, which in turn is a requirement for an effective financial system. a. internet banking system b. electronic data transfer system c. wire transfer system d. efficient payments mechanism e. none of the above

D

The accommodative activities of the Federal Reserve System are: a. clearing checks b. meeting the credit needs of individuals and institutions c. supporting depository institutions d. all of the above

D

The basic policy instruments that the Fed uses to execute monetary policy include all of the following EXCEPT a. changing reserve requirements b. changing the discount rate c. conducting open market operations d. all of the above are monetary policy instruments

D

The chairman of the Federal Reserve System: a. is appointed by the Secretary of the Treasury b. serves a life term c. is the president of the New York Federal Reserve Bank d. none of the above

D

_____________ sets up a procedure for the prompt correction of errors on a revolving charge account and prevents damage to credit ratings while a dispute is being settled. a. Truth in Lending Act b. Equal Credit Opportunity Act c. Federal Trade Commission Improvement Act d. Fair Credit Billing Act

D

The Federal Open Market Committee: a. is comprised of members of the Federal Reserve board and representatives of all Federal Reserve Banks b. came into being at the time the Federal Reserve System was created c. is made up of the presidents of the 12 Federal Reserve Banks d. was created under a provision of the Banking Act of 1935

D b. came into being at the time the Federal Reserve System was created (Banking Act of 1935) c. is made up of the presidents of the 12 Federal Reserve Banks (five presidents)

The dynamic actions of the Federal Reserve System: a. contribute to the smooth everyday functioning of the economy b. are designed to meet the credit needs of individuals and institutions c. support depositories and other institutions d. stimulate or repress the level of prices or economic activity

D a. contribute to the smooth everyday functioning of the economy (defensive)

Which of the following statements is correct? a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. b. Open-market operations don't always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to restrict deposit growth. c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to expand deposit growth. d. Open-market operations don't always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth. e. none of the above

D, to the extent banks borrow from the Fed to replenish lost reserves makes the change a gradual one a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. Selling bonds → ↓ deposit growth → reduces lending

Although it enjoys substantial independence in its operations, the appointive power of the president and the ability of Congress to alter its structure make the ______________ a dependent political structure while being one of the most powerful monetary organizations in the world. a. Presidential Appointment Board (PAB) b. Board of Directors (BOD) c. Governing Body (GOB) d. Financial Governors (FOG) e. none of the above

E

History generally supports the contention that under the guidance of Paul Volcker, a (n) ____________ Fed policy brought down the double-digit inflation of the 1970s and the early 1980s, and the Federal Open Market Committee consistently responded to his leadership. a. loosening of b. easing of c. expansionary d. two of the above e. none of the above

E

The Board of Governors of the Federal Reserve establishes monetary policy by: a. setting reserve requirements, altering the prime rate, and through federal open market operations. b. setting loan to value ratios, altering the discount rate, and through federal open market operations. c. setting reserve requirements, altering the discount rate, and through international currency transactions. d. setting bank profitability ratios, altering the discount rate, and through federal open market operations. e. none of the above

E

The Federal Open Market committee: a. establishes and administers protective consumer finance regulations b. furnishes currencies c. handles U.S. government debt and cash balances d. all the above e. none of the above

E

Federal Reserve actions that stimulate or repress the level of prices or economic activity are called defensive activities.

F, dynamic activities

Although a central bank does not necessarily operate for profit, it generally deals directly with the public

F, it does not deal directly with the public, you can't have an account at the Fed

The Federal Reserve has no power to regulate the overseas activities of member banks and bank holding companies.

F, it has broad powers, this allows US banks to be competitive with institutions of host countries in financing US trade and investment overseas

Empirical evidence shows that in countries where central banks are relatively independent from their governments, there has been higher inflation and lower economic growth rates than in countries where central banks are closely tied to their governments.

F, lower inflation and higher economic growth

Discount policy is still a major instrument of monetary policy

F, not any longer

The Federal Reserve Act of 1913 provided that all national and state-chartered banks were to become members of the Fed.

F, only national banks are required to be members

The three primary means that the Fed can use to exercise monetary policy includes closed market operations, stabilizing reserve requirements, and freeing the Federal discount rate

F, open market, changing reserve requirements, changing the Federal discount rate

The Fed would be practicing contractionary monetary policy if it caused a decrease in market interest rates

F, the Fed buys government securities to decrease interest rates → more money in circulation which is expansionary monetary policy

The Fed prefers to change reserve requirements rather than to use open market operations.

F, the Fed prefers open market operations (its most frequently used tool)

Member banks of the Federal Reserve System may not borrow from the Fed.

F, the discount window

The minimum amount of total reserves that depository institutions must hold are called fractional reserves

F, they are required reserves within a fractional reserve system

Open market operations are similar to discount operations in that they increase or decrease bank reserves at the initiative of the Fed

F, they differ from discount operations in this respect, the Fed decides to buy or sell securities with its open market operations which affects bank reserves, if the Fed changed the discount rate the individual banks decide if they want to borrow more or less from the Fed so the banks decide if the change in discount rate will affect bank reserves

If excess reserves are near zero, then a reduction of a bank's reserves will cause the system to loosen credit.

F, this will tighten credit

The only bank asset that can be counted as reserve is deposits with the Reserve Banks.

F, vault cash is included

Federal Reserve actions that meet the credit needs of individuals and institutions, clearing checks, and supporting depository institutions are called accommodative activities.

T

The Consumer Credit Protection Act requires that lenders clearly explain consumer credit costs and prohibits overly high-priced credit transactions.

T

The Fed discount rate is the interest rate that a bank must pay to borrow from its regional Federal Reserve Bank

T

The Fed lending rate to depository institutions was consistently lower than the bank prime lending rate during the 1980-2012 period.

T

The Federal Open Market Committee directs open market operations by buying and selling securities which are the primary instruments of exercising monetary policy.

T

The Federal Reserve System (Fed), the central bank of the United States, is responsible for setting monetary policy and regulating the banking system.

T

The United States was one of the last major industrial nations to adopt a permanent system of central banking.

T

The closer to the required minimum the banking system maintains its reserves, the tighter the control the Fed has over the money creation process through its other instruments.

T

The essential requirements of a well-functioning financial system include an efficient national payments system, a flexible money supply, and a lending/borrowing mechanism to help alleviate liquidity problems when they arise.

T

The money supply can be contracted by holding the amount of reserves constant but raising the reserve requirement

T

The primary responsibility of the Fed is to formulate monetary policy which involves regulating the growth of the supply of money, and therefore regulating its cost and availability.

T

The seven members of the Federal Reserve Board of Governors are responsible for the establishment of monetary policy.

T

Total deposits can be contracted by holding the amount of reserves constant but raising the reserve requirement.

T

Under the Federal Reserve Act of 1913 State-chartered banks were permitted to join the system if they could show evidence of a satisfactory financial condition

T

When reserves are added to the banking system, depository institutions may expand their lending but are not forced to do so.

T

Banks are required by the Fed to hold reserves equal to a part of their deposits as part of the fractional reserve system of the U.S. banking system.

T, another way of saying a specified percentage

The Fed would be practicing contractionary monetary policy if, through open market operations, it is a net seller of government securities.

T, by selling securities the Fed receives money which decreases the money supply which will increase interest rate which is contractionary

The Federal Reserve Act required that ALL national banks were to become members of the Fed.

T, only national banks are required to be members, state banks can become members

Because of the National Banking Act, the volume of national bank notes depends on the government bond market rather than the seasonal or cyclical needs of the nation for currency.

T, this was the second weakness of the banking system prior to the Fed was created, banknotes could be issued only to the extent they were backed by the US government securities

Although it enjoys substantial independence in its operations, the appointive power of the president and the ability of Congress to alter its structure make the ______________ a dependent political structure while being one of the most powerful monetary organizations in the world. a. Board of Governors (BOG) b. Board of Directors (BOD) c. Governing Body (GOB) d. Financial Governors (FOG) e. none of the above

A

Currently, the Chairman of the Federal Reserve is ________________________. a. Janet Yellen b. Alan Greenspan c. Ben Bernanke d. None of the above

A

During the time period 1980 - 2012: a. the discount rate was lower than the prime rate b. the discount rate was higher than the prime rate c. the discount rate was unrelated to the prime rate d. none of the above

A

Federal Reserve actions that offset unexpected monetary developments and contribute to the smooth everyday functioning of the economy are called a. defensive actions b. dynamic actions c. accommodative actions d. none of the above

A

The most used monetary policy instrument used by the Fed is a. open market operations b. changing the discount rate c. changing the reserve requirement d. none of the above

A

Today the responsibilities of the Fed may be described as: a. those relating to monetary policy, to supervision and regulation, and to services provided for depository institutions and the government. b. those relating to fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government. c. those relating to monetary policy, to deregulation, and to services provided for depository institutions and the government. d. those relating to monetary policy, to supervision and regulation, and to services provided for homeowners and the government. e. none of the above

A

All Federal Reserve Banks have: a. check clearance facilities b. branch banks c. directors who are elected for 14-year terms d. directors who are appointed by the President of the United States

A b. branch banks (Boston District does not have a branch) c. directors who are elected for 14-year terms (3 year terms) d. directors who are appointed by the President of the United States (class A&B directors are elected by member banks)

The purpose of Regulation Z is to: a. make consumers aware of the costs of alternative forms of credit b. prohibit garnishment c. encourage depository institutions to help meet the credit needs of their communities for housing and other purposes d. regulate the overseas activities of member banks of the Federal Reserve System

A, it enacts the Truth and Lending section of the Consumer Credit Protection Act

The Board of Governors of the Federal Reserve establishes monetary policy by: a. setting reserve requirements, altering the prime rate, and through federal open market operations. b. setting reserve requirements, altering the discount rate, and through federal open market operations. c. setting reserve requirements, altering the discount rate, and through international currency transactions. d. setting bank profitability ratios, altering the discount rate, and through federal open market operations. e. none of the above

B

The Federal Open Market Committee: a. is made up of the presidents of the 12 Federal Reserve Banks b. consists of the seven members of the Board of Governors of the Fed, plus five presidents of Reserve Banks c. is appointed by the Chairman of the Federal Reserve System d. none of the above

B

The National Banking Acts of 1863 and 1864 were: a. totally eliminated under the Federal Reserve Act of 1913 b. were modified to permit greater flexibility of operations under the Federal Reserve Act of 1913 c. were unaffected by the Federal Reserve Act of 1913 d. none of the above

B

The Truth in Lending Act: a. prohibits discrimination in the granting of credit on the basis of sex, race, color, and religion b. limits liability on lost or stolen credit cards c. prohibits unfair or deceptive acts or practices on the part of banks d. requires prompt correction of errors on a revolving charge account

B

The United States created its system of central banking: a. earlier than such banks were established in other industrial nations b. later than such banks were established in other industrial nations c. to facilitate branch banking d. to facilitate international exchange operations

B

The seven-member board of the Federal Reserve that sets monetary policy is called a. the Federal Reserve Open Market Committee b. the Federal Reserve Board of Governors c. the Federal Reserve Advisory Committee d. none of the above

B

Which of the following statements would be false? The discount rate is a. an instrument of monetary policy b. frequently used as a tool of fiscal policy c. regarded as a fine-tuning mechanism d. all the above are true

B

Which of the following is not a tool used by the Fed to implement its monetary policy? a. changing reserve requirements b. changing the prime rate c. open market operations d. all of the above are tools the Fed uses

B, this is not a monetary policy tool of the Fed

Bank holding companies are supervised and examined by: a. the Comptroller of the Currency b. the FDIC c. the Federal Reserve d. internal auditors only

C

Each member of the Fed Board of Governors is appointed for a term of: a. 8 years b. 12 years c. 14 years d. none of the above

C

The __________________, passed in 1968, requires the clear explanation of consumer credit costs and garnishment procedures (taking wages or property by legal means) and prohibits overly high-priced credit transactions. a. Consumer Credit Expansion Act b. Credit Growth Act c. Consumer Credit Protection Act d. Consumer Safety Act e. none of the above

C

The basic policy instruments that the Fed uses to execute monetary policy include all of the following EXCEPT a. changing reserve requirements b. changing the discount rate c. conducting closed market operations d. all of the above are monetary policy instruments

C

The interest rate that a bank must pay to borrow from its regional federal reserve bank is called a. the Secondary Rate b. the Prime Rate c. the Discount Rate d. the Capital Rate

C

The least used monetary policy instrument used by the Fed is a. open market operations b. changing the discount rate c. changing the reserve requirement d. none of the above

C

Three essential needs of a well-operating financial system include all of the following EXCEPT: a. an efficient national payments system b. an elastic or flexible money supply c. a bank insurance system d. a lending/borrowing mechanism

C

Under the Federal Reserve Act of 1913, the number of Federal Reserve districts established is: a. 8 b. 10 c. 12 d. 25

C

Under the authority of the Federal Reserve Act of 1913: a. all national and state-chartered banks must become members of the Fed b. only national banks were permitted to become members of the Fed c. state-chartered banks were permitted to withdraw from membership with the Fed d. a system of deposit insurance was created

C

For which of the following are member banks prohibited from borrowing at the Fed's discount window? a. funds to meet reserve requirements b. funds to meet depositor withdrawal demands c. to meet business loan demands d. all the above are permitted e. none of the above are permitted

D

Member banks of the Federal Reserve System: a. must maintain all reserves with their Federal Reserve Bank b. may include deposits held at large city banks as legal reserves c. maintain levels of reserves based on the size of the city in which they are located d. are permitted to count vault cash as part of their reserves

D

The Board of Governors of the Federal Reserve System: a. consists of 7 appointed members b. sets reserve requirements c. approves discount rates as part of monetary policy d. all the above e. none of the above

D

The Federal Reserve Banks are owned by: a. commercial banks b. the U.S. Treasury c. national member banks of the Federal Reserve System d. member banks of the Federal Reserve System

D

The Federal Reserve System consists of all of the following components EXCEPT: a. Federal Reserve District Banks b. Board of Governors c. Federal Open Market Committee d. all of the above

D

The Federal Reserve System's primary method for carrying out monetary policies is: a. by the issuance of Federal Reserve notes b. through reserve requirements c. by setting the discount rates on loans to depository institutions d. through open market operations

D

Which of the following is a method by which the Federal Reserve establishes monetary policy? a. setting reserve requirements, b. altering the discount rate, c. through federal open market operations, d. all of the above methods are used. e. none of the above

D

Which of the following is not a method by which the Federal Reserve establishes monetary policy? a. setting reserve requirements, b. altering the discount rate, c. through federal open market operations, d. setting bank profitability ratios, e. none of the above

D

The five components of the Federal Reserve System include: a. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Monetary Committees. b. Nonmember banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees. c. Member banks, Federal Reserve District Banks, Board of Presidents, Federal Open Market Committee, Advisory committees. d. Member banks, Federal Reserve District Banks, Board of Governors, Federal Closed Market Committee, Advisory committees. e. none of the above

E

Today the responsibilities of the Fed may be described as: a. those relating to monetary and fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government. b. those relating to fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government. c. those relating to monetary policy, to deregulation, and to services provided for depository institutions and the government. d. those relating to monetary policy, to supervision and regulation, and to services provided for homeowners and the government. e. none of the above

E

Which of the following statements is correct? a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. b. Open-market operations don't always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to restrict deposit growth. c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to expand deposit growth. d. Increasing reserve requirements always leads to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. e. none of the above

E a. selling bonds dec deposit growth which reduces lending b. buying bonds expands deposit growth c. selling bonds restricts deposit growth d. inc in reserve requirements, dec in excess reserves, dec in volume of lending

The United States was one of the earliest major-industrial nations to adopt a permanent system of central banking

F

The ability to change the reserve requirement is a powerful tool the Fed uses frequently

F, (frequently)

A central bank is a Federal government agency that facilitates operation of the financial system and regulates growth of the money supply.

T

A major weakness of the banking system under the National Banking Acts was that the money supply could not be easily expanded or contracted to meet changing seasonal needs and/or changes in economic activity.

T

About one-third of the nation's commercial banks are members of the Fed.

T

Although not provided for in the original organization of the Fed, open market operations have become the most important and effective means of monetary control.

T

By exercising its influence on the monetary system of the United States, the Fed performs a unique and important function: promoting economic stability.

T

Federal Reserve actions that stimulate or repress the level of prices or economic activity are called dynamic actions

T

Open market operations involve the buying and selling of securities

T

The banking system of the United States is a(n) ___________ reserve system because banks are required by the Fed to hold reserves equal to a specified percentage of their deposits. a. required b. fractional c. excess d. multiplicative e. none of the above

B a. required (required reserves are a result of our fractional reserve system) b. fractional c. excess (excess reserves are a result of our fractional reserve system)

Open market operations: a. are used infrequently b. are a prime source of income for the U.S. economy c. are used by the Fed to alter bank reserves d. none of the above

C

State-chartered banks: a. automatically receive membership in the Federal Reserve System b. are prohibited from membership in the Federal Reserve System c. may be permitted to join the Federal Reserve system, given a satisfactory financial condition d. none of the above

C

Before the Federal Reserve System was created, a large part of the reserves of commercial banks was: a. in the form of state and federal government bonds b. deposited with the United States Treasury c. held as deposits with large city banks d. held as cash in their vaults

C, third weakness

The payment mechanism of the Reserve Bank includes: a. processing and clearing checks b. issuing currency and coins c. electronic forms of payment d. all the above

D

The Fed Board of Governors is composed of seven members who are appointed for a term of 12 years

F, 14 year terms

The accommodative actions of the Fed includes buying treasury securities.

F, buying treasury securities is an instrument of the Fed's monetary policy, it is not an accomodative function of the Fed

Fannie Mae was created to support the financial markets by purchasing home mortgages and automobile loans from banks so that the proceeds could be lent to other borrowers.

F, not automobile loans

All commercial banks are members of the Fed

F, only national banks are required to be members