04.04 The Feds Toolbox Quiz

(04.04 LC) Which tool does the Federal Reserve use to control monetary policy through bank borrowing? A) Discount rate B) Money creation C) Open-market operations D) Reserve requirement

A) Discount rate CORRECT The discount rate is the interest rate the Federal Reserve charges banks to borrow currency.

(04.04 MC) Which of the following actions would the Federal Reserve most likely take to rein in spiraling inflation? A) Generate more money B) Increase reserve requirement C) Lower the discount rate D) Buy of government securities

B) Increase reserve requirement CORRECT To rein in spiraling inflation, or the steep rise of prices in a short time, the Fed could increase the reserve requirement. The reserve requirement is the percentage of a bank's deposits that must be kept as currency and coin in the bank. By raising the reserve requirement, the Fed can lower the amount of currency in circulation and thereby slow inflation.

(04.04 MC) Which of the following actions would the Federal Reserve most likely take during an economic recession? A) Increase reserve requirement B) Raise interest rates C) Lower discount rate D) Sell government securities

C) Lower discount rate CORRECT During an economic recession, the Fed would want to increase the spending power of citizens. Lowering the discount rate, which is the interest rate banks pay to borrow currency, would increase the ability of banks to give loans. This is an expansionary action by the Fed.

(04.04 MC) Which of the following actions would the Federal Reserve most likely take to reduce unemployment? A) Raise discount rate B) Increase reserve requirement C) Restrict money supply D) Buy government securities

D) Buy government securities CORRECT If unemployment is high, the Fed may choose to buy government securities. This would increase the available money supply, increasing the purchasing power of businesses and individuals, stimulating the economy, which would in turn lower the unemployment rate.

(04.04 LC) Through which tool does the Federal Reserve affect money available for banks to loan? A) Discount rate B) Money multiplier C) Open-market operations D) Reserve requirement

D) Reserve requirement CORRECT The reserve requirement is the percentage of a bank's deposits that must be kept as currency and coin in the bank. Changing the reserve requirement can make more or less money available to loan.