CH 4 Practice Problems

The seven-member board of the Federal Reserve that sets monetary policy is called

. the Federal Reserve Board of Governors

Under the Federal Reserve Act of 1913, the number of Federal Reserve districts established is:

12

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

14 year terms

Each member of the Fed Board of Governors is appointed for a term of:

14 years

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.

Board of Governors (BOG

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.

Consumer Credit Protection Act

The ____________ conducts monetary policy for the European countries that have adopted the euro as their common currency.

European Central Bank

The ___________conducts monetary policy for the European countries that adopted the euro as their common currency

European Central Bank

_____________ 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.

Fair Credit Billing Act

T/F 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.

False

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

False

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

False

T/F The accommodative actions of the Fed includes buying treasury securities.

False: buying treasury securities is an instrument of the Fed's monetary policy, it is not an accommodative function of the Fed

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

False: dynamic activities

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

False: it does not deal directly with the public, you can't have an account at the Fed, only banks and the Treasury have accounts at the Fed

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

False: it has broad powers, this allows U.S. banks to be completive with institutions of host countries in financing U.S. trade and investment overseas

T/F 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.

False: lower inflation and higher economic growth

T/F Discount policy is still a major instrument of monetary policy.

False: not any longer

T/F All commercial banks are members of the Fed.

False: only national banks are required to be members

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

False: only national banks are required to be members

T/F he 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.

False: open, changing, changing

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

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

T/F The Fed prefers to change reserve requirements rather than to use open market operations

False: the Fed prefers open market operations (its most frequently used tool)

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

False: the discount window

T/F minimum amount of total reserves that depository institutions must hold are called fractional reserves.

False: they are required reserves within a fractional reserve system

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

False: 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 changes 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 the discount rate will affect bank reserves

T/F If excess reserves are near zero, then a reduction of a bank's reserves will cause the system to loosen credit.

False: this will tighten credit

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

False: vault cash is included

Select ALL of the following that are components of the Federal Reserve System:

Federal Reserve District Banks; Board of Governors; Federal Open Market Committee

Currently, the Chairman of the Federal Reserve is _______________________.

Janet Yellen

The five components of the Federal Reserve System include:

Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees

Select ALL of the following that are not components of the Federal Reserve System:

Monetary Policy Committee; Congressional Budget Office; President of the United States

_____________ has become the most important and effective means of monetary and credit control.

Open market operations

Which of the following statements is correct?

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.

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

True

T/F 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.

True

T/F About one-third of the nation's commercial banks are members of the Fed.

True

T/F 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.

True

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

True

T/F 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

True

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

True

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

True

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

True

T/F In recent years the Fed has also engaged in a nontraditional monetary policy called quantitative easing

True

T/F Open market operations involve the buying and selling of securities

True

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

True

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

True

T/F The Fed lending rate to depository institutions was consistently lower than the bank prime lending rate in recent years

True

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

True

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

True

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

True

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

True

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

True

T/F 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.

True

T/F 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

True

T/F The money supply can be contracted by holding the amount of reserves constant but raising the reserrequirement

True

T/F 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

True

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

True

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

True

T/F 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.

True

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

True

Three essential needs of a well-operating financial system include all of the following EXCEPT:

a bank insurance system

In addition to the clearing of checks through Federal Reserve Banks, the Fed accommodates check clearing through:

a group of regional check-processing centers

The effect of an increase of required reserves by the Fed is:

a. a decrease in loanable funds of depository institutions; reduces excess reserves

For which of the following are member banks prohibited from borrowing at the Fed's discount window?

all the above are permitted

The members of the Fed Board of Governors are:

appointed by the President of the United States with the advice and consent of the Senate

Member banks of the Federal Reserve System:

are permitted to count vault cash as part of their reserves

Open market operations:

are used by the Fed to alter bank reserves

A central bank serves the nation:

by regulating money supply growth

Select ALL of the following that are basic policy instruments that the Fed uses to execute monetary policy:

changing reserve requirements; changing the discount rate; conducting open market operations

Which of the following is not a tool used by the Fed to implement its monetary policy?

changing the prime rate

The least frequently used monetary policy instrument used by the Fed is

changing the reserve requirement

All Federal Reserve Banks have:

check clearance facilities

The accommodative activities of the Federal Reserve System are:

clearing checks; meeting the credit needs of individuals and institutions; supporting depository institutions

Members of the Federal Reserve System may include:

commercial banks with a national charter

Select ALL of the following that are not basic policy instruments that the Fed uses to execute monetary policy:

conducting primary market operations; regulating and overseeing the New York Stock Exchange; determining the national budget

The Federal Open Market Committee

consists of the seven members of the Board of Governors of the Fed, plus five presidents of Reserve Banks

Federal Reserve actions that offset unexpected monetary developments and contribute to the smooth everyday functioning of the economy are called

defensive actions

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.

efficient payments mechanism

One significant feature of DIDMCA was that it:

expanded Fed control over the reserve requirements of non-member banks

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.

fractional

Which of the following statements is false? The discount rate is

frequently used as a tool of fiscal policy

The Fed Board of Governors:

has seven members appointed for 14-year term

Before the Federal Reserve System was created, a large part of the reserves of commercial banks was:

held as deposits with large city banks

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.

intradistrict, interdistrict

The United States created its system of central banking:

later than such banks were established in other industrial nations

The Truth in Lending Act:

limits liability on lost or stolen credit cards

The purpose of Regulation Z is to:

make consumers aware of the costs of alternative forms of credit

State-chartered banks:

may be permitted to join the Federal Reserve system, given a satisfactory financial condition

The Federal Reserve Banks are owned by:

member banks of the Federal Reserve System

Under the authority of the Federal Reserve Act of 1913:

member banks were required to purchase capital stock in the Federal Reserve Banks of their district

The Board of Governors of the Federal Reserve System:

none of the above

The Federal Open Market committee:

none of the above

The chairman of the Federal Reserve System:

none of the above

The most frequently used monetary policy instrument used by the Fed is

open market operations

The payment mechanism of the Reserve Bank includes:

processing and clearing checks; issuing currency and coins; electronic forms of payment

A nontraditional monetary policy approach to stimulate economic activity when conventional monetary policy methods are ineffective is called

quantitative easing

The primary responsibility of the Federal Reserve System is to:

regulate the growth of the money supply

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.

restrictive

The Board of Governors of the Federal Reserve establishes monetary policy by:

setting reserve requirements, altering the discount rate, and through federal open market operations

Which of the following is a method by which the Federal Reserve establishes monetary policy?

setting reserve requirements; altering the discount rate; through federal open market operations

Under the authority of the Federal Reserve Act of 1913:

state-chartered banks were permitted to withdraw from membership with the Fed

The dynamic actions of the Federal Reserve System:

stimulate or repress the level of prices or economic activity

The interest rate that a bank must pay to borrow from its regional federal reserve bank is called

the Discount Rate

Which of the following statements is correct about the Fed's open-market operations? To encourage deposit growth

the Fed should buy bonds which increases the money supply and increases lending

Which of the following statements is correct about the Fed's open-market operations? To restrict deposit growth

the Fed should sell bonds which reduces the money supply and reduces lending,

Bank holding companies are examined by:

the Federal Reserve

One of the major weaknesses of the banking system before the Federal Reserve System was set up was:

the arrangement for holding reserves

In recent years:

the discount rate was lower than the prime rate

The Fed's service functions to depository institutions and the U.S. government include:

the payments mechanism; electronic funds transfers; net settlements facilities; safekeeping and transfer of securities

The discount rate is:

the rate a bank must pay to borrow from the Fed

The percentage of deposits that must be held as reserves is called

the required reserve ratio

Today the responsibilities of the Fed may be described as:

those relating to monetary policy, to supervision and regulation, and to services provided for depository institutions and the government.

The Federal Reserve System's primary method for carrying out monetary policies is:

through open market operations

The Federal Open Market Committee:

was created under a provision of the Banking Act of 1935

The National Banking Acts of 1863 and 1864 were:

were modified to permit greater flexibility of operations under the Federal Reserve Act of 1913