ECON - Money and Banking Final

Most economists agree that a well-designed central bank would a. Be independent of political pressure b. make its policy actions difficult to interpret c. be accountable only to other banks d. be run by one key policymaker

a. Be independent of political pressure

1. Select the criteria used to judge a central banks independence- a. Budgetary independence b. long terms for members c. cabinet or ministry level of authority d. irreversible decisions

a. Budgetary independence b. long terms for members d. irreversible decisions

Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision a. Immediately after the meeting b. 48 hours after the meeting adjourns c. within five business days d. 24 hours after the meeting adjourns

a. Immediately after the meeting

An open market sale of U.S. Treasury securities by the Fed will cause the Feds balance sheet to show a. a decrease in the asset of securities and a decrease in the liability of reserves b. an increase in the liability of reserves c. no change in the size of the balance sheet just the composition of assets will change from securities to cash d. an increase in the asset category of securities and the liability category of reserves

a. a decrease in the asset of securities and a decrease in the liability of reserves

Interest rate volatility is a problem because it a. adds to uncertainty thereby diminishing an investment b. decreases risk c. can impact productivity in a positive way d. can make financial decisions less difficult

a. adds to uncertainty thereby diminishing an investment

Currently the requirement of holding a non-interest bearing reserve account at the Fed must be met by a. all banks, member or not b. only member banks c. member banks and non-member banks with over $100 million in assets d. only nationally chartered banks.

a. all banks, member or not

A central bank sale of securities from its portfolio will a. decrease the size of its balance sheet b. have no impact at all on the balance sheet c. only change the composition of its liabilities d. only change the composition of its assets

a. decrease the size of its balance sheet

In the United States, loans made by the Federal Reserve to banks are a. discount loans b. reserves c. discount loans and reserves d. discount loans and foreign exchange reserves

a. discount loans

The interest rate that the FOMC currently chooses to control is the a. federal funds rate b. 30-year treasury bond rate c. discount rate d. prime rate

a. federal funds rate

One monopoly that modern central banks have is in a. issuing currency b. making loans to banks c. regulating commercial banks d. issuing U.S. Treasury securities

a. issuing currency

1. In its role as bank for the US government the Federal Reserve performs which of the following services? (select all that apply) a. issuing new currency b. making discount loans c. maintaining the US treasury's bank account d. managing U.S. Treasury borrowings e. clearing paper checks and transferring funds electronically

a. issuing new currency b. making discount loans c. maintaining the US treasury's bank account d. managing U.S. Treasury borrowings

Discount lending is part of the feds function of a. lender of last resort b. open market operations c. the government's bank d. regulation of banking

a. lender of last resort

Which of the following items would appear as assets on the central banks balance sheet? (select all that apply) a. loans b. securities c. currency d. foreign exchange reserves e. accounts of commercial banks

a. loans b. securities d. foreign exchange reserves e. accounts of commercial banks

One reason for having a monetary policy framework is that it a. makes clear what specific goals the central bankers are pursuing b. provide leeway for central bankers to change their goals without communicating the change and disrupting financial markets c. provide central bankers the secrecy needed to perform their jobs effectively d. can make goal setting vague enough so that the central bankers can always claim success

a. makes clear what specific goals the central bankers are pursuing

The European equivalent of the US market federal funds rate is called the a. overnight cash rate b. target refinancing rate c. European discount rate d. overnight repurchase rate

a. overnight cash rate

Select the types of loans the Fed makes a. primary credit b. conditional credit c. seasonal credit d. secondary credit e. non-banking credit

a. primary credit c. seasonal credit d. secondary credit

If the market federal funds rate were below the target rate, the response from the Fed would likely be to a. raise the IOER (interest rate on excess reserves) b. purchase U.S. Treasury securities c. sell U.S. Treasury securities d. raise the discount rate

a. raise the IOER (interest rate on excess reserves)

When an individual withdraws funds from a checking account the bank's balance sheet a. shrinks, and the size of the Feds balance sheet is not affected b. shrinks and so does the fed's balance sheet c. shrinks and the size of the feds balance sheet increases d. stays the same in size and the size of the feds balance sheet shrinks

a. shrinks, and the size of the Feds balance sheet is not affected

The relationship between stability and economic growth is best summarized by which of the following statements? a. stability results in higher output growth rates b. inflation volatility results in higher output growth rates c. there is no correlation between the volatility in growth rates and annual output growth d. the more volatile the growth rate the higher is the annual output growth

a. stability results in higher output growth rates

One argument for an independent central bank is that a. successful monetary policy requires a long-time horizon usually well beyond the next election of most public officials b. Without independence, competent people would not take a position in a central bank. c. the central bank usually hires more competent individuals than the Treasury Department or other finance ministries d. central bankers have a short-run focus that usually corrects problems faster

a. successful monetary policy requires a long-time horizon usually well beyond the next election of most public officials

If the Federal Reserve is to be independent, then the quantity of securities it purchases must be determined by a. the Federal Reserve itself b. Congress c. the amount the public does not want to purchase at the going price d. the Treasury

a. the Federal Reserve itself

The ability to create money means the central bank can control a. the availability of money and credit in a country's economy b. tax revenue c. the unemployment rate d. government expenditures

a. the availability of money and credit in a country's economy

Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact of Harry's deposit on the monetary base? a. the monetary base did not change b. the monetary base increased by $1000 c. The monetary base decreased by $1000 d. the monetary base increased by more than $1000

a. the monetary base did not change

Central bank accountability means that central bankers a. will report on the progress of goals that are established by politicians b. are not accountable to any elected officials c. are only accountable to the banks in their respective countries d. must hold press conferences to explain their monetary policy views

a. will report on the progress of goals that are established by politicians

Which one of the following is responsible for invoking the feds emergency powers? a. FOMC b. Board of Governors c. Fed Chairman d. a majority of the Federal Reserve Bank presidents

b. Board of Governors

To be independent, a central bank must have a. policies that can be overturned only by the president b. Control of its own budget c. board members were appointed for very short terms d. the chairperson served as a member of the president's cabinet

b. Control of its own budget

In terms of economic growth, the central bank would like to a. Have the maximum growth rate possible b. Keep the economy close to its potential or sustainable rate of growth c. keep the growth rate averaging zero d. balance every recession with a boom

b. Keep the economy close to its potential or sustainable rate of growth

In the United States, monetary policy is formed by a. An individual advised by a close group of people b. a committee c. the president and approved by Congress d. the chairman of the Federal Reserve and can only be overturned by the presidents of the regional Federal Reserve Banks

b. a committee

The Taylor rule is a. the formula for setting monetary policy that is followed explicitly by the FOMC b. add approximation that seeks to explain how the FOMC sets their target c. an explicit tool used by the ECB but not the Fed d. a rule adopted by Congress to make the Feds monetary policy more accountable to the public

b. add approximation that seeks to explain how the FOMC sets their target

Secondary credit provided by the Fed is designed for banks that a. qualify for a lower interest than what is available under primary credit b. are in trouble and cannot obtain a loan from anyone else c. want to borrow without putting up collateral d. are foreign

b. are in trouble and cannot obtain a loan from anyone else

The federal funds rate is the interest rate a. The Fed charges banks who borrow from it b. banks charge each other for overnight loans on excess reserves held at the Fed c. The US treasury charges banks that need emergency funds d. the FDIC charges banks that need to borrow from it to meet depositor demands

b. banks charge each other for overnight loans on excess reserves held at the Fed

1. Which of the following items would appear as liabilities on a central bank's balance sheet? (select all that apply) a. loans b. currency c. foreign exchange reserves d. the government's account e. accounts of commercial banks

b. currency d. the government's account e. accounts of commercial banks

The market for reserves derives from the fact that a. reserves pay a relatively high return b. desired reserves do not always equal actual reserves c. the Fed refuses to lend to banks d. the banks do not want excess reserves

b. desired reserves do not always equal actual reserves

Conventional policy tools available to the Fed include: (select all that apply) a. currency to deposit ratio b. discount rate c. target federal funds rate range d. reserve requirement e. targeted asset purchases

b. discount rate c. target federal funds rate range d. reserve requirement e. targeted asset purchases

The European Central Bank's equivalent of the Feds open market operations (OMO) is a. Very similar to the Feds OMO in that they are highly centralized b. dissimilar to the Feds OMO in that the operations are conducted at all 19 of the national central banks simultaneously c. similar to the Feds OMO in that they accept only U.S. Treasury securities in their refinancing operations d. dissimilar to the Feds OMO because fewer banks participate in the auctions of these securities

b. dissimilar to the Feds OMO in that the operations are conducted at all 19 of the national central banks simultaneously

The Federal Reserve Act explicitly requires that the Board of Governors represent each of the following except which one? a. commercial interests b. foreign interests c. financial interests d. agricultural interests

b. foreign interests

The FOMC controls the real interest rate a. if inflation changes quickly b. if inflation doesn't change quickly c. only if it adjusts the federal funds rate to match the changes in the rate of inflation d. only on an annual basis

b. if inflation doesn't change quickly

If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to a. decrease b. increase c. not change d. decrease since failing banks lost theirs

b. increase

When the Fed wants to tighten monetary policy it is likely to a. increase discount loans b. increase the IOER (interest rate on excess reserves) c. purchase U.S. Treasury securities d. Sell U.S. Treasury securities

b. increase the IOER (interest rate on excess reserves)

Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets a. increased by $1000 when he deposited the $1000 in his checking account b. increased when he received the $1000 in currency from his grandfather c. and his liabilities increased by $1000 when he deposited the funds into his checking account. d. increased by $1000 and his liability is decreased by $1000 but he deposited the funds into his checking account

b. increased when he received the $1000 in currency from his grandfather

The main problem from inflation as seen by most economists is that a. inflation raises prices more than wages b. inflation creates risk c. inflation harms lenders more than it benefits borrowers d. during periods of inflation some prices fall

b. inflation creates risk

The primary monetary policy tool most used by central banks today is a. the quantity of M1 b. interest rates c. the size of the money multiplier d. the quantity of M2

b. interest rates

The correlation between high rates of inflation and economic growth is a. direct; one brings about the other b. inverse; high inflation usually means low economic growth c. nonexistent; there is no correlation between these measures d. direct at low rates of economic growth and inverse at higher rates

b. inverse; high inflation usually means low economic growth

The chairman of the Board of Governors a. serves a four-year term that cannot be renewed b. is appointed by the US president, selected from the Board of Governors c. search the same four-year term as the US president d. serves an 8 year-term

b. is appointed by the US president, selected from the Board of Governors

Considering the Federal Reserve Districts, which of the following is true? a. with the exception of New York, no district coincides with a single state b. no district coincides with the single state c. some districts are made-up of single states d. the districts are divided with equal population

b. no district coincides with the single state

The Fed will make a discount loan to a bank during a crisis a. no matter what condition the bank is in b. only if the bank is sound financially and can provide collateral for the loan c. but if the bank doesn't have collateral the interest rate is higher d. only if the bank would fail without the loan

b. only if the bank is sound financially and can provide collateral for the loan

Seasonal credit provided by the Fed is not as common as it used to be because a. there are fewer banks in these areas b. other sources for long term loans have developed for banks in these areas c. it has been replaced by secondary credit d. much of the credit was not repaid

b. other sources for long term loans have developed for banks in these areas

A primary goal of central banks is to a. reduce the idiosyncratic risk that impacts specific investments b. reduce systematic risk c. keep stock and bond prices high d. keep inflation rates high

b. reduce systematic risk

How many members are on the Board of Governors of the Federal Reserve System? a. twelve, one for each district. b. seven c. nine d. fourteen

b. seven

The three branches of the Federal Reserve System include each of the following, except which one? a. the Board of Governors b. the Federal Deposit Insurance Corporation c. the Federal Open Market Committee d. the twelve regional Federal Reserve Banks

b. the Federal Deposit Insurance Corporation

A good monetary policy instrument is a. observable only to the monetary policy officials b. tightly linked to monetary policy objectives c. controllable and rigid d. difficult to change

b. tightly linked to monetary policy objectives

Federal fund loans are a. secured loans between the banks and the Fed b. unsecured loans c. collateralized loans between banks d. guaranteed by the FDIC

b. unsecured loans

If the required reserve rate is expressed by RD and deposits by D, the formula for calculating the amount of required reserves is a. (1/ RD)D b. 1/ RD c. (RD)D d. D/ RD

c. (RD)D

Monetary policy in the United States is under the control of the a. U.S. Treasury b. President c. Federal Reserve d. U.S. Senate

c. Federal Reserve

The Governors of the Federal Reserve System are appointed by the a. member banks from their home district b. board of directors of the Reserve Bank from their home district c. President of the United States d. Chairman of the Federal Reserve System

c. President of the United States

When the Fed makes a discount loan the impact on the feds balance sheet will reflect a. no change in liabilities but an increase in assets b. a decrease in assets and liabilities c. an increase in assets and liabilities d. an increase in assets and a decrease in liabilities

c. an increase in assets and liabilities

The stability of the financial system is enhanced by the ability of central banks to a. Provide loans to insolvent banks b. provide deposit insurance c. be a lender of last resort d. convert poorly run banks into branches of the central bank

c. be a lender of last resort

The reserve requirement does not meet all the criteria of a good monetary policy tool because it a. is not controllable b. is not observable c. cannot be quickly changed d. has a predictable impact on the economy

c. cannot be quickly changed

The Fed can do which of the following in the economy? a. change the interest rates but not the supply of money b. change the supply of money but not the interest rates c. change both the interest rates and the supply of money d. change neither interest rates nor the supply of money

c. change both the interest rates and the supply of money

The primary purpose of meetings of the FOMC is to a. set the required reserve rate b. set the discount rate c. decide on how to influence the financial conditions d. set the prime rate

c. decide on how to influence the financial conditions

One trait a central bank has over other businesses, including banks, is that it a. receives all of its funding from the government b. can control the size of its balance sheet c. doesn't have stockholders d. doesn't have a board of directors

c. doesn't have stockholders

The most a bank could lend at any time without altering its assets is an amount equal to its a. checkable deposits b. reserves c. excess reserves d. net worth

c. excess reserves

A central bank holds foreign exchange reserves for a. diversification purposes b. safekeeping c. foreign exchange interventions d. diversification and safekeeping

c. foreign exchange interventions

The simple deposit expansion multiplier it's really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it a. ignores how central banks could change their balance sheet b. assumes bank hold excess reserves c. ignores the fact that people might change their currency holdings d. assumes there are no changes in vault cash

c. ignores the fact that people might change their currency holdings

A central bank's purchase of security is made by writing checks on itself will a. decrease the size of its balance sheet b. have no impact at all on the balance sheet c. increase the size of the balance sheet d. only change the composition of its assets

c. increase the size of the balance sheet

Discount lending by the Fed a. is the key component of monetary policy b. is more important today than in years past c. is usually small except in times of crisis d. amounts to five billion dollars in volume during an average week

c. is usually small except in times of crisis

The main asset held by a central bank in its role as the bankers bank is a. foreign exchange reserves b. currency c. loans d. securities

c. loans

The services that the Federal Reserve provides to foreign central banks and other international organizations are handled a. directly by the Board of Governors in Washington DC b. by any of the Reserve Banks c. only by the Reserve Bank in New York d. only by the Reserve Bank in San Francisco

c. only by the Reserve Bank in New York

To say that monetary policy is transparent implies that a. anyone could figure out what the correct policy should be b. monetary policy should not be so difficult that most people couldn't understand it c. policymakers offer plausible explanations for their decisions along with supporting data d. When faced with the same problem, policymakers will always react the same way

c. policymakers offer plausible explanations for their decisions along with supporting data

To obtain a discount loan from the Fed a commercial bank must a. sure that it will fail if it does not obtain the loan b. prove that the loan will be used to make loans c. provide collateral d. agree to more frequent examinations

c. provide collateral

The FOMC a. Set the federal funds rate b. uses the discount rate as its primary policy tool c. sets the target federal funds rate range d. set the dealers spread as the difference between the target and actual federal funds rate

c. sets the target federal funds rate range

Central banks are in a position to control risk in the economy because they control a. the unemployment rate b. the economy's real growth rate c. short term interest rates d. tax rates

c. short term interest rates

Primary credit extended by the Fed is a. for banks needing long term loans to work out financial problems b. the highest interest rate loans offered by the Fed c. short-term usually overnight loans d. loans offered at the prime interest rate for periods exceeding 30 days but less than one year.

c. short-term usually overnight loans

The real power in the FOMC lies with a. the President of the New York Fed Bank b. The System Open Market Manager c. the Chairman of the Board of Governors d. no single individual; all participants have an equal share of the power

c. the Chairman of the Board of Governors

The interest rates changes that result from the FOMC meetings can only be altered by a. Congress b. the Secretary of the Treasury during an economic crisis c. the FOMC d. by the US president during a time of crisis

c. the FOMC

Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed? a. the Bluebook and the Beigebook b. the Beigebook and the Greenbook c. the Tealbook d. the Bluebook and the Greenbook

c. the Tealbook

Which of the following books used at the FOMC meetings contains the Board staffs economic forecast for the next few years? a. the Bluebook b. the Beigebook c. the Tealbook d. both the Beigebook and the Bluebook

c. the Tealbook

The Federal Reserve System is composed of a. five branches with clear responsibilities b. six branches with overlapping responsibilities c. three branches with overlapping responsibilities d. twelve branches with clear responsibilities

c. three branches with overlapping responsibilities

The Federal Reserve Bank of New York is unique from other reserve banks because it is a. the only regional Bank that serves just one state b. the only regional Bank located in a financial center c. where the Federal Reserve systems portfolio is managed d. the oldest and therefore the largest

c. where the Federal Reserve systems portfolio is managed

The Central Bank in the United States is the a. Bank of America b. U.S. Treasury c. Bank of the United States d. Federal Reserve

d. Federal Reserve

Reserves are a. assets of the central bank and liabilities of the US treasury b. assets of the central bank and liabilities of commercial banks c. liabilities of commercial banks and assets of the US treasury d. assets of commercial banks and liabilities of the central bank

d. assets of commercial banks and liabilities of the central bank

The interest rate decisions made by the Federal Open Market Committee a. can be overridden by the president b. can be overridden by the secretary of the treasury c. can be overridden by the US Senate by a two-thirds majority d. cannot be overridden by anyone outside of the Federal Reserve

d. cannot be overridden by anyone outside of the Federal Reserve

One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed a. can control the stock market b. can reduce the idiosyncratic risk of investing but not the systematic risk c. can eliminate the risk from investing d. cannot prevent a stock market decline

d. cannot prevent a stock market decline

The monetary base is the sum of a. reserves and M2 b. M1 and the reserves c. currency in the hands of the public, reserves, and M1 d. currency in the hands of the public and reserves in the banking system

d. currency in the hands of the public and reserves in the banking system

Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the banking systems balance sheet will be to a. only reduce checkable deposits by $500 b. increased reserves and reduced checkable deposits by $500, respectively c. only reduced reserves by the required reserve rate times $500 d. decreased reserves and checkable deposits by $500, respectively

d. decreased reserves and checkable deposits by $500, respectively

The Fed can control a. the amount of reserves, but cannot control the monetary base b. the composition of the monetary base but cannot affect the market interest rate c. the size of the monetary base but not the price of its components d. either the size of the monetary base or the price of its components

d. either the size of the monetary base or the price of its components

The rationale for the existence of central banks is mainly that a. financial markets lack transparency b. they are needed for the supervision of banks c. financial intermediation cannot occur without a central bank d. financial systems are prone to periods of extreme volatility

d. financial systems are prone to periods of extreme volatility

Often central banks that employ inflation targeting have hierarchal mandate that means that a. hitting the inflation target is the first priority after all stated objectives are reached b. hitting the inflation target is the only objective c. the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers d. hitting the inflation target comes first and everything else comes second

d. hitting the inflation target comes first and everything else comes second

The fact that there is a market for federal funds enables banks to a. make fewer loans than they would otherwise b. borrow more from the Fed c. hold less in required reserves d. hold a lower level of excess reserves than they would otherwise hold

d. hold a lower level of excess reserves than they would otherwise hold

The policy directive that is produced from the FOMC meeting a. details the exact amount of U.S. Treasury securities the system open market account manager is to purchase or sell b. set the specific discount rate for the next 8 eight weeks c. Set the specific range that the target interest rate can fall within d. instructs the staff of the New York fed on how to manage the feds balance sheet

d. instructs the staff of the New York fed on how to manage the feds balance sheet

If the market federal funds rate were above the target rate, the response from the Fed would likely be to a. purchase U.S. Treasury securities b. sell U.S. Treasury securities c. lowered the discount rate d. lower the IOER (interest rate on excess reserves)

d. lower the IOER (interest rate on excess reserves)

1. Discount loans are a. initiated by the Federal Reserve b. made when banks need relatively small amounts of cash for the long term c. made when banks need relatively large amounts of cash for the long term d. made when banks need relatively small amounts of cash for the short term

d. made when banks need relatively small amounts of cash for the short term

One reason given for more central bankers releasing decisions publicly is that a. for monetary policy to work, people must be taken by surprise b. most people do not understand monetary policy so it really doesn't do any harm to release the decisions publicly c. it gives central banks across the world a chance to coordinate their policies d. monetary policy is more effective than households and businesses can understand and anticipate it.

d. monetary policy is more effective than households and businesses can understand and anticipate it.

If Bank ABC sells a $100,000 U.S. Treasury bonds to the Fed, Bank ABC's required reserves will a. increase by $100,000 b. increase but by less than $100,000 c. decrease d. no change

d. no change

Today reserve requirements are a. set in a way that makes reserve demand highly unpredictable b. changed whenever the target federal funds rate is changed c. changed instead of making changes in the discount rate d. not often used as a direct tool of monetary policy

d. not often used as a direct tool of monetary policy

Buying and selling U.S. Treasury securities for the feds own portfolio is called a. managing the float b. discount buying c. reserve adjustment d. open market operations

d. open market operations

Vault cash is not included in the central bank's liability category of currency because it a. counts as currency b. is not part of reserves c. is not available to meet depositors' withdrawal demands d. serves the insurance function for which reserves are designed

d. serves the insurance function for which reserves are designed

The principal tool the Fed uses to keep the federal funds rate close to the target is a. the required reserve rate b. discount lending c. open market operations d. the IOER (interest rate on excess reserves)

d. the IOER (interest rate on excess reserves)

The likelihood that the Fed will implement a change that will seriously harm the economy is minimized by the fact that a. only bright well-intentioned people are appointed to key roles and the Fed b. Congress can remove the chairman of the Fed at any time c. the Board of Governors ultimately must answer to the US president since he can replace them d. there is decision making by committee

d. there is decision making by committee

The number of regional Federal Reserve Banks is a. nine. b. seven c. five d. twelve

d. twelve