test 3

Which of the following men has NOT served as Chairman of the Board of Governors?

Milton Friedman

The only state to have two Federal Reserve District Banks is

Missouri

If C represents currency, D represents checkable deposits, N represents savings accounts, and MM represents money market mutual funds, which of the following equations is correct?

M2 = C + D + N + MM

During the financial crisis, the Fed introduced three new policy tools connected with bank reserve accounts. Which of the following is NOT one of those three new tools?

open market operations

In managing the monetary base, the Fed most often uses

open market operations

What is the most direct method the Fed uses to change the monetary base?

open market operations

Which of the following is NOT an activity carried out by Federal Reserve district banks?

open market operations

Expansionary monetary policy consists of all of the following EXCEPT

open market sales

How does the Open Market Trading Desk conduct its operations?

over-the-counter electronically with private securities dealers

How can the Fed reduce the implicit tax on banks resulting from reserve requirements?

paying interest on reserves

The largest institutional participants in capital markets are

pension funds

In a defined contribution pension plan

pension income varies depending on how well the plan's investments have done.

Primary dealers are those

permitted to trade directly with the Fed.

A benefit of hedge funds relative to mutual funds is

possible higher returns

The law of large numbers allows insurance companies to

predict the average number of occurrences of insurable events in a large population of policyholders.

Which of the following is considered to be a goal of monetary policy?

price stability

Which of the following is the mandate of the European Central Bank?

price stability

When economists and policymakers refer to the Fed's dual mandate, they are referring to

price stability and maximum employment

Discount loans available to healthy banks which can be used for any purpose are called

primary credit

Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?

principal risk

The regional Federal Reserve Banks are owned by

private banks which are part of the Federal Reserve System in each region.

The Employment Act of 1946 codified the federal government's commitment to

promote high employment consistent with price stability

The margin requirement set by the Federal Reserve is the

proportion of the purchase price of a security that an investor must pay in cash.

When investment banks buy or sell securities on their own account, it's called

proprietary trading.

What was the primary reason that Congress initiated deposit insurance in the 1930s?

protect the deposits of individual savers

Business finance companies

purchase accounts receivable of small firms at a discount.

During and after the financial crisis of 2007-2009, the Fed greatly increased the supply of reserves through three rounds of quantitative easing by

purchases of both long-term Treasury securities and mortgage-backed securities.

What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system?

push more trading of derivatives onto exchanges

Finance companies

raise funds in financial markets to lend to households and firms

If the Fed wished to decrease the money supply, it could

raise the interest rate it pays on reserves.

Depository institutions such as savings and loans have deposits with the Fed that ________, and financial institutions such as Fannie Mae have deposits with the fed that ________.

receive interest; do not receive interest

What are the two main objectives of policymakers in restoring the Glass-Steagall Act?

reduce risk in the financial system and reduce the size of banks

By the 1990s, most economists supported the repeal of the Glass-Steagall Act, arguing that the separation of commercial banking from investment banking ________ competition in the market for investment banking services and ________ opportunities for economies of scope in banking.

reduced; reduced

The Depository Institutions Deregulation and Monetary Control Act of 1980

required all banks to maintain reserve deposits with the Fed.

The percentage of deposits that banks must hold as reserves is called the

required reserve ratio.

In August 2016, the largest liability of the Fed was

reserves

Which of the following is a liability of the Fed?

reserves

When financial markets and institutions are NOT efficient in matching savers and borrowers

resources are lost

A matched sale-purchase transaction is also known as a

reverse repo

Which of the following equations is correct?

M = m(Bnon + BR)

In 1981, the first of the large investment banks to convert from a partnership to a corporation was

Salomon Brothers

All of the following are associated with rising inflation EXCEPT

a steady decrease in interest rates.

Which of the following are statisticians who compile statistics to predict the risk of an event occurring in the population?

actuaries

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of

adverse selection

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of

adverse selection

The Fed was created

after financial panics in the late 1800s and early 1900s.

The monetary base is equal to

all currency in circulation plus reserves held by banks.

In addition to the Fed, which other central bank pursued unusual monetary policy following the financial crisis of 2007-2009?

all of the above

The Bank of the United States faced opposition from which of the following?

all of the above

How did the Fed peg interest rates during World War II?

by agreeing to purchase any bonds that were not purchased by private investors

How does the Fed reach its target for the federal funds rate?

by buying and selling Treasury securities

Which of the following is NOT considered to be a goal of monetary policy?

fair wages

All of the following were reasons that the Fed increased the required reserve ratio in 1936 EXCEPT

fears that the economy was overheating.

Which of the following interest rates tends to fluctuate the most?

federal funds rate

An insurance premium is a

fee paid by policyholders to insurance companies as payment for coverage.

Which of the following does NOT serve on the Governing Council of the European Central Bank?

finance ministers of each country

The bursting of the dot-com bubble contributed to the

financial crisis of 2007-2009

The development of new financial securities or investment strategies using sophisticated models is known as

financial engineering.

Intermediate targets are

financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.

What is the length of a term for the Chairman of the Board of Governors?

four years

John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be

frictionally unemployed

Individual investors who always want to hold gold are known as

gold bugs

All of the following are types of finance companies EXCEPT

government finance

Although open market operations and discount loans both change the monetary base, the Fed has

greater control over open market operations than over discount loans.

Underwriting involves

guaranteeing a price for new capital to the issuing firm.

The Fed's monetary policy tools

have allowed the Fed to achieve its monetary policy goals indirectly.

All of the following are differences between hedge funds and mutual funds EXCEPT

hedge funds use money collected from savers to make investments.

Traditionally, Fed policymakers have been ________ to use higher interest rates to head off potential asset bubbles ________.

hesitant; because it may cause a slowdown in the economy

Money market mutual funds

hold portfolios of short-term assets

Rates of inflation in the hundreds or thousands of percent per year are known as

hyperinflation

Under which circumstance is the Fed most likely to carry out a defensive open market operation?

if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float

The main argument against Fed independence is that

in a democracy, elected officials should make public policy.

The principal-agent view of Fed motivation predicts that the Fed acts

in order to increase its power, influence, and prestige.

Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine by how much checking deposits would change.

increase by $10 million

The Banking Acts of 1933 and 1935

increased central control of the Federal Reserve System.

Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009?

increased leverage

In the United States from 1981 to 1983, the money supply ________ and the inflation rate ________.

increased; decreased

An open market purchase

increases the monetary base

An open market purchase

increases the price of Treasury securities and decreases their yield.

Which of the following groups is an investment bank NOT likely to visit during a "road show"?

individual investors

A firm that holds an inventory of a security and serves as an intermediary between buyers and sellers of the security is known as a(n)

market maker

Which of the following is a term for the total value of a firm's outstanding shares?

market value

A defined benefits plan

may be either underfunded or overfunded

A consequence of the impact lag is that the Fed

might not be able to correct a mistaken policy soon enough.

The main argument in favor of Fed independence is that

monetary policy is too important and too technical to be determined in the political arena.

What do many economists see finance companies as having an advantage in?

monitoring the value of collateral

The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of

moral hazard

Which of the following is likely to be more of a problem after the introduction of deposit insurance?

moral hazard

A rising dollar makes U.S. goods

more expensive abroad and decreases the volume of U.S. exports

The Fed can implement open market operations

more rapidly than either changes in the discount rate or changes in reserve requirements.

Since 1980, the M2 multiplier has been

more stable than the M1 multiplier.

The third round of quantitative easing, announced in September 2012, was focused on purchases of

mortgage-backed securities

Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?

national banks

How many times has the Fed changed reserve requirements since 1993?

never

How did Operation Twist affect the monetary base?

no change

Because of the breakdown in the relationship between the growth of the money supply and inflation, since 1993, the Fed

no longer announces targets for M1 or M2.

Which of the following is an operating target?

non-borrowed reserves

The shadow banking system refers to

nonbank financial institutions such as investment banks and hedge funds.

Apart from the United States, in countries where central bank board members serve fixed terms of office

none have terms as long as fourteen years.

Congress established the FOMC because

of a lack of coordination among district banks in carrying out open market operations.

Which type of offering typically has the lowest fees?

offering of investment-grade bonds

High employment spurs economic growth because high employment

often leads to high rates of investment

The rapid increase in bank reserves that began in 2008 was a result of

the Fed purchasing assets.

The paper currency of the United States is issued by

the Fed.

"Nonbank" financial institutions include all of the following EXCEPT

the Federal Reserve

To conduct open market operations, the FOMC issues a directive to

the Open Market Desk at the Federal Reserve Bank of New York.

All of the following central banks took action to stimulate their economies following the 2007-2009 financial crisis and recession by implementing negative interest rates EXCEPT

the U.S. Federal Reserve.

The policy directive from the FOMC is carried out by

the account manager at the Federal Reserve Bank of New York.

All of the following help make the Fed independent of the political process EXCEPT

the chair of the Fed receives a lifetime appointment.

The Chairman of the Federal Open Market Committee is also

the chairman of the Board of Governors.

What was the goal of Operation Twist?

to reduce long-term interest rates and increase short-term interest rates

In 2016, state and local government pension plans were estimated to be

underfunded by a total of $1 trillion

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium

unemployment is at its natural rate

Which of the following statements is correct?

Federal Reserve district banks pay dividends on their earnings to member banks.

Which of the following is an investment institution?

Fidelity Magellan Mutual Fund

What was the approximate peak amount of borrowing from the Fed during the Financial Crisis of 2007-2009?

$1 trillion

As of August 2016, the value of currency in circulation was about

$1.4 trillion

A $10 million open market purchase will increase the monetary base by

$10 million

A $10 million open market sale will decrease the monetary base by

$10 million

Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans?

$100 million

Suppose that the banking system currently has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?

$40,000

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

$550 million

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?

$8,000

Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's return on its equity investment if the value of the mortgage-backed securities decreases by 20% during the year after they are purchased?

-100%

For someone who invested in gold bars or coins in the late 1970s, when including storage and insurance fees the real return on investment in 2016 would have been

-30%

Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000 deposit?

.25%

When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on overnight reverse repurchase agreements at

.25%

Assuming a required reserve ratio of 8%, interest rate on reserves of 0.5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1,000 deposit?

.28%

When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on excess reserves at

.50%

For how long must most hedge fund investors wait before withdrawing funds?

1 to 3 years

How many Federal Reserve districts are there?

12

The movement to set up a central bank in the United States was spurred by the financial panic that occurred in

1907

When did the Federal Reserve Act become law?

1913

In what year did the mutual fund industry in the United States begin?

1924

In what year did the United States go off the gold standard?

1933

If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?

20

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

3.43

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

3.57

What percentage of all commercial banks in the United States belong to the Federal Reserve System?

34%

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?

401(k) plan

Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's leverage?

5

Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's return on its equity investment if the value of the mortgage-backed securities increases by 10% during the year after they are purchased?

50%

Private banks in each region which are part of the Federal Reserve System elect

6 members of the regional Reserve Bank's board of directors.

In December 2008, the FOMC cut its target for the federal funds rate from 1% to a range from 0% to 0.25%, and it remained at this level for

7 years

Who organized the Bank of the United States?

Alexander Hamilton

Which of the following statements regarding member banks is TRUE?

A minority of banks are part of the Federal Reserve System, but they hold a majority of all bank deposits.

Which president failed to renew the charter of the Second Bank of the United States?

Andrew Jackson

Which of the following expressions is correct?

B = Bnon + BR

Which central bank has its exchange rate as a focus of its monetary policy?

Bank of Canada

Which central bank gained the power to set interest rates independent of the government in the late 1990s?

Bank of England

Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?

Banks loan out all of their excess reserves.

The members of Federal Reserve district bank boards of directors who are bankers are known as

Class A directors

Under which chair did the Fed implement the policy of inflation targeting?

Bernanke

The members of Federal Reserve district bank boards of directors who are leaders in industry, commerce, and agriculture are known as

Class B directors

The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as

Class C directors

The members of Federal Reserve district bank boards of directors who represent the public interest are known as

Class C directors

Which government agency regulates futures markets?

Commodity Futures Trading Commission

Which of the following statements about the natural rate of unemployment is correct?

Currently, most economists think that the natural rate is about 5%.

The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks?

Class A directors

If C represents currency, D represents checkable deposits, N represents savings accounts, and MM represents money market mutual funds, which of the following equations is correct?

M1 = C + D

If the nonbank public wants to move funds from checkable deposits to savings accounts

M1 would fall and M2 would remain unchanged.

If the nonbank public wants to move funds from savings accounts to checkable deposits

M1 would rise and M2 would remain unchanged.

Which of the following is an intermediate target?

M2

Which of the following is NOT considered one of the four groups in the Federal Reserve System?

Federal Deposit Insurance Corporation

Which of the following cities contains a Federal Reserve bank?

Dallas

Which of the following statements is correct?

Decisions by both banks and the Fed determine the volume of discount loans.

Which of the following statements is NOT true?

Each Federal District Bank can charge a different discount rate.

To deal with difficulties in administering pension funds, Congress in 1974 passed the

Employee Retirement Income Security Act.

Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009?

Excess reserves exceeded checkable deposits.

Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009?

Germany

Which of the following countries experienced hyperinflation during the 1920s?

Germany

In 1976, Congress passed legislation which requires most federal government agencies to give public notice before a meeting. This legislation is the

Government in the Sunshine Act.

The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the

Green Book

If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors?

He completed the remaining years left on someone else's term and then served one 14-year term.

Which agency did Congress create in the 1930s to reduce information costs in financial markets?

SEC

Which of the following is an accurate description of the steps by which the FOMC causes the actual federal funds rate to rise into its target range when it votes to raise the federal funds rate target?

IOER is increased → this affects depository institutions that can borrow and lend in the federal funds market AND are paid interest on their deposits with the Fed → this pushes the federal funds rate to the top of the target range → federal funds rate rises into this new range.

Which of the following statements concerning seasonal credit is TRUE?

Improvements in credit markets have reduced the need for a seasonal credit facility.

Which of the following best describes a policy of inflation targeting?

It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession.

Which of the following statements accurately describes the Fed's control of discount policy?

It controls discount policy less completely than it controls open market operations.

Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act of 1980 is NOT correct?

It eliminated restrictions on interstate banking for member banks.

Which of the following was NOT a result of the passage of the Gramm-Leach-Bliley Act?

It increased the capital requirements for commercial banks.

Which of the following is NOT an accurate description of open market operations prior to 2008?

It involved buying and selling long-term securities.

What does it mean for an investment bank to conduct a "road show"?

It involves visits to institutional investors who might want to buy the security issue.

What is the main reason the Fed operates in a political arena?

It lacks a constitutional mandate.

Which of the following accurately describes the Fed's inflation target?

It seeks to maintain an average inflation rate of 2% per year.

Who had served as a de facto lender of last resort during the 1907 panic?

J.P. Morgan

Which of the following rules affected hedge funds as a result of the Dodd-Frank Act of 2010?

Large hedge funds must register with the SEC.

Which of the following cities does NOT contain a Federal Reserve bank?

Los Angeles

The president of which Federal Reserve Bank is always a voting member of the Federal Open Market Committee?

New York

Why did fewer state banks choose to become or remain members of the Federal Reserve System during the 1960s and 1970s?

Nominal interest rates rose.

Which of the following is an accurate description of the steps by which the FOMC causes the actual federal funds rate to rise into its target range when it votes to raise the federal funds rate target?

ON RRP is increased → this affects certain nonbank financial institutions that can borrow and lend in the federal funds market BUT ARE NOT paid interest on their deposits with the Fed → this keeps the federal funds rate above the bottom of the target range → federal funds rate rises into this new range.

The Fed ended QE3 in

October 2014

Which of the following statements is correct?

Open market purchases are expansionary and open market sales are contractionary.

What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities?

Operation Twist

In 2010, doubts were raised about the debt of all of the following countries EXCEPT

Poland

Which of the following is a contractual saving instituition?

Prudential Insurance Company

Why might Congress benefit from the Fed being self-financed?

Self-financing gives the Fed an incentive to expand the money supply, which ultimately results in Congress having additional funds to spend.

Which of the following statements is correct?

The Fed completely controls the volume of open market operations.

Which of the following statements is correct?

The Fed is only partially insulated from external pressures.

Which of the following statements is correct?

The Fed's profits are substantial, even when compared to the largest U.S. corporations.

What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary policy?

The Federal Advisory Council

Which of the following statements is correct?

The discount rate is generally above the federal funds rate.

Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?

The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier.

Which of the following statements is NOT true?

The federal courts have never upheld the constitutionality of the Federal Reserve Act.

Which of the following statements is correct?

The volume of defensive open market operations is much greater than the volume of dynamic open market operations.

Which of the following statements is correct?

The volume of open market operations is determined solely by the Fed.

Which best describes the Federal Reserve district banks?

They are private-government joint ventures.

Which of the following statements is NOT true of consumer finance companies?

They are strictly regulated by state governments.

How were open market operations conducted prior to 1935?

They were carried out by the district Federal Reserve banks.

Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009?

They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

In the long run, gold has shown to be

a poor hedge against inflation.

During the financial crisis of 2007-2009, Fed Chairman Ben Bernanke relied on an informal group of three advisors to help make quick decisions on policy actions. Which of the following was NOT one of those advisors?

Treasury Secretary Henry Paulson

Which of the following officially ended the cooperation between the Treasury and the Fed that had taken place during World War II?

Treasury-Federal Reserve Accord

The Fed's portfolio of securities consists principally of

U.S. Treasury obligations

When an insurance company makes a direct loan to a firm, the loan is known as

a private placement

When is the Fed likely to return to to using normal monetary policy procedures?

While the Fed may eventually return to normal monetary policy procedures, it is unlikely to do so in the near future.

If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show

a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show

a decrease in securities held of $10 million and an increase in bank reserves of $10 million.

Which of the following decreases the M2 multiplier?

a decrease in the nonbank public's preference for money market-type accounts relative to checkable deposits

A specified amount of a claim that the insurance company does NOT need to pay is called

a deductible

A syndicate is

a group of investment banks underwriting a large security issue.

As large investment banks converted from partnerships to corporations, the separation of ownership from control had the potential to lead to

a moral hazard problem resulting in a principal-agent problem

The FOMC states its overall objectives for interest rates in

a policy directive

A Federal Reserve repurchase agreement involves

an agreement by a dealer to buy back securities she has sold to the Fed.

If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show

an increase in discount loans of $2 million and an increase in bank reserves of $2 million.

Which of the following increases the M2 multiplier?

an increase in the nonbank public's preference for nontransaction accounts relative to checkable deposits

If the account manager does NOT use a Federal Reserve reverse repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use

an outright purchase or sale

Entry-level hires in investment banking firms are usually called

analysts

Members of the Board of Governors are

appointed by the President of the United States, subject to confirmation by the Senate.

Sales finance companies

are affiliated with companies which manufacture or sell goods.

Dynamic open market operations

are aimed at achieving changes in monetary policy.

Open market operations

are more flexible than other traditional policy tools.

Defensive open market transactions

are used to offset disturbances to the supply or demand for reserves.

Reserve deposits are

assets for financial institutions, but liabilities for the Fed.

When conducting open market operations, at what price is the Fed willing to buy or sell securities?

at whatever price is necessary to carry out its open market operations

Which of the following is NOT a form of a short-term loan in the shadow banking system?

bank deposits

Most of the increase in the monetary base between 2008 and 2016 was due to increases in

bank reserves

As of August 2016, which of the following was TRUE?

bank reserves > currency in circulation > deposits of foreign government and international organizations

If the Fed buys securities worth $10 million, then

bank reserves will increase by $10 million.

In 2016, federal regulators proposed that at least half of the bonuses investment banks pay top managers

be deferred for four years

In 2006, the Bank of Japan

began to scale back its expansionary policy, only to return to an expansionary policy following the financial crisis.

Which of the following is NOT a way in which power was divided up in the Federal Reserve System?

between importers and exporters

In 1913, Congress and the president did not envision that the Fed would control

broad control over most aspects of money and the banking system.

If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?

by $50,000

As of early 2016, carried interest was taxed as

capital gains

The mix of stocks and bonds a firm uses to raise funds is called

capital structure

The fee charged by a typical hedge fund are sometimes called

carried interest

Which of the following is NOT a responsibility of the Board of Governors?

carrying out open market operations

Who sets the inflation target for the Bank of England?

chancellor of the Exchequer

A load fund

charges a commission for purchases or sales.

The chair of the Federal Reserve is

chosen by the president

If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will

conduct an open market sale.

In order to increase its target for the federal funds rate, the Fed would normally

conduct open market sales

Shadow banks ________ borrow short-term funds that are not federally insured and use them for long-term investment, and therefore ________ to runs similar to those that occurred during the financial crisis.

continue to; are vulnerable

In which of the following have pension funds invested the most?

corporate equities and mutual fund shares

The risk that the party on the other side of a financial transaction fails to meet its obligation is called

counterparty risk

Generally

countries with the most independent central banks have the lowest inflation rates.

During the financial crisis, which type of risk was the biggest problem faced by investment banks?

credit risk

Included in both M1 and M2 are

currency and checkable deposits.

Which of the following is a liability of the Fed?

currency in circulation

The aggregate M1 consists of

currency plus checkable deposits in financial institutions.

Federal Reserve districts

cut across state and economic boundaries.

As a result of the financial crisis of 2007-2009, the size of the shadow banking system

declined, but remained larger than the commercial banking system.

Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?

declines by 100%

An open market sale

decreases the price of Treasury securities and increases their yield.

Reserves equal

deposits with the Fed plus vault cash.

The original Federal Reserve Act

did not specifically mention open market operations.

Congress authorized the Second Bank of the United States partly in response to

difficulty in funding the War of 1812.

When the Fed lends to depository institutions, the loans are called

discount loans

The primary assets of the Fed are

discount loans and government securities.

Which of the following is an asset of the Fed?

discount loans to banks

The Beige Book is prepared by

district banks

The facts show that the political business cycle theory

does not generally hold true in the United States.

The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems.

does not insure; not eligible

A majority of the members of the boards of the 12 Federal Reserve Banks are

elected by bankers

The Federal Reserve district banks

engage in monetary policy directly through discount lending.

In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be

inflation

The ECB has emphasized what type of goal for monetary policy?

inflation targeting

The Fed's inability to instantaneously observe changes in inflation and economic growth result in

information lag.

In 2016, the Bank of Japan

instituted a negative interest rate on deposits it receives from Japanese banks, effectively requiring banks to pay the Bank of Japan for keeping their deposits.

Most of the Fed's earnings come from

interest on the securities it holds.

The risk that increased market interest rates will cause a decline in the value of an investment bank's holdings of long-term securities is known as

interest-rate risk.

The money multiplier

is an expression that converts the monetary base to the money supply.

Most economists believe that a zero rate of unemployment

is consistent with a well-functioning economy

The M2 multiplier

is larger than the M1 multiplier.

When banks hold excess reserves, the size of the money multiplier

is less than the simple deposit multiplier would suggest.

The Fed's goal of interest rate stability

is motivated by political pressure as well as by a desire for a stable saving and investment environment.

Factoring

is purchasing accounts receivable at a discount.

The Fed tends not to use discount policy as its principal tool in influencing the money supply since

it does not have as much control over discount loans as it has on open market operations.

When the Fed extends loans to depository institutions

it increases the level of reserves

The Fed does NOT have to go through the normal congressional appropriations process because

it is self financing

If the Fed desired to reduce the federal funds rate

it would conduct an open market purchase, increasing reserve supply.

All of the following arguments are presented in favor of inflation targeting EXCEPT

it would reduce the lags inherent in monetary policy.

What is the maximum amount a bank can lend?

its excess reserves

The Glass-Steagall Act was designed to

legally separate investment banking from commercial banking.

The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role?

lender of last resort

A falling dollar makes U.S. goods

less expensive abroad and increases the volume of U.S. exports.

Reserve requirements are changed

less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Vault cash is a(an)

liability of the Fed and is counted as reserves.

The Open Market Trading Desk is

linked electronically to a group of private securities firms that the Fed has selected to participate in open market operations.

The resolution plans of an investment bank that "must describe the company's strategy for rapid and orderly resolution in the event of material financial distress or failure of the company" is called a

living will

Which of the following is the most common goal for central banks of industrialized countries?

low inflation

All of the following are potential benefits of defined contribution plans EXCEPT

lower risk for employees

An important service provided by underwriters is

lowering of information costs.

Interest rate fluctuations

make it difficult for households and firms to plan for the future.

Inflation is an economic problem because it

makes prices less useful as signals for resource allocation.

Which of the following was NOT advocated by former Texas Congressman Ron Paul?

making the Fed Board of Governors lifetime appointments

As a result of an open market purchase, bank reserves

rise and interest rates fall

If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits change (assuming no change in excess reserves or the public's currency holdings)?

rise by $12.5 million

Between late 2007 and 2016, the Fed's balance sheet

rose fivefold

In 2008, as the financial crisis was at its worst, the sale of 1-ounce American Eagle gold coins

rose to more than 10 times the pre-crisis level.

Included in M2 but not in M1 are

savings accounts and money market mutual funds.

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as

seasonal credit

Discount loans intended for banks that are NOT financially healthy are called

secondary credit

All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT

securitized loans must now be insured.

Finance companies...

sell commercial paper and securities and make loans to borrowers with the funds.

Mutual funds

sell shares to savers and purchase assets with the funds.

In a matched sale-purchase transaction, the Fed

sells securities to a dealer and the dealer agrees to sell them back.

Members of the Board of Governors

serve one nonrenewable fourteen-year term.

Which of the following is NOT a role of Federal Reserve Banks?

set the interest rate on reserves

Federal Reserve district banks perform all of the following roles EXCEPT

setting the federal funds rate.

In the federal funds market diagram, a decrease in the required reserve ratio

shifts the demand curve for reserves to the left

In the federal funds market diagram, an open market sale by the Fed

shifts the reserve supply curve to the left

When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the

size of the Fed's assets.

Which groups were opposed to the Bank of the United States?

southern and western agrarian and small-business interests

The Federal Reserve Act of 1913

specified neither the boundaries nor city locations for the district banks.

Modern hedge funds typically make investments that involve

speculating

The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called

structural unemployment

Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be

structurally unemployed

Which of the following activities is NOT a primary concern of investment banks?

taking in deposits and making loans

Which of the Fed's three new policy tools connected with bank reserve accounts is the least important?

term deposit facility

The European Central Bank is responsible for the monetary policy of

the 19 sovereign countries that use the euro as their currency.

When did the Fed first begin to use open market operations as a policy tool?

the 1920s

Increases in interest rates are often blamed on

the Fed

Reserve requirements are set by

the Fed

The political business cycle theory predicts that

the Fed acts to stimulate economic activity before an election.

During World War II

the Fed agreed to hold interest rates on short-term Treasury securities at low levels.

Open market operations generally involve

the Fed buying and selling U.S. government securities.

Who is considered to wield the most power in the Federal Reserve System?

the Fed chair

The Fed uses operating targets as well as intermediate targets because

the Fed controls intermediate targets only indirectly.

All of the following arguments are made against inflation targeting EXCEPT

the Fed has little influence on inflation.

The information lag facing the Fed is

the delay in receiving accurate information about the state of the economy.

The inflation gap can best be described as

the difference between inflation and its target.

The interest rate the Fed charges on loans to depository institutions is known as

the discount rate

The size of the money multiplier depends upon all of the following EXCEPT

the discount rate

Which of the following appears to be evidence against the public interest view of the Fed's motivation?

the failure of the Fed to emphasize the goal of price stability

One of the extraordinary policy actions taken by the Fed in response to the financial crisis of 2007-2009 was making huge asset purchases. These asset purchases greatly increased all of the following EXCEPT

the federal funds rate

The public interest view of Fed motivation holds that the Fed acts in the interest of

the general public.

An important problem facing the Fed is that

the goals for economic growth and price stability may conflict in the short run.

The benchmark default-free interest rate of the financial system is generally considered to be

the interest rate on the 10-year Treasury note.

Vesting refers to

the length of service required of an employee before he or she is eligible for a pension.

As of 2015, the dividend the Fed pays to member banks with assets greater than $10 billion is

the lesser of 6% or the interest rate on 10-year Treasury notes.

Investment banks are vulnerable because

the maturity of their liabilities is less than the maturity of their assets.

The discount window is

the means by which the Fed makes discount loans to banks.

By the time of the annual monetary policy conference in Jackson Hole, Wyoming in 2016,

the monetary base and the Fed's balance sheet remained very large, and the target for the federal funds rate had only slightly risen.

The Fed has the greatest control over which of the following?

the nonborrowed monetary base

The output gap can best be described as

the percentage difference between real GDP and its potential.

In investment banking the "spread" is the difference between

the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market.

Primary credit is only a backup source of funds for healthy banks since

the primary credit rate is set above the federal funds rate.

Who owns the Federal Reserve banks?

the private commercial banks in each district which are members of the Federal Reserve System

The issue of Fed independence is most often raised by

the public's negative reaction to Fed policy.

The Federal Reserve Act of 1913 made who the chairman of the Federal Reserve Board?

the secretary of the Treasury

The impact lag facing the Fed is

the time required for monetary policy changes to affect output, employment, and prices.

Hedge funds have been criticized for

their heavy use of short selling

All of the following statements about secondary credit are true EXCEPT

they are temporary, short-term loans to satisfy seasonal requirements.

Since 1980, discount loans have been available

to all depository institutions

The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by

using targets to meet its goals.

The portfolios that mutual funds offer to savers are

usually more liquid than the underlying assets.

The difference between currency outstanding and currency in circulation is equal to

vault cash

The assumption that reserves are scarce

was accurate prior to the financial crisis of 2007-2009 but not following the crisis.

The National Monetary Commission

was created by Congress to study the setting up of a central bank.

In 2016, savings rates in Japan, Germany, Denmark, Sweden, and Switzerland

were at their highest level since 1995, indicating that negative interest rates were not increasing consumer spending.

The due diligence process is

when an investment bank researches a firm's value.

If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

whether the public holds the proceeds as currency or deposits them as checkable deposits.

According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT

yield curve

On the books of the Fed, the difference between borrowed reserves and discount loans is equal to

zero; they are the same thing.