The Federal Reserve and Monetary Policy
Monetary policy.
Actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy:
Money multiplier formula.
Amount of new money that will be created with each demand deposit; 1 ÷ RRR:
D
As commercial banks keep more excess reserves, what happens to money creation? (A) It remains the same. (B) It could either increase or decrease. (C) It increases. (D) It decreases.
B
As interest rates rise, _____. (A) It becomes more expensive to hold money as cash. (B) Bonds and savings accounts become less attractive for investment. (C) Firms will generally spend their wealth. (D) It becomes less expensive to hold money as cash.
C
Bank examiners are _____. (A) More interested in regulating the overall money supply than the net worth of member banks. (B) Required to schedule with banks when they plan to visit. (C) Authorized to force banks to sell off investments that they consider excessively risky. (D) Only permitted to label a bank as a "problem bank" if the institution has excessive risks.
Monetarism.
Belief that the money supply is the most important factor in macroeconomic performance:
Bank holding company.
Company that owns more than one bank:
Inside lag.
Delay in implementing monetary policy:
A
Easy money policy is _____. (A) Monetary policy that increases the money supply. (B) Monetary policy that reduces the money supply. (C) The belief that the money supply is the most important factor in macroeconomic performance. (D) The time it takes for monetary policy to have an effect.
Committee.
Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply.
A
Five of the 12 members of the Federal Open Market Committee (FOMC) must be _____. (A) Bank presidents from Federal Reserve Districts. (B) Appointed by the chair of the Board of Governors. (C) Elected by the Board of Governors. (D) From the Federal Advisory Council (FAC).
A
Five of the 12 members of the Federal Open Market Committee (FOMC) must be _____. (A) Bank presidents from Federal Reserve Districts. (B) From the Federal Advisory Council (FAC). (C) Appointed by the chair of the Board of Governors. (D) Elected by the Board of Governors.
C
How could the Federal Reserve encourage banks to lend out more of their reserves? (A) By raising the required amount of reserves. (B) By reducing the money supply. (C) By reducing the discount rate. (D) By increasing the prime rate.
D
How does a bond sale by the Fed affect the money supply? (A) The sale increases the money supply but not in the proportion that the multiplier effect would suggest. (B) The sale increases the money supply. (C) It does not affect the money supply. (D) The sale decreases the money supply.
B
How long does it take for a check to clear? (A) Three days (B) Two days (C) Four days (D) One day
D
How many directors are on the boards for each of the 12 Federal Reserve banks? (A) 12 (B) 7 (C) 15 (D) 9
A
How quickly can an increase in government spending increase the gross domestic product? (A) 6 months (B) 1 year (C) 5 years (D) 3 years
C
How well did the Federal Reserve Banks perform during the Great Depression? (A) The Chair of the Board of Governors made bad decisions and directed the Federal Reserve Banks to act in harmful ways. (B) The Federal Reserve System skillfully guided the United States economy out of the Great Depression. (C) Individual governors of the Federal Reserve Banks disagreed over policy and were unable to stop the depression. (D) The Great Depression took place before the Federal Reserve System was established.
D
If the Fed were to impose a slight increase in the required reserves ratio, there would be _____. (A) No change in the money supply. (B) An increase, then a decrease, in the money supply. (C) An increase in the money supply. (D) A decrease in the money supply.
D
If the money multiplier is 4, what is the required reserve ratio (RRR)? (A) 50 percent (B) 20 percent (C) 2 percent (D) 25 percent
C
If the required reserve ratio is 20 percent and a customer deposited $5,000 in the bank, how much is available to the bank for lending? (A) $3,500 (B) $5,000 (C) $4,000 (D) $1,000
D
In 1935, what changes were made to the Federal Reserve System? (A) A central group of banks were authorized to lend to each other in times of need. (B) There was an increase of Federal District Banks from 10 to 12 banks. (C) The problems of regional banks were no longer the concern of Federal District Banks. (D) The Federal Reserve System was given more centralized power.
Excess reserves.
In banking, reserves of cash more than the required amounts:
Federal funds rate.
Interest rate banks charge each other for loans:
B
Monetary policy administered by the Fed is the principal method of softening the effects of the business cycle because _____. (A) The outside lag for fiscal policy is shorter than the outside lag for monetary policy. (B) There are more political complications with determining and implementing fiscal policy. (C) Fiscal policy is not effective at easing the fluctuations of the economy. (D) Monetary policy has the shortest total delay in implementing and achieving a planned outcome.
Easy money policy.
Monetary policy that increases the money supply:
Tight money policy.
Monetary policy that reduces the money supply:
B
Monetary policy-makers can help smooth out the fluctuations of the business cycle by _____. (A) Implementing inside lags. (B) Reacting to current trends. (C) Practicing good timing. (D) Examining banks.
Check clearing.
Process by which banks record whose account gives up money and whose account receives money when a customer writes a check:
Money creation.
Process by which money enters into circulation.
Prime rate.
Rate of interest that banks charge on short-term loans to their best customers:
Discount rate.
Rate the Federal Reserve charges for loans to commercial banks:
Required reserve ratio.
Ratio of reserves to deposits required of banks by the Federal Reserve:
Federal advisory council.
Research arm of the Federal Reserve.
D
The Federal Reserve System is overseen by the _____. (A) President (B) Department of Commerce (C) Senate (D) Board of Governors
Open market operations.
The buying and selling of government securities to alter the supply of money:
B
The money multiplier formula _____. (A) Is used by the Board of Governors to decide interest rate cuts. (B) Determines the amount of new money that will be created with each demand deposit. (C) Determines the amount of funds loaned by the Federal Reserve Bank to its members. (D) Is used by the Fed to determine the amount of currency in the economy.
Board of governors.
The seven-member board that oversees the Federal Reserve System:
Outside lag.
The time it takes for monetary policy to have an effect:
Federal reserve districts.
The twelve banking districts created by the Federal Reserve Act:
Net worth.
Total assets minus total liabilities:
C
Truth-in-lending laws require that _____. (A) Banks lend each other funds using the federal funds rate. (B) Bank holding companies offer the same interest rates at all of their member banks. (C) Sellers provide full and accurate information about loan terms. (D) Banks allow Federal Reserve examiners to audit their financial activities.
B
What change in monetary policy could eventually cause overborrowing and overinvestment? (A) Contractionary policy. (B) An increase in the money supply. (C) A fall in the discount rate. (D) A decrease in the money supply.
A
What does "lender of last resort" mean with respect to the Federal Reserve? (A) It will lend money to a bank in a financial emergency. (B) It has the power to decide how much money a bank can lend out. (C) It decides interest rates for interbank loans. (D) It makes decisions about who a bank can lend money to.
C
What does a "fractional reserve banking system" mean? (A) One that must keep most deposited money in reserve. (B) One that uses fractional paper currency as well as coins. (C) One that keeps only a small part of customers' deposits on hand. (D) One that is required to report daily deposits to the Federal Reserve.
D
What does fiscal policy include? (A) Changes in monetary policy. (B) Changes in banking regulations and policies. (C) Changes in interest rates and loan policies. (D) Changes in government spending and taxation.
C
What does monetary policy do? (A) It mints new coins and prints bills. (B) It changes the way that taxes are collected. (C) It alters the supply of money. (D) It charters new banks.
B
What effect do low interest rates have on business investment? (A) They encourage it. (B) They slow it down. (C) They generally stop it completely. (D) They do not have much effect on essential investment.
A
What is likely to be the best approach to a recession that is expected to turn into an expansion in a short time? (A) Do nothing and let the economy fix itself. (B) Use monetary policy to lower interest rates. (C) Use fiscal policy to lower interest rates. (D) Use monetary policy to raise interest rates.
A
What is one service the Fed performs for the Treasury Department? (A) It processes payments, such as Social Security checks. (B) It auctions government bills. (C) It collects federal taxes. (D) It selects the Secretary of the Treasury.
C
What is the Federal Reserve best known for? (A) For setting the discount rate. (B) For the fractional reserve banking system. (C) For regulating the nation's money supply. (D) For bank examinations.
D
What is the cost of money? (A) The economy's use of open market operations. (B) The bank's use of money creation. (C) The smoothing out of fluctuations in the market. (D) The price of the interest rate.
A
What is the function of a bank examiner? (A) To make sure banks are obeying laws and regulations. (B) To carry on day-to-day functions within the bank. (C) To respond to banks about their daily reports to the Fed. (D) To oversee decisions about major loans by each bank.
Each district is made up of more than one state. Federal Reserve Districts include a mixture of agricultural, manufacturing, and service industries as well as rural and urban areas.
What is the makeup of the Federal Reserve Districts?
D
What is the most-used instrument for controlling week-to-week changes in the money supply? (A) The required reserve ratio (B) The money multiplier (C) The discount rate (D) Open market operations
C
What is the policy used most by the Fed to change the money supply? (A) Changes in the money creation policy. (B) Changes in the discount rate. (C) Open market operations. (D) Changes in the reserve requirements.
A
What is the relationship between interest rates and demand for money? (A) As interest rates decrease, demand for money increases. (B) Interest rates and demand for money are unrelated. (C) As interest rates increase, demand for money increases. (D) Interest rates are determined by demand for money.
C
What is the required reserve ratio (RRR)? (A) The ratio of commercial to personal loans that a bank makes. (B) The amount of money a bank has to loan out. (C) The portion of a deposit that a bank must keep on hand. (D) The deposits that commercial companies make in banks.
A
What is the role of the Federal Open Market Committee (FOMC)? (A) It makes key decisions about interest rates and the growth of the United States money supply. (B) It redraws the map of the 12 Federal Reserve Districts every ten years in response to economic changes. (C) It collects information on each Federal Reserve District and reports on economic conditions to the Board of Governors. (D) Composed of seven members appointed by the President, it oversees the Federal Reserve System.
C
What monetary policy should be implemented to correct an inflationary economy? (A) Easy monetary policy (B) Money creation policy (C) Tight monetary policy (D) Laissez faire policy
C
What was one reason the U.S. government started a Federal Reserve System? (A) To keep the banking power of the United States spread out among various districts. (B) To have a place for banks to deposit their excess deposits. (C) To provide consumers with access to funds for business expansion. (D) To make sure that the U.S. banks were obeying laws regarding banking.
C
Where are coins manufactured? (A) Federal Reserve Banks (B) Bank holding companies (C) United States Mint (D) Bureau of Engraving
A
Which monetary policy tool is considered an expansionary tool? (A) Decreasing the discount rate. (B) Cutting taxes. (C) Increasing the reserve requirements. (D) Increasing government spending.
B
Which of the following actions would the Fed take to fight inflation? (A) Increase the money supply. (B) Reduce the money supply. (C) Increase government spending. (D) Raise taxes.
B
Which of the following is an example of inside lag in monetary policy? (A) The U.S. government debates a public works program and chooses not to spend money on new highways and railroads. (B) Members of the Board of Governors refuse to lower the discount rate until several months after a recession has begun. (C) Corporations respond slowly to increases in interest rates by reducing their planned investment for future years. (D) Individual banks ignore a reduction in the required reserve ratio and hold excess reserves.
D
Which of the following is one way the Federal Reserve Bank serves the government? (A) Financing state government projects. (B) Making loans to the government. (C) Minting coins for the government. (D) Selling government securities.
D
Which of the following would create the most money? (A) The initial deposit is $3,000 and the required reserve ratio is 10 percent. (B) The initial deposit is $7,500 and the required reserve ratio is 25 percent. (C) The initial deposit is $4,500 and the required reserve ratio is 15 percent. (D) The initial deposit is $6,500 and the required reserve ratio is 20 percent.
B
Which of these situations is most likely to cause the Fed to introduce a tight money supply? (A) A recession has reduced aggregate demand and increased unemployment. (B) The economy is expanding quickly and inflation is a concern. (C) The economy is prosperous with relatively low inflation and low unemployment. (D) The federal government passes a new budget with a large deficit.
D
Who appoints the members of the Board of Governors of the Federal Reserve? (A) The U.S. senate (B) The state legislatures of the states represented (C) The state governors (D) The U.S. President
B
Who issues U.S. paper currency? (A) The Treasury Department (B) The district Federal Reserve Banks (C) The U.S. bank examiners (D) The U.S. Mint
B
Who issues U.S. paper currency? (A) The U.S. bank examiners (B) The district Federal Reserve Banks (C) The U.S. Mint (D) The Treasury Department
C
Who owns the Federal Reserve System? (A) All commercial banks in the country (B) The federal government (C) Member banks (D) All banks in the country
D
Why does a bank sometimes hold excess reserves? (A) To keep from lending too much money. (B) To make check clearing easier. (C) To protect against high prices. (D) To be sure it can meet its customers' demands.
D
Why does a high interest rate discourage people from holding their money in cash? (A) They are fearful of inflation. (B) They cannot be sure that cash will hold its value. (C) They are more concerned that it will be stolen. (D) They can earn interest on the cash if it is invested.
C
Why does the Fed rarely increase reserve requirements? (A) It is not an effective way to manipulate the money supply. (B) It is too complicated as a way to make minor adjustments. (C) It can be disruptive to the whole banking system. (D) It might not have a significant effect on the money available.
B
Why does the Federal Reserve System have a high degree of political independence? (A) The system has only advisory power. (B) The system is owned by the banks. (C) It is divided into geographical districts. (D) The governors are appointed for life terms.
C
Why does the Federal Reserve alter monetary policy? (A) To provide services to member banks. (B) To enable banks to clear checks. (C) To lessen the effect of natural business cycles. (D) To regulate the banking industry.
A
Why were many U.S. citizens against the Second Bank of the United States, which was an attempt by Congress to restore order in the monetary system in 1816? (A) Citizens feared that a central bank placed too much power in the hands of the federal government. (B) Citizens believed that the Federal Reserve Districts were not assigned appropriately. (C) Citizens feared that there could be a reoccurrence of "The Panic of 1807." (D) Citizens believed that the states should not be given power over the banking system.