Ch14 - The Federal Reserve System

Anil buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate increases to 27 percent, Anil can sell his bond for up to

$1,259.26.

Janette buys a bond in the amount of $500 with a promised interest rate of 15 percent. If the market interest rate decreases to 5 percent, Janette can sell her bond for up to

$1,500.

Suppose all of the banks in the Federal Reserve System have $100 billion in transactions accounts, the required reserve ratio is 0.25, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.20, the total lending capacity of the system is increased by

$25 billion.

Suppose the banks in the Federal Reserve System have $100 billion in transactions accounts, the required reserve ratio is 0.10, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.15, the deficiency of reserves would be

$5 billion.

Which of the following represents the lending capacity of an entire banking system?

(Total reserves - required reserves) ×money multiplier.

Which of the following represents the money multiplier?

1 ÷ (required reserve ratio).

If the annual interest rate printed on the face of a bond is 12 percent, the face value of the bond is $1,000, and the current market price of the bond is $1,200, what is the current yield on the bond?

10.0 percent.

The Board of Governors consists of

7 members, appointed for 14-year terms.

Assume the reserve requirement is 25 percent, demand deposits are $500 million, and total reserves are $32 million. If the reserve requirement is decreased to 20 percent, the banking system will experience

A deficiency of required reserves equal to $68 million.

Assume the reserve requirement is 10 percent, demand deposits are $200 million, and total reserves are $18 million. If the reserve requirement is increased to 14 percent, the banking system will have

A deficiency of reserves equal to $10 million.

Changing the reserve requirement is

A powerful tool that can cause abrupt changes in the money supply.

Members of the Board of Governors are

Appointed by the president and confirmed by the Senate.

Excess reserves are

Bank reserves in excess of required reserves.

If the Federal Reserve buys government bonds from the public,

Banks will be able to make additional loans.

The Federal Reserve holds deposits from

Banks.

Monetary policy is set by the

Board of Governors.

Suppose the Federal Reserve System has a required reserve ratio of 0.20. If the Open Market Committee sells $10 billion of securities to the commercial banking system, then before the money multiplier takes effect, initially excess reserves

Decrease by $10 billion.

If the Fed sells $5 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually

Decrease by $100 billion.

The Federal Open Market Committee meets

Every four or five weeks.

Public cash = $40b Transactions deposits = $80b Required reserves = $20b Excess reserves = $0b US bonds held by public = $125b Assume an original balance sheet: In Table 14.3, if the Fed changes the required reserve ratio to 10 percent, the lending capacity of the system would eventually

Increase by $120 billion.

If the Fed buys $25 billion of U.S. bonds in the open market and the reserve requirement is 20 percent, M1 will eventually

Increase by $125 billion.

If the Fed buys $150 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually

Increase by $3,000 billion.

If the Fed buys $32 billion of U.S. bonds in the open market and the reserve requirement is 10 percent, M1 will eventually

Increase by $320 billion.

If the Fed buys $20 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually

Increase by $400 billion.

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system. If the Open Market Committee buys $50 million of securities from the commercial banking system, the total lending capacity for the system

Increases by $500 million.

When the Fed buys bonds from the public, it

Increases the flow of reserves to the banking system.

Which of the following is true about an increase in the discount rate?

It signals the Federal Reserve's desire to restrain money growth.

Discounting refers to the Fed's practice of

Lending reserves directly to private banks.

If the Fed wishes to increase the money supply, it could

Lower the discount rate.

In order to increase the money supply, the Fed can

Lower the reserve requirement, decrease the discount rate, or buy bonds.

The M2 money supply is defined as

M1 plus balances in most savings accounts and money market mutual funds.

Members of the Federal Reserve Board of Governors are appointed for one 14-year term so that they

Make their decisions based on economic, rather than political, considerations.

The use of money and credit controls to achieve macroeconomic goals is

Monetary policy.

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

Open market operations.

Suppose the banks in the Federal Reserve System have $200 billion in transactions accounts, the required reserve ratio is 0.15, and there are no excess reserves in the system. If the required reserve ratio is changed to 0.10, the amount of excess reserves would be

Positive $10 billion.

A bond is a

Promise to repay borrowed funds.

Which of the following services is performed by the regional Federal Reserve banks?

Providing currency to private banks.

The minimum amount of reserves a bank is required to hold is

Required reserves.

When a bank borrows money from the Federal Reserve,

Reserves increase for the bank.

The money supply (M2) includes M1 plus balances in

Saving accounts and money market mutual funds.

If banks do not have enough reserves to satisfy the reserve requirement, they can

Sell securities.

The Fed can increase the federal funds rate by

Selling government bonds, which causes market interest rates to rise.

Monetary policy involves the use of money and credit controls to

Shift the aggregate demand curve.

A reduction in the discount rate

Signals the Federal Reserve's desire for additional credit expansion.

A growing economy needs a

Steadily increasing supply of money to finance market exchanges.

Which of the following provides evidence that the Federal Reserve System is politically insulated?

The Fed governors are appointed for 14-year terms and cannot be reappointed.

Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?

The Federal Open Market Committee.

The creation of a Federal Reserve System was recommended by

The National Monetary Commission.

Which of the following represents the lending capacity of an individual (non-monopoly) bank?

Total reserves - required reserves.

The money supply (M1) includes currency held by the public plus

Transactions accounts plus travelers checks.

The government uses ______________ to regulate the amount of money banks lend.

monetary policy

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

Federal funds market.

Regional Fed banks

Clear checks between private banks.

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

Discount rate.

Currency held by the public plus balances in transactions accounts plus travelers checks is the definition of

M1.

Public cash = $40b Transactions deposits = $80b Required reserves = $20b Excess reserves = $0b US bonds held by public = $125b Assume an original balance sheet: On the basis of the information in Table 14.3, the required reserve ratio is

25 percent. Required reserves / transactions deposits

If the annual interest rate printed on the face of a bond is 7 percent, the face value of the bond is $1,000, and the current market price of the bond is $250, what is the current yield on the bond?

28 percent.

If the annual interest rate printed on the face of a bond is 25 percent, the face value of the bond is $1,000, and the current market price of the bond is $700, what is the current yield on the bond?

35.7 percent.

If excess reserves are too large, a bank is likely to

Buy government securities.

If a bank does not have enough reserves to satisfy the reserve requirement, it is likely to do any of the following except

Buy securities.

The Fed can decrease the federal funds rate by

Buying government bonds, which causes market interest rates to fall.

Open market operations involve the Fed

Buying or selling government bonds.

When the Fed wishes to increase the reserves of the member banks, it

Buys securities.

All of the following are tools available to the Fed for controlling the money supply except -The reserve requirement. -The discount rate. -Open market operations. -Taxes.

Taxes.

Which of the following serves as the central banker for private banks in the United States?

The 12 Federal Reserve banks.

Which of the following is responsible for the Fed's daily activity in financial markets?

The FOMC.

The Federal Reserve System was created by

The Federal Reserve Act in 1913.

The Fed is most likely to pursue

Use of open market operations as the primary mechanism to change reserves.