Exam 4 Money and Banking

If the required reserve rate is expressed by rD and deposits by D, the formula for calculating the amount of required reserves is Multiple Choice (1/rD )D .1/rD. (rD )D. D/rD.

(rD)D

Recent research by Fed researchers put the natural rate of interest at what level as of late 2018? Multiple Choice −1 percent 1/2 percent 0 percent 2 percent

1/2 percent

If required reserves are expressed by RR, the required reserve rate by rD, and deposits by D, the simple deposit expansion multiplier is expressed as Multiple Choice RD × D. (1/rD )D. RR × D. 1/rD.

1/rD

By 2020, the euro had become the currency of Multiple Choice every country in Europe. 19 countries in Europe. 25 countries in Europe. all European countries except Great Britain.

19 countries in europe

The Federal Reserve was created in Multiple Choice 1929. 1913. 1909. 1945.

1913

The Federal Open Market Committee began operating in Multiple Choice 1913. 1929. 1914. 1936.

1936

Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by Multiple Choice 2.5 times. 3 times. 4.5 times. 6 times.

2.5 times

In 2018, the average daily volume on the Federal Reserve's Fedwire system was Multiple Choice $28 billion. $280 billion. $2.8 trillion. $280 million.

2.8 trillion

As of 2020, the largest expansion of the Fed's balance peaked in what year? Multiple Choice 1933 2008 2015 2019

2015

The components of the formula for the Taylor rule include each of the following, except which one? Multiple Choice target federal funds rate current inflation rate 30-year U.S. Treasury bond rate inflation gap

30-year U.S. Treasury bond rate

The functions of a modern central bank

The government's bank: Executes financial transactions for the government. The bankers; bank: Guarantees that sound intermediaries can do business by lending to them, even during crises, operates a payments system for interbank payments, oversees financial institutions to ensure confidence in their soundness

Executive board members of the European System of Central Banks are appointed by Multiple Choice a committee made up of bank presidents in the member countries. a committee made up of heads of state of member countries. the finance ministers of member countries. the directors of the National Central Banks.

a committee made up of heads of state of member countries

Most central banks of industrialized countries have monetary policy formed by Multiple Choice an individual, usually the minister of finance. their version of Congress. a committee made up of members of their central bank. an individual, usually the person heading the central bank at the time.

a committee made up of members of their central bank

Sweden is Multiple Choice a member of the European Union but not a member of the Eurosystem. a member of the Eurosystem but not a member of the European Union. not a member of the Eurosystem or the European Union. a member of both the European Union and the Eurosystem.

a member of the european union but not a member of the eurosystem

The interest rate on primary credit extended by the Fed is Multiple Choice below the IOER. above the IOER. equal to the IOER. consistently uncorrelated with the IOER.

above the IOER

Interest rate volatility is a problem because it rev: 01_15_2021_QC_CS-246754 Multiple Choice adds to uncertainty, thereby diminishing an investment. decreases risk. can impact productivity in a positive way. can make financial decisions less difficult.

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 Multiple Choice all banks, member or not. only member banks. member banks and nonmember banks with over $100 million in assets. only nationally chartered banks.

all banks, member or not

France, Germany, and Italy are Multiple Choice all members of the European Union and the Eurosystem. all members of the Eurosystem but not the European Union. all members of the European Union but not the Eurosystem. not members of either the Eurosystem or the European Union; they have their own economic union.

all members of the european union and the eurosystem

The Federal Reserve's Fedwire system is used mainly to provide Multiple Choice a means for foreign banks to transfer funds to U.S. banks. an inexpensive and reliable way for financial institutions to transfer funds to one another. an inexpensive way for individuals to pay their bills online. a means for the Treasury to collect tax payments.

an inexpensive and reliable way for financial institutions to transfer funds to one another

Each of the Reserve Banks has a president who is Multiple Choice appointed by the bank's board of directors but approved by the board of governors. appointed by the board of governors but approved by the bank's board of directors. elected by the commercial banks in their district. selected from the Board of Directors.

appointed by the bank's board of directors but approved by the board of governors

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

be a lender of last resort

Bonds issued by a foreign government in its own currency would Multiple Choice not be held by the Fed. be held by the Fed as part of its securities. be held by the Fed as part of its foreign exchange reserves. be held by the Fed as part of its loans.

be held by the fed as part of its foreign exchange reserves

Bonds issued by the U.S. Treasury would Multiple Choice not be held by the Fed. be held by the Fed as part of its securities. be held by the Fed as part of its foreign exchange reserves. be held by the Fed as part of its loans.

be held by the fed as part of its securities

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

be independent of political pressure

How did the Federal Reserve change its discount lending practices in 2002?

before 2002, the fed discouraged banks from borrowing at eh discount window and actually created volatility in the market for reserves.

Whenever central bankers face more than one goal, the policy framework requires Multiple Choice central bankers to always focus on inflation first. central bankers to focus on all goals, no matter what. economic growth to be the top priority. central bankers to make their priorities clear.

central bankers to make their priorities clear

Operation Bernhard was a German operation to attack the United Kingdom by using Multiple Choice German Panzers. counterfeit British pounds. tariffs and other trade barriers to limit British exports to Germany. sophisticated economic policy to discredit the British Parliament.

counterfeit british pounds

Each of the following items would appear as assets on the central bank's balance sheet except which one? Multiple Choice loans securities foreign exchange reserves currency

currency

The monetary base is the sum of Multiple Choice reserves and M2. M1 and reserves. currency in the hands of the public, reserves, and M1. currency in the hands of the public and reserves in the banking system.

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

A central bank's sale of securities from its portfolio will Multiple Choice decrease the size of its balance sheet. have no impact at all on the balance sheet. only change the composition of its liabilities. only change the composition of its assets.

decrease the size of its balance sheet

During the 1990s, the money multipliers for M1 and M2 Multiple Choice decreased. remained fairly constant even though the economy grew. the M1 multiplier decreased while the M2 multiplier increased dramatically. increased dramatically as the economy grew.

decreased

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

desired reserves do not always equal actual reserves

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

doesn't have stockholders

The Federal Reserve's Open Market Committee currently meets Multiple Choice monthly. biweekly. eight times a year. once every quarter, unless a crisis warrants more frequent meetings.

eight times a year

Which one of the following would give the most importance to the goal of exchange rate stability? Multiple Choice large, closed economies the United States and Japan and other developed countries emerging market countries where exports and imports are central to the structure of the economy Europe

emerging market countries where exports and imports are central to the structure of the economy

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

excess reserves

each of the following except which one? Multiple Choice commercial interests foreign interests financial interests agricultural interests

financial interest

Inflation targeting does all of the following, except which one? Multiple Choice increase policymakers' credibility increase policymakers' accountability communicate policymakers' objectives clearly and openly hinder economic growth

hinder economic growth

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

in 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 Multiple Choice decrease. increase. not change. decrease since failing banks lost theirs.

increase

A central bank's purchase of securities made by writing checks on itself will Multiple Choice decrease the size of its balance sheet. have no impact at all on the balance sheet. increase the size of their balance sheet. only change the composition of its assets.

increase the size of their balance sheet

In 1936, when the Fed doubled the reserve requirements, bank executives rev: 01_18_2021_QC_CS-246967 Multiple Choice allowed their excess reserves to decline. increased excess reserves to the new proposed level in advance of the change in requirements. maintained the level of excess reserves desired by the Fed. increased lending from remaining reserves, causing inflation.

increased excess reserves to the new proposed level in advance of the change in requirements.

For fiscal policymakers, one of the results of an independent central bank is that Multiple Choice to finance government spending, the Treasury has to order more currency from the central bank. fiscal policymakers always have to borrow to increase spending. fiscal policymakers cannot borrow unless the Federal Reserve prints more money. increased government spending has to be financed with either higher taxes or increased government borrowing.

increased government spending has to be financed with either higher taxes or increased government borrowing.

As the inflation rate Multiple Choice increases, inflation becomes less stable. decreases, inflation becomes less stable. decreases, inflation becomes more volatile. increases, inflation becomes more stable.

increases, inflation becomes less stable.

The collapse of the Thai currency, the baht, was partially due to Multiple Choice inaction by the Federal Reserve. actions taken by the European Central Bank. information kept hidden by the central bank of Thailand. central bankers and the Minister of Finance publishing too much information.

information kept hidden by the central bank of thailand

The policy directive that is produced from the FOMC meeting Multiple Choice details the exact amount of U.S. Treasury securities the System Open Market Account Manager is to purchase or sell. sets the specific discount rate for the next eight weeks. sets the specific range that the target interest rate can fall within. instructs the staff of the New York Fed on how to manage the Fed's balance sheet.

instructs the staff of the new york fed on how to manage the fed's balance sheet

The primary monetary policy tool most used by central banks today is Multiple Choice the quantity of M1. interest rates. the quantity of M2. the size of the money multiplier.

interest rates

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

inverse; high inflation usually means low economic growth

Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank Multiple Choice will keep interest rates low to keep the momentum. will now identify this new rate as the sustainable rate and try to maintain it. is likely to raise interest rates to slow the rate of growth. is likely to lower the interest rate thinking a slowdown is coming to offset this boom.

is likely to raise interest rates to slow the rate of growth

Fiscal policymakers may actually welcome some inflation for all of the following reasons except which one? Multiple Choice It potentially raises tax revenues. It reduces the real value of the national debt allowing governments to "default" on a portion of their debt. Interest payments tend to be fixed so the real interest payments are reduced. It weakens the independence of the central bank.

it weakens the independence of the central bank

During World War II, the Fed accommodated the war effort by Multiple Choice significantly curtailing credit in the economy. keeping bond prices high and interest rates low. selling any Treasury securities the public did not purchase. curtailing credit and keeping bond prices high.

keeping bond prices high and interest rates low

For most of the Fed's history, the Fed Multiple Choice loaned reserves at an interest rate below the target federal funds rate. provided far more loans to banks than they did to each other. was very lenient in making discount loans. tied the discount rate to the rate on Treasury securities.

loaned reserves at an interest rate below the target federal funds rate.

Each of the following items would appear as liabilities on the central bank's balance sheet except which one? Multiple Choice loans currency the government's account accounts of the commercial banks

loans

The main asset held by a central bank in its role as the bankers' bank is Multiple Choice foreign exchange reserves. currency loans. securities.

loans

Central bankers work to reduce the volatility of the economic and financial system by pursuing 5 objectives:

low and stable inflation high and stable real growth, together with high employment stable financial markets and institutions stable interest rates a stable exchange rate

During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet? Multiple Choice foreign exchange reserves U.S. Treasury securities mortgage-backed securities loans

mortgage-backed securities

Current law regarding the Fed's Board of Governors stipulates that Multiple Choice no more than three governors can come from the same district. no more than two governors can come from the same district. every district must have at least one governor on the board. no more than one governor can come from the same district.

no more than one governor can come from the same district

Higher than expected inflation will increase the Multiple Choice real interest rate borrowers pay on fixed rate mortgages. nominal amounts people need to save for retirement. real interest rate savers earn on fixed rate CDs. real interest rates both paid on mortgages and earned on CDs.

nominal amounts people need to save for retirement

The services that the Federal Reserve provides to foreign central banks and other international organizations are handled Multiple Choice directly by the Board of Governors in Washington, D.C. by any of the Reserve Banks. only by the Reserve Bank in New York. only by the Reserve Bank in San Francisco.

only by the reserve bank in new york

The quantity of securities held by the Federal Reserve is controlled through Multiple Choice the U.S. Treasury. the Fed's annual budget. open market operations. the purchases made by the regional Reserve Banks.

open market operations

The European equivalent of the U.S. market federal funds rate is called the Multiple Choice overnight cash rate. target refinancing rate. European discount rate. overnight repurchase rate.

overnight cash rate

Which one of the following statements is not true? Multiple Choice Periods of growth above the potential level are periods of high employment. Periods of growth below the potential level are periods of low unemployment. Periods of growth above the potential level are periods of low unemployment. Periods of growth below the potential level are periods of high unemployment.

periods of growth below the potential level are periods of low unemployment

Which one of the following cities has a Federal Reserve Bank located in it? Multiple Choice Denver Philadelphia Detroit Miami

philadelphia

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

policy makers offer plausible explanations for their decisions along with supporting data.

Monetary policy operations for central banks are run through changes in which liability category? Multiple Choice government's accounts currency reserves gold

reserves

The monetary base is the sum of Multiple Choice reserves and currency in the hands of the public. reserves and M2. currency in the hands of the public and M2. currency in the hands of the public M1.

reserves and currency in the hands of the public

If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must Multiple Choice equal the loss of reserves by the entire system. be equal to the net loss of reserves for the banking system. result in a multiple loss to the banking system. result in no change in reserves for the banking system.

result in no change in reserves for the banking system

The Fed is reluctant to change the required reserve rate because

small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits

The interest rate changes that result from the FOMC meetings can only be altered by Multiple Choice Congress. the Secretary of the Treasury during an economic crisis. the FOMC. by the U.S. President during a time of crisis.

the FOMC

The principal tool the Fed uses to keep the federal funds rate close to the target is rev: 01_18_2021_QC_CS-247003 Multiple Choice the required reserve rate. discount lending. open market operations. the IOER (interest rate on excess reserves).

the IOER (interest rate on excess reserves)

One thing the Fed has learned over the past 25 years is that Multiple Choice the money multiplier is fairly constant no matter what changes are made to the monetary base. the money multiplier is unstable over time. it should focus its attention on targeting M2. the money multiplier has a trend rate of growth that is fairly constant.

the money multiplier is unstable over time

Potential output depends on all of the following except which one? Multiple Choice technology the number of firms in the economy the size of the capital stock the number of people who can work

the number of firms in the economy

When the Fed makes a discount loan, the impact on the banking system's balance sheet is Multiple Choice an increase in liabilities with no change in assets. an increase in assets and a decrease in liabilities. a decrease in assets and an increase in liabilities. the same as that of an open market purchase.

the same as that of an open market purchase

Which one of the following is (are) not a permanent voting member(s) on the FOMC? Multiple Choice the seven Governors of the Fed the Secretary of the Treasury the President of the Federal Reserve Bank of New York the chair of the Board of Governors

the secretary of the treasury.

The Federal Reserve System is composed of Multiple Choice five branches with clear responsibilities. six branches with overlapping responsibilities. three branches with overlapping responsibilities. twelve branches with clear responsibilities.

three branches with overlapping responsibilities

A good monetary policy instrument is Multiple Choice observable only to monetary policy officials. tightly linked to monetary policy objectives. controllable and rigid. difficult to change.

tightly linked to monetary policy objectives

The number of voting members on the Federal Open Market Committee is Multiple Choice seven. eight. twelve. nineteen.

twelve

The FOMC

was less successful than the ECB at keeping the market rate closer to the target rate until the Fed began paying interest on reserves

The Federal Reserve Bank of New York is unique from other Reserve banks because it is Multiple Choice the only regional Bank that serves just one state. the only regional Bank located in a financial center. where the Federal Reserve System's portfolio is managed. the oldest and therefore the largest.

where the federal reserve system's portfolio is managed

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

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

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

are in trouble and cannot obtain a loan from anyone else

Targeted asset purchases are Multiple Choice statements today about policy targets in the future. expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. asset purchases that shift the composition of the Fed's balance sheet. asset purchases that increase the reserves held by the federal government.

asset purchases that shift the composition of the Fed's balance sheet.

The attendees at the FOMC meetings receive information prior to the meetings that is contained in books with colorful names. The information that is released to the public prior to the meetings is from the Multiple Choice Bluebook only. Beigebook only. Bluebook and Greenbook, but not the Tealbook. Beigebook and Bluebook but not the Greenbook.

beigebook only

the European system resembles the Multiple Choice FOMC. Board of Governors. Presidents of the regional Federal Reserve Banks. Chairman of the Board of Governors of the Fed.

board of governors

Criteria used to judge a central bank's independence include each of the following except which one? Multiple Choice budgetary independence long terms for members cabinet or ministry level of authority irreversible decisions

cabinet or ministry level of authority

The central bank has the ability to create money, which means that it Multiple Choicec an control the availability of money but not the availability of credit in the economy. can make loans only when other institutions can. can impact the rate of inflation. has an objective to maximize its profit.

can impact the rate of inflation

The Fed can do which of the following in the economy? Multiple Choice change interest rates but not the supply of money change the supply of money but not the interest rates change both interest rates and the supply of money change neither interest rates nor the supply of money

change both interest rates and the supply of money

As of 2019, even though the ECB charges a fee for accepting excess reserves, banks have not switched from holding reserves to holding cash in their vaults. Were they to make that switch, the policy impact of the negative deposit rate would become Multiple Choice negligible. expansionary. contractionary. indeterminate.

contractionary

The conventional policy tools available to the Fed include each of the following, except which one? Multiple Choice currency-to-deposit ratio discount rate target federal funds rate range reserve requirement

currency-to-deposit ration

median country is likely to be Multiple Choice Italy. very large. fairly small. growing more rapidly than the others.

fairly small

Since the Great Recession in the United States, reserves have been so abundant that the rev: 01_18_2021_QC_CS-246776 Multiple Choice federal funds rate is not easily manipulated with open market operations. Fed cannot affect the federal funds rate. Fed prefers to target the discount rate. IOER (interest rate on excess reserves) is ineffective.

federal funds rate is not easily manipulated with open market operations

In the U.S., the authority to issue currency is held by the Multiple Choice Federal Reserve. U.S. Treasury. Office of the Comptroller of the Currency. U.S. Mint.

federal reserve

The idea that central banks should be independent of political pressure is an idea that Multiple Choice has been around since there were central banks. is relatively new. every central bank was founded upon. became quite popular in the early 1900s.

is relatively new

All of the following are true about central bank independence except that it Multiple Choice is usually given at the pleasure of governments. can be eliminated by governments in a time of crisis. is usually guaranteed by a country's constitution. can be subverted by the actions of fiscal policymakers.

is usually guaranteed by a country's constitution.

The experience of the Marcos presidency in the Philippines in 1986 showed that Multiple Choice publishing central bank balance sheets ensures their accuracy. desperation is positively correlated with sound monetary policy. transparency is unimportant for building citizens' trust in the central bank. it is important to keep the central bank independent from political pressure.

it is important to keep the central bank independent from political pressure

Which one of the following statements is true? Multiple Choice Printing currency can be a profitable venture for a government. Printing currency, while necessary, is a losing venture for a government. Printing too much money usually leads to lower prices. In the modern economy the amount of money created has no effect on prices.

printing currency can be a profitable venture for a government

Many governments give their central bank control over issuing currency because Multiple Choice printing currency can be profitable for a government, providing a strong incentive to print too much. having large amounts of currency can lead to lower rates of inflation. central banks use the profits from issuing currency to finance their operations. the only way to distribute currency to banks is through the central bank.

printing currency can be profitable for a government, providing a strong incentive to print too much.

Fed would likely be to rev: 01_18_2021_QC_CS-247006 Multiple Choice raise the IOER (interest rate on excess reserves). purchase U.S. Treasury securities. sell U.S. Treasury securities. raise the discount rate.

raise the IOER(interest rate on excess reserves)

excess reserves in the Eurosystem's banks. What has changed this in recent years? Multiple Choice The deposit facility interest rate fell Commercial banks increased their lending to other commercial banks. ECB policy changed, which made it more difficult to keep reserves in the deposit facility. As the ECB began selling large quantities of sovereign bonds, banks' excess reserve levels fell dramatically.

the deposit facility interest rate fell