LearningCurve - Chapter 34: The Federal Reserve System and Open Market Operations

Which statement is TRUE?

*The Federal Funds rate is overnight lending rate from one major bank to another. *The U.S. Federal Reserve uses interest payments on reserves to control the money supply. *Under fractional reserve banking, banks hold only a small portion of deposits in reserve, and they lend the rest. *When banks are confident that depositors will not want to withdraw their cash or when loans seem profitable, they want a reserve ratio that is relatively low. *People would be more likely to invest their savings in bank alternatives if the reserve ratio is 100 percent. *Systemic risk is the risk that the failure of one financial institution can bring down other institutions as well.

The Federal Reserve does all of these activities EXCEPT:

*set marginal tax rates. *print money to pay federal employee salaries. *calculate labor market statistics, such as the unemployment rate.

Suppose that the money multiplier is 10. If reserves increase by $1,000, by how much will the money supply increase?

$10,000

If banks want to maintain a reserve ratio of 1/10, and the Fed increases reserves by $10,000, by how much must the money supply increase?

$100,000

Suppose that banks want to maintain a reserve ratio of 1/10. If the Fed increases reserves by $5,000, by how much must the money supply increase?

$50,000

Which is FALSE?

*Banks earn profit on deposits. *Banks hold reserves only to meet ordinary depositor demands for currency and payment services.

Which is TRUE?

*The money multiplier is the amount the money supply expands with each dollar increase in reserves. *The money supply will increase by more than the initial change in reserves.

What is something that the Federal Reserve does?

*regulate banks *issue money *protect consumers with disclosure regulations

The discount rate sets the _____ of the reserves that the Fed will lend. The term auction facility sets the _____ of the reserves that the Fed will lend.

interest rate; quantity

Which help(s) to reduce the probability of a liquidity crisis? I. the existence of the FDIC II. the Fed's role as lender of last resort III. the existence of the Federal Open Market Committee

I and II

Currency is part of:

M1, M2, and MB.

Which statement is FALSE?

Quantitative easing occurs when the Fed sells longer-term government bonds or other securities.

Which event would occur first as a part of the Fed using monetary policy to increase aggregate demand?

The Fed buys bonds in an open market operation.

The world's largest bank customer is the:

U.S. Treasury.

What is also known as a Federal Reserve note?

a U.S. dollar

If the Fed wants to decrease interest rates, it should:

buy bonds in open market operations.

ΔReserves × MM equals the:

change in the money supply.

The monetary base (MB) includes:

currency and total reserves held at the Fed.

The Fed's actions do not change aggregate demand by any guaranteed amount, because it is NOT known:

exactly how much the change in interest rates will change investment spending.

A solvent, illiquid bank is one whose short-term liabilities are:

greater than its short-term assets, but whose overall assets are greater than its liabilities.

As a result of the financial crisis of 2007-2008, the Fed:

has become much more active and has assumed greater powers.

Which is one of the services that the Federal Reserve performs for the U.S. government?

maintaining the U.S. Treasury's bank account

One problem with discount window lending that does not apply to the term auction facility is banks may:

not borrow for fear of admitting to the market that they are in a weak position.

The size of the money multiplier is:

not fixed but depends on how much of their assets banks want to hold as reserves.

The Federal Funds rate is the:

overnight lending rate from one major bank to another.

The Federal Reserve creates money:

primarily by electronically adding reserves to bank accounts held at the Fed.

What does RR stand for?

reserve ratio

Of these assets, which is the LEAST liquid?

savings deposits

If the Fed wants to increase interest rates, it should:

sell bonds in open market operations.

The Fed has the most influence over:

short-term real interest rates.

The bank account of the U.S. Treasury is maintained by:

the Federal Reserve.

The Federal Reserve's customers are:

the government and private banks.

The independence of the Federal Reserve:

worries some people who would prefer that the Fed be more accountable.

If banks want a reserve ratio of 1/10 and the Fed increases reserves by $1,000, by how much must the money supply increase?

$10,000

What is one of the reasons that banks keep their accounts at the Federal Reserve?

*Some banks are required by law to hold accounts with the Federal Reserve. *They want a safe place to hold their money.

What is the formula for the money multiplier?

1 ÷ RR

If the reserve ratio is 1/10, what is the money multiplier?

10

The Federal Open Market Committee has how many members?

12

What effect does a decrease in reserves have on the money supply?

A decrease in reserves decreases both M1 and M2.

What is NOT one of the reasons that banks keep their accounts at the Federal Reserve?

Interest paid by the Federal Reserve exceeds the returns from any other type of investment.

The MOST important and influential part of the Fed system is the:

Open Market Committee.

Of the events that might occur as a part of the Fed's use of monetary policy, which would probably NOT occur if the Fed's goal was to decrease aggregate demand?

The monetary base increases.

The term auction facility sets _____, and then the Fed _____.

a certain quantity of reserves; reduces the interest rate until banks borrow the money