Money and Banking Chapter 17

Does the Federal Reserve frequently purchase or sell gold or foreign exchange as part of its efforts to change the money supply?

No, Fed transactions in foreign exchange and gold are infrequent and are not used to alter the money supply.

Suppose you examine the central bank's balance sheet and observe that since the previous day, reserves had fallen by $100 million. In addition, on the asset side of the central bank's balance sheet, securities had fallen by $100 million. What activity did the central bank carry out earlier in the day to lead to these changes in the balance sheet?

The central bank conducted an open market sale. By carrying out this activity, the central bank was aiming to decrease the size of the money supply.

In which of the following cases will the size of the central bank's balance sheet change? Case A: The Federal Reserve conducts an open market purchase of $100 million of U.S. Treasury securities. Case B: A commercial bank borrows $100 million from the Federal Reserve. Case C: The amount of cash in the vaults of commercial banks falls by $100 million due to withdrawals by the public.

The size of the central bank's balance sheet will increase by $100 million in Cases A and B, but not in Case C, where only a change in the composition of central bank liabilities will occur.

In carrying out open market operations, the Federal Reserve usually buys and sells U.S. Treasury securities. Suppose the U.S. government paid off all its debt. Could the Federal Reserve continue to carry out open market operations?

Yes. The Fed could use other assets besides Treasury securities to carry out its open market operations. These alternative assets would have to be traded in deep, highly active markets to avoid the Federal Reserve's actions causing distortions.

Do you think the Federal Reserve successfully carried out its role as lender of last resort in the wake of the terrorist attacks on September 11, 2001?

Yes. The system was threatened by the inability to collect checks in the absence of civilian flights. The Fed stepped in and provided huge amounts of liquidity to enable banks to meet their commitments.

An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show:

a decrease in the asset of securities and a decrease in the liability of reserves.

Vault cash is:

a part of reserves and an asset of commercial banks.

A liability of the central bank in functioning as the bankers' bank is:

accounts of commercial banks.

Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check. When the check returns, the Fed's balance sheet will show:

an increase in assets and liabilities of $1 million.

Reserves are:

assets of commercial banks and liabilities of the central bank.

Each of the following items would appear as assets on the central bank's balance sheet except which one?

currency TRUE: loans, securities, foreign exchange reserves

The monetary base is the sum of:

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

In the United States, loans made by Federal Reserve to banks are:

discount loans

The Federal Reserve failed to keep the financial system operational during the 1930s because it:

failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money.

A central bank holds foreign exchange reserves for:

foreign exchange interventions.

On the morning of September 11, 2001, terrorists attacked the United States and caused enormous disruptions. In assessing the performance of the Fed and the impact on financial systems in hindsight, this is a story of:

great success by the Federal Reserve.

The monetary base is also known as:

high powered money

During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet?

mortgage backed securities

The quantity of securities held by the Federal Reserve is controlled through:

open market operations

As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is:

securities