Unit 13: The Federal Reserve

Where can demand deposits, checking accounts, paper currency and coins be found in the money supply? A) M1, M2, and M3 B) M2 only C) M1 only D) M1 and M3 only

A) M1, M2, and M3 Demand deposits, checking accounts, paper currency, and coins are a part of M1 in the money supply. However, consider that M2 contains all of M1, and M3 contains all of M2 and M1; therefore, one should recognize that these components are found in each of them: M1, M2, and M3,

If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur? A) Smaller banks will lower lending rates for creditworthy corporate customers as well. B) Smaller banks will need to offset the lower prime rate by increasing the broker call loan rate. C) Smaller banks will need to increase their lending rates for creditworthy corporate customers. D) Smaller banks will follow by lowering the discount rate.

A) Smaller banks will lower lending rates for creditworthy corporate customers as well. When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the Federal Reserve Board (FRB) (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased).

The monetarist theory proposes which of the following? A) The Federal Reserve may impact the economy by raising and lowering the discount rate. B) The federal government can impact the economy by raising and lowering the federal funds rate. C) The Federal Reserve has a major impact on the economy by raising and lowering taxes. D) The federal government impacts the economy through repurchase and reverse repurchase agreements.

A) The Federal Reserve may impact the economy by raising and lowering the discount rate. The Federal Reserve controls the discount rate and repurchase and reverse repurchase agreements. The federal government controls taxes and spending.

When the Federal Reserve Board (FRB) wants to expand (loosen) the money supply, it will A) buy Treasury securities from banks in the open market. B) buy corporate securities from banks in the open market. C) sell Treasury securities to banks in the open market. D) sell corporate securities to banks in the open market.

A) buy Treasury securities from banks in the open market. When the FRB wants to expand (loosen) the money supply, it will buy Treasury securities from banks in the open market. The securities come out of the economy, and the money goes into the economy.

The best characterization of how economists view the money supply is A) cash, loans, different forms of credit, and other liquid instruments. B) paper money and coinage only. C) all forms of cash and liquid instruments but no forms of credit. D) savings and checking accounts and all lines of credit but not paper money or coins.

A) cash, loans, different forms of credit, and other liquid instruments. Economists take a broad view of the money supply and include within it all cash (paper money and coins), loans, credit, and other liquid instruments, such as savings and checking accounts.

When the demand for money exceeds the supply, A) interest rates rise, making consumer borrowing more difficult. B) interest rates rise, making consumer borrowing easier. C) interest rates fall, making consumer borrowing easier. D) interest rates fall, making consumer borrowing more difficult.

A) interest rates rise, making consumer borrowing more difficult. Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult.

To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board (FRB) can A) lower the discount rate. B) lower the federal funds rate. C) raise the federal funds rate. D) raise the discount rate.

A) lower the discount rate. Wanting to ease its monetary policy, which would allow consumers to borrow more easily, the FRB can lower the discount rate—the rate it charges its member banks for short-term loans. This frees up more money for its member banks to lend to consumers. The federal funds rate isn't one charged by the FRB but instead by large commercial banks to one another.

The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically A) slightly above (a percentage point or so) other short-term lending rates. B) notably below (several percentage points) other short-term lending rates. C) notably above (several percentage points) other short-term lending rates. D) slightly below (a percentage point or so) other short-term lending rates.

A) slightly above (a percentage point or so) other short-term lending rates. The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates.

A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from A) the Federal Reserve Board (FRB) at the discount rate. B) another FRB member bank at the discount rate. C) another FRB member bank at the prime rate. D) the Federal Reserve Board (FRB) at the federal funds rate.

A) the Federal Reserve Board (FRB) at the discount rate. A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.

A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the broker call loan rate. B) the discount rate. C) the prime rate. D) the federal funds rate.

A) the broker call loan rate. The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to relend to margin account customers.

A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the broker call loan rate. B) the federal funds rate. C) the prime rate. D) the discount rate.

A) the broker call loan rate. The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to relend to margin account customers.

The rate that commercial money center banks charge each other for overnight loans is A) the federal funds rate. B) the broker call loan rate. C) the prime rate. D) the discount rate.

A) the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.

When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates? A) Discount B) Broker call loan C) Federal funds D) Prime

B) Broker call loan Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).

Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Prime rate B) Discount rate C) Call loan rate D) Margin rate

B) Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.

The prime rate is set by A) the Federal Open Market Committee (FOMC). B) individual banks. C) the Securities and Exchange Commission (SEC). D) the Federal Reserve Board (FRB).

B) individual banks. The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate.

Considered the most volatile of the benchmark interest rates in the economy would be A) the discount rate. B) the federal funds rate. C) the broker call loan rate. D) the prime rate.

B) the federal funds rate. The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.

The interest rate negotiated for an uncollateralized overnight loan between two money center banks is known as A) the repo rate. B) the federal funds rate. C) the discount rate. D) the prime rate.

B) the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured (no collateral) loan.

The rate that commercial money center banks charge each other for overnight loans is A) the discount rate. B) the federal funds rate. C) the broker call loan rate. D) the prime rate.

B) the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.

To arrive at M3, one would add to M2 which of the following? A) Gold and silver bars held on reserve at the FR B) Savings and checking accounts C) $100,000 and larger time deposits and repurchase agreements D) All currency in circulation, including coins

C) $100,000 and larger time deposits and repurchase agreements Included in M3 but not found in M2 are time deposits of more than $100,000 and repurchase agreements with terms longer than one day.

Currency held by the public, including checking accounts and time deposits less than $100,000, and money market mutual funds would best be described by economists as A) M1. B) M3. C) M2. D) M4.

C) M2. M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.

Within the money supply, which of the following are part of M2 but not M1? A) Demand deposits at S&Ls B) Currency in circulation C) Money market mutual funds D) Checking accounts at commercial banks

C) Money market mutual funds Money market funds are part of M2 but not M1. M2 includes everything in M1, plus time deposits and money market funds.

Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans? A) Federal funds rate B) Broker call loan rate C) Prime rate D) Discount rate

C) Prime rate Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans.

Which benchmark interest rate indicates the direction of the Federal Reserve Board's monetary policy? A) The prime rate B) The federal funds rate C) The discount rate D) The broker call loan rate

C) The discount rate The discount rate, being the rate the Federal Reserve Bank (FRB) charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers.

When the supply for money exceeds the demand, A) interest rates fall, making consumer borrowing more difficult. B) interest rates rise, making consumer borrowing more difficult. C) interest rates fall, making consumer borrowing easier. D) interest rates rise, making consumer borrowing easier.

C) interest rates fall, making consumer borrowing easier. Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the supply is greater than the demand for money, interest rates fall, making consumer borrowing easier.

When the demand for money exceeds the supply, A) interest rates rise, making consumer borrowing easier. B) interest rates fall, making consumer borrowing easier. C) interest rates rise, making consumer borrowing more difficult. D) interest rates fall, making consumer borrowing more difficult.

C) interest rates rise, making consumer borrowing more difficult. Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult.

When the Federal Reserve Board (FRB) wants to contract (tighten) the money supply, it will A) buy Treasury securities from banks in the open market. B) sell corporate securities to banks in the open market. C) sell Treasury securities to banks in the open market. D) buy corporate securities from banks in the open market.

C) sell Treasury securities to banks in the open market. When the FRB wants to contract (tighten) the money supply, it will sell Treasury securities to banks in the open market. The securities go into the economy, and the money comes out of the economy.

Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)? A) By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates. B) By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. C) By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates. D) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.

D) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.

Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Call loan rate B) Margin rate C) Prime rate D) Discount rate

D) Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.

Large time deposits of more than $100,000 are considered to be found in what part of the money supply? A) M1 and M2 B) M2 C) M1 D) M3

D) M3 M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.

Match the following statement to the best expression: A well-controlled, moderately increasing money supply leads to price stability and a healthy economy. A) Socialism B) Keynesian Theory C) Balance of payments D) Monetarist Theory

D) Monetarist Theory Monetarists judge that a well-controlled, moderately increasing money supply leads to price stability. Price stability allows business managers (considered to be more efficient allocators of resources than the government) to plan and invest, which in turn keeps the economy healthy.

Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans? A) Federal funds rate B) Discount rate C) Broker call loan rate D) Prime rate

D) Prime rate Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans.

The cost of doing business is closely linked to the cost of money, which is known as A) M1. B) supply. C) demand. D) interest.

D) interest. The cost of doing business is closely linked to the cost of money; the cost of money is called interest. In large measure, the supply and demand of money determines the rate of interest that must be paid to borrow it.

Federal Reserve member banks needing to borrow money can borrow from A) the Federal Reserve Bank at the federal funds rate. B) member firms at the discount rate. C) nonmember banks at the federal funds rate. D) the Federal Reserve Bank at the discount rate.

D) the Federal Reserve Bank at the discount rate. Federal Reserve member banks needing to borrow have two resources: the Federal Reserve Bank itself, which will lend to them at the discount rate, and other member banks, who will lend to one another at the federal funds rate.

A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following? A) The discount rate B) The federal funds rate C) The prime rate D) the broker call loan rate

D) the broker call loan rate The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.