Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) Federal Reserve interest rate decisions can be vetoed
by the U.S. president or the Congress.

⊚ true
⊚ false

2) Four seats on the FOMC are allocated to Federal

Reserve Bank presidents on an annual rotating basis.

⊚ true
⊚ false

3) The monetary base is the amount of coin and currency

in circulation plus reserves.

⊚ true
⊚ false

4) Nationally chartered banks are required to become

members of the Federal Reserve System.

⊚ true
⊚ false

5) About 38 percent of all U.S. banks are members of the

Federal Reserve System.

⊚ true
⊚ false

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6) The major asset of the Federal Reserve is currency
outside banks and the major liability is U.S. Treasury
securities.

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 ⊚ true ⊚ false

7) The seven members of the Board of Governors of the

Federal Reserve System serve 14-year nonrenewable terms.
Each Board member is appointed by the president and
confirmed by the Senate.

⊚ true
⊚ false

8) Federal Reserve Board members are appointed by the nonrenewable 10-year

U.S. president and confirmed by the Senate for a term.

⊚ true
⊚ false

9) If the FOMC wished to generate faster economic

growth, they could issue a policy directive to the Federal
Reserve Board Trading Desk to purchase U.S. government
securities.

⊚ true
⊚ false

10) An increase in Treasury securities held by the Fed

leads to a decrease in the money supply.

⊚ true
⊚ false

11) One of the objectives of the FOMC is to formulate

policies to promote 100 percent employment.

⊚ true
⊚ false

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12) During the 2010–2014 period, the Federal Reserve Quantitative Easing
purchased long-term treasury securities as part of the program.

⊚ true
⊚ false

13) The Quantitative Easing program initiated by the purchase of long-term

Federal Reserve during the 2010–2014 period, involved the corporate bonds.

⊚ true
⊚ false

14) According to the FOMC regarding actions taken in

2012, inflation targeting promotes maximum employment.

⊚ true
⊚ false

15) Countries with independent central banks are subject

to political pressure to conduct monetary policies with short-
term expectations.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
16) The primary policy tool used by the Fed to meet its
monetary policy goals is:

D) changing bank
A) changing the discount rate.
B) changing reserve requirements.
C) devaluing the currency.

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regulations.
E) open market operations.

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17) The Federal Reserve System is charged with:

E) conducting
A) regulating securities exchanges. monetary policy and
B) conducting monetary policy. providing payment and
C) providing payment and other services to a variety other services to a variety
of institutions. of institutions.
D) setting bank prime rates.

18) The _______________ is a nationwide network

jointly operated by the Fed and private institutions that
electronically process credit and debit transfers of funds.

D) NASDAQ
A) Fedwire E) SWIFT
B) ACH
C) CHIPS

19) The _____________ is a network linking over 5,300

banks with the Federal Reserve that is used to transfer
deposits and make loan payments between participants.

D) NASDAQ
A) Fedwire E) SWIFT
B) ACH
C) CHIPS

20) All else held constant, if the Fed was targeting the would likely
quantity of money supplied and money demand dropped, the _______________.
Fed would likely ______________. If the Fed was instead
targeting interest rates and money demand dropped, the Fed

E) increase the
A) increase the money supply; do nothing money supply; decrease
B) do nothing; decrease the money supply the money supply
C) decrease the money supply; do nothing
D) do nothing; increase the money supply

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21) Which of the following is the major monetary policy-
making body of the U.S. Federal Reserve System?

D) U.S. Congress
A) FOMC E) Group of Eight
B) OCC
C) FRB bank presidents

22) The major liability of the Federal Reserve is:

E) gold and
A) U.S. Treasury securities. foreign exchange.
B) depository institution reserves.
C) currency outside banks.
D) vault cash of commercial banks.

23) The major asset of the Federal Reserve is:

E) gold and
A) U.S. Treasury securities. foreign exchange.
B) depository institution reserves.
C) currency outside banks.
D) vault cash of commercial banks.

24) The Fed funds rate is the rate that:

reserves.
A) banks charge for loans to corporate customers. E) banks charge
B) banks charge to lend foreign exchange to securities dealers to
customers. finance their inventory.
C) the Federal Reserve charges on emergency loans
to commercial banks.
D) banks charge each other on loans of excess

25) The discount rate is

the rate that:

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 inventory.
A) banks charge for loans to corporate customers. E) the Federal
B) banks charge to lend foreign exchange to Reserve charges on loans
customers. to commercial banks.
C) banks charge each other on loans of excess
reserves.
D) banks charge securities dealers to finance their

26) The Fed offers three types of discount window loans. troubled institutions with
______________ credit is offered to small institutions with more severe liquidity
demonstrable patterns of financing needs, _____________ problems.
credit is offered for short-term temporary funds outflows, and
_____________ credit may be offered at a higher rate to

E) Adjustment;
A) Seasonal; extended; adjustment seasonal; extended
B) Extended; adjustment; seasonal
C) Adjustment; extended; seasonal
D) Seasonal; primary; secondary

27) Before 2003 the discount window loan rate was set:

D) equal to the
A) below the target Fed funds rate. repurchase rate.
B) above the target Fed funds rate.
C) equal to the target Fed funds rate.

28) A decrease in reserve requirements could lead to an:

E) increase in
A) increase in bank lending. bank lending and an
B) increase in the money supply. increase in the discount
C) increase in the discount rate. rate.
D) increase in bank lending and an increase in the
money supply.

29) Bank A has an increase in deposits of $20 million dollars and all bank reserve

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requirements are 10 percent. Bank A loans out the full amount C. What is the total
of the deposit increase that is allowed. This amount winds up increase in deposits
deposited in Bank B. Bank B lends out the full amount resulting from these three
possible as well and this amount winds up deposited in Bank banks?

D) $57.10 million
A) $48.00 million E) $60.00 million
B) $54.20 million
C) $56.33 million

30) The Fed changes reserve requirements from 10

percent to 7 percent, thereby creating $900 million in excess
reserves. The total change in deposits (with no drains) would
be:

D) $3,795 million.
A) $3,000 million. E) None of these
B) $15,625 million. choices are correct.
C) $12,857 million.

31) If the Fed wishes to stimulate the economy, it could:

1.I. buy U.S. government securities.
2.II. raise the discount rate.
3.III. lower reserve requirements.

D) II only
A) I and III only E) I, II, and III
B) II and III only
C) I and II only

32) Currently the Fed sets monetary policy by targeting:

E) the stock
A) the Fed funds rate. market.
B) the prime rate.
C) the level of nonborrowed reserves.
D) the level of borrowed reserves.

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33) From October 1982 to July 1993, the Federal Reserve
targeted:

D) M1.
A) the Fed funds rate. E) M3.
B) borrowed reserves.
C) nonborrowed reserves.

34) Assume oil prices rise in the United States, generating

concerns that inflation may increase. If the Fed wishes to
ensure that inflation does not get out of hand, the Fed could:

E) reduce reserve
A) intervene in the currency markets to push the requirements at banks.
value of the dollar down.
B) decrease the discount rate.
C) lower the target Fed funds rate.
D) lower the target money supply growth rate.

35) The Fed changes reserve requirements from 10

percent to 14 percent, thereby eliminating $750 million in
excess reserves. The total change in deposits (with no drains)
would be (rounded):

D) $4.934 billion.
A) $7.917 billion. E) None of these
B) $6.630 billion. choices are correct.
C) $5.357 billion.

36) The Fed increases bank reserves in the system by $75

million. If there are no drains, the expected change in bank
deposits is:

D) $1,500 million.
A) $82.5 million. E) $655 million.
B) $945 million.
C) $750 million.

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37) If the Fed is targeting interest rates and money
demand increases, an appropriate policy response would be
to:

D) increase
A) increase reserve requirements. government spending.
B) increase the discount rate. E) None of these
C) buy U.S. Treasury securities from government choices are correct.
bond dealers.

38) The major monetary policy-making arm of the Federal

Reserve is the:

E) None of these
A) Board of Governors. choices are correct.
B) Council of Federal Reserve Bank presidents.
C) Office of the Comptroller of the Currency.
D) Federal Reserve Bank of New York.

39) In the area of bank supervision, which of the following

are functions of the Federal Reserve Banks? 1.I.
Examinations of state member banks
2.II. Approval of member bank and bank holding company
acquisitions
3.III. Deposit insurance

D) I and III only

A) I only E) I, II, and III
B) I and II only
C) II and III only

40) The Check 21 Act, effective in October 2004, does

which of the following?

of bank float
A) Allows bank customers to better take advantage B) Requires banks

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to immediately clear all customer deposits facilitate paperless check
C) Prohibits the Fed from being involved in check clearing
clearing to prevent unfair competition with private check E) Eliminates all
clearing agencies fees on checking
D) Authorizes the use of an electronic image to

41) A bank has $770 million in checkable deposits. The

bank has $85 million in reserves. The bank's required reserves
are _____________ and its excess reserves are
_____________.

E) $77 million; $8
A) $85 million; $0 million
B) $770 million; $85 million
C) $89 million; $21 million
D) $685 million; $8.5 million

42) The Federal Reserve does all but which one of the
following?

facilities
A) Conducts monetary policy E) Insures
B) Supervises and regulates bank activities deposits
C) Serves as the commercial bank for the U.S.
Treasury
D) Operates check clearing and wire transfer

43) Which of the following is not a goal of monetary

policy?

D) Stable prices
A) Moderate long-term interest rates E) All of these
B) Stable interest rates choices are correct.
C) High employment

44) Which of the

following is not a program

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initiated by the world’s major central banks during the
financial crisis of 2007 to avoid a deep worldwide recession?

E) Asset
A) Expansion of retail deposit insurance purchases/guarantees
B) Capital injections
C) Purchase of U.S. dollars
D) Debt guarantees

45) What are the intended consequences from charging an

interest on excess reserves by Central banks?

E) All of these
A) Banks lend less money. choices are correct.
B) Interest rates increase.
C) Banks deposits increase.
D) Banks lend more money.

46) In the aftermath of the 2007 financial crisis, the Fed

used several programs to increase liquidity, including
________.

E) All of these
A) expansion of the discount window choices are correct.
B) setting up the Term Auction Facility
C) lending to investment banks
D) purchase of long-term treasury bonds

SHORT ANSWER. Write the word or phrase that best

completes each statement or answers the question.
47) What are the four major functions of the Federal
Reserve System?

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48) The 12 Federal Reserve Banks perform what functions?

49) How do Federal Reserve Banks generate income? Do

they require supplemental funding from Congress?

50) Why did the Fed switch from increasing rates prior to
2007 to reducing interest rates in 2007 and 2008?

51) What are the main responsibilities of the FOMC?

52) Explain how a change in open market operations can

affect a new college graduate.

53) How have changes in discount window credit

programs affected the use of this tool for monetary policy
over time?

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54) Explain how the deposit multiplier works.

55) The Fed wishes to expand the money supply. What

three things can it do? Which has the most predictable effect?
Be specific.

56) Is there a trade-off between controlling domestic

inflation and maintaining a sustainable pattern of international
trade?

57) Suppose that oil prices hit an all-time high of $200 a

barrel, driving U.S. inflation up to 7 percent per year. At the
same time, weak U.S. growth and increasing foreign
competition have generated unacceptably high levels of
unemployment in the United States. You are the chair of the
Federal Reserve. What do you suggest?

58) What does the 2004

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Check 21 Act allow? Why was this law passed? Does it
benefit the customer or banks? Explain.

59) What supervisory and regulatory authority does the

Fed have under current law?

60) Why do changes in reserve requirements have less changes in open market
predictable effects on the money supply in comparison to operations?

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Answer Key

Test name: Chapter 4

1) FALSE
2) TRUE
3) TRUE
4) TRUE
5) TRUE
6) FALSE
7) TRUE
8) FALSE
9) TRUE
10) FALSE
11) FALSE
12) TRUE
13) FALSE
14) TRUE
15) FALSE
16) E
17) E
18) B
19) A

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20) B
21) A
22) C
23) A
24) D
25) E
26) D
27) A
28) D
29) B
20 + (20 × 0.90) + (18 × 0.90)
30) C
(1/0.07) × $900 million

31) A
32) A
33) B
34) D
35) C
(1/0.14) × $750 million
36) C
(1/0.10) × $75 million

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37) C
38) E
The Federal Open Market Committee is the
correct answer.
39) B
40) D
41) E
Required = 10% ($770); Excess = $85 − 10%
($770)
42) E
43) B
44) C
45) D
46) E
47) 1.Conducts monetary policy 4.Provides
2.Supervises and regulates depository payment and other
institutions services to
3.Maintains the stability of the financial institutions
system
48) 1.Assist in monetary policy protection laws and
2.Supervise and regulate district state- establish programs
chartered member banks and bank holding to promote access to
companies credit and
3.Write regulations to implement consumer community

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development 7.Provide wire
4.Serve as commercial banks for the U.S. transfer services
Treasury 8.Provide
5.Distribute and replace currency economic research
6.Provide check clearing services for monetary policy

49) They generate income by: ● Interest The Fed does not
earned on government securities acquired in need supplemental
open market transactions funding from
● Interest earned on reserves that banks are Congress.
required to deposit at the Fed
● Fees from services and membership fees
50) The growing problems in the housing Banks were cutting
markets led to problems in the subprime risky lending
mortgage markets. Many financial institutions because of the
held or guaranteed mortgage-backed problems in their
securities, which were becoming increasingly mortgage loans and
risky in 2007 and early 2008. It became mortgage-backed
apparent that banks had made too many risky securities, and the
mortgage-backed loans with borrowed funds. resulting "credit
Lenders to these institutions were wary of crunch" (banks’
accepting mortgage collateral, causing short- unwillingness to
term funding problems at banks and lend) led to rapidly
investment banks. The Fed began to slowing economic
aggressively cut interest rates to help the growth.
mortgage market, particularly the subprime
portion, and to encourage economic growth.
51) Promote full employment; promote promote sustainable
economic growth; promote price stability;

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pattern of international trade.
52) If the Fed increases bank reserves by forth, will likely be
buying securities, interest rates on all loan lower, not to
types will be affected. For instance, when mention that the
interest rates fall, corporations will likely have value of your stock
more projects with positive NPVs, leading to holdings would
more spending and more jobs. A college probably go up.
graduate is then more likely to get hired, and
your interest rates on new cars, homes, and so
53) In the past, the discount rate was kept window to nonbank
below the Fed funds rate to allow troubled brokers and dealers
banks that could not obtain private credit to who were
borrow on an emergency basis. Changes in the experiencing
announced discount rate signaled to investors liquidity problems
about the way the Fed wanted interest rates to in their mortgage
move. Under the new rules, however, the portfolios.
discount rate is generally tied to the current Securities firms
Fed funds rate target. This largely eliminates could exchange
the use of the discount rate as a signal to the some of their
market. In recent years the FOMC has illiquid mortgage
announced a target Fed funds target rate and assets with the Fed
the discount rate is adjusted as the Fed funds for liquid Treasury
target is changed. securities.

In early 2008, the Fed opened the discount

54) Suppose the Fed increases bank reserves funds are deposited
via open market operations. The bank now has in another bank.
too many excess reserves that earn no interest, The second bank
so it seeks to loan out the funds. The lent keeps some funds in

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the form of required reserves and lends the equal to Δreserves ×
rest. The second loan is also redeposited at 1/reserve
another bank and a portion of those funds is requirement.
lent again, and so forth. At the limit, a change
in reserves increases deposits by the amount
55) The Fed can expand money supply by: ● most predictable
Buying U.S. government securities. effect.
● Decreasing the discount rate.
● Decreasing reserve requirements.
Buying U.S. government securities has the
56) Yes. If the United States curtails money less, possibly
supply growth to the point that U.S. inflation leading to a large
is lower than inflation elsewhere, the dollar and potentially
will tend to appreciate against foreign unsustainable trade
currencies. With a strong dollar, the United deficit.
States will tend to import more and export
57) This is a very difficult scenario for the Fed higher prices.
chair. It is called stagflation and the Alternative policy
combination of high inflation and actions may include
unemployment reduces the effectiveness of fiscal spending,
any monetary policy action to provide removing the
sustained relief to the economy's problem. factor(s) causing the
Increasing bank excess reserves and lowering problems (such as a
interest rates may reduce unemployment supply constraint
temporarily, but these actions will also likely causing a lack of oil
exacerbate inflation, drive up wages, and with availability), or
a higher labor supply cost, will eventually perhaps stimulating
drive unemployment back up. The end result greater global
is that the employed and the unemployed face

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growth to help U.S. domestic demand to begin
growing.

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58) The Check 21 Law authorizes the use of that reduces
an electronic image as a substitute document customer's ability to
for a paper check and helps move the financial "play the float." The
system toward paperless, electronic transfers. float is the time
It was passed because of the September 11 period between
attacks that grounded cargo planes that fly tendering a check
checks all over the country. Switching to and your account
electronic check images saves an estimated $3 being debited,
billion per year for the banking industry. If which used to be as
these cost savings are passed on to customers many as several
in the form of better deposit rates or reduced days. Checks may
checking fees, customers benefit. However, now instantly clear.
the law facilitates speedier clearing of checks
59) The Fed has the authority to: 1.conduct acquisitions and
examinations and inspections of member other line-of-
banks, bank holding companies, and foreign business restrictions
bank offices by teams of bank examiners. for both banks and
2.require banks to suspend bank activities bank holding
deemed excessively risky or in violation of companies.
federal laws.
3.approve or not allow mergers and
60) Changing the reserve requirements system. Therefore,
changes the multiplier effect and large the true new
changes in the money supply may result. multiplier is
However, it is difficult to predict the level of difficult to estimate;
excess reserves held by banks, the willingness hence, the net effect
of banks to make loans instead of investments, on the money
and the uncertainty about how much money supply is somewhat
the public will redeposit into the banking unpredictable.

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