Economics 252 – Review Questions Chapter 14 – The Federal Reserve System
(1) Which of the following is most responsible for the overall conduct of monetary policy?
(a) The commercial banks.
(b) The President.
(c) The Board of Governors of the Federal Reserve.
(2) Members of the Board of Governors of the Federal Reserve:
are appointed to fourteen-year terms by the president of the
(b) are sensitive and respond to short-term political pressures.
(c) are elected by the voters every four years.
(d) are appointed by the Supreme Court.
(3) Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?
(a) The commercial banks.
(b) The Board of Governors of the Federal Reserve.
(c) The Federal Open Market Committee of the Federal Reserve.
(d) The Department of the Treasury, a unit of the federal government.
(4) A change in the reserve requirement is the tool used least often by the Fed. because:
(a) it does not affect bank reserves.
(b) it can cause large and abrupt changes in the money supply.
(c) it does not affect the money multiplier.
(d) it has no impact on the lending capacity of the banking system.
(5) Assume the reserve requirement in 10 percent, demand deposits are $100 million, and total reserves are $12 million. If the reserve requirement increased to 12 percent, the banking system will have:
(a) excess reserves equal to zero.
(b) excess reserves equal to $1 million.
(c) an increase in the money multiplier.
(d) a deficiency of reserves equal to $4 million.
(6) Suppose all of the banks in the Federal Reserve system have $40 billion in transactions accounts, the required reserve ratio is 10 percent, and there are no excess reserves in the system. If the required reserve ratio is changed to 5 percent, then the total lending capacity of the system is increased by:
(a) $40 billion.
(b) $2 billion.
(c) $1 billion.
(d) $500 million.
(7) The rate of interest charged by banks on interbank loans is the:
(a) prime rate.
(b) discount rate.
(c) foreign exchange rate.
(d) federal funds rate.
(8) Discounting refers to the Fed's practice of:
(a) selling securities at the federal funds rate.
(b) purchasing securities at the lowest available funds rate.
(c) lending reserve to the private banks.
(d) lending at the prime rate.
(9) An increase in the discount rate:
(a) reduces the cost of reserves borrowed from the Fed.
(b) increases the cost of reserves borrowed from the Fed.
(c) increases the required reserve ratio of the commercial banks.
(d) signals the Fed's desire to support loan and deposit creation.
(10) The most frequently used tool on the part of the Fed. is:
(a) the reserve requirement.
(b) the discount rate.
(c) open market operations.
(d) fiscal policy (taxation and government expenditure).
(11) Jim buys a 5 percent bond in the amount of $100. If the market interest rate increases to 10 percent, Jim can sell his bond for:
(12) If market interest rates rise, then the selling price of bonds in the market will, ceteris paribus,
(c) not change.
(d) rise or fall cannot be predicted.
(13) If the annual interest rate printed on the face of a bond is 8 percent, the face value of the bond is $1,000, and you purchase the bond for $800, what is the current yield on the bond?
(a) 6.4 percent.
(b) 10 percent.
(c) 20 percent.
(d) 80 percent.
(14) If the Federal Reserve buys bonds from the public:
(a) the money supply will contract.
(b) bank reserves will not change.
(c) banks will be able to make additional loans.
(d) demand deposits will decrease.
the Fed buys $50 billion of
(a) increase by $200 billion.
(b) decrease by $200 billion
(c) increase by $12.5 billion.
(d) decrease by $50 billion.