Question 1

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

Accepted Answer

A) Money market. 
B) Commercial paper market. 
C) Federal funds market. 
D) Foreign exchange market. 
A) Money market. 
B) Commercial paper market. 
C) Federal funds market. 
D) Foreign exchange market.

Question 2

Janette buys a bond in the amount of $500 with a promised interest rate of 15 percent.If the market interest rate decreases to 5 percent,Janette can sell her bond for up to

Accepted Answer

A) $500. 
B) $250. 
C) $1,500. 
D) $1,250. 
A) $500. 
B) $250. 
C) $1,500. 
D) $1,250.

Question 3

Why do banks typically maintain a low level of excess reserves?

Accepted Answer

Banks can earn interest on excess reserv

Question 4

Which of the following concerns is consistent with the Fed's policy initiative outlined in the In the News article titled " U.S.Federal Reserve Cuts Interest Rates to Historic Low"?

Accepted Answer

A) Concern about mounting unemployment. 
B) Concern about desired spending exceeding current output. 
C) Concern about the lower interest rates harming the economy. 
D) Concern about inflationary pressures on the economy. 
A) Concern about mounting unemployment. 
B) Concern about desired spending exceeding current output. 
C) Concern about the lower interest rates harming the economy. 
D) Concern about inflationary pressures on the economy.

Question 5

Which of the following is likely in response to the policy initiative described in the In the News article titled "U.S.Federal Reserve Cuts Interest Rates to Historic Low"?

Accepted Answer

A) The unemployment rate will rise. 
B) The inflation rate will fall in the long run. 
C) Bank lending will increase. 
D) Home equity and home mortgage loans will dry up. 
A) The unemployment rate will rise. 
B) The inflation rate will fall in the long run. 
C) Bank lending will increase. 
D) Home equity and home mortgage loans will dry up.

Question 6

Table 14.1 Monetary Aggregates of the U.S.Financial System
$\begin{array}{|l|r|}
\hline\text { Item } & \text { Amount } \
\hline \text { Cash held by public } & \text { \$250billion } \
\hline\text { Transactions deposits } & \text { \$1,000billion } \
\hline\text { Required reserves } & \text { \$150billion } \
\hline\text { Excess reserves } & \text { \$0billion } \
\hline \text { U.S. bonds held by public } & \$ 1,000 \text { billion }\
\hline 
\end{array}$

Assume an original balance sheet: Refer to Table 14.1.If the Fed changes the required reserve ratio to 10 percent,ceteris paribus,the lending capacity of the system would eventually

Accepted Answer

A) Decrease by $50 billion. 
B) Increase by $50 billion. 
C) Decrease by $500 billion. 
D) Increase by $500 billion. 
A) Decrease by $50 billion. 
B) Increase by $50 billion. 
C) Decrease by $500 billion. 
D) Increase by $500 billion.

Question 7

In order to increase the money supply,the Fed can

Accepted Answer

A) Raise the reserve requirement,increase the discount rate,or sell bonds. 
B) Raise the reserve requirement,increase the discount rate,or buy bonds. 
C) Lower the reserve requirement,increase the discount rate,or buy bonds. 
D) Lower the reserve requirement,decrease the discount rate,or buy bonds. 
A) Raise the reserve requirement,increase the discount rate,or sell bonds. 
B) Raise the reserve requirement,increase the discount rate,or buy bonds. 
C) Lower the reserve requirement,increase the discount rate,or buy bonds. 
D) Lower the reserve requirement,decrease the discount rate,or buy bonds.

Question 8

Which of the following represents the lending capacity of an individual (non-monopoly)bank?

Accepted Answer

A) Required reserve ratio × total deposits. 
B) Total reserves - required reserves. 
C) (Total reserves - required reserves)× multiplier. 
D) 1 ÷ (required reserve ratio). 
A) Required reserve ratio × total deposits. 
B) Total reserves - required reserves. 
C) (Total reserves - required reserves)× multiplier. 
D) 1 ÷ (required reserve ratio).

Question 9

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

Accepted Answer

A) Federal funds rate. 
B) Prime rate. 
C) Discount rate. 
D) Commercial paper rate. 
A) Federal funds rate. 
B) Prime rate. 
C) Discount rate. 
D) Commercial paper rate.

Question 10

If the annual interest rate printed on the face of a bond is 16 percent,the face value of the bond is $1,000,and the current market price of the bond is $200,what is the current yield on the bond?

Accepted Answer

A) 5.5 percent. 
B) 200.0 percent. 
C) 16.0 percent. 
D) 80.0 percent. 
A) 5.5 percent. 
B) 200.0 percent. 
C) 16.0 percent. 
D) 80.0 percent.

Question 11

The Federal Open Market Committee is responsible for

Accepted Answer

A) The Fed's daily activity in financial markets. 
B) Determining broad Fed policy. 
C) Providing central banking services to individual banks. 
D) Check cashing services for large corporations. 
A) The Fed's daily activity in financial markets. 
B) Determining broad Fed policy. 
C) Providing central banking services to individual banks. 
D) Check cashing services for large corporations.

Question 12

The Fed is most likely to pursue

Accepted Answer

A) Frequent adjustment of the reserve requirement. 
B) Use of open market operations as the primary mechanism to change reserves. 
C) Numerous increases in the discount rate to tighten the money supply quickly. 
D) Frequent changes in marginal tax rates. 
A) Frequent adjustment of the reserve requirement. 
B) Use of open market operations as the primary mechanism to change reserves. 
C) Numerous increases in the discount rate to tighten the money supply quickly. 
D) Frequent changes in marginal tax rates.

Question 13

Discounting refers to the Fed's practice of

Accepted Answer

A) Selling securities at the federal funds rate. 
B) Purchasing securities at the lowest available federal funds rate. 
C) Lending reserves directly to private banks. 
D) Lending at the prime rate. 
A) Selling securities at the federal funds rate. 
B) Purchasing securities at the lowest available federal funds rate. 
C) Lending reserves directly to private banks. 
D) Lending at the prime rate.

Question 14

The creation of a Federal Reserve System was recommended by

Accepted Answer

A) The National Monetary Commission. 
B) The U.S.Treasury. 
C) A member of Congress. 
D) The Federal Bureau of Investigation. 
A) The National Monetary Commission. 
B) The U.S.Treasury. 
C) A member of Congress. 
D) The Federal Bureau of Investigation.

Question 15

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system.If the Open Market Committee buys $50 million of securities from the commercial banking system,the total lending capacity for the system

Accepted Answer

A) Decreases by $50 million. 
B) Decreases by $500 million. 
C) Increases by $50 million. 
D) Increases by $500 million. 
A) Decreases by $50 million. 
B) Decreases by $500 million. 
C) Increases by $50 million. 
D) Increases by $500 million.

Question 16

The Fed can decrease the federal funds rate by

Accepted Answer

A) Selling government bonds. 
B) Buying government bonds,which causes market interest rates to fall. 
C) Simply announcing a lower rate because the Fed has direct control of this interest rate. 
D) Changing the money multiplier. 
A) Selling government bonds. 
B) Buying government bonds,which causes market interest rates to fall. 
C) Simply announcing a lower rate because the Fed has direct control of this interest rate. 
D) Changing the money multiplier.

Question 17

A change in the reserve requirement causes a change in all of the following except

Accepted Answer

A) The money multiplier. 
B) The lending capacity of the banking system. 
C) Excess reserves. 
D) Pretax income. 
A) The money multiplier. 
B) The lending capacity of the banking system. 
C) Excess reserves. 
D) Pretax income.

Question 18

If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent,it should

Accepted Answer

A) Buy $60 billion in bonds from banks. 
B) Buy $6 billion in bonds from banks. 
C) Sell $60 billion in bonds to the public. 
D) Sell $6 billion in bonds to the public. 
A) Buy $60 billion in bonds from banks. 
B) Buy $6 billion in bonds from banks. 
C) Sell $60 billion in bonds to the public. 
D) Sell $6 billion in bonds to the public.

Question 19

An open market purchase occurs when the Fed

Accepted Answer

A) Buys bonds from the public,increasing bank reserves. 
B) Sells bonds to the public,increasing bank reserves. 
C) Buys bonds from the public,decreasing bank reserves. 
D) Sells bonds to the public,decreasing bank reserves. 
A) Buys bonds from the public,increasing bank reserves. 
B) Sells bonds to the public,increasing bank reserves. 
C) Buys bonds from the public,decreasing bank reserves. 
D) Sells bonds to the public,decreasing bank reserves.

Question 20

If the Fed buys $20 billion of U.S.bonds in the open market and the reserve requirement is 5 percent,M1 will eventually

Accepted Answer

A) Decrease by $100 billion. 
B) Decrease by $400 billion. 
C) Increase by $100 billion. 
D) Increase by $400 billion. 
A) Decrease by $100 billion. 
B) Decrease by $400 billion. 
C) Increase by $100 billion. 
D) Increase by $400 billion.

Exam 14: The Federal Reserve System

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

Janette buys a bond in the amount of $500 with a promised interest rate of 15 percent.If the market interest rate decreases to 5 percent,Janette can sell her bond for up to

Why do banks typically maintain a low level of excess reserves?

Which of the following concerns is consistent with the Fed's policy initiative outlined in the In the News article titled " U.S.Federal Reserve Cuts Interest Rates to Historic Low"?

Which of the following is likely in response to the policy initiative described in the In the News article titled "U.S.Federal Reserve Cuts Interest Rates to Historic Low"?

In order to increase the money supply,the Fed can

Which of the following represents the lending capacity of an individual (non-monopoly)bank?

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

If the annual interest rate printed on the face of a bond is 16 percent,the face value of the bond is $1,000,and the current market price of the bond is $200,what is the current yield on the bond?

The Federal Open Market Committee is responsible for

The Fed is most likely to pursue

Discounting refers to the Fed's practice of

The creation of a Federal Reserve System was recommended by

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system.If the Open Market Committee buys $50 million of securities from the commercial banking system,the total lending capacity for the system

The Fed can decrease the federal funds rate by

A change in the reserve requirement causes a change in all of the following except

If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent,it should

An open market purchase occurs when the Fed

If the Fed buys $20 billion of U.S.bonds in the open market and the reserve requirement is 5 percent,M1 will eventually

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