Question 1

The primary objective of Fed open market activity is to alter the price of bonds and their yields.

Accepted Answer

A) True 
 B)False

Question 2

If excess reserves are too large,a bank is likely to

Accepted Answer

A) Buy government securities. 
B) Borrow in the federal funds market. 
C) Borrow reserves from the discount window. 
D) All of the choices are correct. 
A) Buy government securities. 
B) Borrow in the federal funds market. 
C) Borrow reserves from the discount window. 
D) All of the choices are correct.

Question 3

Assuming a reserve requirement of 20 percent,if the Fed sells $20 billion in bonds in the open market,the lending capacity of the system will eventually

Accepted Answer

A) Increase by $100 billion. 
B) Decrease by $100 billion. 
C) Increase by $1 billion. 
D) Decrease by $1 billion. 
A) Increase by $100 billion. 
B) Decrease by $100 billion. 
C) Increase by $1 billion. 
D) Decrease by $1 billion.

Question 4

The money supply (M1)includes currency held by the public plus

Accepted Answer

A) Transactions accounts plus travelers checks. 
B) Currency held by the Fed and Treasury and transactions accounts. 
C) Balances in most savings accounts and money market mutual funds. 
D) Transactions accounts plus money market mutual funds. 
A) Transactions accounts plus travelers checks. 
B) Currency held by the Fed and Treasury and transactions accounts. 
C) Balances in most savings accounts and money market mutual funds. 
D) Transactions accounts plus money market mutual funds.

Question 5

Increasing the reserve requirement reduces the money supply.

Accepted Answer

A) True 
 B)False

Question 6

The money supply (M2)includes M1 plus balances in

Accepted Answer

A) Saving accounts,money market mutual funds,and certificates of deposit over $100,000. 
B) Saving accounts and money market mutual funds. 
C) Saving accounts only. 
D) Money market mutual funds only. 
A) Saving accounts,money market mutual funds,and certificates of deposit over $100,000. 
B) Saving accounts and money market mutual funds. 
C) Saving accounts only. 
D) Money market mutual funds only.

Question 7

If the Fed wishes to reduce the money supply,it can do all of the following except

Accepted Answer

A) Raise the discount rate. 
B) Raise the minimum reserve ratio. 
C) Sell securities on the open market. 
D) Buy shares of common stock in a large bank. 
A) Raise the discount rate. 
B) Raise the minimum reserve ratio. 
C) Sell securities on the open market. 
D) Buy shares of common stock in a large bank.

Question 8

The Fed can use all of the following except ________ to change the lending capacity of the banking system.

Accepted Answer

A) the reserve requirement 
B) the excess reserve requirement 
C) open market operations 
D) the discount rate 
A) the reserve requirement 
B) the excess reserve requirement 
C) open market operations 
D) the discount rate

Question 9

The reserve requirements and discount rates affect M2 but do not have much impact on M1.

Accepted Answer

A) True 
 B)False

Question 10

If the annual interest rate printed on the face of a bond is 25 percent,the face value of the bond is $1,000,and the current market price of the bond is $700,what is the current yield on the bond?

Accepted Answer

A) 25.5 percent. 
B) 20.5 percent. 
C) 35.7 percent. 
D) 25.0 percent. 
A) 25.5 percent. 
B) 20.5 percent. 
C) 35.7 percent. 
D) 25.0 percent.

Question 11

Table 14.2 Monetary Aggregates of the U.S.Financial System
$\begin{array}{|l|r|}
\hline\text { Item } & \text { Amount } \
\hline \text { Cash held by public } & \text { \$100billion } \
\hline\text { Transactions deposits } & \text { \$300billion } \
\hline\text { Required reserves } & \text { \$30billion } \
\hline\text { Excess reserves } & \text { \$0billion } \
\hline \text { U.S. bonds held by public } & \$ 475 \text { billion }\
\hline 
\end{array}$

Assume an original balance sheet: If the Fed changes the required reserve ratio in Table 14.2 to 15 percent,the lending capacity of the system will eventually

Accepted Answer

A) Increase by $100 billion. 
B) Increase by $15 billion. 
C) Decrease by $100 billion. 
D) Decrease by $1.5 billion. 
A) Increase by $100 billion. 
B) Increase by $15 billion. 
C) Decrease by $100 billion. 
D) Decrease by $1.5 billion.

Question 12

Table 14.2 Monetary Aggregates of the U.S.Financial System
$\begin{array}{|l|r|}
\hline\text { Item } & \text { Amount } \
\hline \text { Cash held by public } & \text { \$100billion } \
\hline\text { Transactions deposits } & \text { \$300billion } \
\hline\text { Required reserves } & \text { \$30billion } \
\hline\text { Excess reserves } & \text { \$0billion } \
\hline \text { U.S. bonds held by public } & \$ 475 \text { billion }\
\hline 
\end{array}$
 Assume an original balance sheet: Refer to Table 14.2.If the Fed sells $20 billion in bonds to the public,all of the following are true except

Accepted Answer

A) The public will hold $495 billion worth of bonds. 
B) M1 will decrease initially by $20 billion. 
C) M2 will expand initially by $20 billion. 
D) Additional increases in M1 will occur after the multiplier process. 
A) The public will hold $495 billion worth of bonds. 
B) M1 will decrease initially by $20 billion. 
C) M2 will expand initially by $20 billion. 
D) Additional increases in M1 will occur after the multiplier process.

Question 13

The rate of return on a bond is the

Accepted Answer

A) Annual interest payment. 
B) Discount rate. 
C) Yield. 
D) Federal funds rate. 
A) Annual interest payment. 
B) Discount rate. 
C) Yield. 
D) Federal funds rate.

Question 14

Which of the following is true about an increase in the discount rate?

Accepted Answer

A) It reduces the cost of reserves borrowed from the Federal Reserve. 
B) It signals the Federal Reserve's desire to restrain money growth. 
C) It signals the Federal Reserve's desire to support credit creation. 
D) It signals the Federal Reserve's eagerness to lend additional reserves. 
A) It reduces the cost of reserves borrowed from the Federal Reserve. 
B) It signals the Federal Reserve's desire to restrain money growth. 
C) It signals the Federal Reserve's desire to support credit creation. 
D) It signals the Federal Reserve's eagerness to lend additional reserves.

Question 15

A growing economy needs a

Accepted Answer

A) Steadily increasing supply of money to finance market exchanges. 
B) Continually decreasing supply of money to finance the government's expenditures. 
C) Constant supply of money to keep inflation under control. 
D) Decreasing supply of money to keep interest rates low. 
A) Steadily increasing supply of money to finance market exchanges. 
B) Continually decreasing supply of money to finance the government's expenditures. 
C) Constant supply of money to keep inflation under control. 
D) Decreasing supply of money to keep interest rates low.

Question 16

If the annual interest rate printed on the face of a bond is 12 percent,the face value of the bond is $1,000,and the current market price of the bond is $1,200,what is the current yield on the bond?

Accepted Answer

A) 10.0 percent. 
B) 12.0 percent. 
C) 8.5 percent. 
D) 5.0 percent. 
A) 10.0 percent. 
B) 12.0 percent. 
C) 8.5 percent. 
D) 5.0 percent.

Question 17

How does the reserve requirement impact the banking system as a monetary policy tool,and is it used frequently?

Accepted Answer

A change in the reserve requirement chan

Question 18

If the Fed buys $32 billion of U.S.bonds in the open market and the reserve requirement is 10 percent,M1 will eventually

Accepted Answer

A) Decrease by $32 billion. 
B) Increase by $32 billion. 
C) Decrease by $320 billion. 
D) Increase by $320 billion. 
A) Decrease by $32 billion. 
B) Increase by $32 billion. 
C) Decrease by $320 billion. 
D) Increase by $320 billion.

Question 19

If banks do not have enough reserves to satisfy the reserve requirement,they can

Accepted Answer

A) Buy securities. 
B) Pay off discount loans at the Federal Reserve bank. 
C) Lend additional reserves in the federal funds market. 
D) Sell securities. 
A) Buy securities. 
B) Pay off discount loans at the Federal Reserve bank. 
C) Lend additional reserves in the federal funds market. 
D) Sell securities.

Question 20

In order to decrease 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 sell 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 sell bonds.

Exam 14: The Federal Reserve System

The primary objective of Fed open market activity is to alter the price of bonds and their yields.

If excess reserves are too large,a bank is likely to

Assuming a reserve requirement of 20 percent,if the Fed sells $20 billion in bonds in the open market,the lending capacity of the system will eventually

The money supply (M1)includes currency held by the public plus

Increasing the reserve requirement reduces the money supply.

The money supply (M2)includes M1 plus balances in

If the Fed wishes to reduce the money supply,it can do all of the following except

The Fed can use all of the following except ________ to change the lending capacity of the banking system.

The reserve requirements and discount rates affect M2 but do not have much impact on M1.

If the annual interest rate printed on the face of a bond is 25 percent,the face value of the bond is $1,000,and the current market price of the bond is $700,what is the current yield on the bond?

The rate of return on a bond is the

Which of the following is true about an increase in the discount rate?

A growing economy needs a

If the annual interest rate printed on the face of a bond is 12 percent,the face value of the bond is $1,000,and the current market price of the bond is $1,200,what is the current yield on the bond?

How does the reserve requirement impact the banking system as a monetary policy tool,and is it used frequently?

If the Fed buys $32 billion of U.S.bonds in the open market and the reserve requirement is 10 percent,M1 will eventually

If banks do not have enough reserves to satisfy the reserve requirement,they can

In order to decrease the money supply,the Fed can

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