WorksheetsFederal Reserve and Financial Instruments
Total questions: 52
Worksheet time: 26mins
(Last Word) During the financial crisis of 2007–2008, the Federal Reserve
served as a lender of last resort to solvent, but not insolvent, firms.
served as a lender of last resort to both solvent and insolvent firms.
suspended its role as lender of last resort so that the financial market could correct itself.
acquired the assets of a number of bankrupt firms.
As it relates to Federal Reserve activities, the acronym FOMC describes the
Federal Organization for Money Creation.
Federal Open Market Committee.
Federal Organization for Monetary Control.
Federal Options Market Committee.
Collateralized default swaps
are loans to investors in mortgage-backed securities.
insured holders of loan-backed securities in case the underlying loans were not repaid.
helped reduce the losses from the mortgage default crisis.
involve exchanging high-risk mortgages for low-risk mortgage-backed securities.
If the price index rises from 100 to 120, the purchasing power value of the dollar
will rise by 20 percent.
will fall by one-sixth.
may either rise or fall.
will rise by one-sixth.
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of account.
a store of value.
an economic investment.
a medium of exchange.
Joe deposits $200 in currency into his checking account at a bank. This deposit is treated as
an addition of $200 to the money supply because of the creation of a checkable deposit of $200.
an addition of $200 to the money supply because the bank holds $200 in currency and the checking account has been increased by $200.
no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.
a subtraction of $200 from the money supply because the $200 in currency is no longer in circulation.
Refer to the given list of assets.
1. Large-denominated ($100,000 and over) time deposits
2. Noncheckable savings deposits
3. Currency (coins and paper money) in circulation
4. Small-denominated (under $100,000) time deposits
5. Stock certificates
6. Checkable deposits
7. Money market deposit accounts
8. Money market mutual fund balances held by individuals
9. Money market mutual fund balances held by businesses
10. Currency held in bank vaults
The M2 definition of money includes
items 3, 4, 5, and 6.
items 2, 3, 4, 6, 7, 8, and 10.
items 2, 3, 4, 6, 7, and 8.
all of the items listed.
The Federal Reserve System performs the following functions except
lending money to banks and thrifts.
providing financial services to the Federal government.
providing banking services to the general public.
issuing the paper currency in the economy.
The blurring of the lines separating the subsets of the financial industry started in the
1940s.
1970s.
1990s.
1960s.
The seven members of the Board of Governors of the Federal Reserve System are
appointed by the Senate Finance Committee.
appointed by the president with the confirmation of the Senate.
elected by Congress from a slate of nominees provided by the president.
appointed by the presidents of the 12 Federal Reserve Banks.
A bank that has assets of $85 billion and a net worth of $10 billion must have
excess reserves of $75 billion.
liabilities of $75 billion.
liabilities of $10 billion.
excess reserves of $10 billion.
A commercial bank can expand its excess reserves by
buying bonds from the public.
buying bonds from a Federal Reserve Bank.
demanding and receiving payment on an overdue loan.
paying back money borrowed from a Federal Reserve Bank.
Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be
10 percent.
25 percent.
zero.
20 percent.
Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,
a claim has been "demonetized."
the supply of money declines by the amount of the loan.
the Metro Bank acquires reserves from other banks.
the supply of money is increased by $5,000.
Money is "created" when
a depositor gets cash from the bank's ATM.
a bank accepts deposits from its customers.
people spend the incomes that they receive.
people receive loans from their banks.
The market for immediately available reserve balances at the Federal Reserve is known as the
short-term bond market.
money market.
long-term bond market.
federal funds market.
Disequilibrium in the money market is mainly corrected via a change in
saving levels.
the money supply.
bond prices.
the price level.
If the Fed wants to discourage commercial bank lending, it will
lower the federal funds rate target.
buy government securities from commercial banks.
decrease the interest paid on excess reserves held at the Fed.
increase the interest paid on excess reserves held at the Fed.
The Federal Reserve can increase aggregate demand by
raising the reserve requirement.
reducing the money supply.
reducing the discount rate.
selling government securities in the open market.
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
buying government securities, doing reverse repos, and raising the reserve ratio
selling government securities, doing repos, and lowering the discount rate
selling government securities, doing reverse repos, and raising the discount rate
buying government securities, doing repos, and lowering the discount rate
The problem of cyclical asymmetry refers to the idea that
an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary policy may not achieve a contraction of the money supply.
the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy
cyclical downswings are typically of longer duration than cyclical upswings.
a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.
The purpose of a restrictive monetary policy is to
increase aggregate demand and GDP.
raise interest rates and restrict the availability of bank credit.
increase investment spending.
alleviate recessions.
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
Which of the following best describes what occurs when monetary authorities sell government securities?
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP.
There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.
There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP.
Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply
expands and commercial bank reserves decrease.
expands and commercial bank reserves increase.
contracts and commercial bank reserves increase
contracts and commercial bank reserves decrease.
(Last Word) Solvent firms face the threat of bankruptcy during a financial crisis
because the Federal Reserve extends loans to these firms at high rates of interest.
because the value of their assets is less than the value of their debts.
because, by law, the Federal Reserve can only serve as lender of last resort to insolvent firms.
when many assets are illiquid, making it difficult to make timely payments on debt.
A commercial bank can add to its actual reserves by
lending money to bank customers.
buying government securities from a Federal Reserve Bank.
borrowing from a Federal Reserve Bank.
buying government securities from the public.
A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are
$900,000.
$1 million.
$50,000.
$100,000.
A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank. The commercial bank then lends $4,000 to a borrower. As a consequence of these transactions, the size of the money supply has
not been affected.
increased by $5,000.
increased by $4,000.
decreased by $5,000.
A fractional reserve banking system
prevents money creation through the lending process.
only tends to exist in developing economies
is susceptible to bank "panics" or "runs."
prevents the Federal Reserve from influencing the money supply.
According to the Taylor rule,
if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.
growth in the money supply should be limited to the long-run average growth rate of real GDP.
the rate of money growth should be set at 4 percent per year.
for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP.
Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.
As a result of the given transactions, reserves in the banking system will
remain unchanged.
fall by $100.
rise by $100.
rise by $1,000.
Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,
the Metro Bank acquires reserves from other banks.
the supply of money is increased by $5,000.
the supply of money declines by the amount of the loan.
a claim has been "demonetized."
Checkable deposits are a liability on a bank's balance sheet.
True
False
If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be
4.
5.
3½.
6.67.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
a store of value.
an economic investment.
a medium of exchange.
a unit of account.
In traditional (before 2008) analysis, an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market.
True
False
Insurance companies mainly acquire households' savings by
offering checking and savings accounts.
selling stocks and bonds to them.
offering policies in return for periodic premiums.
selling financial advice and related consulting services.
Money performs its function as a store of value very well, because it protects one against the erosion of purchasing power from inflation.
True
False
Other things equal, if there is an increase in nominal GDP,
bond prices will rise.
the demand for money will decrease.
consumption spending will fall.
the interest rate will rise.
Research for industrially advanced countries indicates that
the more independent the central bank, the higher the average annual rate of inflation.
the more independent the central bank, the lower the average annual rate of inflation.
the more independent the central bank, the higher the average annual rate of unemployment.
there is no relationship between the degree of independence of a country's central bank and its inflation rate.
TARP, created in 2008, stands for
Troubled Asset Recovery Plan.
Toxic Asset Relief Program.
Toxic Asset Reinvestment Policy.
Troubled Asset Relief Program.
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in
thrifts and insurance companies.
commercial banks and thrifts.
securities firms and insurance companies.
mutual fund companies and pension fund companies.
The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits
and reserves of commercial banks both decrease.
of commercial banks are unchanged, but their reserves decrease.
and reserves of commercial banks are both unchanged.
of commercial banks are unchanged, but their reserves increase.
The Federal Reserve alters the amount of the nation's money supply by
controlling the assets of the nation's largest banks.
manipulating the size of excess reserves held by commercial banks.
reducing the liabilities of the banking system.
minting coins and printing currency that is distributed to banks.
The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that
the central banks follow policies that prevent reserves from falling below the level required by law.
the MPC of borrowers is greater than zero but less than 1.
the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.
reserves lost by any particular bank will be gained by some other bank.
The monetary multiplier can also be called the spending multiplier.
True
False
When economists say that money serves as a medium of exchange, they mean that it is
a monetary unit for measuring and comparing the relative values of goods.
declared as legal tender by the government.
a means of payment.
a way to keep wealth in a readily spendable form for future use.
When the receipts given by goldsmiths to depositors were used to make purchases,
existing banking laws were violated
a fractional reserve banking system was created.
the receipts became in effect paper money.
the gold standard was created.
Which of the following is not a tool of monetary policy?
changes in the rate of interest paid on reserves held at Federal Reserve Banks
open-market operations
Fed lending or borrowing with repos or reverse repos
changes in banking laws
Which of the following items are included in money supply M2 but not M1?
checkable deposits
savings deposits
Federal Reserve notes
coins
Which of the following would be considered to be the most liquid?
small time deposits
savings deposits
checkable deposits
money market mutual funds
