Practice Questions: The Fed and Monetary Policy

 

The Fed: Structure and Function

1. In 1996, the General Accounting Office faulted the Federal Reserve Bank bookkeeping for sharply rising expenses at the Fed.  Congress could not do which of the following to express its disapproval of Fed bookkeeping?
a.    Reduce appropriations for the following year.
b.    Fail to confirm the presidentís nominee to the Chair of the Federal Reserve.
c.    Fail to confirm the presidentís nominee to the Board of Governors.
d.    Audit Federal Reserve District banks.

2. Explicit functions of the Fed include all of the following except:
a.    Conducting monetary policy.
b.    Conducting fiscal policy.
c.    Providing banking services to the U.S. government.
d.    Serving as a lender of last resort to financial institutions.

3. Which of the following is not a function of the Fed?
a.    Buying and selling bonds.
b.    Lending money to commercial banks.
c.    Clearing the checks issued by commercial banks.
d.    Financing US budget deficits.

4. The most important policy-making body of the Federal Reserve System is the:
a.    Federal Open Market Committee.
b.    Federal Depository Insurance Corporation.
c.    Federal Advisory Council.
d.    National Federal Reserve Bank.

5. Deciding on the Fedís purchases and sales of government securities is the responsibility of:
a.    The Federal Advisory Council.
b.    The Comptroller of the Currency.
c.    The 12 regional Federal Reserve Banks.
d.    The Federal Open Market Committee.

6. The group of Federal Reserve officials consisting of the 7 Fed governors and 5 regional Fed bank presidents forms the :
a.    Federal Open Market Committee.
b.    Federal Depository Insurance Corporation.
c.    Federal Advisory Council.
d.    Council of Economic Advisors.

 

The Fed's Monetary Policy Tools

7. The reserve requirement is the __________ ratio of reserves to __________ that a bank can have.
a.    Maximum; deposits.
b.    Minimum; deposits.
c.    Maximum; loans.
d.    Minimum; loans.

8. One of the tools of monetary policy is changing:
a.    The level of government expenditures.
b.    The discount rate.
c.    The prime interest rate.
d.    The minimum wage.

9. If the Fed increases required reserves, financial institutions will likely lend out ________ than before, ________ the money supply.
a.    More; increasing.
b.    Less; decreasing.
c.    More; decreasing.
d.    Less; increasing.

10. When the Fed increases the reserve requirement, the money supply:
a.    Expands and the money multiplier contracts.
b.    Expands and so does the money multiplier.
c.    Contracts and so does the money multiplier.
d.    Contracts and the money multiplier expands.

11. The Fed engages in open market operations by:
a.    Closing insolvent banks.
b.    Raising or lowering the reserve requirement.
c.    Raising or lowering the discount rate.
d.    Buying or selling government securities.

12. The Fed can contract the money supply by:
a.    Reducing the discount rate.
b.    Injecting reserves into the banking system.
c.    Selling government securities in the open market.
d.    Reducing the reserve requirement.

13. To increase the nationís money supply, the Fed can:
a.    Increase reserve requirements.
b.    Decrease reserve requirements.
c.    Increase the discount rate.
d.    Sell government securities in the open market.

14. To increase the nationís money supply, the Fed can:
a.    Increase the required reserve ratio.
b.    Decrease the discount rate.
c.    Increase the discount rate.
d.    Sell bonds.

15. The discount rate is the interest rate:
a.    Commercial banks charge their largest customers.
b.    The Fed charges on loans to individuals.
c.    The Fed charges on loans to commercial banks.
d.    The interest rate commercial banks charge one another for overnight loans.

16. Suppose the Fed expects an undesired decrease in aggregate demand this year.  To offset this change, the Fed should:
a.    Engage in open market sales of government securities.
b.    Reduce the discount rate.
c.    Raise the Federal Funds rate.
d.    Raise the reserve requirement.

17. Which of the following Fed actions reduces the money supply?
a.    Increasing the amount of loans made to commercial banks.
b.    Buying government securities in the open market.
c.    Selling government securities in the open market.
d.    Decreasing reserve requirements.

18. Which of the following is an example of an expansionary monetary policy?
a.    Raising the discount rate.
b.    Reducing the prime rate.
c.    Selling bonds.
d.    Reducing the reserve requirement.

19. Federal Reserve sales of government securities ________ bank reserves and ________ the money supply.
a.    Increase; increase;
b.    Decrease; decrease.
c.    Decrease; increase.
d.    Increase; decrease.

20. If the Fed buys government securities, you might expect:
a.    A decrease in interest rates.
b.    An increase in interest rates.
c.    A decrease in the money supply.
d.    A fall in the discount rate.

21. If the Fed sells securities through its open market operations, the money supply will:
a.    Decrease.
b.    Remain the same.
c.    Increase.
d.    Increase or decrease depending on the reserve requirement.

22. If the Fed simultaneously sells government securities and raises the discount rate, the money supply will:
a.    Decrease.
b.    Remain unchanged.
c.    Increase.
d.    Take on a value that cannot be determined from the information given.

23. Suppose the reserve requirement is 25 percent and no one holds cash.  A $1 billion purchase of government securities by the Fed will:
a.    Increase the potential amount of checkable deposits in the banking system by $4 billion.
b.    Increase the potential amount of checkable deposits in the banking system by $1 billion.
c.    Reduce the potential amount of checkable deposits in the banking system by $1 billion.
d.    Reduce the potential amount of checkable deposits in the banking system by $4 billion.

24. Suppose the reserve requirement is 20 percent and there are no cash holdings or excess reserves. A $1 billion sale of government securities by the Fed will:
a.    Increase checkable deposits in the banking system by $5 billion.
b.    Increase checkable deposits in the banking system by $1 billion.
c.    Reduce checkable deposits in the banking system by $1 billion.
d.    Reduce checkable deposits in the banking system by $5 billion.

25. Suppose the money multiplier is equal to 4.  If the Fed wants to expand the money supply by 400 it should:
a.    Buy government securities worth 100.
b.    Buy government securities worth 400.
c.    Sell government securities worth 400.
d.    Sell government securities worth 100.

26. Suppose the money multiplier is equal to 5.  If the Fed wants to reduce the money supply by 1000 it should:
a.    Buy government securities worth 200.
b.    Buy government securities worth 1000.
c.    Sell government securities worth 200.
d.    Sell government securities worth 1000.

27. If the banking system has no excess reserves and the reserve requirement is 0.10, then a $1 billion sale of government securities by the Fed ultimately:
a.    Has no effect on bank deposits.
b.    Increases deposits by $10 billion.
c.    Reduces deposits by $1 billion.
d.    Reduces deposits by $10 billion.

28. An increase in interest rates might be explained by:
a.    Open market purchases of government securities by the Fed.
b.    Open market sale of government securities by the Fed.
c.    Decrease in the discount rate.
d.    Decrease in reserve requirement.

29. The discount rate is the interest rate:
a.    Commercial banks charge investors.
b.    The Federal Reserve Bank charges individuals for loans.
c.    The Federal Reserve Bank charges banks for loans.
d.    The Federal Reserve Bank charges the government for loans.

30. An open market purchase of government securities should:
a.    Increase the Federal funds rate.
b.    Decrease the Federal funds rate.
c.    Increase the discount rate.
d.    Decrease the discount rate.

31. The Fed uses the ________ as an intermediate target for monetary policy.
a.    Discount rate.
b.    Reserve requirement.
c.    Federal funds rate.
d.    Monetary base.

32. If the Federal funds rate is below the Fedís target range the Fed should:
a.    Follow expansionary policy.
b.    Follow contractionary policy.
c.    Print money.
d.    Do nothing.

33. If the Fed wants a looser monetary policy, it might:
a.    Sell government securities in an attempt to increase the Federal funds rate.
b.    Sell government securities in an attempt to reduce the Federal funds rate.
c.    Buy government securities in an attempt to increase the Federal funds rate.
d.    Buy government securities in an attempt to reduce the Federal funds rate.

 

Monetary Policy in the Aggregate Demand - Aggregate Supply Model

34. In the AS/AD model, a contractionary monetary policy:
a.    Reduces investment but increases aggregate demand.
b.    Increases both investment and aggregate demand.
c.    Reduces both investment and aggregate demand.
d.    Increases investment but reduces aggregate demand.

35. Which of the following monetary policies raises aggregate demand and output?
a.    An open market sale of government securities.
b.    An open market purchase of government securities.
c.    An increase in the discount rate.
d.    An increase in the reserve requirement.

36. According to the AS/AD model, if the economy is in a recession and the Fed wants to increase output and employment, it should:
a.    Act to increase the money supply.
b.    Act to decrease the money supply.
c.    Raise interest rates.
d.    Raise reserve requirements.

37. Which of the following Fed policies would help reduce inflation?
a.    Open market purchases of government securities.
b.    Open market sales of government securities.
c.    A decrease in the discount rate.
d.    A decrease in the reserve requirements.