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  1. If money is defined as both a medium of exchange and a store of value, the money supply would consist solely of all currency and coin held by the public.

    a) True
    b) False
    b) False

    If we define money as both a medium of exchange and a store of value, the money supply would consist of all currency and coin held by the public plus all publicly held checking accounts and other deposits against which drafts may be made, plus all publicly held time and savings accounts in various types of institutions.
  2. An important function of a central bank is to help stabilize money and capital markets.

    a) True
    b) False
    a) True

    Along with control of the money supply, central banks play an important role in stabilizing money and capital markets.
  3. Most of the actions taken by the Federal Reserve System to combat inflation are carried out by government order rather than through the marketplace.

    a) True
    b) False
    b) False

    Most actions by the Fed to combat inflation are carried out through the marketplace, rather than by government order.
  4. The Federal Reserve System's chief policymaking and administrative group is composed of the member banks.

    a) True
    b) False
    b) False

    The chief policymaking and administrative group of the Federal Reserve System is the Board of Governors.
  5. In principle, the Federal Reserve Board is independent of both Congress and the executive branch of the federal government.

    a) True
    b) False
     
    a) True

    The Federal Reserve Banks were established to be independent of direct political pressures. However, the president appoints the seven members to the Board to staggered terms ending every even year, subject to congressional approval.
  6. One of the most important committees within the Federal Reserve System is the Federal Open Market Committee.

    a) True
    b) False
    a) True

    The Open Market Committee decides the course of monetary policy and influences the cost and availability of credit for millions of people.
  7. Legally, the Federal Reserve Banks are owned by the federal government.

    a) True
    b) False
    b) False

    Each Federal Reserve Bank is a corporation chartered by Congress. Legally, it is owned by the member banks in its district, which select a majority of the bank's Board of Directors.
  8. Nearly all paper money in circulation in the United States today is issued by Federal Reserve Banks.

    a) True
    b) False
    a) True

    Federal Reserve notes, issued by Federal Reserve Banks, make up the paper currency that is normally in circulation.
  9. Most Federal Reserve services to member banks are provided free of charge.

    a) True
    b) False
    b) False

    The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) required the Fed to begin assessing fees sufficient to recover their costs for many of the services it provides to member banks.
  10. The principal immediate target of Federal Reserve policy is the level of employment in the economy.

    a) True
    b) False
    b) False

    • The primary immediate target of Federal Reserve policy is the level of market interest rates.
    •  
  11. In a very simple financial system where the public makes all payments by check and holds no thrift deposits, and where banks hold no excess reserves, the deposit multiplier will be 8 if the reserve requirement on transaction deposits is 12.5 percent.

    a) True
    b) False
    a) True

    In the simple system where there are no leakages, excess reserves, or thrift deposits, the deposit multiplier would be the reciprocal of the reserve requirement on transaction deposits.
  12. An increase in the required reserve rate for time and savings deposits will tend to reduce the size of the transaction deposit multiplier, all other things being equal.

    a) True
    b) False
    a) True

    If the required reserve rate for time and savings deposits increased, less funds would be available for the expansion process, and the transaction deposit multiplier would fall.
  13. An increase in the volume of excess reserves maintained by banks will tend to increase the size of the transaction deposit multiplier, all other things being equal.

    a) True
    b) False
    b) False  

    An increase in the volume of excess reserves maintained by banks will tend to reduce the size of the deposit multiplier, all other things being equal.
  14. The monetary base is the sum of legal reserves plus the currency and coin held by the public

    a) True
    b) False
    a) True

    This is the generally accepted definition of the monetary base.
  15. The monetary base is one of the principal determinants of the size of the nation's money supply.

    a) True
    b) False
    a) True

    The money supply equals the monetary base times the money multiplier.
  16. A change in the size of the monetary base produces an equal change in the size of the money supply.

    a) True
    b) False
    b) False

    A change in the size of the monetary base, working through the money multiplier, produces a magnified change in the size of the nation's money supply.
  17. Reserve requirements only affect the size of the money multiplier.

    a) True
    b) False
    b) False

    They affect the money multiplier, the mix between legal and excess reserves, and interest rates.
  18. A change in the discount rate usually causes other interest rates to change also.

    a) True
    b) False
    a) True  

    As the discount rate changes, it signals the direction of monetary policy, and other interest rates will soon begin to move in the same direction.
  19. The tool of monetary policy on which the Federal Reserve System most heavily relies is the discount rate.

    a) True
    b) False
    b) False  

    The tool relied on most heavily by the Fed is open market operations.
  20. The sale of U.S. government securities by the Federal Reserve System tends to push interest rates up.

    a) True
    b) False
    a) True

    Central bank sales of securities reduces the amount of demand deposits, loans, and reserves in the commercial banking system, making money and credit less available and increasing interest rates.
  21. The margin requirement on a regulated security is the difference between its market value and the maximum loan value of the security.

    a) True
    b) False
     
    a) True

    The maximum loan value of a security is expressed as a percentage of its current market value. The difference between its market value and loan value is the margin requirement.
  22. The Federal funds rate is the same as the discount rate.

    a) True
    b) False
    b) False  

    The Federal funds rate is a market-determined interest rate on the overnight borrowing of funds that banks pay to lend to one another.
  23. Borrowed reserves are part of the banking system's total reserves.

    a) True
    b) False
    a) True

    Some of the banking system's total reserves are borrowed from the Fed.
  24. The Fed has direct control of long-term interest rates in the economy.

    a) True
    b) False
    b) False

    The Fed cannot directly control long-term interest rates.
  25. The goal of full employment does not require the unemployment rate to fall to zero.

    a) True
    b) False
    a) True  

    In a free economy there will always be some level of unemployment, known as frictional unemployment, which arises as people are in the process of changing jobs.
  26. The Fed's focus is primarily on inflation targets, as deflation is no longer a concern.

    a) True
    b) False
    b) False

    When the economy slipped into recession in 2001, the Fed's concern switched to deflation for the first time since the Great Depression.
  27. In a market-oriented economy such as that of the United States, it is probably impossible to achieve a zero unemployment rate.

    a) True
    b) False
    a) True

    There will always be some unemployment as people change jobs. Full employment refers to a situation in which the only type of unemployment is frictional in nature.
  28. Frictional unemployment is that type of temporary unemployment that arises when people are changing jobs to obtain higher wages or better working conditions.

    a) True
    b) False
    a) True

    Frictional unemployment is joblessness resulting from workers in the process of changing jobs.
  29. Which of the following policy tools of the Federal Reserve System is a selective credit control? 

    A) changing reserve requirements 
    B) changing margin requirements 
    C) engaging in open-market operations
    D) setting the discount rate 
    B) changing margin requirements

    The others are incorrect because reserve requirements, discount rates, and open market operations are general credit controls that affect the entire banking and financial system. Changing margin requirements affects credit conditions in one sector of the market.
    (this multiple choice question has been scrambled)
  30. Which of the following statements concerning federal funds is correct? 

    A) They are also known as clearinghouse funds.   
    B) They are often used by wealthy individuals for large purchases.   
    C) They are the principal means of making payments in the money market.   
    D) They have a degree of risk because some transactions may be returned for insufficient funds.
    • C) They are the principal means of making payments in the money market. 
    •  
    • Federal funds are deposits held by banks at the regional Federal Reserve Bank or at their correspondent banks. In order to settle a money market transaction, the purchasing bank requests by wire or telephone that federal funds be transferred from its account to the account of the selling bank. Most money market transactions are handled in this way.
  31. Which of the following actions by the Federal Reserve System will tend to have an expansionary effect on the supply of credit in the economy? 

    A) increasing the discount rate
    B) increasing open-market securities purchases   
    C) increasing the reserve requirement   
    D) increasing the margin requirement   
    B) increasing open-market securities purchases   

    Purchasing securities in the open market will result in an increase in both the money supply and excess reserves of the banking system.
    (this multiple choice question has been scrambled)
  32. Which of the following factors will reduce the size of the deposit multiplier?

    I. a reduction in excess reserves held by banks

    II. an increase in the public's holding of currency and coin rather than checking account balances

    A) I only   
    B) II only   
    C) Both I and II   
    D) Neither I nor II
    B) II only   

    I is incorrect because a reduction in excess reserves held by banks will increase the size of the deposit multiplier.
    (this multiple choice question has been scrambled)
  33. Banks required to be members of the Federal Reserve System include which of the following?

    I. all national banks

    II. all state-chartered banks

    A) Both I and II   
    B) I only   
    C) II only   
    D) Neither I nor II
    B) I only   

    II is incorrect because state-chartered banks may become members but are not required to do so.
    (this multiple choice question has been scrambled)
  34. Banks required to be members of the Federal Reserve System include which of the following?

    I. all national banks

    II. all state-chartered banks 

    A) I only   
    B) II only   
    C) Both I and II   
    D) Neither I nor II
    • D) Neither I nor II
    •  
    • I is incorrect because a bank's total legal reserves equal its required reserves plus its excess reserves.

    II is incorrect because a bank's total legal reserves equal its deposits at the Federal Reserve Bank plus the vault cash the bank holds on its premises.
  35. Which of the following statements concerning bank reserves is (are) correct?
    I. A bank's total legal reserves equal its required reserves minus its excess reserves.
    II. A bank's total legal reserves equal its deposits at the Federal Deposit Insurance Corporation. 

    A) Both I and II   
    B) I only   
    C) II only   
    D) Neither I nor II
    B) I only   

    II is incorrect because issuance of commercial paper is normally feasible only for large organizations that have a very good credit rating.
    (this multiple choice question has been scrambled)
  36. Which of the following statements concerning the commercial paper market is (are) correct?

    I. The interest rates on commercial paper are usually lower than on commercial bank loans.

    II. Borrowing by issuing commercial paper usually can be accomplished even if the borrower is small and has a poor credit rating.

    A) I only   
    B) II only   
    C) Both I and II   
    D) Neither I nor II
    • C) Both I and II  
    •  
    • The Federal Reserve System pursues both of these goals, as well as the goals of controlling inflation, promoting full employment, and protecting the value of the dollar in foreign currency markets.
  37. All the following are functions performed by the Federal Reserve System EXCEPT

    A) insuring depositor accounts   
    B) clearing checks   
    C) issuing currency   
    D) examining member banks
    • A) insuring depositor accounts 
    •  
    • The Federal Reserve System does not insure depositor accounts. This function is performed by other federal agencies, particularly the FDIC.
  38. Loans from the Federal Reserve's discount window are typically made for all the following reasons EXCEPT
       
    A) to cover a bank's short-term deficiency in required legal reserves   
    B) to assist a bank that is facing a liquidity problem   
    C) to assist a bank that is experiencing seasonal fluctuations in its loans and deposits   
    D) to finance the construction of a bank's facilities
    D) to finance the construction of a bank's facilities

    The discount window cannot be used to finance renovations in bank facilities.
    (this multiple choice question has been scrambled)

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