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Assignment Print View
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The use of money and credit controls to achieve macroeconomic goals is
Fiscal policy.
→
Monetary policy.
Supply-side policy.
Eclectic policy.
Monetary policy allows the Federal Reserve to stabilize the macroeconomy somewhat.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
award:
0.00 points
Monetary policy involves the use of money and credit controls to
→
Shift the aggregate demand curve.
Shift the aggregate supply curve.
Move the economy along the aggregate demand curve.
Move the economy along the aggregate supply curve.
Monetary policy is a tool that the Federal Reserve uses to try to achieve its macroeconomic goals.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
award:
0.00 points
The creation of a Federal Reserve System was recommended by
→
The National Monetary Commission.
The U.S. Treasury.
A member of Congress.
The Federal Bureau of Investigation.
The National Monetary Commission recommended the creation of the Fed in response to the disastrous effects to the
economy from the Panic of 1907.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
12/1/2013 12:18 PM
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The Federal Reserve System was created by
The FDIC in 1929.
→
The Federal Reserve Act in 1913.
The U.S. Treasury in 1914.
The Federal Banking Authority in 1904.
President Wilson signed the Federal Reserve Act in 1913 to bring greater stability to the banking system following the
Panic of 1907.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
award:
0.00 points
Which of the following serves as the central banker for private banks in the United States?
→
The 12 Federal Reserve banks.
The executive branch of government.
The legislative branch of the government.
The Federal Open Market Committee.
The central bank in the United States is the Fed, which is composed of 12 district banks.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
award:
0.00 points
Which of the following is responsible for the Fed's daily activity in financial markets?
The Board of Governors.
The House of Representatives Ways and Means Committee.
Bank of America.
→
The FOMC.
The FOMC plays the very important role of setting short-term interest rates and setting the level of reserves held by
private banks.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-01 How the
Federal Reserve is organized.
12/1/2013 12:18 PM
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Which of the following is responsible for buying and selling government securities to influence reserves in the banking
system?
Twelve Federal Reserve banks.
The executive branch of government.
→
The Federal Open Market Committee.
The Board of Governors of the Federal Reserve.
The FOMC plays the very important role of setting short-term interest rates and setting the level of reserves held by
private banks.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-01 How the
Federal Reserve is organized.
award:
0.00 points
Currency held by the public plus balances in transactions accounts is the definition of
Bank surplus.
→
M1.
M2.
Bank deficit.
M1, the most liquid form of money, includes currency in the hands of the public and balances in transaction accounts.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
All of the following are tools available to the Fed for controlling the money supply except
The reserve requirement.
The discount rate.
Open market operations.
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Taxes.
Setting the level of taxes is an important fiscal lever controlled by the U.S Congress and president.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
12/1/2013 12:18 PM
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Which of the following represents the money multiplier?
Required reserve ratio × total deposits.
Total reserves - required reserves.
(Total reserves - required reserves) × multiplier.
→
1 ÷ (required reserve ratio).
The money multiplier tells us how much money creation will result from each dollar of deposits.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
Assume the reserve requirement is 25 percent, demand deposits are $500 million, and total reserves are $32 million. If
the reserve requirement is decreased to 20 percent, the banking system will experience
Excess reserves equal to $32 million.
Excess reserves equal to $68 million.
No change in the lending capacity.
→
A deficiency of required reserves equal to $68 million.
If the reserve requirement is changed to 20 percent, the banking system will need at least $100 million in required
reserves. So it will have a deficiency of $68 million.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
A change in the reserve requirement causes a change in all of the following except
The money multiplier.
The lending capacity of the banking system.
Excess reserves.
→
Pretax income.
Changes to the level of required reserves do not impact the level of pretax income, but will alter the money multiplier,
the lending capacity of the banking system, and the level of excess reserves.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
12/1/2013 12:18 PM
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Changing the reserve requirement is
→
A powerful tool that can cause abrupt changes in the money supply.
The most often-used tool on the part of the Fed.
A tool that has little impact on the money supply.
Effective in changing excess reserves but not the money supply.
Changing the required reserve ratio changes the excess reserves immediately and can result in banks quickly trying
to achieve the new required level of reserves, which will impact the overall economy.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the
Federal funds rate.
Prime rate.
→
Discount rate.
Commercial paper rate.
Traditionally, the Fed will lend to member banks at an interest rate known as the discount rate, which is an overnight
loan allowing member banks to meet the minimum level of required reserves.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
Through open market operations, the Fed is able to influence
The stock market but not the bond market.
Automatic stabilizers.
→
Portfolio decisions.
Real output but not the price level.
By influencing the portfolio decision, the Fed can encourage individuals to move wealth into bonds, stocks, or
deposits at the bank.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
12/1/2013 12:18 PM
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When the Fed wishes to increase the reserves of the member banks, it
→
Buys securities.
Raises the reserve requirement.
Raises the discount rate.
Sells securities.
When the Fed buys securities, reserves are injected directly into banks in exchange for their bonds, making more
loans possible.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
Rommel buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate
increases to 27 percent, Rommel can sell her bond for up to
→
$1,259.26.
$540.00.
$7,407.00.
$11,764.71.
The market interest rate will be the yield or return that the purchaser of the bond can expect to earn. Using the yield
formula and solving for the current price, one can determine the highest price an investor would be willing to pay for
this existing bond. Since the buyer will earn a 27 percent return or yield and the annual interest payment will be $340,
the bond will sell for up to $1,259.25 ($340/0.27). There is also a simpler way to do this. Interest rates and bond
prices have an inversely related correlation factor of -1. To get the new principal, divide the old interest rate by the
new interest rate and multiply the quotient by the old principal. In this case, (17/27 × $2,000 = $1,259.26).
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
The rate of return on a bond is the
Annual interest payment.
Discount rate.
→
Yield.
Federal funds rate.
The yield represents the return to the holder in terms of fixed interest payments to be received in the future divided by
the current market price of the principal.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM
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Which of the following equals the current yield on a bond?
Required reserve ratio × total deposits.
Total reserves - required reserves.
(Total reserves - required reserves) × the money multiplier.
→
Annual interest payment ÷ current market price of the bond.
The annual interest payment divided by the current market price of the bond equals the current rate of return.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
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?
→
10.0 percent.
12.0 percent.
8.5 percent.
5.0 percent.
The current yield is equal to the fixed annual interest payment divided by the current market price of the bond times
100, which in this case is ($120/$1,200) × 100 equals 10 percent.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
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?
25.5 percent.
20.5 percent.
→
35.7 percent.
25.0 percent.
The current yield is equal to the fixed annual interest payment divided by the current market price of the bond times
100, which in this case is ($250/$700) × 100 equals 35.7 percent.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM
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If market interest rates rise, the selling price of existing bonds in the market will, ceteris paribus,
Rise.
→
Fall.
Not change.
Change unpredictably.
Bond prices and yields move in opposite directions. If the Fed sells government bonds, bond prices fall and yields
(interest rates) rise.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
In order to increase the money supply, the Fed can
Raise the reserve requirement, increase the discount rate, or sell bonds.
Raise the reserve requirement, increase the discount rate, or buy bonds.
Lower the reserve requirement, increase the discount rate, or buy bonds.
→
Lower the reserve requirement, decrease the discount rate, or buy bonds.
The traditional tools of the Fed include changing the discount rate, the reserve requirement, and open market
operations, with the last being the most popular.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
If the Fed buys $20 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually
Decrease by $100 billion.
Decrease by $400 billion.
Increase by $100 billion.
→
Increase by $400 billion.
The money multiplier is equal to 1 ÷ required reserve ratio, which allows a $20 billion injection to support $400 billion
in additional deposits, which are included in M1.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM
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Suppose the required reserve ratio is 10 percent, and the Fed buys $5 million worth of bonds from the public. If the
public deposits this amount into transactions accounts, the money supply will
Increase directly by $5 million in reserve deposits, with an additional lending capacity of $40 million
created for the banking system.
Not be affected directly, but an additional lending capacity of $50 million will be created for the banking
system.
→
Increase directly by $5 million in reserve deposits, with an additional lending capacity of $45 million
created for the banking system.
None of the choices are correct.
The money multiplier is equal to 1 ÷ required reserve ratio, which allows a $5 million injection to support $50 million in
additional deposits, of which $45 million will be additional loans.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
If the Fed wishes to reduce the money supply, it can do all of the following except
Raise the discount rate.
Raise the minimum reserve ratio.
Sell securities on the open market.
→
Buy shares of common stock in a large bank.
The traditional tools of the Fed include changing the discount rate, the reserve requirement, and open market
operations, with the last being the most popular.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
In order to decrease the money supply, the Fed can
→
Raise the reserve requirement, increase the discount rate, or sell bonds.
Raise the reserve requirement, increase the discount rate, or buy bonds.
Lower the reserve requirement, increase the discount rate, or buy bonds.
Lower the reserve requirement, decrease the discount rate, or sell bonds.
The traditional tools of the Fed include changing the discount rate, the reserve requirement, and open market
operations, with the last being the most popular.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM
Assignment Print View
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If the Fed sells $7.5 billion of U.S. bonds in the open market and the reserve requirement is 15 percent, M1 will
eventually
→
Decrease by $50 billion.
Increase by $7.5 billion.
Increase by $50 billion.
Increase by $1.125 billion.
By removing $7.5 billion in reserves from the banking system through the money multiplier, the Fed reduces the total
deposits, part of M1, from the banking system by $50 billion.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
If the required reserve ratio is 5 percent and the Federal Reserve sells $10,000 worth of bonds, the money supply can
potentially
→
Decrease by $200,000.
Decrease by $50,000.
Decrease by $500.
Increase by $50,000.
By removing $10,000 in reserves from the banking system through the money multiplier, the Fed reduces the total
deposits, part of the money supply, from the banking system by $200,000.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
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
Increase by $100 billion.
→
Decrease by $100 billion.
Increase by $1 billion.
Decrease by $1 billion.
By removing $20 billion in reserves from the banking system through the money multiplier, the Fed reduces the total
lending capacity of the banking system by $100 billion.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM
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Which of the following is true about the Monetary Control Act of 1980?
→
It reduced the distinction between different types of depository institutions.
It further restricted the Federal Reserve's control of the banking system.
It placed S&Ls, credit unions, mutual savings banks, and nonmember banks under regulatory
institutions other than the Fed.
It deregulated the banking industry.
Because many types of financial institutions were not subject to Fed regulation, controlling the money supply was
difficult prior to the Monetary Control Act of 1980.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
award:
0.00 points
Assume an original balance sheet: The total money supply (M1) in Table 14.2 is
$100 billion.
$905 billion.
→
$400 billion.
$430 billion.
M1 is equal to currency held by the public plus deposits in transactions accounts, which in this case is $400 billion.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
12/1/2013 12:18 PM
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Assume an original balance sheet: On the basis of the information in Table 14.3, the required reserve ratio is
5 percent.
15 percent.
→
25 percent.
20 percent.
The required reserves are $20 billion out of $80 billion in total deposits. So the required reserve ratio must be 25
percent.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
award:
0.00 points
One In the News article is titled "Fed Cuts Deposit Reserve Requirements." All of the following are consistent with this
headline except
A change in excess reserves.
A change in the money multiplier.
A change in the lending capacity of the banking system.
→
A change in marginal tax rates.
A change in marginal tax rates is the realm of fiscal policy, controlled by Congress and the president.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-02 The Fed
s major policy tools.
12/1/2013 12:18 PM
Assignment Print View
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An open market purchase occurs when the Fed
→
Buys bonds from the public, increasing bank reserves.
Sells bonds to the public, increasing bank reserves.
Buys bonds from the public, decreasing bank reserves.
Sells bonds to the public, decreasing bank reserves.
An open market purchase occurs when the Fed buys bonds from the public, reducing the number of bonds
outstanding and increasing the amount of deposits or reserves in the banking system.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 14-03 How
open market operations work.
12/1/2013 12:18 PM