Exam Questions Ch.22 Monetary Policy And The Federal Reserve

c22; Chapter 22: Monetary Policy and the Federal Reserve

Learning Objectives

1. Define the concept of money
2. Explain how the fractional reserve banking system allows banks to create money
3. Explain how the market for loans functions
4. Describe the structure of the Federal Reserve System
5. Summarize the roles of the Federal Reserve
6. Explain how monetary policy takes place
7. Illustrate the impact of monetary policy on the economy
8. Access the tradeoffs associated with monetary policy

Multiple Choice

1. The system of using something as money began with
   1. the Federal Reserve System.
   2. the development of the FOMC.
   3. the barter exchange.
   4. the SEC.

LO-1

Level: Easy

1. An item that is widely accepted as payment for goods and services is a
   1. barter exchange.
   2. exchange rate.
   3. trade exchange.
   4. medium of exchange.

LO-1

Level: Easy

1. The primary functions of money include each of the following except
   1. barter facilitator.
   2. medium of exchange.
   3. store of value.
   4. unit of account.

LO-1

Level: Easy

1. The function of money that provides you a means of purchasing a cup of your favorite coffee is
   1. barter facilitator.
   2. medium of exchange.
   3. store of value.
   4. unit of account.

LO-1

Level: Easy

1. The function of money that allows you to save is
   1. barter facilitator.
   2. medium of exchange.
   3. store of value.
   4. unit of account.

LO-1

Level: Easy

1. The function of money that allows you to comparison shop is
   1. barter facilitator.
   2. medium of exchange.
   3. store of value.
   4. unit of account.

LO-1

Level: Easy

1. The price tag on your dream car serves as
   1. a facilitator of trade.
   2. a medium of exchange.
   3. a store of value.
   4. a unit of account.

LO-1

Level: Moderate

1. An advantage of the medium of exchange function of money is that it
   1. facilitates trade.
   2. provides a value for goods and service.
   3. allows for comparison of prices.
   4. allows consumers to time their purchases.

LO-1

Level: Moderate

1. Providing consumers with a means of timing purchases is
   1. the barter facilitator.
   2. the medium of exchange function of money.
   3. the store of value function of money.
   4. the unit of account function of money.

LO-1

Level: Moderate

1. Which of the following provides a standard definition of the money supply?
   1. Money in circulation
   2. Money stored in bank vaults
   3. Printed money
   4. Money stored for distribution at the regional Federal Reserve Banks

LO-1

Level: Easy

1. The M1 money supply includes each of the following except
   1. cash.
   2. demand deposits.
   3. savings deposits and savings bonds.
   4. travelers checks.

LO-1

Level: Easy

1. You received $100 in cash as a birthday gift. You deposit this money into your checking account. This deposit
   1. increased the M1 money supply because of the increase of demand deposits.
   2. decreased the M1 money supply because cash was taken out of circulation.
   3. increased the M1 money supply because the cash is now in the bank vault and in your checking account.
   4. did not change the M1 money supply.

LO-1

Level: Moderate

1. The total of M1 is

• 1. $1,265.
  2. $2,165.
  3. $2,765.
  4. $6,165.

LO-1

Level: Easy

1. The requirement on banks to hold only a portion of their deposits as reserves is known as
   1. the federal reserve system.
   2. the fractional reserve banking system.
   3. the federal open market system.
   4. the federal deposit insurance system.

LO-2

Level: Easy

1. The cash holdings of a bank are also known as
   1. total reserves.
   2. required reserves.
   3. excess reserves.
   4. the money multiplier.

LO-2

Level: Easy

1. The percentage of deposits that a bank must hold as reserves by law is known as
   1. total reserves.
   2. required reserves.
   3. excess reserves.
   4. the money multiplier.

LO-2

Level: Easy

1. A deposit of $8,500 is made to Econobank which has a 10 percent reserve rate. Which of the following statements about this deposit is true?
   1. Econobank’s total reserve increased by $850.
   2. Econobank’s required reserve increased by $7,650.
   3. Econobank’s excess reserves increased by $7,650.
   4. Econobank’s vault cash increased by $850.

LO-2

Level: Moderate

1. Econobank has the following required reserve requirements

If Econobank has $68.5 million in checking deposits what is the amount of required reserves?

• 1. $1.683 million
  2. $2.055 million
  3. $6.85 million
  4. $68. million

LO-2

Level: Difficult

1. Total reserves is equal to
   1. required reserves minus excess reserves.
   2. required reserves plus excess reserves.
   3. required reserves times the required reserve rate.
   4. required reserves times the money multiplier.

LO-2

Level: Easy

1. A bank receives a deposit of $10,000 and has a required reserve rate of 15%. What amount is available for loans to the bank?
   1. $1,000
   2. $1,500
   3. $8,500
   4. $10,000

LO-2

Level: Moderate

1. A bank receives a deposit of $15,000 and has a required reserve rate of 20%. What is the potential amount of new money that can be created?
   1. $3,000
   2. $12,000
   3. $15,000
   4. $75,000

LO-2

Level: Moderate

1. The money multiplier tells the maximum amount
   1. that total reserves can increase for a given increase in deposits.
   2. that required reserves can increase for a given increase in deposits.
   3. that excess reserves can increase for a given increase in deposits.
   4. that the money supply can increase for a given increase in deposits.

LO-2

Level: Easy

1. Money supply can be expanded and contracted by a multiple equal to
   1. the required reserve ratio.
   2. the reciprocal of the required reserve ratio.
   3. excess reserves.
   4. the reciprocal of the amount of excess reserves.

LO-2

Level: Easy

1. In the market for loans the supply (S) comes primarily from
   1. demand deposit accounts.
   2. checking accounts.
   3. savings accounts.
   4. the M1 money supply.

LO-3

Level: Easy

1. In the market for loans the demand (D) comes
   1. from savings accounts.
   2. the M1 money supply.
   3. individuals and households.
   4. businesses only.

LO-3

Level: Easy

1. The price of loans is
   1. the federal funds rate.
   2. the discount rate.
   3. the open market rate.
   4. the interest rate.

LO-3

Level: Easy

1. In the market for loans, if the interest rate is above market equilibrium quantity demanded is
   1. greater than quantity supplied and a surplus of money is available for loans.
   2. less than quantity supplies and a surplus of money is available for loans.
   3. greater than quantity supplied and a shortage of money is available for loans.
   4. less than quantity supplies and a shortage of money is available for loans.

LO-3

Level: Moderate

1. In the market for loans, if the interest rate is below market equilibrium quantity demanded is
   1. greater than quantity supplied and a surplus of money is available for loans.
   2. less than quantity supplies and a surplus of money is available for loans.
   3. greater than quantity supplied and a shortage of money is available for loans.
   4. less than quantity supplies and a shortage of money is available for loans.

LO-3

Level: Moderate

1. In the market for loans an interest rate above market equilibrium will
   1. result in an increase of interest rates to meet the demand for loans.
   2. result in a decrease of interest rates to reduce the supply of available funds.
   3. not result in a change of interest rates as they are determined by members of a bank board.
   4. have no affect on the market for loans.

LO-3

Level: Moderate

1. The structure of the Federal Reserve System consists of
   1. the Board of Governors and the Federal Open Market Committee.
   2. the Board of Governors and the 12 Federal Reserve Regional banks.
   3. the Federal Open Market Committee and the commercial banking system.
   4. the U. S. Department of Treasury and the Federal Open Market Committee.

LO-4

Level: Easy

1. Which of the following statements concerning the Federal Reserve Board of Governors is true?
   1. Twelve members of the Federal Reserve Board of Governors are nominated by the president and approved by Congress to serve staggered seven year terms.
   2. Seven members of the Federal Reserve Board of Governors are nominated by the president and approved by Congress to serve staggered two year terms.
   3. Fourteen members of the Federal Reserve Board of Governors are appointed by the president to serve staggered two year terms.
   4. Seven members of the Federal Reserve Board of Governors are appointed by the president to serve staggered 14 year terms.

LO-4

Level: Moderate

1. Which of the following statements best describes the Federal Reserve role for banks?
   1. The Federal Reserve is a bank for banks.
   2. The Federal Reserve is the controller of all banks.
   3. The Federal Reserve is the auditor for all banks.
   4. The Federal Reserve provides money for banks.

LO-5

Level: Easy

1. The primary roles of the Federal Reserve System are to
   1. ensure economic growth and promote stable prices.
   2. ensure economic growth and promote employment.
   3. ensure economic growth and limit economic contractions.
   4. promote stable prices and employment.

LO-5

Level: Easy

1. The Federal Reserve conducts monetary policy by
   1. influencing Congress to pass laws manipulating the availability of loans.
   2. influencing the ability of banks to create loans from their excess reserves.
   3. mandating banks concerning loans availability.
   4. supervising banks on their use of vault cash.

LO-6

Level: Easy

1. The tools of monetary policy include all of the following except
   1. open market operations.
   2. discount rate.
   3. reserve requirements.
   4. prime interest rates.

LO-6

Level: Easy

1. The buying and selling of securities from banks and investors is handled through the
   1. open market operations.
   2. discount rate.
   3. reserve requirements.
   4. prime interest rates.

LO-6

Level: Easy

1. When the Federal Reserve wants to stimulate the economy it can undertake
   1. a contractionary monetary policy and sell securities.
   2. a contractionary monetary policy and buy securities.
   3. an expansionary monetary policy and sell securities.
   4. an expansionary monetary policy and buy securities.

LO- 7

Level: Moderate

1. The economy is heating up and concerns of inflation are present. To ease this situation the Federal Reserve can undertake
   1. a contractionary monetary policy and sell securities.
   2. a contractionary monetary policy and buy securities.
   3. an expansionary monetary policy and sell securities.
   4. an expansionary monetary policy and buy securities.

LO-7

Level: Moderate

1. A disadvantage of monetary policy includes
   1. the political pressure from Congress.
   2. the inability to be flexible.
   3. the tradeoff to the economy.
   4. the effects on the money supply.

LO-8

Level: Easy

1. Which of the following is an accurate statement concerning the tradeoff to the economy resulting from monetary policy?
   1. The buying of securities from an expansionary monetary policy may stifle output and result in a recession.
   2. The tradeoff of an expansionary monetary policy is that while the buying of securities will increase money supply and stimulate the economy through increased spending, there will be increased pressure on prices thus running the risk of inflation.
   3. The buying of securities from a contractionary monetary policy will result in an increase in the number of loans and a decreased price level.
   4. The selling of securities in a contractionary monetary policy may result in an increase in unemployment.

LO-8

Level: Difficult