Test Bank Chapter 16 Central Banks Fed ECB Structure

Student name:__________

1) Why did it take almost 150 years before the United States had a permanent central bank?

2) What are the three branches that make up the Federal Reserve System?

3) Why are so few state chartered banks members of the Federal Reserve System?

4) How are the locations of the twelve regional Federal Reserve Banks and the corresponding districts explained?

5) The Federal Reserve is the U.S. government's bank. Identify the functions the Fed performs in this role.

6) Why is it technically incorrect to say that the board of directors of the regional Fed banks set the discount rate that each bank charges?

7) Why can't two Governors of the Fed come from the same district? Does this limitation make sense today?

8) Who makes up the voting members of the Federal Reserve's Open Market Committee?

9) In what ways do the regional Federal Reserve Banks influence monetary policy?

10) If it is the real rate of interest that savers and borrowers respond to, how does the Fed impact a real rate by targeting a nominal rate of interest?

11) Why can it be argued that, while interest rate decisions are made by the FOMC, which is a committee, the real power of the committee lies with the Chairman of the Federal Reserve System?

12) How can the FOMC utilize an inflation-targeting framework and also satisfy its dual mandate? As part of your answer, describe the Fed’s dual mandate.

13) What are the three criteria that are used to judge a central bank's independence and how does the Fed stack up to each of these criteria?

14) Given the democratic political structure of the United States, make an argument against the independence granted the Federal Reserve.

15) In the mid-1930s, the Federal Reserve became more independent from political pressure. What significant changes occurred then to increase the Fed's independence?

16) How is accountability achieved for the Federal Reserve? What makes assessing performance in this area difficult?

17) Is it correct to say that the Federal Reserve can improve the performance of the stock market but it cannot prevent a stock market crash?

18) Considering the three branches that make up the Federal Reserve System, identify the corresponding branches that make up the Eurosystem. Be sure to state which part of the Eurosystem corresponds to which part of the Federal Reserve System.

19) Describe four important differences between the Fed and the European Central Bank (ECB).

20) What is the difference between the European System of Central Banks and the Eurosystem?

21) Explain why the decision to join the Eurosystem presents serious domestic monetary policy issues.

22) What argument can you offer to justify the policy prohibiting formal voting during the Eurosystem’s Governing Council meetings?

23) How does cooperation with fiscal policymakers differ between the FOMC of the Fed and the Governing Council of the ECB?

24) In assessing whether the ECB’s communications strategy is sufficient, there are two questions that need to be addressed. These are whether the information that is released minimizes the extent to which people will be surprised by future policy actions and whether the system holds policymakers accountable for their decisions. How does the ECB rate in terms of these issues?

25) Describe how the Treaty of Maastricht mastered the time-consistency problems of monetary policy but not of fiscal and prudential policy. Provide examples of policy changes that could help.

26) In terms of the decisions coming from the Eurosystem's Governing Council, explain why, at times, relatively small countries may be at a distinct disadvantage in terms of monetary policy targets but perhaps have undue influence in terms of the actual policies.

27) If the current number of participating countries in the Eurosystem is nineteen as of 2019 and the number of large countries is four (Germany, France, Italy, and Spain), are policies likely to favor small or large countries? Explain.

28) Read the following partial transcript of the FOMC statement from September 18, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm). Then, answer the questions that follow.

29) Explain how a regulation requiring banks to keep a given percentage of deposits in an account paying below market interest rates at the Fed is really a tax on banks.

30) Discuss whether a large private organization could function in the role of a lender of last resort, and if it could, what potential problem(s) might arise.

31) The system of government in the United States has historically been one of checks and balances. Provide examples of these checks and balances as they pertain to the Board of Governors of the Federal Reserve and their relationship to the executive and legislative branches of government.

32) Briefly explain the economic rationale for Brexit. In other words, why would Great Britain choose to leave the European Union? And, why did they not adopt the euro and not adopt the ECB as their central bank even when they were a member of the EU? Was this the right choice?

33) The Federal Reserve was created in

A) 1929.
B) 1913.
C) 1909.
D) 1945.

34) The Federal Reserve System is composed of

A) five branches with clear responsibilities.
B) six branches with overlapping responsibilities.
C) three branches with overlapping responsibilities.
D) twelve branches with clear responsibilities.

35) Member banks of the Federal Reserve System include

A) only nationally chartered banks.
B) all state chartered banks with assets exceeding $100 million.
C) nationally chartered banks and state chartered banks that decide to join.
D) nationally chartered banks and all state chartered banks.

36) The three branches of the Federal Reserve System include each of the following, except which one?

A) the Board of Governors.
B) the Federal Deposit Insurance Corporation.
C) the Federal Open Market Committee.
D) the twelve regional Federal Reserve Banks.

37) Considering state chartered banks,

A) most elect to join the Federal Reserve System.
B) those with assets exceeding $100 million must join the Federal Reserve System.
C) most elect not to join the system.
D) only those that join the system must abide by reserve requirements.

38) Prior to 1980,

A) member banks of the Federal Reserve did not have to hold non-interest-bearing reserve deposits at the Fed.
B) nonmember banks had to hold non-interest-bearing reserve deposits at the Fed.
C) nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed.
D) all banks, member or not, had to hold non-interest-bearing reserve deposits at the Fed.

39) Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by

A) all banks, member or not.
B) only member banks.
C) member banks and nonmember banks with over $100 million in assets.
D) only nationally chartered banks.

40) One reason it took so long to have a central bank in the United States is that

A) it was not needed.
B) states feared centralization of power.
C) state currencies worked fine.
D) the primarily agrarian economy made it difficult for financial difficulties to become widespread.

41) Prior to the creation of the Federal Reserve System in the United States, how did financial panics typically begin?

A) shortage of gold
B) stock market crash
C) bank run on an urban bank
D) crop failure or a bumper crop that drove the market price down

42) The number of regional Federal Reserve Banks is

A) nine.
B) seven.
C) five.
D) twelve.

43) The Federal Reserve Bank of New York is unique from other Reserve banks because it is

A) the only regional Bank that serves just one state.
B) the only regional Bank located in a financial center.
C) where the Federal Reserve System's portfolio is managed.
D) the oldest and therefore the largest.

44) The lines drawn to establish Federal Reserve Districts were based

A) solely on population distribution in 1914.
B) solely on economic forces that existed in 1914.
C) on economic and political forces that existed in 1914.
D) on economic and political forces as well as population distribution in 1914.

45) Considering the Federal Reserve Districts, which one of the following is true?

A) With the exception of New York, no district coincides with a single state.
B) No district coincides with a single state.
C) Some districts are made up of single states.
D) The districts are divided with equal population.

46) The Reserve Banks of the Federal Reserve System are owned by

A) the taxpayers in their districts.
B) the U.S. Treasury.
C) the Board of Governors.
D) the commercial banks in their districts.

47) How many members belong to the board of directors for each of the Reserve Banks of the Fed?

A) 7
B) 9
C) 12
D) 14

48) Each of the Reserve Banks has a president who is

A) appointed by the bank's board of directors but approved by the board of governors.
B) appointed by the board of governors but approved by the bank's board of directors.
C) elected by the commercial banks in their district.
D) selected from the Board of Directors.

49) Each president of a Reserve Bank serves for a

A) fourteen-year term.
B) five-year term.
C) seven-year term.
D) two-year renewable term.

50) Which one of the following is a false statement about the structure of the Federal Reserve System?

A) Banker and business interests are reflected.
B) State and regional interests are reflected.
C) Government (public) and private interests are reflected.
D) Exporter and importer interests are reflected.

51) In its role as bank for the U.S. government, the Federal Reserve performs all of the following services except which one?

A) issuing new currency
B) making discount loans
C) maintaining the U.S. Treasury's bank account
D) managing U.S. Treasury borrowings

52) In its role as the bankers' bank, the Federal Reserve performs all of the following services except which one?

A) collecting and making available data on business conditions
B) making discount loans
C) managing U.S. Treasury borrowings
D) clearing paper checks and transferring funds electronically

53) Which one of the following cities does not have a Federal Reserve Bank located in it?

A) Denver
B) Atlanta
C) San Francisco
D) Chicago

54) Which one of the following cities has a Federal Reserve Bank located in it?

A) Denver
B) Philadelphia
C) Detroit
D) Miami

55) The Federal Reserve District that covers the largest geographic area is serviced by the Reserve Bank located in

A) Chicago.
B) Richmond.
C) Atlanta.
D) San Francisco.

56) The services that the Federal Reserve provides to foreign central banks and other international organizations are handled

A) directly by the Board of Governors in Washington, D.C.
B) by any of the Reserve Banks.
C) only by the Reserve Bank in New York.
D) only by the Reserve Bank in San Francisco.

57) The largest Federal Reserve District geographically is serviced by the Reserve Bank in

A) San Francisco.
B) Chicago.
C) New York.
D) the city closest to the depositor.

58) Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called

A) managing the float.
B) discount buying.
C) open market operations.
D) reserve adjustment.

59) Each of the following is a monetary policy action conducted by any of the regional Federal Reserve banks except which action?

A) conducting open market operations from their banks
B) participating in FOMC meetings
C) participating in setting the discount rate
D) making discount loans

60) How many members are on the Board of Governors of the Federal Reserve System?

A) twelve, one for each district
B) seven
C) nine
D) fourteen

61) Current law regarding the Fed's Board of Governors stipulates that

A) no more than three governors can come from the same district.
B) no more than two governors can come from the same district.
C) every district must have at least one governor on the board.
D) no more than one governor can come from the same district.

62) The Governors of the Federal Reserve System are appointed by the

A) member banks from their home district.
B) Board of Directors of the Reserve Bank from their home district.
C) President of the United States.
D) Chairman of the Federal Reserve System.

63) The Governors of the Federal Reserve System serve terms of

A) four years that can be renewed.
B) fourteen years.
C) four years, the same as the U.S. President, and the terms are not renewable.
D) seven years.

64) To make sure the U.S. President cannot unduly influence the Board of Governors

A) the terms of the governors are staggered.
B) the law prevents a president from appointing more than one governor.
C) the terms of the governors are ten years long.
D) only three governors can be replaced in any one year.

65) The Chairman of the Board of Governors

A) serves a four-year term that cannot be renewed.
B) is appointed by the U.S. President, selected from the Board of Governors.
C) serves the same four-year term as the U.S. President.
D) serves an eight-year term.

66) The Board of Governors of the Fed performs each of the following functions except which one?

A) analyzing financial and economic conditions
B) setting the reserve requirement
C) approving bank merger applications
D) making discount loans

67) The Federal Reserve Act explicitly requires that the Board of Governors represents each of the following except which one?

A) commercial interests
B) foreign interests
C) financial interests
D) agricultural interests

68) Members of the Board of Governors of the Fed

A) can be reappointed after their term expires.
B) must leave office when there is a new administration elected.
C) serve one nonrenewable, 14-year term.
D) are appointed for life, though they can resign at any time.

69) The Federal Reserve's Open Market Committee currently meets

A) monthly.
B) biweekly.
C) eight times a year.
D) once every quarter, unless a crisis warrants more frequent meetings.

70) The Federal Open Market Committee began operating in

A) 1913.
B) 1929.
C) 1914.
D) 1936.

71) The number of voting members on the Federal Open Market Committee is

A) seven.
B) eight.
C) twelve.
D) nineteen.

72) Which one of the following is (are) not a permanent voting member(s) on the FOMC?

A) the seven Governors of the Fed
B) the Secretary of the Treasury
C) the President of the Federal Reserve Bank of New York
D) the chair of the Board of Governors

73) The Chairman of the FOMC is the

A) Secretary of the Treasury.
B) Vice Chairman of the Board of Governors.
C) Chairman of the Board of Governors.
D) President of the New York Fed.

74) The interest rate that the FOMC currently chooses to control is the

A) federal funds rate.
B) 30-year Treasury bond rate.
C) discount rate.
D) prime rate.

75) The federal funds rate is the interest rate

A) the Fed charges banks who borrow from it.
B) banks charge each other for overnight loans on excess reserves held at the Fed.
C) the U.S. Treasury charges banks that need emergency funds.
D) the FDIC charges banks that need to borrow from it to meet depositor demands.

76) The federal funds rate is stated as

A) a real interest rate.
B) a nominal interest rate.
C) a rate that is automatically indexed to inflation.
D) the current rate less the expected rate of inflation.

77) The FOMC controls the real interest rate

A) if inflation changes quickly.
B) if inflation doesn't change quickly.
C) only if it adjusts the federal funds rate to match the changes in the rate of inflation.
D) only on an annual basis.

78) Changes in the federal funds rate influence the economy's growth rate through all of the following except by

A) making it more or less attractive to save.
B) making it more or less expensive to borrow.
C) making investment spending more or less attractive.
D) altering the real interest rate when inflation is changing quickly.

79) The primary purpose of meetings of the FOMC is to

A) set the required reserve rate.
B) set the discount rate.
C) decide on how to influence financial conditions.
D) set the prime rate.

80) The policy directive that is produced from the FOMC meeting

A) details the exact amount of U.S. Treasury securities the System Open Market Account Manager is to purchase or sell.
B) sets the specific discount rate for the next eight weeks.
C) sets the specific range that the target interest rate can fall within.
D) instructs the staff of the New York Fed on how to manage the Fed’s balance sheet.

81) The attendees at the FOMC meetings receive information prior to the meetings that is contained in books with colorful names. The information that is released to the public prior to the meetings is from the

A) Bluebook only.
B) Beigebook only.
C) Bluebook and Greenbook, but not the Tealbook.
D) Beigebook and Bluebook but not the Greenbook.

82) Which one of the following is responsible for invoking the Fed’s emergency powers?

A) FOMC
B) Board of Governors
C) Fed Chairman
D) a majority of the Federal Reserve Bank presidents

83) Which of the books used at the FOMC meetings contains anecdotal information collected by the Federal Reserve Banks?

A) the Bluebook
B) the Beigebook
C) the Tealbook
D) both the Beigebook and Bluebook

84) Which of the books used at the FOMC meetings contains the Board staff's economic forecast for the next few years?

A) the Bluebook
B) the Beigebook
C) the Tealbook
D) both the Beigebook and Bluebook

85) Which of the books used at the FOMC meetings contains a discussion of financial markets and current policy options?

A) the Tealbook
B) the Beigebook
C) the Greenbook
D) both the Beigebook and Greenbook

86) Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed?

A) the Bluebook and the Beigebook
B) the Beigebook and the Greenbook
C) the Tealbook
D) the Bluebook and the Greenbook

87) Which of the books used at the FOMC meetings can be characterized as less quantitative than the others?

A) the Tealbook
B) the Beigebook
C) the Greenbook
D) the Economic Forecast Reports

88) The information contained in the Fed's Tealbook is released to the public

A) immediately after the FOMC meeting in which it is used.
B) within two weeks after the FOMC meeting in which it is used.
C) the material in the teal book is never released to the public.
D) five years after the FOMC meeting in which it is used.

89) A typical FOMC meeting would best be described as

A) an informal meeting with significant give and take among participants.
B) an informal meeting with the Chairman as a passive observer.
C) a fairly formal session with not much give and take.
D) a press conference, where the financial press can ask questions regarding the Fed's view of the economy.

90) The real power in the FOMC lies with

A) the President of the New York Fed Bank.
B) the System Open Market Manager.
C) the Chairman of the Board of Governors.
D) no single individual; all participants have an equal share of the power.

91) Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision

A) immediately after the meeting.
B) 48 hours after the meeting adjourns.
C) within five business days.
D) 24 hours after the meeting adjourns.

92) Once the FOMC announces the result of its meeting, the attendees

A) must brief the financial news immediately after and answer questions posed to them.
B) observe a 24-hour blackout period following the meeting during which they do not speak publicly about the economic outlook or current monetary policy.
C) observe a blackout period that lasts for a week following the meeting during which they do not speak publicly about the economic outlook or current monetary policy.
D) never discuss the policy issues addressed in the meetings.

93) Criteria used to judge a central bank's independence include each of the following except which one?

A) budgetary independence
B) long terms for members
C) cabinet or ministry level of authority
D) irreversible decisions

94) The Fed's revenue comes

A) from congressional appropriation.
B) from the Department of Commerce.
C) from internally generated funds from interest on securities it holds and fees charged to banks for payments system services.
D) solely from taxes placed on member banks.

95) Most of the Fed's income is

A) paid to member banks in the form of a dividend.
B) sent to the FDIC to shore up the depositor insurance fund.
C) returned to the U.S. Treasury.
D) used to build the Fed's portfolio of securities.

96) The interest rate changes that result from the FOMC meetings can only be altered by

A) Congress.
B) the Secretary of the Treasury during an economic crisis.
C) the FOMC.
D) by the U.S. President during a time of crisis.

97) A large step toward independence occurred for the Fed in 1935 when the

A) Fed went from two to twelve districts.
B) Secretary of the Treasury and the Comptroller of the Currency were removed from the Board of Governors.
C) Chairman of the Board of Governors was no longer a cabinet position.
D) Fed was given the ability to control its own budget.

98) During World War II, the Fed accommodated the war effort by

A) significantly curtailing credit in the economy.
B) keeping bond prices high and interest rates low.
C) selling any Treasury securities the public did not purchase.
D) curtailing credit and keeping bond prices high.

99) The Fed's independence can only be revoked by

A) the U.S. President.
B) the Secretary of the Treasury.
C) Congress.
D) changing the U.S. Constitution.

100) The likelihood that the Fed will implement a change that will seriously harm the economy is minimized by the fact that

A) only bright, well-intentioned people are appointed to key roles at the Fed.
B) Congress can remove the Chairman of the Fed at any time.
C) the Board of Governors ultimately must answer to the U.S. President since he can replace them.
D) there is decision making by committee.

101) The objectives set for the Fed by Congress are

A) very specific, which adds to the Fed's accountability.
B) by design, quite vague, allowing the Fed to really set its own goals.
C) specific regarding inflation, but vague on all other goals.
D) specific on the growth rate for the economy, but vague on all other objectives.

102) One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed

A) can control the stock market.
B) can reduce the idiosyncratic risk of investing but not the systematic risk.
C) can eliminate the risk from investing.
D) cannot prevent a stock market decline.

103) The U.S. dollar is to the fifty states as the euro is to the

A) European Central Bank
B) states of the European Monetary Union
C) National Central Banks
D) European System of Central Banks

104) The agreement to form a European monetary union was formalized in the Treaty of

A) Maastricht.
B) Paris.
C) Amsterdam.
D) Milan.

105) By 2020, the euro had become the currency of

A) every country in Europe.
B) 19 countries in Europe.
C) 25 countries in Europe.
D) all European countries except Great Britain.

106) Comparing the European and the U.S. central bank systems, the National Central Banks that make up part of the European System of Central Banks resembles the

A) U.S. Treasury.
B) Board of Governors.
C) FOMC.
D) regional Federal Reserve Banks.

107) Comparing the European and the U.S. central bank systems, the Executive Board of the European system resembles the

A) FOMC.
B) Board of Governors.
C) Presidents of the regional Federal Reserve Banks.
D) Chairman of the Board of Governors of the Fed.

108) Comparing the European and the U.S. central bank systems, the Governing Council of the European system resembles the

A) Board of Governors.
B) Presidents of the Regional Federal Reserve Banks.
C) FOMC.
D) Chairman of the Board of Governors of the Fed.

109) Executive board members of the European System of Central Banks are appointed by

A) a committee made up of bank presidents in the member countries.
B) a committee made up of heads of state of member countries.
C) the finance ministers of member countries.
D) the directors of the National Central Banks.

110) The Treaty of Maastricht was signed in

A) 1992.
B) 1982.
C) 2000.
D) 2010.

111) Member countries of the Eurosystem agree to

A) pursue independent domestic monetary policies based on what is best for their own country, but not all member countries have adopted the euro as their currency.
B) share a common monetary policy and fiscal policy.
C) use the euro as their currency, but each country still pursues an independent monetary policy.
D) share a common monetary policy and use the euro as their currency.

112) In the meetings of the Governing Council of the European Central Bank, formal votes are

A) taken and published immediately.
B) not taken, since formal voting could get in the way of good policy.
C) taken but not published for five years.
D) taken and released two years after the meetings.

113) Sweden is

A) a member of the European Union but not a member of the Eurosystem.
B) a member of the Eurosystem but not a member of the European Union.
C) not a member of the Eurosystem or the European Union.
D) a member of both the European Union and the Eurosystem.

114) France, Germany, and Italy are

A) all members of the European Union and the Eurosystem.
B) all members of the Eurosystem but not the European Union.
C) all members of the European Union but not the Eurosystem.
D) not members of either the Eurosystem or the European Union; they have their own economic union.

115) As of May, 2019, the euro had become the currency for

A) 7 countries.
B) 12 countries.
C) 19 countries.
D) 25 countries.

116) The European Central Bank has ensured independence by appointing Executive Board members for

A) life.
B) eight-year, nonrenewable terms.
C) 14-year terms.
D) 20-year terms.

117) The European Central Bank has ensured independence by

A) explicitly forbidding the Governing Council from taking instructions from any government.
B) making sure the ECB's financial interests supports member countries' political organizations.
C) by appointing the Executive board members for life.
D) not taking votes on policy matters.

118) Price stability is declared to be the primary objective of the European System of Central Banks by which agreement?

A) Peace of Lodi
B) Treaty of Paris
C) Treaty of Maastricht
D) Treaty of Amsterdam

119) The ECB's Governing Council has price stability as a primary objective and has defined price stability as

A) a zero rate of inflation.
B) an inflation rate less than 5 percent.
C) an inflation rate below, but close to, 2 percent over the medium term.
D) an inflation rate in the 3 to 5 percent range.

120) The method used by the ECB to measure inflation for meeting its objectives

A) is based on wholesale rather than retail prices.
B) gives greater relative weight to smaller countries.
C) uses an average of retail price inflation in all the member countries with no adjustment for GDP differences.
D) could result in a contractionary monetary policy being used in a country where inflation is already very low.

121) The index used by the ECB’s Governing Council to measure inflation is a euro-area-wide measure of consumer prices called the

A) Stability-Oriented Price Index.
B) European Consumer Price Index.
C) European Community Index of Prices.
D) Harmonized Index of Consumer Prices.

122) The make-up of the Governing Council of the European Central Bank and the methods used to calculate price stability for the monetary system could potentially result in which one of the following shortcomings?

A) small countries having no influence on the decisions of the Council
B) monetary policy that is well suited for some countries but ill-suited for others
C) a unified monetary policy appropriate for the median country, which will be a country with a large economy
D) monetary policy that emphasizes unemployment over price stability

123) Based on the rankings of members of the Eurosystem by nominal GDP in 2018, the median country is likely to be

A) Italy.
B) very large.
C) fairly small.
D) growing more rapidly than the others.