Test Questions & Answers Federal Reserve System Ch.4

Chapter 4

Federal Reserve System

TRUE-FALSE QUESTIONS

1. Fannie Mae was created to support the financial markets by purchasing home mortgages and automobile loans from banks so that the proceeds could be lent to other borrowers.

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

2. The Federal Reserve System (Fed), the central bank of the United States, is responsible for setting monetary policy and regulating the banking system.

Answer T

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

3. The federal government has historically played a very passive role in encouraging home ownership by supporting liquid markets for home mortgages.

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

4. The Government National Mortgage Association (Ginnie Mae) was created in 1968 as a public-private corporation.

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

5. Because of the National Banking Act, the volume of national bank notes depends on the government bond market rather than the seasonal or cyclical needs of the nation for currency.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

6. A major weakness of the banking system under the National Banking Acts was that the money supply could not be easily expanded or contracted to meet changing seasonal needs and/or changes in economic activity.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

7. The United States was one of the earliest major-industrial nations to adopt a permanent system of central banking.

Difficulty Level: Medium

Subject Heading: The Movement to Central Banking

L.O. 4.2

8. The United States was one of the last major industrial nations to adopt a permanent system of central banking.

Difficulty Level: Medium

Subject Heading: The Movement to Central Banking

L.O. 4.2

9. Although a central bank does not necessarily operate for profit, it generally deals directly with the public.

Difficulty Level: Medium

Subject Heading: Subject Heading: The Movement to Central Banking

L.O. 4.2

10. A central bank is a Federal government agency that facilitates operation of the financial system and regulates growth of the money supply.

Difficulty Level: Easy

Subject Heading: The Movement to Central Banking

L.O. 4.3

11. All commercial banks are members of the Fed.

Difficulty Level: Easy

Subject Heading: Member Banks

L.O. 4.3

12. State-chartered banks were permitted to join the system if they could show evidence of a satisfactory financial condition

Difficulty Level: Easy

Subject Heading: Member Banks

L.O. 4.3

13. About one-third of the nation’s commercial banks are members of the Fed.

Difficulty Level: Easy

Subject Heading: Member Banks

L.O. 4.3

14. The Fed Board of Governors is composed of seven members who are appointed for a term of 12 years.

Difficulty Level: Medium

Subject Heading: Organization of the Federal Reserve System

L.O. 4.3

15. The Federal Reserve act required that all national banks were to become members of the Fed.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

16. The essential requirements of a well-functioning financial system include an efficient national payments system, a flexible money supply, and a lending/borrowing mechanism to help alleviate liquidity problems when they arise.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.3

17. The seven members of the Federal Reserve Board of Governors are responsible for the establishment of monetary policy.

Difficulty Level: Medium

Subject Heading: Organization of the Federal Reserve System

L.O. 4.3

18. The 1980 Depository Institutions Deregulation and Monetary Control Act applies different reserve requirements to different banks based on their charters.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

19. Open market operations involve the buying and selling of U.S. government securities.

Difficulty Level: Easy

Subject Heading: Federal Open Market Committee

L.O. 4.3

20. Although not provided for in the original organization of the Fed, open-market operations have become the most important and effective means of monetary control.

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

21. The Federal Open Market Committee directs open market operations by buying and selling government securities which are the primary instruments of exercising monetary policy.

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

22. The Federal Reserve Act of 1913 provided that all national and state-chartered banks were to become members of the Fed.

Difficulty Level: Easy

Subject Heading: Member Banks

L.O. 4.3

23. The Federal Reserve Advisory Council provides advice and general information to the Secretary of the Treasury.

Difficulty Level: Medium

Subject Heading: Advisory Committees

L.O. 4.3

24. The closer to the required minimum the banking system maintains its reserves, the tighter the control the Fed has over the money creation process through its other instruments.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

25. The Fed lending rate to depository institutions was consistently lower than the bank prime lending rate during the 1980–2009 period.

Difficulty Level: Medium

Subject Heading: Rate Policy

L.O. 4.4

26. The ability to change reserve requirement is a powerful tool the Fed uses frequently.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

27. If excess reserves are near zero, then a reduction of a bank’s reserves will cause the system to loosen credit.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

28. The Fed discount rate is the interest rate that a bank must pay to borrow from its regional Federal Reserve Bank.

Difficulty Level: Medium

Subject Heading: Rate Policy

L.O. 4.4

29. Total deposits can be contracted by holding the amount of reserves constant but raising the reserve requirement.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

30. The money supply can be contracted by holding the amount of reserves constant but raising the reserve requirement.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

31. The Fed prefers to change reserve requirements rather than to use open market operations.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

32. When reserves are added to the banking system, depository institutions may expand their lending but are not forced to do so.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

33. Open market operations are similar to discount operations in that they increase or decrease bank reserves at the initiative of the Fed.

Difficulty Level: Medium

Subject Heading: Open-Market Operations

L.O. 4.4

34. By exercising its influence on the monetary system of the United States, the Fed performs a unique and important function: promoting economic stability.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

35. The three primary means that the Fed can use to exercise monetary policy includes closed market operations, stabilizing reserve requirements, and freeing the Federal discount rate.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

36. Discount policy is still a major instrument of monetary policy.

Difficulty: Medium

Subject Heading: Rate Policy

L.O. 4.4

37. The minimum amount of total reserves that depository institutions must hold are called fractional reserves.

Difficulty Level: Easy

Subject Heading: Reserve Requirements

L.O. 4.4

38. Banks with large transaction account balances hold the same percentage of reserves as all other banks.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

39. The primary responsibility of the Fed is to formulate monetary policy which involves regulating the growth of the supply of money, and therefore regulating its cost and availability.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

40. Federal Reserve actions that stimulate or repress the level of prices or economic activity are called dynamic actions.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

41. Federal Reserve actions that stimulate or repress the level of prices or economic activity are called defensive activities.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

42. The accommodative actions of the Fed includes buying treasury securities.

Difficulty: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

43. Dynamic actions are Fed activities that off set unexpected monetary developments and contribute to the smooth, everyday functioning of the economy.

Difficulty: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

44. The most-used instrument of monetary policy is open-market operations.

Difficulty Level: Easy

Subject Heading: Open-Market Operations

L.O. 4.4

45. Due to its easy-of-use, quantitative easing is the primary Fed monetary policy.

Difficulty Level: Easy

Subject Heading: Quantitative Easing

L.O. 4.1

46. Quantitative easing is when the Fed engages in purchasing financial assets from banks and other financial institutions with newly created money, resulting in larger bank excess reserves and increased money supply and liquidity.

Difficulty Level: Easy

Subject Heading: Quantitative Easing

L.O. 4.1

47. The federal funds rate is the interest rate on overnight loans from banks with excess reserves to the Fed.

Difficulty Level: Easy

Subject Heading: Implementation of Monetary Policy

L.O. 4.4

48. Banks are required by the Fed to hold reserves equal to a part of their deposits as part of the fractional reserve system of the U.S. banking system.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.5

49. The Federal Reserve has no power to regulate the overseas activities of member banks and bank holding companies.

Difficulty Level: Medium

Subject Heading: Specific Supervisory Responsibilities

L.O. 4.5

50. The Consumer Credit Protection Act requires that lenders clearly explain consumer credit costs and prohibited them from charging overly high-priced credit transactions.

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

51. Regulation Z requires that lenders clearly explain consumer credit costs and prohibited them from charging overly high-priced credit transactions.

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

52. The Reserve Banks provide a wide range of important services to depository institutions and to the U.S. government.

Difficulty Level: Easy

Subject Heading: Fed Service Functions

L.O. 4.6

53. The Fed is no longer involved in processing checks.

Difficulty Level: Easy

Subject Heading: Fed Service Functions

L.O. 4.6

54. A large portion of Fed employees hold jobs directly related to the Fed’s role as fiscal agent for the U.S. government.

Difficulty Level: Easy

Subject Heading: Other Service Activities

L.O. 4.6

55. Empirical evidence shows that in countries where central banks are relatively independent from their governments, there has been higher inflation and lower economic growth rates than in countries where central banks are closely tied to their governments.

Difficulty Level: Medium

Subject Heading: Central Banks in Other Countries

L.O. 4.7

56. The European Central Bank (ECB) conducts monetary policy for Britain.

Difficulty Level: Medium

Subject Heading: Central Banks in Other Countries

L.O. 4.7

57. The central bank of Japan is called the First Bank of Japan.

Difficulty Level: Medium

Subject Heading: Central Banks in Other Countries

L.O. 4.7

58. All of the Chairmen of the Fed Board of Governors have been male.

Difficulty Level: Easy

Subject Heading: Board of Governors

L.O. 4.3

59. As of early 2019, nearly all the checks processed for collection by Federal Reserve Banks are still received as paper checks.

Difficulty Level: Easy

Subject Heading: The Payments Mechanism

L.O. 4.5

MULTIPLE-CHOICE QUESTIONS

60. U.S. central bank that sets monetary policy and regulates banking system.

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

61. Created to support the financial markets by purchasing home mortgages from banks so that the proceeds could be lent to other borrowers,

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

62. Created to issue its own debt securities to obtain funds that are invested in mortgages made to low to moderate income home purchasers

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

63. Formed to support mortgage markets by purchasing and holding mortgage loans,

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

64. Also known as Freddie Mac.

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Rceserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

65. Also known as the Fed.

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

66. Also known as Fannie Mae.

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

67. Also known as Gennie Mae.

a. Government National Mortgage Association

b. Federal National Mortgage Association

c. Federal Home Loan Mortgage Corporation

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: U.S. Central Bank Response to the Financial Crisis and Great Recession

L.O. 4.1

68. Under the authority of the Federal Reserve Act of 1913

a. member banks were required to purchase capital stock in the Federal Reserve Banks of their district.

b. member banks may not borrow from the Fed.

c. a formal open-market committee arrangement was established.

d. national banks were permitted to become members of the Fed if they could show evidence of satisfactory financial condition.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.2

69. One of the major weaknesses of the banking system before the Federal Reserve System was set up was

a. the arrangement for holding reserves.

b. the lack of a deposit insurance system.

c. a lack of currency and coin.

d. an inadequate supply of government bonds.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

70. Before the Federal Reserve System was created, a large part of the reserves of commercial banks was

a. in the form of state and federal government bonds.

b. deposited with the United States Treasury.

c. held as deposits with large city banks.

d. held as cash in their vaults.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

71. The National Banking Acts of 1863 and 1864 provided that

a. national banks could issue their own notes only against U.S. government bonds the banks held on deposit with the Treasury.

b. national banks could issue their own notes only against cash held in their vaults.

c. national banks could issue their own notes only against U.S. government bonds the banks held on deposit with the Federal Reserve Bank.

d. none of the above.

Difficulty Level: Medium

Subject Heading: The U.S. Banking System Prior to the Fed

L.O. 4.2

72. The United States created its system of central banking

a. earlier than such banks were established in other industrial nations.

b. later than such banks were established in other industrial nations.

c. to facilitate branch banking.

d. to facilitate international exchange operations.

Difficulty Level: Medium

Subject Heading: The Movement to Central Banking

L.O. 4.2

73. When the Federal Reserve System was created, it was thought that its most important influence over monetary conditions would be

a. lending to banks to bolster their reserve positions.

b. quantitative easing.

c. the issuance of Federal Reserve notes.

d. the changing of reserve requirements.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

74. Three essential needs of a well-operating financial system include all of the following except

a. an efficient national payments system.

b. an elastic or flexible money supply.

c. a bank insurance system.

d. a lending/borrowing mechanism.

Difficulty Level: Medium

Subject Heading: Weaknesses of the National Banking System

L.O. 4.2

75. Under the authority of the Federal Reserve Act of 1913

a. all national and state-chartered banks must become members of the Fed.

b. only national banks were permitted to become members of the Fed.

c. state-chartered banks were permitted to withdraw from membership with the Fed.

d. a system of deposit insurance was created.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

76. The National Banking Acts of 1863 and 1864 were

a. totally eliminated under the Federal Reserve Act of 1913.

b. were modified to permit greater flexibility of operations under the Federal Reserve Act of 1913.

c. were unaffected by the Federal Reserve Act of 1913.

d. found unconstitutional by the Supreme Court.

Difficulty Level: Medium

Subject Heading: Structure of the Federal Reserve System

L.O. 4.3

77. Under the Federal Reserve Act of 1913, the number of Federal Reserve districts established is

a. 8

b. 10

c. 12

d. 25

Difficulty Level: Easy

Subject Heading: Organization of the Federal Reserve System

L.O. 4.3

78. The seven-member board of the Federal Reserve that sets monetary policy is called

a. the Federal Reserve Open Market Committee.

b. the Federal Reserve Board of Governors.

c. the Federal Reserve Advisory Committee.

d. the Federal Market Advisory Committee.

Difficulty Level: Easy

Subject Heading: Organization of the Federal Reserve System

L.O. 4.3

79. The chairman of the Federal Reserve System

a. is appointed by the Secretary of the Treasury.

b. serves a life term.

c. is the president of the New York Federal Reserve Bank.

d. is appointed by the President of the United States.

Difficulty Level: Easy

Subject Heading: Board of Governors

L.O. 4.3

80. As of 2019, the Chairman of the Federal Reserve is ________________________.

a. Jerome Powell

b. Alan Greenspan

c. Ben Bernanke

d. Janet Yellen

Difficulty Level: Easy

Subject Heading: Role of the Chair of the Fed Board of Governors

L.O. 4.3

81. As of 2019, there have been how many Chairmen of the Federal Reserve?

a. 14

b. 15

c. 16

d. 17

Difficulty Level: Easy

Subject Heading: Role of the Chair of the Fed Board of Governors

L.O. 4.3

82. The primary function of the Federal Reserve System is to

a. issue currency to member banks.

b. regulate the growth of the money supply.

c. serve as a fiscal agent for the U.S. government.

d. regulate and conduct bank examinations.

Difficulty Level: Medium

Subject Heading: Board of Governors

L.O. 4.3

83. The Class C directors of each Federal Reserve Bank are

a. appointed by the Board of Governors of the Federal Reserve System.

b. elected by the member banks.

c. chosen by the Board of Governors and by the member banks.

d. appointed by the President of the United States with the advice and consent of the Senate.

Difficulty Level: Medium

Subject Heading: Federal Reserve District Banks

L.O. 4.3

84. The members of the Fed Board of Governors are

a. elected by the member banks.

b. appointed by the President of the United States with the advice and consent of the Senate.

c. appointed by the Secretary of the Treasury.

d. appointed by each of the Federal Reserve banks.

Difficulty Level: Medium

Subject Heading: Board of Governors

L.O. 4.3

85. Each member of the Fed Board of Governors is appointed for a term of

a. 8 years.

b. 12 years.

c. 14 years.

d. 16 years.

Difficulty Level: Medium

Subject Heading: Board of Governors

L.O. 4.3

86. Each Federal Reserve Bank has a president and first vice president who are appointed by

a. the Board of Governors.

b. the President of the United States.

c. the President of the United States with the advice and consent of the Senate.

d. its board of directors.

Difficulty Level: Medium

Subject Heading: Federal Reserve District Banks

L.O. 4.3

87. The Fed Board of Governors

a. is elected by the member banks.

b. is appointed by the Senate.

c. has seven members appointed for 14-year terms.

d. has seven members appointed for a term of 12 years.

Difficulty Level: Medium

Subject Heading: Board of Governors

L.O. 4.3

88. The Federal Reserve Banks are owned by

a. commercial banks.

b. the U.S. Treasury.

c. national member banks of the Federal Reserve System.

d. member banks of the Federal Reserve System.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

89. History generally supports the contention that under the guidance of Paul Volcker, a (n) ____________ Fed policy brought down the double-digit inflation of the 1970s and the early 1980s, and the Federal Open Market Committee consistently responded to his leadership.

a. loosening of

b. restrictive

c. expansionary

d. None of the above

Difficulty Level: Medium

Subject Heading: Role of the Chair of the Fed Board of Governors

L.O. 4.3

90. The Board of Governors of the Federal Reserve System

a. consists of 7 appointed members.

b. sets reserve requirements.

c. approves discount rates as part of monetary policy.

d. all the above.

Difficulty Level: Medium

Subject Heading: Organization of the Federal Reserve System

L.O. 4.3

91. State-chartered banks

a. automatically receive membership in the Federal Reserve System.

b. are prohibited from membership in the Federal Reserve System.

c. may be permitted to join the Federal Reserve system, given a satisfactory financial condition.

d. can be Fed members if sponsored by an existing member bank.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

92. Members of the Federal Reserve System may include

a. commercial banks with a national charter.

b. credit unions.

c. savings and loan institutions.

d. thrift and loan associations.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

93. The capital stock of each Federal Reserve Bank

a. is owned by the Board of Governors of the Fed.

b. can be used in an emergency to provide funds for the Fed.

c. is owned by members of the individual Federal Reserve Banks.

d. has been reserved for purchase of the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

94. The Federal Reserve System consists of all of the following components except

a. Monetary Policy Committee.

b. Board of Governors.

c. Federal Open Market Committee.

d. Federal Reserve District Banks.

Difficulty Level: Medium

Subject Heading: Structure of the Federal Reserve System

L.O. 4.3

95. Approximately __________ of the nation’s commercial banks are members of the Fed.

a. three-fourths

b. two-thirds

c. one-third

d. one-half

e. Commercial banks cannot be members of the Fed

Difficulty Level: Medium

Subject Heading: Member Banks

L.O. 4.3

96. __________ directors of the Federal Reserve are appointed by the Board of Governors of the Federal Reserve System and may not be stockholders, directors, or employees of existing banks.

a. Class A

b. Class B

c. Class C

d. Class D

Difficulty Level: Hard

Subject Heading: Federal Reserve District Banks

L.O. 4.3

97. Although it enjoys substantial independence in its operations, the appointive power of the president and the ability of Congress to alter its structure make the ______________ a dependent political structure and one of the most powerful monetary organizations in the world.

a. Board of Governors (BOG)

b. Board of Directors (BOD)

c. Governing Body (GOB)

d. Financial Governors (FOG)

Difficulty Level: Hard

Subject Heading: Board of Governors

L.O. 4.3

98. The five components of the Federal Reserve System include:

a. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Monetary Committees.

b. Nonmember banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees.

c. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees.

d. Member banks, Federal Reserve District Banks, Board of Governors, Federal Closed Market Committee, Advisory committees.

Difficulty Level: Hard

Subject Heading: Structure of the Federal Reserve

L.O. 4.3

99. Which of the following is a component of the Federal Reserve System?

a. Member banks

b. Nonmember banks

c. Advisory committees

d. Federal Closed Market Committee

Difficulty Level: Hard

Subject Heading: Structure of the Federal Reserve

L.O. 4.3

100. The Federal Open Market Committee

a. is comprised of members of the Federal Reserve board and representatives of all Federal Reserve Banks.

b. came into being at the time the Federal Reserve System was created.

c. is made up of the presidents of the 12 Federal Reserve Banks.

d. was created under a provision of the Banking Act of 1935.

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

101. The Federal Open Market Committee

a. typically buys and sells long-term corporate bonds

b. implements the most powerful and flexible monetary policy tool of the Fed

c. works out of Washington D.C.

d. deals with most of the commercial banks of the nation

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

102. The Federal Open Market Committee

a. is made up of the presidents of the 12 Federal Reserve Banks.

b. consists of the seven members of the Board of Governors of the Fed, plus five presidents of Reserve Banks.

c. is appointed by the Chairman of the Federal Reserve System.

d. is elected by Fed member banks.

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

103. The Federal Open Market committee

a. establishes and administers protective consumer finance regulations.

b. furnishes currencies.

c. handles U.S. government debt and cash balances.

d. buys and sells securities.

Difficulty Level: Medium

Subject Heading: Federal Open Market Committee

L.O. 4.3

104. Which of the following is not a responsibility of the Board of Governors?

a. Sets reserve requirements

b. Supervises and regulates member banks

c. Proposes discount rates

d. Oversees Federal Reserve Banks

Difficulty Level: Easy

Subject Heading: Figure 4.1

L.O. 4.3

105. Which of the following is not a responsibility of the Federal Reserve Banks?

a. Sets reserve requirements

c. Proposes discount rates

c. Furnishes currency

d. Handles U.S. government debt and cash balances

Difficulty Level: Easy

Subject Heading: Figure 4.1

L.O. 4.3

106. The Advisory Committee to the Board of Governors is made up of three councils. Which of the following is not one of those?

a. Consumer Advisory Council

b. Federal Advisory Council

c. Thrift Institutions Advisory Council

d. Business Advisory Council

Difficulty Level: Easy

Subject Heading: Figure 4.1

L.O. 4.3

107. Member banks of the Federal Reserve System

a. must maintain all reserves with their Federal Reserve Bank.

b. may include deposits held at large city banks as legal reserves.

c. maintain levels of reserves based on the size of the city in which they are located.

d. are permitted to count vault cash as part of their reserves.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

108. The dynamic actions of the Federal Reserve System

a. contribute to the smooth everyday functioning of the economy.

b. are designed to meet the credit needs of individuals and institutions.

c. support depositories and other institutions.

d. stimulate or repress the level of prices or economic activity.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

109. One significant feature of DIDMCA was that it

a. expanded the ability of the Fed to influence unemployment rates.

b. expanded Fed control over the reserve requirements of non-member banks.

c. created the FDIC.

d. eliminated regulation Z.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

110. Today the responsibilities of the Fed may be described as

a. those relating to monetary policy, to supervision and regulation, and to services provided for depository institutions and the government.

b. those relating to fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government.

c. those relating to monetary policy, to deregulation, and to services provided for depository institutions and the government.

d. those relating to monetary policy, to supervision and regulation, and to services provided for homeowners and the government.

Difficulty Level: Hard

Subject Heading: Overview of Responsibilities

L.O. 4.4

111. Open market operations

a. are used infrequently

b. are a prime source of income for the U.S. economy

c. are used by the Fed to alter bank reserves

d. are used by the Fed to issue securities

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

112. The effect of an increase of required reserves by the Fed is

a. a decrease in loanable funds of depository institutions.

b. a decrease in interest rates.

c. an increase of excess reserves.

d. to stimulate activity in the home construction field.

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

113. Which monetary policy tool does the Fed use most infrequently?

a. changing reserve requirements

b. changing the discount rate

c. open market operations

d. changing the Fed Funds rate

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

114. During the past several years

a. the discount rate has been lower than the prime rate.

b. the discount rate has been higher than the prime rate.

c. the discount rate has been unrelated to the prime rate.

d. has been the same as the prime rate.

Difficulty Level: Medium

Subject Heading: Figure 4.3

L.O. 4.4

115. Federal Reserve actions that offset unexpected monetary developments and contribute to the smooth everyday functioning of the economy are called

a. defensive actions.

b. dynamic actions.

c. accommodative actions.

d. automatic actions.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

116. A basic policy instrument that the Fed uses to execute monetary policy is which of the following?

a. changing bank interest rates.

b. changing the lending/discount rate.

c. issuing securities.

d. buying loans from mortgage banks.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

117. The basic policy instruments that the Fed uses to execute monetary policy include all of the following except

a. changing reserve requirements.

b. changing the lending/discount rate.

c. conducting closed market operations.

d. conducting open market operations.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

118. The most used monetary policy instrument used by the Fed is

a. open market operations.

b. changing the discount rate.

c. changing the reserve requirement.

d. issuing securities.

Difficulty Level: Medium

Subject Heading: Open-Market Operations

L.O. 4.4

119. __________________ become the most important and effective means of monetary and credit control.

a. Changing reserve requirements has

b. Changing the discount rate has

c. Open market operations has

d. Changing the Treasury bill rate has

Difficulty Level: Medium

Subject Heading: Open-Market Operations

L.O. 4.4

120. The least used monetary policy instrument used by the Fed is

a. open market operations

b. changing the discount rate

c. changing the reserve requirement

d. issuing treasury bills

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

121. Which of the following is not a method by which the Federal Reserve establishes monetary policy?

a. setting reserve requirements

b. altering the discount rate

c. through federal open market operations

d. setting bank profitability ratios

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

122. Which of the following is a method by which the Federal Reserve establishes monetary policy?

a. setting reserve requirements,

b. altering the discount rate,

c. through federal open market operations,

d. all of the above methods are used.

Difficulty Level: Medium

Subject Heading: Overview of Responsibilities

L.O. 4.4

123. The Board of Governors of the Federal Reserve establishes monetary policy by

a. setting reserve requirements, altering the prime rate, and through federal open market operations.

b. setting reserve requirements, altering the discount rate, and through federal open market operations.

c. setting reserve requirements, altering the discount rate, and through international currency transactions.

d. setting bank profitability ratios, altering the discount rate, and through federal open market operations.

Difficulty Level: Hard

Subject Heading: Overview of Responsibilities

L.O. 4.4

124. Because depository institutions earn no interest on reserves

a. profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.

b. profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.

c. profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.

d. profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.

Difficulty Level: Hard

Subject Heading: Reserve Requirements

L.O. 4.4

125. Which of the following statements is most correct?

a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth.

b. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to expand deposit growth.

c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.

d. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.

Difficulty Level: Hard

Subject Heading: Open-Market Operations

L.O. 4.4

126. Which of the following statements is most correct?

a. Open-market operations do not always lead to an increase in the volume of lending.

b. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to expand deposit growth.

c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.

d. Increasing reserve requirements always leads to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth.

Difficulty Level: Hard

Subject Heading: Open-Market Operations

L.O. 4.4

127. A central bank serves the nation

a. as a source of consumer credit when otherwise not available.

b. by regulating money supply growth.

c. as a secondary source of funds for home financing.

d. as the strong right arm of the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Implementation of Monetary Policy

L.O. 4.4

128. The percentage of deposits that must be held as reserves is called

a. the bank reserve percentage

b. the required reserve ratio

c. the excess reserve ratio

d. the fractional reserve percentage

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

129. The banking system of the United States is a ___________ reserve system because banks are required by the Fed to hold reserves equal to a specified percentage of their deposits.

a. required

b. fractional

c. proportional

d. multiplicative

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

130. Reserves must be held equal to a certain percentage of bank deposits.

a. Excess reserves

b. Required reserves ratio

c. Fractional reserve system

d. Bank reserves

Difficulty Level: Easy

Subject Heading: Reserve Requirements

L.O. 4.4

131. Vault cash and deposits held at Federal Reserve Banks.

a. Excess reserves

b. Required reserves ratio

c. Fractional reserve system

d. Bank reserves

Difficulty Level: Easy

Subject Heading: Reserve Requirements

L.O. 4.4

132. The minimum amount of total reserves that a depository institution must hold.

a. Excess reserves

b. Required reserves

c. Fractional reserve system

d. Bank reserves

Difficulty Level: Easy

Subject Heading: Reserve Requirements

L.O. 4.4

133. The amount by which total reserves are greater than required reserves.

a. Excess reserves

b. Required reserves

c. Fractional reserve system

d. Bank reserves

Difficulty Level: Easy

Subject Heading: Reserve Requirements

L.O. 4.4

134. A nontraditional monetary policy approach to stimulate economic activity.

a. Excess reserves

b. Quantitative reserves

c. Fractional easing

d. Quantitative easing

Difficulty Level: Medium

Subject Heading: Reserve Requirements

L.O. 4.4

135. The principle examining activity of the Federal Reserve System is directed to

a. all state-chartered banks

b. state-chartered member banks

c. all national banks

d. all state-chartered and national banks

Difficulty Level: Medium

Subject Heading: Specific Supervisory Responsibilities

L.O. 4.5

136. The Federal Reserve is empowered to encourage depository institutions to help meet the needs of communities for housing and other purposes

a. through the Community Reinvestment Act.

b. through the Truth in Lending Act.

c. by a provision of the Fair Housing Act.

d. by strictly enforcing usury laws setting maximum interest rates.

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

137. The Fed shares its depository examining functions with

a. the Federal Savings and Loan Insurance Corporation.

b. the FDIC, Comptroller of the Currency, and state agencies.

c. only the Comptroller of the Currency.

d. National Credit Union administration and the FDIC.

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

138. The purpose of Regulation Z is to

a. make consumers aware of the costs of alternative forms of credit.

b. prohibit garnishment.

c. encourage depository institutions to help meet the credit needs of their communities for housing and other purposes.

d. regulate the overseas activities of member banks of the Federal Reserve System.

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

139. The Truth in Lending Act

a. prohibits discrimination in the granting of credit on the basis of sex, race, color, and religion.

b. limits liability on lost or stolen credit cards.

c. prohibits unfair or deceptive acts or practices on the part of banks.

d. requires prompt correction of errors on a revolving charge account.

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

140. ____________________________ requires disclosure of the finance charge and the annual percentage rate of credit along with certain other costs and terms to permit consumers to compare the prices of credit from differing sources.

a. Truth in Lending Act

b. Equal Credit Opportunity Act

c. Federal Trade Commission Improvement Act

d. Fair Credit Billing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

141. ____________________________ sets up a procedure for the prompt correction of errors on a revolving charge account and prevents damage to credit ratings while a dispute is being settled.

a. Truth in Lending Act

b. Equal Credit Opportunity Act

c. Federal Trade Commission Improvement Act

d. Fair Credit Billing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

142. ____________________________ prohibits discrimination in the granting of credit on the basis of sex, marital status, race, color, religion, national origin, age, or receipt of public assistance.

a. Truth in Lending Act

b. Equal Credit Opportunity Act

c. Federal Trade Commission Improvement Act

d. Fair Credit Billing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

143. ____________________________ authorizes the Federal Reserve Board to identify unfair or deceptive acts or practices on the part of banks and to issue regulations to prohibit them.

a. Truth in Lending Act

b. Equal Credit Opportunity Act

c. Federal Trade Commission Improvement Act

d. Fair Credit Billing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

144. The __________________, passed in 1968, requires the clear explanation of consumer credit costs and garnishment procedures (taking wages or property by legal means) and prohibits overly high-priced credit transactions.

a. Consumer Credit Expansion Act

b. Credit Growth Act

c. Consumer Credit Protection Act

d. Consumer Safety Act

Difficulty Level: Medium

Subject Heading: Specific Regulatory Responsibilities

L.O. 4.5

145. Bank holding companies are supervised and examined by

a. the Comptroller of the Currency.

b. the FDIC.

c. the Federal Reserve.

d. internal auditors only.

Difficulty Level: Hard

Subject Heading: Specific Supervisory Responsibilities

L.O. 4.5

146. All Federal Reserve Banks have

a. check clearance facilities.

b. branch banks.

c. directors who are elected for 14-year terms.

d. directors who are appointed by the President of the United States.

Difficulty Level: Medium

Subject Heading: The Payments Mechanism

L.O. 4.5

147. This act sets up a procedure for correcting mistakes on credit records and requires that records be used only for legitimate business purposes.

a. The Fair Credit Reporting Act

b. The Electronic Funds Transfer Act

c. The Real Estate Settlement Procedures Act

d. The Consumer Leasing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

148. This act requires disclosure of information to help consumers compare the cost and terms of one lease of consumer goods with another and to compare the cost of leasing versus buying on credit or for cash.

a. The Fair Credit Reporting Act

b. The Electronic Funds Transfer Act

c. The Real Estate Settlement Procedures Act

d. The Consumer Leasing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

149. This act requires disclosure of information about the services and costs involved at the time of settlement when property is transferred from seller to buyer.

a. The Safe Real Estate Purchase Act

b. The Electronic Funds Transfer Act

c. The Real Estate Settlement Procedures Act

d. The Consumer Leasing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

150. This act provides a basic framework regarding the rights, liabilities, and responsibilities of consumers who use electronic transfer services and of the financial institutions that offer them.

a. The Safe Checks Act

b. The Electronic Funds Transfer Act

c. The Real Estate Settlement Procedures Act

d. The Consumer Leasing Act

Difficulty Level: Medium

Subject Heading: Figure 4.4

L.O. 4.5

151. The Fed controls the _____ supply.

a. credit

b. mortgage

c. money

d. credit card balances

Difficulty Level: Easy

Subject Heading: Personal Financial Planning

L.O. 4.5

152. For which of the following are member banks allowed borrowing at the Fed’s discount window?

a. funds to purchase securities

b. funds to meet depositor withdrawal demands

c. to invest in subsidiaries

d. to loan to other banks

Difficulty Level: Medium

Subject Heading: Fed Lending Rate Policy

L.O. 4.6

153. The Fed discount rate is

a. the rate charged a bank’s best customers.

b. the rate paid by large business with good credit.

c. the rate a bank must pay to borrow from the Fed.

d. the rate one bank loans to another bank.

Difficulty Level: Medium

Subject Heading: Fed Lending Rate Policy

L.O. 4.6

154. Which of the following statements would be false? The discount rate is

a. an instrument of monetary policy.

b. frequently used as a tool of fiscal policy.

c. regarded as a fine-tuning mechanism.

d. is set by the Fed.

Difficulty Level: Medium

Subject Heading: Fed Lending Rate Policy

L.O. 4.6

155. In addition to the clearing of checks through Federal Reserve Banks, the Fed accommodates check clearing through

a. check clearinghouses it sponsors in major cities.

b. its branches and a group of regional check-processing centers.

c. electronic transfers of funds.

d. the United Postal Service.

Difficulty Level: Medium

Subject Heading: Structure of the Federal Reserve

L.O. 4.6

156. ___________ is an accommodative activity of the Federal Reserve System.

a. Clearing checks

b. Providing for the credit needs of individuals.

c. Supporting investment institutions

d. Lending to businesses

Difficulty Level: Medium

Subject Heading: Structure of the Federal Reserve

L.O. 4.6

157. Eligible paper that the borrowing institution can sell to the Reserve Bank includes

a. common stock.

b. corporate bonds.

c. U.S. government bonds.

d. insurance policies.

Difficulty Level: Medium

Subject Heading: Fed Lending Rate Policy

L.O. 4.6

158. The interest rate that a bank must pay to borrow from its regional federal reserve bank is called

a. the National Discount Rate.

b. the Prime Rate.

c. the Federal Discount Rate.

d. Fed Funds rate.

Difficulty Level: Medium

Subject Heading: Fed Lending Rate Policy

L.O. 4.6

159. A (n) ____________________ is necessary for the monetary system to carry out the financial function of transferring money, which in turn is a requirement for an effective financial system.

a. internet banking system

b. electronic data transfer system

c. wire transfer system

d. efficient payments mechanism

Difficulty Level: Medium

Subject Heading: The Payments Mechanism

L.O. 4.6

160. The two routes of check clearance include the _____________ settlement, in which the transaction takes place entirely within a single Federal Reserve district, and the _____________ settlement, in which there are relationships between banks of two Federal Reserve districts.

a. interdistrict, intradistrict

b. intradistrict, interdistrict

c. Fed wire, District wire

d. District wire, Fed wire

Difficulty Level: Medium

Subject Heading: The Payments Mechanism

L.O. 4.6

161. The ___________________ conducts monetary policy for the twelve European countries that formed the European Monetary Union and adopted the euro as their common currency at the beginning of 1999.

a. Bank of England

b. European Central Bank

c. Bank of Europe

d. Bank of Switzerland

Difficulty Level: Medium

Subject Heading: Central Banks in Other Countries

L.O. 4.7

162. The central bank in the United Kingdom is the

a. Bank of Britain

b. British Fed

c. British Bank

d. Bank of England

Difficulty Level: Medium

Subject Heading: Central Banks in Other Countries

L.O. 4.7