These multiple choice questions will not appear on the exam, but they reflect the style of questions from the test bank.
1. _____ Deposits by depository institutions with the Fed:
(a) Are an asset to the Fed but a liability to the depository institutions.
2. _____ If the Federal Reserve float increases, what happens to the monetary base and money supply?
(a) The monetary base increases, while the money supply decrease.
3. _____ The monetary base rises permanently:
(a) Whenever the federal government runs a deficit.
4. _____ If the U.S. Treasury deposits more funds at the Fed, what happens to the monetary base and money supply?
(a) The monetary base increases, while the money supply decrease.
5. _____ Which item below is a liability to the Fed?
(a) Items in the process of collection (CIPC).
6. _____ The following items below appear on the Feds balance sheet. Which item below can the Fed control?
(a) Discount loans.
7. _____ Why does the Fed buy U.S. government securities from the secondary market instead of the primary market?
(a) The secondary market for government securities is located in New York City, while the primary market is located in Washington, D.C.
8. _____ Why is the chairperson of the Board of Governors such a powerful man?
(a) The chairperson is also a member of Congress and the Secretary of the Treasury Department.
9. _____ When a government bureaucracy does not serve the purpose that it was created for, what is this called?
(a) Public interest view.
10. _____ Why was the Federal Reserve System broken down into 12 Fed district banks?
(a) To help centralize the central banks power.
11. _____ Why was the Federal Reserve System created in 1913?
(a) To help the U.S. Treasury to finance budget deficits.
12. _____ A rise in market interest rates:
(a) Encourages banks to take out discount loans but discourages their holding excess reserves.
13. _____ Primary bond dealers are those:
(a) Permitted to trade directly with the Fed.
14. _____ Which of the following statements is correct?
(a) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed.
15. _____ When the Fed changes the percentage that banks must hold as vault cash or as deposits at the Fed in order to influence bank reserves and the money supply, what tool is the Fed using?
(a) Reserve requirements.
16. _____ If the Fed bought a bankers acceptance, what impact would this have on bank reserves and the money supply?
(a) The bankers acceptance has no impact on bank reserves and the money supply.
17. _____ When the Fed uses this technique during Christmas time to temporary inject reserves into the banking system, because people are withdrawing currency out of their banks to buy presents, what is this technique called?
(a) Outright purchases and sales.
18. _____ When the Fed unexpectedly changes the discount rate, this signals the financial markets of the Feds intentions. What is this called?
(a) Dynamic transactions.
19. _____ Which item below is a monetary policy goal of the Fed?
(a) Foreign-exchange market stability.
20. _____ What is the purpose of monetary policy?
(a) To decrease the quantity of goods and services produced in the economy.
21. _____ Which answer below is the proper sequence when the Fed implements monetary policy goal, using its monetary policy tools?
(a) The Feds tools influence the policy goal, which influences the operating target, which influences the intermediate target.
22. _____ Which answer below is the Feds criteria for selecting intermediate targets?
(a) The intermediate target must be variable.
23. _____ If the Fed implements monetary policy that causes the economy to be more unstable, what do economists call this?
(a) Monetary policy goal.
24. _____ Why is inflation such an important monetary policy goal?
(a) High inflation rates create uncertainty for households and businesses.
25. _____ If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency:
(a) The central banks holdings of international reserves will fall.
26. _____ If the U.S. current account balance is positive:
(a) U.S. citizens must have purchased more merchandise abroad than they sold abroad.
27. _____ What are international reserves?
(a) The central bank holds foreign currency, which is an liability.
28. _____ What is it called, when the Fed prevents the monetary base from changing, when the Fed conducts a foreign-exchange transaction?
(a) Balance-of-payment account.
29. _____ If the Fed believes the U.S. dollar is too strong, how can the Fed make the U.S. dollar weaker?
(a) The Fed cannot influence the exchange rate.
30. _____ What is one benefit of having the gold standard?
(a) Under the gold standard, a central bank can easily expand the money supply.
These questions reflect the style of the instructor; I will explain these in class.
1. You purchase a $1,000 computer through the mail from a company located in Texas. Using T-accounts for your bank, the computer firm's bank, and the Fed, show how the Fed clears your check.
Note: If I ask you this question on the exam, I will provide the T-accounts for you.
2. (a) The U.S. government is having a budget deficit. If the government raises taxes to pay for the budget deficit, show this transaction if you pay $300 more in taxes.
Note: Use the T-accounts for you, your bank, the Fed, and the U.S. Treasury Department. I will provide the T-accounts on the exam, if I ask this question.
(b) When the U.S. Treasury spends your tax money, what is the impact on the monetary base, money supply, and interest rates?
3. Explain in words and show graphically the impact of contractionary monetary policy in the T-bill market, when the Fed uses open-market operations. (Draw the supply and demand curves for the T-bill market),
4. Explain in words and show graphically the impact of contractionary monetary policy in the Federal Funds Market, when the Fed uses discount policy. (Draw the supply and demand curves for the Federal Funds Market).
5. (a) The Fed wants a weaker U.S. dollar exchange rate by buying $100,000 in foreign currencies. Please record this transaction on the Fed's Balance sheet.
(b) If the Fed to use sterilzed foreign-exchange intervention by using T-bills, how would this be recorded on the Fed's balance sheet?
6. (a) If a country is experiencing a balance-of-payment surplus (current account + capital account > 0), what happens to the central bank's official reserve assets?
(b) What happens to this central bank's monetary base, money supply, and interest rates?
7 The United States has a balance-of-payments deficit with Japan under the gold standard, i.e. capital account + current account < 0.