Chapter 5 The Overseer: The Federal Reserve System



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CHAPTER 5

The Overseer: The Federal Reserve System

1. The are the seven members of the Fed appointed by the president and approved by the senate to serve fourteen-year terms; they make up the core of the Fed and are located in Washington, D.C.

a. Board of Governors

b. Federal Reserve Bank Presidents

c. U.S. Treasury Department

d. Federal Open Market Committee (FOMC)

ANSWER: a
2. The is/are the principal policy-making body within the Federal Reserve System.

a. Board of Governors

b. Federal Reserve Banks

c. U.S. Treasury Department

d. Federal Open Market Committee (FOMC)

ANSWER: d


3. The is the rate depository institutions are charged to borrow reserves from the Fed.

a. fed funds rate

b. discount rate

c. required reserve ratio

d. None of the above

ANSWER: b


4. The buying and selling of government securities by the Fed to change the reserves of depository institutions is called

a. the payments mechanism.

b. changing the required reserve ratio.

c. open market operations.

d. the lender of last resort.

ANSWER: c


5. The Federal Reserve Act that created the Federal Reserve System was passed in

a. 1863 and 1864.

b. 1907.

c. 1913.


d. 1933 and 1935.

ANSWER: c


6. The Fed is engaging in when it lends to commercial banks during emergencies to avoid insolvency.

a. monetary policy

b. lender of last resort actions

c. open market operations

d. policy directives

ANSWER: b


7. The Fed is engaging in when it attempts to stabilize the economy and to ensure sufficient money and credit for an expanding economy.

a. monetary policy

b. lender of last resort actions

c. open market operations

d. policy directives

ANSWER: a


8. The ways in which funds are transferred to make payments is called the

a. monetary policy.

b. lender of last resort actions.

c. open market operations.

d. payment mechanism.

ANSWER: d


9. The part(s) of the Federal Reserve System responsible for setting the required reserve ratio is the

a. Board of Governors.

b. Federal Open Market Committee.

c. Federal Reserve Banks.

d. Advisory Council.

ANSWER: b


10. The part(s) of the Fed chiefly responsible for monetary policy is/are the

a. Board of Governors.

b. Federal Open Market Committee.

c. Federal Reserve Banks.

d. Both a and c

ANSWER: b


11. The part(s) of the Fed that makes requests for changes in the discount rate is/are the

a. Board of Governors.

b. Federal Open Market Committee.

c. Federal Reserve Banks.

d. Advisory

ANSWER: c


12. The part(s) of the Fed responsible for determining reserve requirements, approving discount rate changes, supervising and regulating member banks and bank holding companies, establishing and administering consumer protection regulations, and overseeing the Federal Reserve Banks is/are the

a. Board of Governors.

b. Federal Open Market Committee.

c. Federal Reserve Banks.

d. Both a and c

ANSWER: a


13. In the early 1990s, the chairperson of the Fed's Board of Governors was characterized as

a. withdrawn and incompetent.

b. misunderstood and irrational.

c. the second most influential person in the United States.

d. None of the above

ANSWER: c


14. The Federal Reserve System was created by the

a. Senate.

b. Board of Governors.

c. United States President.

d. Congress.

ANSWER: d

15. The Federal Reserve System was created in

a. 1933.


b. 1935.

c. 1913.


d. 1919.

ANSWER: c


16. Providing elastic currency can be understood as being which of the following?

a. FDIC insured

b. A lender of last resort

c. A sound lender

d. Economically stable

ANSWER: b


17. In what years were the Banking Reform Acts passed?

a. 1921 and 1927

b. 1931 and 1936

c. 1933 and 1935

d. 1932 and 1934

ANSWER: c


18. Which of the following is a significant change that was legislated by the Banking Reform Acts?

a. The creation of a lender of last resort

b. The creation of fluctuating interest rates

c. The separation of commercial and investment banking

d. Increased role in fiscal policies

ANSWER: c


19. The underlying need for a stronger central bank became apparent during the

a. Presidential Election of 1930.

b. Great Depression.

c. 1933 Gold Crisis.

d. All of the above

ANSWER: b


20. By regulating and supervising the operation of the financial system, the Fed is attempting to

a. promote a healthy economy.

b. foster an efficient and competitive financial system.

c. support a stable economy.

d. All of the above

ANSWER: d


21. The Board of Governors of the Federal Reserve System is located in which city?

a. San Francisco

b. Miami

c. Fort Knox

d. Washington, D.C.

ANSWER: d


22. The Board of Governors of the Federal Reserve System has

a. 17 members.

b. 6 members.

c. 7 members.

d. 5 members.

ANSWER: c


23. The members of the Board of Governors of the Fed are appointed by which of the following?

a. The President ,with the advice and consent of the U.S. Senate

b. The President, with the advice and consent of Congress

c. The U.S. Senate, with the advice and consent of Congress

d. The U.S. Senate, with the advice and consent of the President's Economic Advisory Board

ANSWER: a


24. The Fed’s main policy tool is

a. changing the discount rate.

b. changing the required reserve ratio.

c. altering its lender of last resort actions.

d. engaging in open market operations.

ANSWER: d


25. The full term of a member of the Board of Governors of the Fed is

a. 2 years.

b. 7 years.

c. 11 years.

d. 14 years.

ANSWER: d


26. The terms of Fed governors are arranged so that one term expires every

a. 1 year.

b. 2 years.

c. 6 years.

d. 7 years.

ANSWER: b


27. Who appoints the chairperson of the Federal Reserve Board?

a. Congress with the advice and approval of the Federal Reserve Board

b. The Senate with the advice and approval of the President

c. The President with the advice and approval of the Senate

d. The Federal Reserve Board Members

ANSWER: c


28. The term of the chairperson of the Federal Reserve Board lasts

a. 1 year.

b. 3 years.

c. 4 years.

d. 7 years.

ANSWER: c


29. The chairperson of the Federal Reserve Board is selected from the

a. Federal Reserve Board.

b. President's Economic Advisory Board.

c. U.S. Senate.

d. Federal Reserve Bank Presidents.

ANSWER: a


30. The nation is divided into Federal Reserve districts.

a. 10


b. 11

c. 12


d. 13

ANSWER: c




  1. Which of the following is false?

a. The Federal Reserve System was created in 1913.

b. The Fed is governed by the Board of Governors, whose seven members are appointed by the president to 14-year terms. The Board chair is appointed for a four-year term.

c. The FOMC is the major policy-making body and includes the seven Fed governors plus the Federal Reserve Bank presidents.

d. The president of the New York Federal Reserve Bank is a permanent member of the FOMC.

ANSWER: c
32. In which of the following cities is the Federal Reserve Bank that carries out open market operations located?

a. New York

b. Chicago

c. San Francisco

d. Washington

ANSWER: a

33. The member banks elect directors of their Reserve Bank.

a. 6 of the 9

b. 3 of the 9

c. 9 of the 9

d. 7 of the 9

ANSWER: a


34. The Board of Governors appoints of the 9 directors to each Reserve Bank.

a. 6


b. 3

c. 10


d. 4

ANSWER: b


35. The president and other officials of each Reserve bank are appointed by the

a. Board of Governors.

b. Federal Reserve chairperson.

c. member banks of each Reserve bank.

d. directors of each Reserve bank.

ANSWER: d


36. The reason for the creation of 12 Reserve banks and the election of directors to each was to

a. centralize banking power authority.

b. strengthen the power of the Fed.

c. decentralize policy-making authority.

d. None of the above

ANSWER: c


37. FOMC stands for the

a. Federal Operations Membership Committee.

b. Federal Open Market Committee.

c. Federal Ongoing Management Council.

d. Federal Open Management Committee.

ANSWER: b


38. The FOMC is

a. the principal policy-making body within the Federal Reserve System.

b. the principal Fed operations membership committee.

c. the principal ongoing investigative organization within the Federal Reserve System.

d. All of the above

ANSWER: a


39. The FOMC

a. investigates fraudulent banking practices.

b. determines the prime interest rate.

c. formulates monetary policy and oversees its implementation.

d. all of the above

ANSWER: c


40. How many members make up the FOMC?

a. 10


b. 2

c. 7


d. 12

ANSWER: d


41. How many votes does the Federal Reserve Board hold on the FOMC?

a. 2


b. 7

c. 11


d. 14

ANSWER: b


42. The Fed Open Market Committee (FOMC) meets in

a. closed meetings in Washington five times a year.

b. closed meetings in Washington eight times a year.

c. closed meetings in New York every month.

d. open meetings in New York six times a year.

ANSWER: b


43. The "Policy Directive"

a. is the set of instructions regarding open market operations issued to the New York Fed.

b. states the policy consensus of the FOMC.

c. sets forth the operating instructions regarding the conduct of monetary policy.

d. All of the above

ANSWER: d


44. All of the following are functions of the Fed except to:

a. supervise and regulate the financial system

b. serve as a fiscal agent for the government.

c. conduct monetary policy.

d. collect tax payments for the federal government.

ANSWER: d


45. The center of the financial system is in which of these cities?

a. Chicago

b. New York

c. Washington, D.C.

d. San Francisco

ANSWER: b


46. Which of the following is false?

a. The discount rate is the interest rate the Fed charges depository institutions for borrowing reserves from their district Reserve Bank.

b. Institutions are encouraged to borrow reserves frequently from the Fed.

c. To preserve the public’s confidence in the safety and soundness of the financial system, the Fed will lend for an extended period to an institution experiencing severe difficulties.

d. The Fed is the lender of last resort.

ANSWER: b


47. Since its onset, the Fed's powers and responsibilities have

a. decreased.

b. remained the same.

c. increased.

d. increased since the 1978 decrease.

ANSWER: c


48. Over time, the Fed’s policy-making authority has

a. become more decentralized through the twelve Federal Reserve Banks.

b. become less powerful because of the increasingly complexity of the economy.

c. remained about the same in terms of power and decentralization.

d. become more concentrated in Washington D.C.

ANSWER: d


49. Check clearing falls under which of following Fed functions?

a. Supervising and regulating the financial system

b. Serving as a fiscal agent of the government

c. Maintaining and developing the payments system

d. Conducting monetary policy

ANSWER: c


50. Open market operations fall under which of the following Fed functions?

a. Supervising and regulating the financial system

b. Serving as a fiscal agent of the government

c. Maintaining and developing the payments system

d. Conducting monetary policy

ANSWER: d


51. Retail sweep accounts

a. have caused the amount of required reserves held by banks and other depository institutions to increase dramatically in recent years.

b. are a financial innovation that allows depository institutions to shift customers’ funds out of checkable accounts that are subject to reserve requirements and into highly liquid money market deposit accounts (MMDAs) that are not.

c. have made it easier for the Fed to implement monetary policy.

d. All of the above.

ANSWER: b


52. Of the following, which is an objective of the nation's monetary policy?

a. Ensuring that sufficient money is available for economic expansion

b. maximizing long-run economic growth with little or no inflation

c. minimizing short-run fluctuations that result in recessions or inflationary booms

d. All of the above

ANSWER: d


53. The Fed's supervisory and regulatory activities are aimed at insuring the safety and soundness of which of these?

a. Wall Street

b. The bond market

c. Depository institutions

d. The foreign exchange market

ANSWER: c


54. The purpose of the Fed's supervisory activities is

a. to promote a strong dollar.

b. to encourage foreign trade.

c. to facilitate the borrowing of deficit funds.

d. to ensure fair and efficient delivery of services to the customers of depository institutions.

ANSWER: d


55. The regulations imposed by the Fed include which of these?

a. The definition of permissible activities for banks

b. Approval of branch and merger applications for national banks

c. Fair treatment of consumers in financial transactions

d. All of the above

ANSWER: d




  1. Which of the following are false?

a. The Fed furnishes banking services to the government in a manner similar to the way private banks furnish banking services to their customers.

b. The Fed clears Treasury checks, issues and redeems government securities, and provides other financial services.

c. The Fed acts as the fiscal agent of the government in financial transactions with foreign governments and foreign central banks.

d. The Fed acts as a super-central bank for other central banks around the world.

ANSWER: d
57. The Community Reinvestment Act seeks

a. to increase the availability of credit to economically disadvantaged areas.

b. to provide credit to senior citizens.

c. to ensure nondiscriminatory lending practices.

d. Both a and c

ANSWER: d


58. One of the Acts that the Fed is responsible for enforcing is the Community Reinvestment Act (CRA). This act

a. protects customers of financial institutions from discrimination on the basis of race, sex, or age, and from unfair or misleading lending practices.

b. ensures that the Fed, along with other relevant government agencies, finds an orderly solution to banks in serious difficulty due to fraudulent or misguided lending practices.

c. seeks to increase the availability of credit to economically disadvantaged areas and to ensure non-discriminatory lending practices.

d. Both a and b

ANSWER: c


59. The most prominent Fed activity in the payments mechanism is the

a. provision of low-cost loans to a bank in serious difficulty.

b. clearing of checks.

c. regulation of ATM fees.

d. conducting of monetary policy.

ANSWER: b


60. The Treasury's "transaction account" balance is

a. considered near cash.

b. considered money.

c. not considered money.

d. included in the monetary aggregate.

ANSWER: c


61. As chief banker for the U.S. Government, the Fed

a. clears Treasury checks.

b. decides fiscal policy.

c. decides government spending.

d. All of the above

ANSWER: a


62. What is the most important monetary policy tool at the Fed's disposal?

a. The discount rate

b. The prime rate

c. Open market operations

d. Setting the required reserve ratio

ANSWER: c


63. Open market operations are executed by the

a. Board of Governors.

b. Federal Reserve Bank of New York.

c. FDIC.


d. Federal Advisory Council.

ANSWER: b


64. Open market operations involve

a. the buying and selling of U.S. common stocks by the Fed.

b. the buying and selling of U.S. mutual funds by the Fed.

c. the buying and selling of U.S. government securities by the Fed.

d. All of the above

ANSWER: c


65. The relationship between the Fed's buying of securities and the supply of reserves available to depository institutions is

a. direct.

b. indirect.

c. vertical.

d. inverse.

ANSWER: a


66. Changes in bank reserves affect

a. the money supply.

b. credit extension .

c. loan availability.

d. All of the above

ANSWER: d


67. The discount window is

a. a lending facility where consumers can borrow from the Fed.

b. a lending facility where large businesses can borrow from the Fed.

c. a lending facility where depository institutions can borrow from the Fed.

d. None of the above

ANSWER: c


68. The discount rate is

a. the interest rate the Fed charges to consumers that borrow from the Fed.

b. the interest rate the Fed charges to large businesses that borrow from the Fed.

c. the interest rate the Fed charges to depository institutions that borrow from the Fed.

d. None of the above

ANSWER: c


69. The discount rate may be changed by the

a. Board of Governors.

b. Reserve banks.

c. Directors of the Reserve Banks.

d. Fed Open Market Committee (FOMC).

ANSWER: a


70. Ceteris paribus, increases in the discount rate,

a. decrease the cost of borrowing reserves from the Fed.

b. increase the cost of borrowing reserves from the Fed.

c. have no effect on the cost of borrowing, but decrease reserves and money supply.

d. increase the cost of borrowing, increase reserves, and increase money supply.

ANSWER: b


71. Under normal circumstances, borrowing from the Fed is

a. preferably for no more than a few days or weeks.

b. preferably for no more than a few months.

c. preferably for no more than a few months to a year.

d. for as long as necessary, usually several years.

ANSWER: a


72. The Fed perceives discount borrowing on the part of member banks as

a. a right under the Fed's Regulation A.

b. an advantage for businesses to remain globally competitive.

c. a privilege under the Fed's Regulation A.

d. a priority for commercial banks under the Fed's Regulation A.

ANSWER: c


73. The main concern for the Lender of Last Resort is to

a. repay large outstanding loans to corporations.

b. provide the lowest interest rate available to borrowers.

c. ensure that all depository institutions have available funds for making public loans.

d. minimize the risk to the public interest and the financial system.

ANSWER: d

74. Required reserves are equal to which of these?

a. Assets that are equal to a percentage of checkable deposit liabilities

b. A percentage of bank assets that is determined by the Fed

c. A percentage of bank vault cash held by a depository institution

d. None of the above

ANSWER: a


75. Which of the following is true?

a. Most other industrialized nations have highly decentralized central banks that direct monetary policy and supervise and regulate the banking system.

b. Research has shown that the less independent a central bank is, the more vulnerable it is to political pressure.

c. Research suggests that inflation rates are lowest in countries with the most independent central banks.

d. Both b and c are true.

ANSWER: d


76. The Fed's income stems from which of the following?

a. Grants from the individual Federal Reserve banks

b. Grants from the executive branch of the government

c. Interest income from required reserves

d. Interest income from discount loans to depository institutions and from its holdings of government securities

ANSWER: d


77. The Fed's exemption from many requirements of the Freedom of Information Act results in

a. public access to all minutes of the Fed's board meetings.

b. unlimited public access to attend the Fed's board meetings.

c. secret meetings to formulate policies.

d. None of the above

ANSWER: c


78. In order to enact an expansionary monetary policy, the Fed could

a. lower the discount rate, decrease the required reserve ratio, or buy securities through open market operations.

b. raise the discount rate, increase the required reserve ratio, or sell securities through open market operations.

c. lower the discount rate, decrease the required reserve ratio, or sell securities through open market operations.

d. raise the discount rate, increase the required reserve ratio, or buy securities through open market operations.

ANSWER: a


79. In order to enact a contractionary monetary policy the Fed could

a. lower the discount rate, decrease the required reserve ratio, or buy securities through open market operations.

b. raise the discount rate, increase the required reserve ratio, or sell securities through open market operations.

c. lower the discount rate, decrease the required reserve ratio, or sell securities through open market operations.

d. raise the discount rate, increase the required reserve ratio, or buy securities through open market operations.

ANSWER: b


80. The current chairperson of the Board of Governors is

a. Edward W. Kelly.

b. Alan Greenspan.

c. Alan S. Blinder.

d. Paul Volcker.

ANSWER: b


81. The central bank in the United States is the

a. Bank of America.

b. Federal Reserve System.

c. U.S. Treasury.

d. Office of Management and Budget.

ANSWER: b


82. The Fed Open Market Committee consists of the

a. 7 members of the Board of Governors plus the 12 Federal Reserve bank presidents

b. 7 members of the Board of Governors plus 5 Federal Reserve bank presidents with the president of the New York Fed a permanent member.

c. 12 presidents of the Federal Reserve banks appointed for 7-year terms.

d. 7 members of the Board of Governors.

ANSWER: b


83. Which of the following is not a function of the Fed?

a. Acting as lender of last resort

b. Acting as fiscal agent for the federal government

c. Conducting fiscal policy

d. Supplying reserves to the banking system

ANSWER: c


84. The most widely used tool that the Fed has to control the money supply is which of these?

a. Setting reserve requirements

b. Setting the discount rate

c. Setting the Fed funds rate

d. Open market operations

ANSWER: d


85. Which of the following was not a possible reform suggested in the text by opponents of the Fed’s autonomy?

a. FOMC meetings that are completely open to the public

b. A broadening of the powers of the General Accounting Office (GAO) to audit the Fed

c. Removal of the Reserve Bank presidents from the FOMC, making them nonvoting members, or changing the way Reserve Bank presidents are selected so that they will be more representative of the public at large

d. Fuller and more complete disclosure of FOMC discussions and decisions

ANSWER: a


86. Members of the Board of Governors of the Fed are appointed to

a. 2-year terms.

b. 4-year terms.

c. 7-year terms.

d. 14-year terms.

ANSWER: d


87. In recent years,

a. the independence of the Fed has been questioned.

b. the secrecy of the Fed has been questioned.

c. Alan Greenspan has been chairperson of the Board of Governors of the Fed.

d. All of the above

ANSWER: d


88. The buying and selling of bonds by the Fed

a. is done to finance government debt.

b. makes interest rates very volatile.

c. is an infrequently used tool of the Fed.

d. is the most important tool in Fed policy.

ANSWER: d


89. Those opposing the Fed’s high degree of independence argue

a. that since the President and Congress are held accountable for the state of economic conditions, they should have all the tools of public policy at their disposal.

b. that Fed independence is inconsistent with democracy.

c. that like other government policies, monetary policy should be controlled by people directly responsible to the electorate.

d. All of the above.

ANSWER: d


90. The first attempt to establish a central bank in the United States was in

a. 1776.


b. 1791.

c. 1816.


d. 1836.

ANSWER: b


91. The authors discuss several reasons for the demise of the first two attempts to establish a U.S. central bank. They include all of the following except

a. opposition to establishing a uniform national currency.

b. allegations that the bank represented big city “moneyed” interests.

c. fear and distrust and the unpopularity of centralized power.

d. questions about its constitutionality.

ANSWER: a





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