Question

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____     6.   Which of the following observations is true?

a.	State governments are the shareholders of the Fed.
b.	The Fed chairman is appointed for a ten year term.
c.	FOMC decisions largely determine short-term interest rates.
d.	Member banks proportionately share all of Federal Reserve's profits.

____     7.   In making policies about the nation's money supply, the Federal Reserve Board

a.	operates as an independent entity.
b.	must consult each member bank.
c.	must consult with Congress.
d.	must coordinate all activity with the White House.

____     8.   In practice, money supply and short-term interest rates are determined by the

a.	Treasury and Commerce departments.
b.	Federal Open Market Committee.
c.	Board of Governors.
d.	House and Senate.

____     9.   Open market operations have their initial effect on bank

a.	lending.
b.	reserves.
c.	profits.
d.	revenues.

____   10.   ____ is the rate that applies when banks borrow and lend reserves to one another.

a.	The repo rate
b.	The discount rate
c.	The coupon rate
d.	The federal fund rate

____   11.   If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

a.	It will give the bank new reserves.
b.	It will write the bank a check.
c.	It will transfer cash to the bank's vault.
d.	It will take reserves from another bank.

____   12.   If the Federal Open Market Committee decides to expand the money supply, then it will

a.	raise the discount rate to member banks.
b.	issue directions to purchase government securities, thus putting more reserves in member banks.
c.	issue directions to sell government securities, thus taking reserves from member banks.
d.	order new Federal Reserve notes delivered to member banks.

____   13.   When the Fed purchases government securities from a commercial bank, the bank

a.	loses its ability to make loans.
b.	automatically becomes poorer.
c.	loses equity in the Fed.
d.	receives reserves that can be loaned out.

____   14.   Which of the following is correct?

a.	The Fed has very good control over the money supply and bank reserves.
b.	The Fed has very poor control over the money supply and bank reserves.
c.	The Fed has very good control over bank reserves but not over the money supply.
d.	The Fed has very good control over the money supply but not over bank reserves.

____   15.   The Fed conducts an open market sale of Treasury bills of $5 million. If the required reserve ratio is 0.20, what change in the money supply can be expected using the oversimplified money multiplier?

a.	$25 million
b.	$5 million
c.	0
d.	-$5 million
e.	-$25 million

Answer 1

Question 6

Federal Reserve system is the central bank of the United States of America.

Federal Reserve is constituted of 12 federal reserve district banks.

These banks acts as the shareholders of the Fed.

However, the profit earned by the Fed after deducting dividend to be paid to district banks goes to the Federal government.

The Fed consist of Board of Governors with Chairman of Board of Governors being appointed for 14-year term.

Federal open market committee conducts open market operations to influence money supply and determines the short-term interest rates.

Hence, the correct answer is the option (c).

Question 7

Federal Reserve conducts the monetary policy in the United States.

This monetary policy is conducted, in the sense, that Fed tries to change money supply in the economy to correct the economic fluctuations.

Fed's decisions are independent of any influence.

So,

In making policies about the nation's money supply, the Federal Reserve Board operates as an independent entity.

Hence, the correct answer is the option (a).