Federal Fiscal and Monetary Policy Quiz

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Questions and Answers

Taxation is a tool the Federal Reserve uses to implement federal monetary policy.

False (B)

A single taxpayer may deduct up to $450,000 in capital gains from the sale of a primary residence.

False (B)

The discount rate is the interest rate the Federal Reserve charges member banks who borrow funds to cover shortfalls.

True (A)

Economic growth that is very fast is usually accompanied by deflation.

False (B) Signup and view all the answers

What is the primary tool the Federal Reserve uses to influence interest rates?

Open market operations (D) Signup and view all the answers

What is the term for the interest rate banks charge each other for overnight, unsecured loans?

The federal funds rate (D) Signup and view all the answers

What is the primary function of the Federal Reserve?

All of the above (D) Signup and view all the answers

If the Federal Reserve wants to decrease interest rates, what actions should they take?

Decrease reserve requirements and buy government securities (A) Signup and view all the answers

Which entity is primarily responsible for executing the federal government's fiscal policy?

The U.S. Treasury Department (D) Signup and view all the answers

What occurs when the federal government's spending exceeds its revenue in a given year?

A federal deficit (D) Signup and view all the answers

What effect does the federal government selling interest-bearing securities to investors typically have?

It finances a federal shortfall. (C) Signup and view all the answers

How does the deductibility of home mortgage interest generally affect taxpayers?

It reduces the amount of taxes they pay. (D) Signup and view all the answers

For a married couple filing jointly, what is the maximum capital gain exclusion from the sale of a principal residence, assuming the requirements are satisfied?

$500,000 (A) Signup and view all the answers

What is the primary way a lender assesses the likelihood of a borrower failing to repay the loan?

Through the use of underwriting standards. (B) Signup and view all the answers

Which scenario would MOST likely result in lower interest rates?

An increase in the money supply as more money is available. (C) Signup and view all the answers

Which form of investment allows the owner to realize a return through appreciation, rents, or both?

An ownership investment. (C) Signup and view all the answers

For which type of property are depreciation deductions available?

Investment or business property. (D) Signup and view all the answers

Which of the following BEST describes a debt investment?

Lending money to a borrower and earning interest on the loan. (A) Signup and view all the answers

What is the primary method by which the U.S. Treasury finances a federal deficit?

By issuing interest-bearing Treasury securities to investors. (A) Signup and view all the answers

What is the relationship between risk and potential yield in investments?

The riskier the investment, the higher the expected potential yield because of the higher risk. (B) Signup and view all the answers

Study Notes

Federal Fiscal and Monetary Policy Learning Objectives

Students should be able to recall two ways the federal government influences borrowing costs.
Students should be able to define fiscal policy and the branches of government that implement it.
Students should be able to describe how government spending and federal deficits are financed through debt.
Students should be able to explain how taxation is used to implement social policy regarding real property.
Students should be able to summarize the historical reasons for government regulation of depository institutions.
Students should be able to outline the organization of the Federal Reserve System.
Students should be able to discuss the relationship between Federal Reserve actions, inflation, and the health of the economy.
Students should be able to list the tools used by the Federal Reserve to implement monetary policy.

Suggested Lesson Plan

Students review the previous chapter on finance and investment using exercise 2.1.
Students receive a brief overview and review the learning objectives for Chapter 2.

Government Influences on Finance

The federal government influences real estate finance by impacting the cost of mortgage funds.
Market interest rates reflect the cost of borrowing, which is affected by supply and demand.
Fiscal policy (spending and debt financing, and taxation) and monetary policy impact the cost of borrowing.

Fiscal Policy

Fiscal policy is determined by legislative and executive branches, carried out by the US Treasury.
A federal deficit occurs when government spending exceeds revenue.
To cover deficits, the government sells interest-bearing securities to investors.
Some economists believe federal deficits have little effect on interest rates while others believe deficits increase interest rates.

Taxation

Taxation affects mortgage rates by influencing the amount of money available for lending or investment.
Tax exemptions, deductions, and exclusions affect mortgage demand.
Interest on home mortgages is deductible, reducing tax obligations; interest on home equity loans is deductible if the funds are used for substantial home improvements but not if the total loan exceeds $750,000, beginning in 2018.
The gain from selling a primary residence up to a certain amount is potentially tax-excluded ($250,000 for individuals, $500,000 for couples).
Investors may take depreciation deductions.

Monetary Policy

Federal monetary policy involves controlling the money supply, executed by the Federal Reserve System.
Banks were first regulated in 1863 with the National Bank Act, which laid out supervisory procedures.
The Federal Reserve System was established in 1913 and 1916.
The Federal Reserve acts as a lender of last resort, supplying short-term loans to banks facing liquidity issues.
The Federal Reserve, formed as a decentralized system with 12 regional banks, has evolved into a crucial economic player.

Tools for Implementing Monetary Policy

Reserve requirements: Banks must maintain a percentage of their deposits. An increase in reserves reduces the ability of banks to lend and increases interest rates; a decrease has the opposite effect.
Interest Rates: The Federal Reserve controls the federal funds rate (rate banks charge each other for loans) and the discount rate (rate Fed charges banks for loans). Raising interest rates can curb inflation whilst lowering interest rates can stimulate economic activity by making borrowing cheaper.
Open Market Operations: Buying or selling government securities to adjust the money supply. Buying securities increases the money supply and lowers interest rates; selling decreases the money supply and raises rates.

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Description

Test your knowledge on federal fiscal and monetary policy. This quiz covers the influence of government on borrowing costs, fiscal policy definitions, government spending, taxation, and the Federal Reserve System. Ensure you understand the historical context and tools of the Federal Reserve as well as their impact on the economy.