Federal Reserve History Quiz
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Questions and Answers

What was the primary purpose of the Bretton-Woods Agreement established in 1944?

  • To create a single global currency
  • To promote fixed exchange rates with gold only
  • To eliminate all tariffs and trade barriers
  • To peg currencies to the U.S. dollar for stability (correct)

Which entity gained increased authority due to the Banking Act of 1935?

  • Council of Economic Advisers
  • Federal Open Market Committee
  • Board of Governors of the Federal Reserve (correct)
  • Department of Treasury

What does the Federal Reserve's dual mandate include?

  • Promoting maximum employment and maintaining price stability (correct)
  • Maintaining high unemployment and price stability
  • Controlling inflation and promoting economic growth
  • Regulating interest rates and managing government spending

In what year did Congress add a third goal to the Federal Reserve's mandate?

<p>1977 (A)</p> Signup and view all the answers

What was the main outcome of the Federal Reserve Reform Act of 1977?

<p>Addition of the goal of stable prices to the Fed's mandate (A)</p> Signup and view all the answers

Which key policy did the Accord grant the Federal Reserve?

<p>The ability to control inflation independently of the Treasury (D)</p> Signup and view all the answers

Who served as Chairman of the Federal Reserve from 1979 to 1987 and is known for addressing inflation?

<p>Paul Volcker (C)</p> Signup and view all the answers

Which Act established the federal government's responsibility to promote full employment in 1946?

<p>Employment Act of 1946 (C)</p> Signup and view all the answers

What characterized the Great Inflation period in the U.S.?

<p>High and persistent inflation driven by oil price shocks (A)</p> Signup and view all the answers

Which factor was NOT a cause of the Great Recession?

<p>High interest rates (D)</p> Signup and view all the answers

What was a major consequence of the Savings and Loan Crisis?

<p>Creation of new regulatory measures (C)</p> Signup and view all the answers

Which period is recognized for relative economic stability with low inflation?

<p>Great Moderation (C)</p> Signup and view all the answers

What triggered the subprime mortgage crisis?

<p>Offering subprime mortgages to unqualified borrowers (C)</p> Signup and view all the answers

What approach did the Federal Reserve take during the 2008 financial crisis?

<p>Implement quantitative easing and maintain zero-interest rates (C)</p> Signup and view all the answers

What economic event caused stagflation during the Great Inflation?

<p>Supply shocks and an increase in oil prices (C)</p> Signup and view all the answers

What was one effect of the tight monetary policies implemented during the recession of 1981-82?

<p>Severe recession but reduced inflation (C)</p> Signup and view all the answers

What was a criticism of the Federal Reserve's actions during the Great Depression?

<p>They worsened the financial crisis. (D)</p> Signup and view all the answers

Which era was particularly marked by the Federal Reserve's struggle with inflation?

<p>Post-War Era (1940s-1970s) (C)</p> Signup and view all the answers

What is the primary function of the Federal Reserve Board of Governors?

<p>Overseeing the central banking system and setting monetary policy. (A)</p> Signup and view all the answers

What is one of the key tools of monetary policy used by the Federal Reserve?

<p>Open Market Operations. (A)</p> Signup and view all the answers

How does a higher discount rate affect the money supply?

<p>It decreases the money supply by making borrowing more expensive. (A)</p> Signup and view all the answers

What does the Federal Reserve's current mandate focus on?

<p>Maximizing employment and maintaining price stability. (C)</p> Signup and view all the answers

What was one result of the Fed's actions after the 2008 financial crisis?

<p>Implementation of zero interest rates and quantitative easing. (D)</p> Signup and view all the answers

What effect does changing reserve requirements have on banks?

<p>It allows banks to lend less by increasing reserve requirements. (C)</p> Signup and view all the answers

What was a key lesson learned by Ben Bernanke during the Great Depression that he applied during the financial crisis of 2007-2009?

<p>To act as a lender of last resort (A)</p> Signup and view all the answers

How do Open Market Operations influence the economy?

<p>By buying or selling government securities (A)</p> Signup and view all the answers

Which tool involves changing the interest rate at which banks can borrow from the Federal Reserve?

<p>Discount Rate (B)</p> Signup and view all the answers

What impact does lowering the reserve requirement have on the banking system?

<p>Increases lending potential (A)</p> Signup and view all the answers

What was one of the actions taken by the Federal Reserve in response to the 2007-2009 financial crisis?

<p>Provided emergency loans through new facilities (A)</p> Signup and view all the answers

What systemic risk did Bernanke recognize during the financial crisis?

<p>The collapse of key financial institutions (A)</p> Signup and view all the answers

What is a potential long-term risk associated with the Federal Reserve's policies during the recovery after the financial crisis?

<p>Increased income inequality (A)</p> Signup and view all the answers

Open Market Operations are primarily used to control what economic aspect?

<p>Monetary supply (B)</p> Signup and view all the answers

What event triggered the 2007-2008 financial crisis?

<p>The collapse of the housing bubble (A)</p> Signup and view all the answers

What role did low interest rates play in the housing market before the crisis?

<p>They encouraged borrowing, leading to increased home purchases (B)</p> Signup and view all the answers

What type of mortgages contributed to the financial crisis?

<p>High-risk subprime mortgages (A)</p> Signup and view all the answers

What was a consequence of the surge in mortgage defaults?

<p>A plunge in the value of mortgage-backed securities (MBS) (B)</p> Signup and view all the answers

What was the Federal Reserve's response to prevent a total collapse of the financial system?

<p>Taking extraordinary measures (C)</p> Signup and view all the answers

Which institution's collapse is noted as a pivotal moment in the 2007-2008 financial crisis?

<p>Lehman Brothers (B)</p> Signup and view all the answers

What impact did the financial crisis have on lending practices?

<p>It resulted in a severe credit crunch (A)</p> Signup and view all the answers

Which monetary policy action was taken by the Federal Reserve following the 2001 recession?

<p>Lowering interest rates (D)</p> Signup and view all the answers

What was one of the primary concerns associated with the Federal Reserve's bailouts during the financial crisis?

<p>It might encourage risky behavior in the future, known as moral hazard. (A)</p> Signup and view all the answers

How did the Federal Reserve's response to the 2007-2008 financial crisis affect interest rates?

<p>It dramatically lowered interest rates to stimulate the economy. (D)</p> Signup and view all the answers

What was one of the main roles of TARP during the financial crisis?

<p>It helped prevent the collapse of major financial institutions. (C)</p> Signup and view all the answers

What was a criticism of quantitative easing as implemented by the Federal Reserve?

<p>It helped primarily wealthy individuals benefit from rising asset prices. (C)</p> Signup and view all the answers

Which statement best reflects the overall impact of the Federal Reserve's response during the crisis?

<p>It restored confidence in markets and helped stimulate economic recovery. (B)</p> Signup and view all the answers

What distinct challenge did the Federal Reserve face during the 2007-2008 financial crisis?

<p>An unprecedented level of financial institution failures. (A)</p> Signup and view all the answers

Which financial institution received a significant loan from the Federal Reserve during the crisis?

<p>AIG (C)</p> Signup and view all the answers

What was one of the intended outcomes of the Federal Reserve's use of quantitative easing?

<p>To lower long-term interest rates and boost asset prices. (C)</p> Signup and view all the answers

Flashcards

Fed's Early Years

The Federal Reserve's early years (1913-1940s) focused on financial stability, but faced criticism for its handling of the Great Depression.

Post-War Fed

After World War II, the Fed focused on controlling inflation and supporting employment but experienced issues with inflation in the 1970s.

Fed's modern era (1980s onward)

Under leaders like Volcker and Greenspan, the Fed showed improved control over inflation. The 2008 crisis led to quantitative easing.

Fed's Mandate

The Fed's current mandate prioritizes maximizing employment and maintaining price stability.

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Open Market Operations (OMO)

Buying or selling government securities to adjust the money supply. Buying increases money, selling decreases money.

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Discount Rate

The interest rate banks pay to borrow from the Federal Reserve. Higher rates decrease lending.

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Reserve Requirements

The fraction of deposits banks must hold as reserves. Changing this affects lending.

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Board of Governors

The central governing body of the Federal Reserve System. They set monetary policy.

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Fed's Independent Monetary Policy

The Federal Reserve has the authority to control inflation without direct Treasury interference.

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Bretton Woods Agreement

A 1944 agreement where countries pegged their currencies to the US dollar (which was convertible to gold).

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Federal Reserve Dual Mandate

The Fed's responsibility to pursue maximum employment and stable prices (controlling inflation).

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Federal Reserve's 3rd Mandate

In 1977, Congress added moderating long-term interest rates to the Fed's goals.

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Banking Act of 1935

New Deal reform restructuring the Federal Reserve, giving the Board of Governors more control over monetary policy.

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Employment Act of 1946

Established the federal government's responsibility for full employment, production, and purchasing power.

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Federal Reserve Reform Act of 1977

Clarified the Fed’s role in controlling inflation, making price stability a formal goal for the Fed.

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Paul Volcker

Federal Reserve Chairman (1979-1987) known for tackling inflation.

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Great Inflation

A period in the U.S. (1965-1982) characterized by high and persistent inflation.

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Oil Shocks of the 1970s

Major disruptions in oil supply, causing energy prices to surge, and contributing to inflation.

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Great Moderation

A period of relative economic stability (1984-2007) with low inflation and steady growth.

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Great Recession

Severe global economic downturn (2007-2009) triggered by the housing market collapse.

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Subprime Mortgage Crisis

Banks offering mortgages to those who couldn't afford them, leading to defaults and market crash (2007-2008).

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Savings and Loan Crisis

Financial crisis involving failed savings institutions due to risky lending (1980s-1990s).

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Federal Reserve's Policy Response to 2008 Crisis

The Federal Reserve implemented policies like quantitative easing, lending to failing banks, and keeping interest rates low, to stabilize the economy during the 2008 financial crisis.

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Recession of 1981-82

A recession caused by tight monetary policies implemented to control inflation.

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Lender of Last Resort

A financial institution (like the Federal Reserve) that provides emergency loans to banks during crises, preventing bank runs and financial collapse.

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Systemic Risk

The risk that the failure of one financial institution could trigger a chain reaction, destabilizing the entire financial system.

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Gold Standard

A monetary system where the value of a currency is fixed to the price of gold. This limits a central bank's ability to adjust monetary policy.

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Term Auction Facility

A program where the Federal Reserve auctions short-term loans to banks, injecting liquidity into the financial system.

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Primary Dealer Credit Facility

A program that allows primary dealers (major financial institutions) to borrow directly from the Fed, providing immediate access to liquidity.

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Quantitative Easing

A monetary policy tool involving the Fed purchasing large quantities of government securities, injecting liquidity into the economy.

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Income Inequality

The gap between the rich and poor in a society, often exacerbated by economic policies.

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Asset Bubble

A situation where the price of an asset (like stocks or real estate) rises rapidly and unsustainably, risking a sudden collapse.

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Housing Bubble (2000s)

A period when home prices rise rapidly, fueled by speculation and easy lending. This can lead to unsustainable growth and eventual collapse.

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Subprime Mortgages

Loans given to borrowers with poor credit history, often at higher interest rates. They pose greater risk of default.

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Mortgage-Backed Securities (MBS)

Bonds backed by a pool of mortgages. They distribute risk among investors but can become risky if underlying mortgages fail.

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Credit Crunch

A situation where banks become unwilling or unable to lend money due to increased risk and uncertainty. This hinders economic activity.

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Lehman Brothers Collapse (2008)

The bankruptcy of a major investment bank, signaling a severe crisis in the financial system.

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AIG Bailout

Government intervention to prevent a financial institution from failing. This prevented a systemic collapse but raised concerns about moral hazard.

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Federal Reserve Response (2008)

A series of unprecedented actions by the Federal Reserve to stabilize the financial system, including interest rate cuts and providing liquidity.

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Preventing a Second Great Depression

The Federal Reserve's actions were crucial in mitigating the impact of the financial crisis and preventing a more severe economic collapse.

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TARP

The Troubled Asset Relief Program, a government bailout designed to prevent further bank failures during the financial crisis of 2008.

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Moral Hazard

The risk that providing bailouts or subsidies could encourage risky behavior, as entities might perceive less consequence for failures.

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Quantitative Easing (QE)

The Fed's policy of injecting money into the economy by buying long-term government bonds, aiming to lower interest rates and stimulate growth.

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Fed's Response to 2008

The actions taken by the Federal Reserve to prevent an economic collapse, including providing liquidity, lowering interest rates, and using quantitative easing.

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Criticism of Fed's Response

Arguments that the Fed's bailout programs unfairly benefited financial institutions and taxpayers, potentially creating moral hazard.

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Evolution of Central Banking

The significant changes in the U.S. central banking system since its inception, marked by key milestones and adjustments in financial policies.

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Study Notes

Financial Crisis of 2007-2008 and Fed Response

  • Risky lending in the housing market caused defaults on mortgages
  • Collapse of financial institutions (Lehman Brothers, AIG)
  • Fed response:
    • Cut interest rates near zero
    • Quantitative Easing (QE): bought government and mortgage-backed securities to inject money into the financial system
    • Offered emergency loans to banks to prevent collapse
    • Crucial in stabilizing the economy and preventing a deeper recession

Stop-and-Go Era of the 1950s

  • Stop-Go policy refers to the Fed switching between tightening and loosening monetary policy to control inflation.
  • During economic booms, the Fed raised interest rates to prevent inflation ("Stop" phase)
  • When the economy slowed they lowered rates to boost growth ("Go" phase)
  • This inconsistent policy resulted in economic instability, with cycles of inflation and recession.

Inflation Era of the 1970s

  • High inflation due to several factors:
    • Oil shocks: OPEC raised oil prices, increasing costs of goods and services
    • Wage-price spirals: Rising wages led to higher prices, leading to more wage demands
    • Fed's slow action to control inflation
  • Stagflation (high inflation + high unemployment)

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Description

Test your knowledge on the key events and acts related to the Federal Reserve and its role in the U.S. economy. This quiz covers important developments from the Bretton-Woods Agreement to the Federal Reserve Reform Act of 1977. Enhance your understanding of monetary policy and its historical context.

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