The Federal Reserve and Banking System
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Questions and Answers

Which action does the Fed take to enact a tight-money policy?

  • Selling bonds on the open market (correct)
  • Increasing the discount rate
  • Decreasing reserve requirements
  • Increasing reserves available for loans

    • What is the effect of selling bonds on the open market?

  • Bond prices fall and interest rates increase (correct)
  • Bond prices rise and interest rates increase
  • Bond prices stay the same and interest rates stay the same
  • Bond prices rise and interest rates decrease

    • What happens when interest rates increase?

  • Lending is encouraged
  • Lending stays the same
  • Lending becomes mandatory
  • Lending is discouraged (correct)

    • What is the impact of less lending on aggregate demand?

    <p>Aggregate demand decreases</p> Signup and view all the answers

    What is the effect of decreased aggregate demand on GDP growth?

    <p>GDP growth decreases</p> Signup and view all the answers

    What is the impact of a contractionary monetary policy on unemployment?

    <p>Unemployment may increase</p> Signup and view all the answers

    Which of the following is a tool the Fed uses to expand the money supply?

    <p>Selling government bonds</p> Signup and view all the answers

    What is the purpose of expansionary monetary policy?

    <p>To promote economic stability</p> Signup and view all the answers

    How does the discount rate affect the money supply?

    <p>Increasing the discount rate decreases the money supply</p> Signup and view all the answers

    What is the purpose of contractionary monetary policy?

    <p>To reduce the money supply</p> Signup and view all the answers

    What is the federal funds rate?

    <p>The interest rate banks charge each other to borrow money</p> Signup and view all the answers

    How does the Fed communicate its intention to buy or sell bonds?

    <p>By announcing a target for the federal funds rate</p> Signup and view all the answers

    Which term best describes the Federal Reserve System?

    <p>Central bank</p> Signup and view all the answers

    What is the main purpose of central banks?

    <p>To influence the amount of loanable funds banks have available</p> Signup and view all the answers

    What is one of the duties of central banks in relation to stability?

    <p>To regulate and supervise banks</p> Signup and view all the answers

    How does the lending practice of the Federal Reserve differ from other banks?

    <p>It does not seek to make a profit through lending</p> Signup and view all the answers

    What is one of the duties of the Federal Reserve in relation to banking in the United States?

    <p>To provide regulation and oversight to ensure sound banking practices</p> Signup and view all the answers

    What is the meaning of the term 'monetary'?

    <p>Relating to money</p> Signup and view all the answers

    Which of the following is a function of the Federal Reserve System?

    <p>Regulating the supply of money</p> Signup and view all the answers

    Who appoints the members of the Board of Governors of the Federal Reserve?

    <p>The president</p> Signup and view all the answers

    Which of the following is true about the stock ownership of member banks in the Federal Reserve district bank?

    <p>It earns a set dividend rate</p> Signup and view all the answers

    What is the role of the Federal Open Market Committee (FOMC)?

    <p>Supervising the sale and purchase of federal government securities</p> Signup and view all the answers

    What is the purpose of the Consumer Advisory Council?

    <p>Advising the board on matters concerning the Fed's responsibilities in enforcing consumer protection laws related to borrowing</p> Signup and view all the answers

    What service does the Fed offer to banks in terms of check clearing?

    <p>Recording receipts and expenditures of bank clients</p> Signup and view all the answers

    Which of the following is NOT a way in which the Fed serves the banking system?

    <p>Creating money through deposits and loans</p> Signup and view all the answers

    What is the purpose of the Fed regulating and supervising banks?

    <p>To maintain competition and enforce truth-in-lending laws</p> Signup and view all the answers

    What is the role of the Fed as the Federal Government's banker in paying government bills?

    <p>Collecting tax revenues and issuing checks for government programs</p> Signup and view all the answers

    What does the Fed do in the process of selling government securities?

    <p>Provides information about the securities and delivers the bonds to their owners</p> Signup and view all the answers

    What is the purpose of the Fed in distributing currency?

    <p>To ensure bills are distributed to banks in needed amounts</p> Signup and view all the answers

    What does it mean for banks to create money in the fractional reserve banking system?

    <p>Keep a fraction of their deposits in reserve and loan out the rest</p> Signup and view all the answers

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