The Federal Reserve and Banking System

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?

Aggregate demand decreases (B) Signup and view all the answers

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

GDP growth decreases (C) Signup and view all the answers

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

Unemployment may increase (D) Signup and view all the answers

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

Selling government bonds (A) Signup and view all the answers

What is the purpose of expansionary monetary policy?

To promote economic stability (D) Signup and view all the answers

How does the discount rate affect the money supply?

Increasing the discount rate decreases the money supply (C) Signup and view all the answers

What is the purpose of contractionary monetary policy?

To reduce the money supply (A) Signup and view all the answers

What is the federal funds rate?

The interest rate banks charge each other to borrow money (B) Signup and view all the answers

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

By announcing a target for the federal funds rate (B) Signup and view all the answers

Which term best describes the Federal Reserve System?

Central bank (B) Signup and view all the answers

What is the main purpose of central banks?

To influence the amount of loanable funds banks have available (A) Signup and view all the answers

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

To regulate and supervise banks (D) Signup and view all the answers

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

It does not seek to make a profit through lending (C) Signup and view all the answers

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

To provide regulation and oversight to ensure sound banking practices (A) Signup and view all the answers

What is the meaning of the term 'monetary'?

Relating to money (A) Signup and view all the answers

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

Regulating the supply of money (D) Signup and view all the answers

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

The president (D) 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?

It earns a set dividend rate (D) Signup and view all the answers

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

Supervising the sale and purchase of federal government securities (D) Signup and view all the answers

What is the purpose of the Consumer Advisory Council?

Advising the board on matters concerning the Fed's responsibilities in enforcing consumer protection laws related to borrowing (C) Signup and view all the answers

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

Recording receipts and expenditures of bank clients (B) Signup and view all the answers

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

Creating money through deposits and loans (A) Signup and view all the answers

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

To maintain competition and enforce truth-in-lending laws (D) Signup and view all the answers

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

Collecting tax revenues and issuing checks for government programs (B) Signup and view all the answers

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

Provides information about the securities and delivers the bonds to their owners (C) Signup and view all the answers

What is the purpose of the Fed in distributing currency?

To ensure bills are distributed to banks in needed amounts (C) Signup and view all the answers

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

Keep a fraction of their deposits in reserve and loan out the rest (B) Signup and view all the answers