Q&A Hero

Q: If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: A. 7%.B. 8.5%.C. 5%.D. 4.5%.

Q: What are the limitations to the Fed's independence?

Q: If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: A. 6.5%.B. 2.5%.C. 3.5%.D. 10%.

Q: In what ways is the Fed independent of the political process?

Q: The Taylor rule assumes the real long-term interest rate would be: A. approximately 2%.B. zero.C. five percent less the inflation rate.D. one percent.

Q: How are the operations of the Federal Reserve financed?

Q: The components of the formula for the Taylor rule includes each of the following, except: A. the target federal funds rate.B. the current inflation rate.C. the 30-year U.S. Treasury bond rate.D. the inflation gap.

Q: Which of the following officially ended the cooperation between the Treasury and the Fed that had taken place during World War 2? A) Truman doctrine B) Federal Reserve Act of 1951 C) Dodd-Frank Act D) Treasury-Federal Reserve Accord

Q: The Taylor rule is: A. the monetary policy setting formula followed explicitly by the FOMC.B. an approximation that seeks to explain how the FOMC sets their target.C. an explicit tool used by the ECB but not the Fed.D. a rule adopted by Congress to make the Fed's monetary policy more accountable to the public.

Q: How did the Fed peg interest rates during World War 2? A) by setting a low federal funds rate B) by agreeing to purchase any bonds that were not purchased by private investors C) through extensive use of discount loans D) through nationalization of the banking system

Q: Inflation targeting does all of the following except: A. increase policymakers' credibility.B. increase policymakers' accountability.C. communicate policymakers' objectives clearly and openly.D. hinder economic growth.

Q: Which of the following statements is correct? A) The Fed has difficulty covering its normal expenses, but is reluctant to ask Congress for money. B) The Fed is dependent on the annual appropriations it receives from Congress. C) The Fed's profits are substantial, even when compared to the largest U.S. corporations. D) At one time the Fed made substantial profits, but falling interest rates have greatly reduced them.

Q: Central banks that have a hierarchical mandate with inflation targeting basically are saying: A. hitting the inflation target is the first priority after all other stated objectives are reached.B. hitting the inflation target is the only objective.C. the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers.D. hitting the inflation target comes first, everything else comes second.

Q: Most of the Fed's earnings come from A) fees charged to financial institutions for check clearing. B) interest on the securities it holds. C) interest on discount loans. D) congressional appropriations.

Q: During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers: A. focusing exclusively on an intermediate target.B. bypassing intermediate targets and focusing directly on an objective.C. focusing on multiple numerical targets.D. developing a new intermediate target.

Q: All of the following help make the Fed independent of the political process EXCEPT A) financial independence. B) chair of Fed receives a lifetime appointment. C) Board members receive a long, nonrenewable appointment. D) Board members' terms expire at different times, reducing the possible number of appointees by any one president.

Q: Over the last few decades, central bankers have: A. mostly abandoned intermediate targets.B. greatly increased their focus on intermediate targets.C. found that the links between the operating instruments and intermediate targets have become more stable.D. developed more intermediate targets.

Q: What is the main reason the Fed operates in a political arena? A) It lacks a constitutional mandate. B) The members of the Board of Governors must run for reelection every fourteen years. C) The members of the Board of Governors are typically prominent politicians. D) It is under the direct control of Congress.

Q: Which of the following would be classified as intermediate targets for U.S. monetary policy? A. M2 but not M1B. The federal funds rateC. M1 and M2D. M1 but not M2

Q: The Fed does not have to go through the normal congressional appropriations process because A) its expenses are very small. B) it was given enough funds at the time of its founding to provide for its expenses indefinitely. C) it is self financing. D) it is not part of the legislative branch of the federal government.

Q: A good definition for intermediate targets of monetary policy would be: A. instruments under the direct control of central bankers but one step removed from operational targets.B. instruments that are not under the direct control of the central banks but lie between operational instruments and objectives.C. the quantity or non-price targets of monetary policy.D. the real goals of monetary policy.

Q: Which of the following statements is correct? A) The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve. B) The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. C) The Fed is fully insulated from external pressures because it has a constitutional mandate. D) The Fed is only partially insulated from external pressures.

Q: If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must: A. target the quantity of reserves.B. set targets for both interest rates and the quantity of reserves.C. not target the interest rates.D. let the quantity of reserves fluctuate.

Q: In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be A) recession. B) inflation. C) higher taxes. D) lower taxes.

Q: In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the: A. economy would have been better off.B. target would not have been politically acceptable.C. target would have been a federal funds rate of zero percent.D. inflation rate would have risen further.

Q: During World War II A) the Board of Governors was temporarily disbanded. B) the Fed was not allowed to make discount loans. C) the Fed agreed to hold interest rates on short-term Treasury securities at low levels. D) the Fed agreed not to buy Treasury securities.

Q: From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: A. the inflation rate increased to over 18 percent in 1983.B. many banks failed that otherwise may not have.C. interest rates rose very high.D. inflation remained high for most of the 1980's.

Q: What is included in the public statement released by the FOMC following the conclusion of its meeting?

Q: The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it: A. is not controllable.B. is not observable.C. cannot be quickly changed.D. it has a predictable impact on the economy.

Q: What are the three books to which the FOMC has access and what information is included in each?

Q: Which of the following features would characterize a good monetary policy instrument? A. observable only to monetary policy officials.B. tightly linked to monetary policy objectives.C. controllable and rigid.D. difficult to change.

Q: Who serves as voting members of the Federal Open Market Committee (FOMC)?

Q: Over the years most monetary policy experts would agree with each of the following statements, except: A. the reserve requirement is not useful as an operational instrument.B. central bank lending is necessary to ensure financial stability.C. short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output.D. transparency in policy making hinders accountability.

Q: How do individual become members of the Board of Governors?

Q: Which of the following statements is most correct? A. The FOMC is more successful at keeping the market rate closer to the target rate than the ECB.B. The FOMC is more successful than the ECB at keeping the market rate within a 100 basis point band of the target rate.C. The ECB has kept the market rate within a 100 basis point band of the target rate; the FOMC cannot make this claim.D. The ECB seldom has the market rate within 100 basis points of the target rate.

Q: What are the roles of Federal Reserve district banks?

Q: The European equivalent of the U.S.'s market federal funds rate is called the: A. overnight cash rate.B. target refinancing rate.C. European discount rate.D. overnight repurchase rate.

Q: What was the original intent of the Federal Reserve Act of 1913?

Q: One key difference between the Fed and the European Central Bank (ECB) in their reserve requirements is that the: A. reserve requirements of the ECB are at a much higher rate than the Fed's.B. ECB's reserve requirements are more difficult for banks to predict.C. reserve requirement of the ECB are determined annually.D. ECB reserve requirement is based on all of a bank's liabilities.

Q: How did the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affect the Fed's

Q: The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system. The "channel" or "corridor" refers to the spread between the central bank's: A. target interest rate and its deposit rate.B. target interest rate and its lending rate.C. lending rate and its deposit rate.D. target interest rate and the current interest rate.

Q: What is the primary objective of the Financial Stability Oversight Council?

Q: The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system that involves setting: A. target interest rate only.B. target interest rate and a lending rate only.C. target interest rate and a deposit rate only.D. target interest rate, a lending rate, and a deposit rate.

Q: Who are the members of the Financial Stability Oversight Council?

Q: Within the European Central Bank, banks with excess reserves: A. can deposit them with the ECB and earn an interest rate below the target refinancing rate.B. earn no interest on excess reserves, similar to the system in the U.S.C. must deposit the excess with the ECB's Deposit Facility.D. none of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves.

Q: How does the Fed reach its target for the federal funds rate? A) by changing the discount rate B) by changing reserve requirements C) by adjusting the level of reserves D) by directly setting the federal funds rate

Q: Which of the following statements is true? A. The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.B. The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same.C. The ECB's weekly auctions include only a few of the largest banks in Europe.D. The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility.

Q: If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors? A) A special exemption was approved for him. B) The rule was not in place at the time. C) He completed the remaining years left on someone else's term and then served one 14-year term. D) He didn't serve consecutive terms.

Q: The European Central Bank's Marginal Lending Facility is used to provide: A. short-term loans to banks at rates below the target refinancing rate.B. long-term loans to banks at rates above the target refinancing rate.C. short-term loans at rates above the target refinancing rate.D. long-term loans to banks at rates below the target refinancing rate.

Q: Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000 deposit?A) 0.05%B) 0.25%C) 0.30%D) 1%

Q: The European Central Bank's equivalent of the Fed's open market operations (OMO) is: A. very similar to the Fed's OMO in that they are highly centralized.B. dissimilar to the Fed's OMO in that the operations are conducted at all 18 of the National Central Banks simultaneously.C. similar to the Fed's OMO in that they accept only U.S. Treasury securities in their refinancing operations.D. dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities.

Q: Assuming a required reserve ratio of 8%, interest rate on reserves of 5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1000 deposit?A) 0.05%B) 0.28%C) 0.32%D) 4%

Q: For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the: A. European target discount rate.B. European target federal funds rate.C. target refinancing rate.D. London Inter-Bank Offer Rate.

Q: Which of the following statements regarding member banks is true? A) A majority of banks are part of the Federal Reserve System as well as a majority of bank deposits. B) A minority of banks are part of the Federal Reserve System, but they have a majority of deposits. C) A majority of banks are part of the Federal Reserve System, but they have a minority of deposits. D) A minority of banks are part of the Federal Reserve System as well as a minority of deposits

Q: Today, reserve requirements are: A. set in a way that makes reserve demand highly unpredictable.B. changed whenever the target federal funds rate is changed.C. changed instead of making changes in the discount rate.D. really not a direct tool of monetary policy.

Q: Which of the following is NOT a role of Federal Reserve Banks? A) conduct discount lending B) serve on the FOMC C) set the interest rate on reserves D) manage check clearing in the banking system

Q: The main purpose of reserve requirements today is to: A. decrease the demand for reserves.B. make sure depositors can withdraw currency on demand.C. enable the FOMC to keep the market federal funds rate closer to the target reserve rate.D. keep banks sound.

Q: The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks? A) Class A directors B) Class B directors C) Class C directors D) Board of Governors

Q: To minimize the cost of holding reserves for small banks, the: A. required reserve rate decreases as the amount of deposits increases.B. required reserve rate is constant.C. required reserve rate is not applied for transaction deposits less than $100 million.D. first few million of transactions deposits are exempt from reserve requirements.

Q: The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role? A) regulator of the banking system B) lender of last resort C) manage the exchange rate D) maintain a balanced budget

Q: The use of lagged reserve accounting makes the demand for reserves: A. highly unpredictable.B. constant.C. more predictable.D. subject to daily changes by the Fed.

Q: Congress authorized a second Bank of the United States partly in response to: A) difficulty in funding the American Revolution B) difficulty in funding the War of 1812 C) difficulty in funding the Industrial Revolution D) difficulty in funding the Civil War

Q: The reserve requirement is applied to two-week balances on: A. transactions deposits.B. savings deposits.C. both transactions deposits and savings deposits.D. savings deposits and one-week balances on transactions deposits.

Q: The Bank of the United States faced opposition from which of the following? A) local banks who resented the Bank's supervision B) advocates of limited government who distrusted its power C) farmers and small businesses who resented the Bank's interference with their ability to obtain loans D) all of the above

Q: The Fed is reluctant to change the required reserve rate because: A. changes in the rate have a small impact on the actual quantity of money.B. the money multiplier is not impacted by the required reserve rate.C. the time lag between changing the required reserve rate and changes in the money supply can be too long.D. small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits.

Q: In 2012, the House of Representatives voted to have what type of audit of the Fed? A) auditing of financial statements B) auditing lending policy that took place during the financial crisis of 2007-2009 C) auditing of monetary policy decisions D) auditing of personal finances of members of the Board of Governors

Q: Seasonal credit provided by the Fed is not as common as it used to be because: A. there are fewer banks in seasonal areas.B. other sources for long-term loans have developed for banks in seasonal areas.C. seasonal credit has been replaced by secondary credit.D. seasonal credit is being replaced by primary credit.

Q: The Banking Acts of 1933 and 1935 A) established the Federal Reserve System. B) increased central control of the Federal Reserve System. C) eliminated the authority of the Board of Governors to set reserve requirements. D) made the Secretary of the Treasury a member of the Board of Governors.

Q: The interest rate the Fed charges for secondary credit is: A. above the primary discount rate.B. below the market federal funds rate.C. below the primary discount rate.D. equal to the primary discount rate.

Q: To conduct open market operations, the FOMC issues a directive to A) the trading desk at the Federal Reserve Bank of New York. B) the Board of Governors in Washington, D.C. C) the presidents of the district banks. D) the chairman of the New York Stock Exchange.

Q: Secondary credit provided by the Fed is designed for: A. banks who qualify for a lower interest than what is available under primary credit.B. banks that are in trouble and cannot obtain a loan from anyone else.C. banks that want to borrow without putting up collateral.D. foreign banks.

Q: The president of which Federal Reserve bank is always a voting member of the Federal Open Market Committee? A) Philadelphia B) Boston C) Chicago D) New York

Q: One of the reasons primary credit exists is to: A. bail out banks which are in financial trouble.B. provide additional reserves when the open market staff's forecasts are off.C. provide banks with an available source for unsecured lending.D. provide banks with a low interest source for long-term capital.

Q: The Chairman of the Federal Open Market Committee is also A) the president of the Federal Reserve Bank of New York. B) the chairman of the Securities and Exchange Commission. C) the chairman of the Federal Deposit Insurance Corporation. D) the chairman of the Board of Governors.

Q: The interest rate on primary credit extended by the Fed is: A. the average of the prime interest rate charged by the ten largest banks in the nation.B. below the target federal funds rate.C. equal to the target federal funds rate.D. above the target federal funds rate.

Q: The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the A) green book. B) beige book. C) blue book. D) Fed book.

Q: Primary credit extended by the Fed is: A. for banks needing long-term loans to work out financial problems.B. the highest interest rate loans offered by the Fed.C. short-term, usually overnight loans.D. loans offered at the prime interest rate for periods exceeding thirty days but less than one year.

Q: The movement to set up a central bank in the United States was spurred by the financial panic that occurred inA) 1816B) 1907C) 1929D) 1987

Q: The types of loans the Fed makes consist of each of the following, except: A. primary credit.B. conditional credit.C. seasonal credit.D. secondary credit.

Q: Which president failed to renew the charter of the Second Bank of the United States? A) George Washington B) Andrew Jackson C) Franklin Roosevelt D) Lyndon Johnson