Q&A Hero

Q: The fact that, for most of its history, the Fed was reluctant to make discount loans actually: A. at times was a destabilizing force for financial markets.B. proved to be a very stabilizing force for financial markets.C. pushed the discount rate above the target federal funds rate.D. resulted in banks in very strong financial shape as being the only ones borrowing from the Fed.

Q: Which groups were opposed to the Bank of the United States? A) northeastern industrial interests B) northeastern financial interests C) southern and western agrarian and small-business interests D) exporters

Q: For most of the Fed's history, the Fed: A. lent reserves at an interest rate below the target federal funds rate.B. found banks would borrow from the Fed far more often than they would borrow in the federal funds market.C. was very lenient in making discount loans.D. tied the discount rate to the rate on Treasury securities.

Q: Who organized the Bank of the United States? A) Alexander Hamilton B) George Washington C) Andrew Jackson D) Woodrow Wilson

Q: The Fed will make a discount loan to a bank during a crisis: A. no matter what condition the bank is in.B. only if the bank is sound financially and can provide collateral for the loan.C. but if the bank doesn't have collateral the interest rate is higher.D. only if the bank would fail without the loan.

Q: Why has the Federal Reserve chairman often been called the second most important person in terms of affecting the economy? A) The Fed chairman has veto power over all federal spending. B) The Fed is in control of monetary policy. C) The Fed chairman draws the second highest salary of any official of the federal government. D) The Fed has regulatory power over all financial markets.

Q: In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate.B. The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective.C. Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves.D. The Fed now controls the quantity of credit extended as well as its price.

Q: In January 2010, President Obama appointed which of the following to be chair of the Federal Reserve? A) Greenspan B) Bernanke C) Geithner D) Trichet

Q: On a particular day, the actual federal funds rate can deviate from the target federal funds rate. This might be due to all of the following except: A. unexpected changes in the demand for reserves.B. the forecasts of the Fed's staff were in error.C. there may have been more float in the banking system than anticipated.D. daily changes in the target rate.

Q: Describe the four stages of the financial regulatory pattern.

Q: The Fed would use a reverse repo when they: A. want to temporarily increase the monetary base.B. forecast a permanent decrease in the demand for monetary base.C. forecast a permanent increase in the demand for monetary base.D. want to temporarily decrease the monetary base.

Q: Which aspects of a bank's operations are evaluated as part of the CAMELS rating system?

Q: The ECB's temporary operations typically involve the use of: A. discount loans.B. repurchase agreements.C. an outright purchase of U.S. Treasury Securities.D. an outright sale of U.S. Treasury Securities.

Q: What are the primary reasons for and against a policy of "too big to fail."

Q: When the Fed forecasts a sustained increase in the demand for the monetary base, the staff of the Fed is likely to meet this demand through: A. discount loans.B. repurchase agreements.C. an outright purchase of U.S. Treasury Securities.D. an outright sale of U.S. Treasury Securities.

Q: When did Regulation Q finally disappear? A) 1934 B) 1945 C) 1986 D) 2000

Q: An increase in the federal funds rate should: A. cause mortgage rates to increase by less than the increase in the federal funds rate.B. have an inverse impact on mortgage rates.C. not impact mortgage rates since the federal funds rate is a very short-term rate.D. cause the mortgage rates to increase by more than the increase in the federal funds rate.

Q: An ATS account A) converts a corporation's checking account balance at the end of the day into an overnight repurchase agreement. B) is the name given to NOW accounts outside of New England. C) are negotiable certificates of deposit of less than $100,000. D) were used during the Great Depression by depositors who had lost faith in conventional checking accounts.

Q: Discount lending ties into the Fed's function of: A. lender of last resort.B. open market operations.C. the government's bank.D. regulation of banking.

Q: As of 2012, what portion of bank assets were owned by the five largest bank holding companies? A) 10% B) 25% C) 50% D) 80%

Q: Discount lending by the Fed: A. is the key component of monetary policy.B. is more important today than in years past.C. is not as important today as it was in the past.D. amounts to five billion dollars in volume during an average week.

Q: The usual response of the banking system to new government regulations is A) evasion through whatever means are necessary. B) strict compliance. C) an attempt to circumvent the regulations through financial innovation. D) bankruptcy.

Q: Which of the following statements is most correct? A. The market federal funds rate equals the target federal funds rate.B. Since 2008, the market federal funds rate has remained solidly within the target range announced by the Fed.C. Since 2008, the market federal funds rate has varied wildly, sometimes moving outside the target range announced by the Fed.D. There doesn't appear to be any relationship at all between the target and market federal fund rates.

Q: The primary motive for financial innovation during the regulatory process is A) profit. B) adherence to the new regulations. C) return to the way business was conducted prior to the new regulations. D) increase coordination with other financial institutions.

Q: The daily reserve supply curve is: A. upward sloping.B. downward sloping.C. vertical until the federal funds rate equals the discount rate; at that point it becomes horizontal.D. horizontal until the federal funds rate equals the discount rate; at that point it becomes vertical.

Q: The fourth stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

Q: One reason the target federal funds rate may not equal the actual federal funds rate is because: A. there is no way that the Fed could keep the actual rate at the target rate.B. the target rate changes with the demand for reserves.C. attaining the target rate involves forecasting reserve demand and forecasts are subject to error.D. none of the answers is correct; the target and the actual federal funds rates are always equal.

Q: The third stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

Q: If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: A. a decrease in the market federal funds rate.B. a market federal funds rate that will equal the target rate.C. an increase in the market federal funds rate.D. nothing; the Fed would act immediately and the market would not be affected.

Q: The second stage in the regulatory process is A) a crisis. B) regulation. C) response by the financial system. D) regulatory response.

Q: If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be: A. the market federal funds rate will decrease.B. the market federal funds rate will equal the target rate.C. the market federal funds rate will increase.D. nothing; the Fed would act immediately and the market would not be affected.

Q: The first stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

Q: If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: A. increase the supply of reserves.B. decrease the supply of reserves.C. do nothing; the Fed will let the market work.D. alter the demand for reserves.

Q: What other markets were affected by the decline in the housing market beginning in 2006? Briefly explain why.

Q: If the market federal funds rate were above the target rate, the response from the Fed would likely be to: A. purchase U.S. Treasury securities.B. sell U.S. Treasury securities.C. lower the required reserve rate.D. lower the discount rate.

Q: How does the relationship between housing prices and rental rates provide evidence for or against the existence of a housing bubble?

Q: If the market federal funds rate were below the target rate, the response from the Fed would likely be to: A. raise the required reserve rate.B. purchase U.S. Treasury securities.C. sell U.S. Treasury securities.D. raise the discount rate.

Q: A stress test of banks, such as that undertaken in the Spring of 2009, is designed to: A) ensure that banks have followed proper accounting standards B) make sure that banks are properly managed C) gauge how well banks would fare if the economy worsens D) estimate the impact of a bank panic on the overall economy

Q: The tool the Fed uses to keep the federal funds rate close to the target is: A. the required reserve rate.B. discount lending.C. open market operations.D. they can set the rate by law.

Q: When prices of new houses rise significantly faster than rent prices, this is evidence of a: A) debt-deflation process B) bubble C) financial crisis D) sovereign debt crisis

Q: One outcome that would result if the Fed paid interest on reserves would be: A. banks would hold less excess reserves.B. the federal government's deficit would be larger (or surplus smaller).C. banks would no longer hold excess reserves.D. the target federal funds rate would have to be fixed at a constant rate.

Q: Losses in which holding resulted in BNP Paribas not allowing investors to redeem shares from three of its investment funds? A) mortgage-backed securities B) Lehman Brothers C) Bear Stearns D) Real Estate Investment Trusts

Q: If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except: A. making unsecured loans.B. in essence paying interest on excess reserves.C. eliminating a lot of valuable information coming from the market.D. following the directives issued by Congress.

Q: Most of the TARP funds were used to A) fund a stimulus package. B) pay for losses incurred by Fannie Mae and Freddie Mac. C) finance the operations of the Federal Reserve. D) make direct purchases of preferred stock in banks to increase their capital.

Q: The Fed could make the market federal funds rate equal the target rate by: A. mandating that all loans be transacted at the target rate.B. setting the discount rate below the federal funds rate.C. entering the federal funds market as a borrower or a lender.D. paying higher interest on reserves.

Q: What was the purpose of the stress test administered by the Treasury in 2009? A) Evaluate potential losses of Fannie Mae and Freddie Mac. B) Assess the viability of AIG. C) Gauge how well the largest financial firms would fare if the recession deepened. D) Evaluate the solvency of the major investment banks.

Q: Federal funds loans are: A. secured loans between banks and the Fed.B. unsecured loans.C. collateralized loans between banks.D. guaranteed by the FDIC.

Q: All of the following were actions taken by the government or the Fed in response to the Financial Crisis of 2007-2009 EXCEPT A) purchasing of most toxic assets such as mortgage-backed securities. B) reducing the federal funds rate to near zero. C) insuring deposits in money market mutual funds. D) effective nationalization of Fannie Mae and Freddie Mac.

Q: During the financial crisis of 2007-2009 it became difficult for the Fed to hit their target federal funds rate because: A. of the number of bank failures.B. of the Federal government stimulus package.C. of the loss of liquidity in the interbank lending market.D. of the instability in the stock market.

Q: Which investment caused the Reserve Primary Fund to incur heavy losses? A) mortgage-backed securities B) real estate investment trusts C) commercial paper issued by Bear Stearns D) commercial paper issued by Lehman Brothers

Q: Which of the following would be categorized as an unconventional monetary policy tool? A. Discount window lendingB. Targeted asset purchasesC. Federal funds rate targetD. Deposit rate

Q: What does it mean for a money market mutual fund to "break the buck"? A) The value of its share declines below $1. B) It incurs losses on its investments. C) It increases its fees to more than 1% of net asset value. D) It is unable to meet the demand for withdrawals by investors.

Q: The fact that there is a market for federal funds enables banks to: A. make fewer loans than they would otherwise.B. borrow more from the Fed.C. hold a lower level of excess reserves than they would otherwise hold.D. hold less in required reserves.

Q: By the summer of 2008, about what percent of subprime mortgages were overdue by at least 30 days? A) 10% B) 25% C) 34% D) 50%

Q: The market for reserves derives from the fact that: A. reserves pay a relatively high return.B. desired reserves don't always equal actual reserves.C. the Fed refuses to lend to banks.D. banks do not want excess reserves.

Q: Which investment bank avoided bankruptcy by being purchased by JP Morgan Chase in March 2008? A) Morgan Stanley B) Lehman Brothers C) Bear Stearns D) Merrill Lynch

Q: Which of the following statements is most correct? A. The FOMC sets the federal funds rate.B. The discount rate is the primary policy tool of the FOMC.C. The FOMC sets the target federal funds rate.D. The difference between the target and actual federal funds rate is the dealer's spread.

Q: What are the four explanations given as to why the Fed did not intervene to stabilize the banking system during the Great Depression?

Q: The tools of monetary policy include: A. the target federal funds rate.B. the excess reserve rate.C. the currency-to-deposit ratio.D. both the excess reserve rate and the target federal funds rate.

Q: How does deflation affect those with debt?

Q: The tools of monetary policy available to the Fed include each of the following, except the: A. currency-to-deposit ratio.B. discount rate.C. target federal funds rate.D. reserve requirement.

Q: Describe the debt-deflation process.

Q: Which of the following statements is most correct? A. The Fed can control the amount of reserves, but cannot control the monetary base.B. The Fed can control the makeup of the monetary base, but cannot affect the market interest rate.C. The Fed can control the size of the monetary base but not the price of its components.D. The Fed can control either the size of the monetary base or the price of its components.

Q: Which of the following is NOT an accurate description of the recession that accompanied the financial crisis of 2007-2009? A) GDP declined by more than twice the rate of the average recession. B) Inflation rose at nearly twice the rate as the average recession. C) It lasted just under twice as long as the typical recession. D) Peak unemployment was about one-third higher than usual.

Q: The ways the Fed can inject reserves into the banking system include: A. an increase in the size of the Fed's balance sheet through purchasing securities.B. increasing the discount rate.C. making loans to non-bank corporations.D. an increase in the size of the Fed's balance sheet through selling securities.

Q: Which of the following led to a "bank jog" in Greece? A) high unemployment B) high inflation C) speculation that Greece would abandon the euro D) the default of several Greek banks

Q: Most central banks, including the Fed and the ECB, provide discount loans at a rate: A. equal to the target interest rate.B. below the target interest rate.C. above the target interest rate.D. that is equal to the overnight interbank lending rate.

Q: Which of the following did NOT play a role in keeping Greece from defaulting between 2010 and 2012? A) International Monetary Fund B) United Nations C) European Union D) European Central Bank

Q: The focus for most central banks today is: A. the quantity of M1.B. interest rates.C. the quantity of M2.D. controlling the size of the money multiplier.

Q: Research by Reinhart and Rogoff indicate that most of the increase in national debt as a result of a financial crisis is due to A) government bail outs of financial institutions. B) increase spending on social welfare programs. C) government stimulus programs. D) sharp declines in tax revenues.

Q: Considering changes to the monetary base, are discount loans and federal funds borrowing equivalent? Explain.

Q: Sovereign debt refers to A) debt owned by the government. B) bonds issued by the government. C) debt owed to the government. D) debt only issued by nations with kings or queens.

Q: Explain why the Fed making more discount loans to banks, or an open market purchase, or an increase in foreign exchange reserves all have the same effect on its balance sheet. What is that effect on the monetary base?

Q: Why might a nation seek to maintain a pegged exchange rate? A) It makes business planning easier for firms involved in the global economy. B) It removes the need to intervene in the foreign exchange market. C) It ensures that the exchange rate will remain at its equilibrium. D) It makes their currency more attractive on the foreign exchange market.

Q: During the financial crisis of 2007-2009, the deposit expansion multiplier plummeted to a fraction of its normal value. Why?

Q: The era of bank panics in the United States was effectively ended by A) establishing the Fed as lender of last resort. B) implementing the gold standard. C) abandoning the gold standard. D) introducing deposit insurance.

Q: What was the main reason the Fed stopped announcing growth targets for money aggregates in the early 2000s?

Q: The original intention of the Fed's role as lender of last resort was to make loans to banks that were A) not illiquid nor insolvent. B) illiquid, but not insolvent. C) insolvent, but not illiquid. D) both illiquid and insolvent.

Q: You are given the following information: Reserves (R) in the banking system amount to $48 billion, of which $45.8 billion are required. Currency in the hands of the public amounts to $692.5 billion while checkable deposits amount to $650 billion. Calculate the money multiplier.

Q: A bank panic occurs when A) a bank is worried that its loans will not be repaid. B) an individual bank cannot meet its reserve requirements. C) a bank lacks sufficient funds with which to make loans. D) the situation in which many banks experience a bank run simultaneously.