BEC - Money, Banking, and Monetary Policy

Question 1

Which one of the following actions would not be taken by the Federal Reserve System to stimulate the economy?

A. 	Reduce the reserve requirement.
B. 	Reduce the discount rate.
C. 	Reduce tax rates.
D. 	Increase the money supply.

Answer 1

C. Reduce tax rates.

A change in tax rates is a fiscal policy initiative and would be initiated by the U.S. Congress, not the Federal Reserve System.
A reduction in tax rates (by Congressional action) would result in higher disposable income, which, in turn, will increase demand.

Question 2

What are 3 actions the Federal Reserve can take to stimulate the economy?

Answer 2

1. Reduce the reserve requirement
2. Reduce the discount rate.
3. Increase the money supply.

Question 3

Which of the following actions is the acknowledged preventive measure for a period of deflation?

A. 	Increasing interest rates.
B. 	Increasing the money supply.
C. 	Decreasing interest rates.
D. 	Decreasing the money supply.

Answer 3

B. Increasing the money supply.

When an economy is in deflation, increasing the money supply (for example, by lowering the reserve requirement or, in most circumstances, lowering the discount/interest rate) will stimulate demand and increase the general price level.

Question 4

An economy is at the peak of the business cycle. Which of the following policy packages is the most effective way to dampen the economy and prevent inflation?

A. 	 Increase government spending, reduce taxes, increase money supply, and reduce interest rates.

B. 	 Reduce government spending, increase taxes, increase money supply, and increase interest rates.

C. 	 Reduce government spending, increase taxes, reduce money supply, and increase interest rates.

D. 	 Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.

Answer 4

C.

Reduce government spending, increase taxes, reduce money supply, and increase interest rates.

Question 5

The U.S. M1 measure of money supply includes:

Paper Currency Y/N
Check-Writing Deposits Y/N
Savings Deposits Y/N

Answer 5

Paper Currency Y
Check-Writing Deposits Y
Savings Deposits N

The M1 measure of money supply includes paper currency, coins, and check-writing deposits, which are the primary financial instruments used for transactions.
Check-writing deposits are amounts held by banks, savings and loan associations, and credit unions for which ownership can be transferred by writing a check. Savings deposits are not an element of the M1 definition of money.

Question 6

Which of the following strategies would the Federal Reserve most likely pursue under an expansionary policy?

A. 	 Purchase federal securities and lower the discount rate.

B. 	 Reduce the reserve requirement while raising the discount rate.

C. 	 Raise the reserve requirement and lower the discount rate.

D. 	 Raise the reserve requirement and raise the discount rate.

Answer 6

A.
Purchase federal securities and lower the discount rate.

Through its exercise of monetary policy, the Federal Reserve (the Fed) can take actions intended to expand or contract the economy. An expansionary policy would serve to increase spending, demand, employment, and other economic measures. By purchasing federal securities (through its Open Market Committee), the Fed would put more cash into the economy by providing cash to the selling investors (e.g., banks, etc.). Increasing cash (the money supply) typically serves to stimulate the economy. In addition, lowering the discount rate (the interest rate the Fed charges for short-term loans to banks) would reduce the cost of borrowing by banks, thus increasing their ability to make loans for consumption and investment purposes.

Question 7

The Federal Reserve System seeks to achieve national economic objectives through its exercise of

Fiscal Policy Y/N
Monetary Policy Y/N

Answer 7

Fiscal Policy N
Monetary Policy Y

The Federal Reserve System (the Fed) seeks to achieve national economic objectives through its exercise of monetary policy, that is, through its control of the money supply. The Fed does not establish or implement fiscal policy. Fiscal policy is established primarily by the U.S. Congress, through its control of the level of government spending and the tax system (rate, etc.).

Question 8

Which of the following Federal Reserve policies would increase money supply?
	A. 	Change the multiplier effect.
	B. 	Increase the reserve requirement.
	C. 	Reduce the discount rate.
	D. 	Sell more U.S. Treasury bonds.

Answer 8

C. Reduce the discount rate.

A reduction in the discount rate would increase the money supply. The discount rate is the interest rate banks pay when borrowing from a Federal Reserve Bank (the “Fed”). By reducing the discount rate, the cost of borrowing is reduced and banks increase lending, which increases the money supply.

Question 9

The Multiplier Effect

Answer 9

The multiplier effect, or the spending multiplier, is the economic concept that an increase in spending by the government (or other segment of the economy) will create aggregate spending and increase national income by an amount greater than the initial spending.