UNIT 13 QBANK Flashcards
When the supply for money exceeds the demand,
A) interest rates fall, making consumer borrowing more difficult.
B) interest rates rise, making consumer borrowing more difficult.
C) interest rates fall, making consumer borrowing easier.
D) interest rates rise, making consumer borrowing easier.
C) interest rates fall, making consumer borrowing easier.
Explanation
Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the supply is greater than the demand for money, interest rates fall, making consumer borrowing easier.
Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)?
A) By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.
B) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
C) By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
D) By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.
B) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
Explanation
When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.
Federal Reserve member banks needing to borrow money can borrow from
A) the Federal Reserve Bank at the federal funds rate.
B) member firms at the discount rate.
C) the Federal Reserve Bank at the discount rate.
D) nonmember banks at the federal funds rate.
C) the Federal Reserve Bank at the discount rate.
Explanation
Federal Reserve member banks needing to borrow have two resources: the Federal Reserve Bank itself, which will lend to them at the discount rate, and other member banks, who will lend to one another at the federal funds rate.
The Federal Reserve Board (FRB) might impact the money supply by using all of the following except
A) buying or selling securities in open market.
B) discount rate.
C) reserve requirements for member banks.
D) prime rate.
D) prime rate.
Explanation
The prime rate is set by money center banks, not the FRB. The remaining three answer choices are the tools available to the FRB to be used to impact the money supply.
A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from
A) the Federal Reserve Board (FRB) at the discount rate.
B) another FRB member bank at the prime rate.
C) the Federal Reserve Board (FRB) at the federal funds rate.
D) another FRB member bank at the discount rate.
A) the Federal Reserve Board (FRB) at the discount rate.
Explanation
A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.
Money available to lend to corporations and consumers is impacted most in the United States by the policies of which of the following?
A) The Federal Open Market Committee (FOMC)
B) The Securities and Exchange Commission (SEC)
C) The National Securities Clearing Corporation (NSCC)
D) The Internal Revenue Service (IRS)
A) The Federal Open Market Committee (FOMC)
Explanation
The FOMC meets regularly to direct the Federal Reserve Board (FRB) to either buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful.
Certain actions taken by the Federal Reserve Board (FRB) would likely have the effect of causing interest rates to increase. Which would these be?
I. The Federal Open Market Committee (FOMC) buying securities
II. Raising the reserve requirements
III. Raising the discount rate
IV. Raising the prime rate
A) I and IV
B) II and IV
C) I and III
D) II and III
D) II and III
II. Raising the reserve requirements
III. Raising the discount rate
Explanation
Raising reserve requirements, having more member deposits being held on reserve at the Fed, would lessen the money available to lend. Raising the discount rate, charging member banks more for loans, would also lessen the money available to lend. With less money available to lend, interest rates would go up.
Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans?
A) Broker call loan rate
B) Prime rate
C) Discount rate
D) Federal funds rate
B) Prime rate
Explanation
Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans.
Which of the following entities is chiefly responsible to conduct U.S. monetary policy and maintain the stability of the financial system?
A) New York Stock Exchange (NYSE)
B) The Federal Reserve Board (FRB)
C) Internal Revenue Service (IRS)
D) Securities and Exchange Commission (SEC)
B) The Federal Reserve Board (FRB)
Explanation
The Federal Reserve is the central bank of the United States, and a special committee within the Federal Reserve System known as the Federal Open Market Committee (FOMC) sets monetary policy.
The interest rate negotiated for an uncollateralized overnight loan between two money center banks is known as
A) the discount rate.
B) the repo rate.
C) the prime rate.
D) the federal funds rate.
D) the federal funds rate.
Explanation
The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured (no collateral) loan.
The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically
A) notably below (several percentage points) other short-term lending rates.
B) notably above (several percentage points) other short-term lending rates.
C) slightly above (a percentage point or so) other short-term lending rates.
D) slightly below (a percentage point or so) other short-term lending rates.
C) slightly above (a percentage point or so) other short-term lending rates.
Explanation
The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates.
Which of the following benchmark interest rates is considered a barometer of the direction of short-term interest rates?
A) Discount rate
B) Federal funds rate
C) Broker call loan rate
D) Prime rate
B) Federal funds rate
Explanation
The federal funds rate is the rate that commercial money center banks charge each other for overnight loans of $1 million or more. Overnight, representing the shortest of loans, makes this rate a good indicator of the direction short-term interest rates are taking.
The best characterization of how economists view the money supply is
A) savings and checking accounts and all lines of credit but not paper money or coins.
B) paper money and coinage only.
C) all forms of cash and liquid instruments but no forms of credit.
D) cash, loans, different forms of credit, and other liquid instruments.
D) cash, loans, different forms of credit, and other liquid instruments.
Explanation
Economists take a broad view of the money supply and include within it all cash (paper money and coins), loans, credit, and other liquid instruments, such as savings and checking accounts.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this will do which of the following?
A) Lower interest rates on loans to consumers
B) Tighten the money supply
C) Have no impact on lending rates to consumers
D) Increase interest rates on loans to consumers
A) Lower interest rates on loans to consumers
Explanation
When the FOMC directs that Treasury securities be purchased in the open market, this will loosen the money supply; securities come out of the economy and money goes in to the economy. More money available lowers interest rates to consumers.
When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates?
A) Federal funds
B) Broker call loan
C)Discount
D) Prime
B) Broker call loan
Explanation
Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).
To arrive at M3, one would add to M2 which of the following?
A) $100,000 and larger time deposits and repurchase agreements
B) Savings and checking accounts
C) All currency in circulation, including coins
D) Gold and silver bars held on reserve at the FR
A) $100,000 and larger time deposits and repurchase agreements
Explanation
Included in M3 but not found in M2 are time deposits of more than $100,000 and repurchase agreements with terms longer than one day.
Which benchmark interest rate indicates the direction of the Federal Reserve Board’s monetary policy?
A) The broker call loan rate
B) The federal funds rate
C) The prime rate
D) The discount rate
D) The discount rate
Explanation
The discount rate, being the rate the Federal Reserve Bank (FRB) charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers.
A bank is likely to do which of the following when the Federal Reserve Board (FRB) tightens the money supply?
A) Lower its prime rate
B) Lower its broker call loan rate
C) Raise its prime rate
D) Raise the hypothecation loan rate
C) Raise its prime rate
Explanation
The prime rate and the broker call loan rate are set by banks for loans to corporate customers and broker-dealers, respectively. If the FRB tightens the money supply (makes less money available to lend), banks will need to charge more for loans and will raise their lending rates. The hypothecation process isn’t a rate, but a percentage amount (140% of the debit balance) and will not be impacted by the Fed’s action with the money supply.
When the Federal Reserve Board (FRB) wants to expand (loosen) the money supply, it will
A) buy corporate securities from banks in the open market.
B) buy Treasury securities from banks in the open market.
C) sell Treasury securities to banks in the open market.
D) sell corporate securities to banks in the open market.
B) buy Treasury securities from banks in the open market.
Explanation
When the FRB wants to expand (loosen) the money supply, it will buy Treasury securities from banks in the open market. The securities come out of the economy, and the money goes into the economy.
When the demand for money exceeds the supply,
A) interest rates rise, making consumer borrowing more difficult.
B) interest rates fall, making consumer borrowing easier.
C) interest rates rise, making consumer borrowing easier.
D) interest rates fall, making consumer borrowing more difficult.
A) interest rates rise, making consumer borrowing more difficult.
Explanation
Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult.
Large time deposits of more than $100,000 are considered to be found in what part of the money supply?
A) M3
B) M2
C) M1 and M2
D) M1
A) M3
Explanation
M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.
The prime rate is set by
A) the Federal Open Market Committee (FOMC).
B) the Federal Reserve Board (FRB).
C) individual banks.
D) the Securities and Exchange Commission (SEC).
C) individual banks.
Explanation
The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate.
If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur?
A) Smaller banks will need to increase their lending rates for creditworthy corporate customers.
B) Smaller banks will need to offset the lower prime rate by increasing the broker call loan rate.
C) Smaller banks will lower lending rates for creditworthy corporate customers as well.
D) Smaller banks will follow by lowering the discount rate.
C) Smaller banks will lower lending rates for creditworthy corporate customers as well.
Explanation
When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the Federal Reserve Board (FRB) (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased).
The Federal Reserve sets which of these rates?
A) Discount
B) Federal funds
C) Prime
D) Broker call
A) Discount
Explanation
Only the discount rate is set by the Fed. The others are set by the banks.
To tighten its monetary policy, making it more difficult for consumers to borrow money, the Federal Reserve Board (FRB) can
A) raise the federal funds rate.
B) lower the federal funds rate.
C) lower the discount rate.
D) raise the discount rate.
D) raise the discount rate.
Explanation
Wanting to tighten its monetary policy, which would make it harder for consumers to borrow money, the FRB can raise the discount rate—the rate it charges its member banks for short-term loans. This lessens the availability of money its member banks have to lend to consumers. The federal funds rate isn’t a rate charged by the FRB but instead by large commercial banks to one another.
Currency held by the public, including checking accounts and time deposits less than $100,000, and money market mutual funds would best be described by economists as
A) M2.
B) M3.
C) M4.
D) M1.
A) M2.
Explanation
M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.
Which of the following organizations engaging in open-market operations acts as agent for the U.S. Treasury Department?
A) Securities and Exchange Commission (SEC)
B) Federal Reserve Board (FRB)
C) Securities Investors Protection Corporation (SIPC)
D) U.S. Congress
B) Federal Reserve Board (FRB)
Explanation
Acting as an agent for the U.S. Treasury Department and under the direction of the Federal Open Market Committee (FOMC), the Federal Reserve Board (FRB) engages in open-market operations buying and selling Treasury securities: T-bills, notes, and bonds.
The Federal Reserve could do which of the following to slow the economy?
A) Increase government spending
B) Lower taxes
C) Buy Treasury securities from banks
D) Raise the discount rate
D) Raise the discount rate
Explanation
Taxation and government spending are tools of the president and congress. Changing the discount rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising rates slows down the economy. Buying treasuries injects money into the economy, speeding it up, not slowing it down.
