Unit 13 Quiz Deck

Question 1

The best characterization of how economists view the money supply is

A) paper money and coinage only.

B) savings and checking accounts and all lines of credit but not paper money or coins.

C) all forms of cash and liquid instruments but no forms of credit.

D) cash, loans, different forms of credit, and other liquid instruments.

Answer 1

D) cash, loans, different forms of credit, and other liquid instruments.

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.

Question 2

To contract the overall economy, the Federal Reserve Board (FRB), acting as agent for the U.S. Treasury department, will

A) sell securities via open-market operations, pushing interest rates down.

B) sell securities via open-market operations, pushing interest rates up.

C) buy securities via open-market operations, pushing interest rates down.

D) buy securities via open-market operations, pushing interest rates up.

Answer 2

B) sell securities via open-market operations, pushing interest rates up.

To contract the overall economy, we want to push interest rates up by decreasing the money supply. Higher interest rates make borrowing and spending more difficult for consumers. To decrease the money supply, the Federal Reserve Board (FRB) will sell securities via open-market operations, putting securities into the banking system and taking money out of the banking system.

Question 3

Which of the following is the rate of interest charged by the Federal Reserve Bank (FRB) for short-term loans to its member banks?

A) The broker call loan rate
B) The prime rate
C) The discount rate
D) The federal funds rate

Answer 3

C) The discount rate

The discount rate is the rate the Federal Reserve charges for short-term loans to member banks.

Question 4

Considered the most volatile of the benchmark interest rates in the economy would be

A)the federal funds rate.
B)the broker call loan rate.
C)the prime rate.
D)the discount rate.

Answer 4

A) the federal funds rate.

The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.

Question 5

Match the following statement to the best expression: A well-controlled, moderately increasing money supply leads to price stability and a healthy economy.

A) Monetarist Theory
B) Keynesian Theory
C) Socialism
D) Balance of payments

Answer 5

A) Monetarist Theory

Monetarists judge that a well-controlled, moderately increasing money supply leads to price stability. Price stability allows business managers (considered to be more efficient allocators of resources than the government) to plan and invest, which in turn keeps the economy healthy.

Question 6

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 offset the lower prime rate by increasing the broker call loan rate.

B) Smaller banks will lower lending rates for creditworthy corporate customers as well.

C) Smaller banks will follow by lowering the discount rate.

D) Smaller banks will need to increase their lending rates for creditworthy corporate customers.

Answer 6

B) Smaller banks will lower lending rates for creditworthy corporate customers as well.

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).

Question 7

The Federal Reserve Board (FRB) might impact the money supply by using all of the following except

A) prime rate.
B) discount rate.
C) buying or selling securities in open market.
D) reserve requirements for member banks.

Answer 7

A) prime rate.

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.

Question 8

According to economists which of the following is the correct characterization of the money supply?

A) M1 includes all of M2 and M3.
B) M1 plus M2 equals M3.
C) M2 equals M1 plus M3.
D) M3 includes all of M1 and M2.

Answer 8

D) M3 includes all of M1 and M2

M3 includes all of M1 and M2, plus time deposits of more than $100,000 and repurchase agreements with terms longer than one day. In this light, M3 is that measure of the money supply that is the most inclusive.

Question 9

When the demand for money exceeds the supply,

A) interest rates rise, making consumer borrowing more difficult.

B) interest rates rise, making consumer borrowing easier.

C) interest rates fall, making consumer borrowing more difficult.

D) interest rates fall, making consumer borrowing easier.

Answer 9

A) interest rates rise, making consumer borrowing more difficult.

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.

Question 10

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 Internal Revenue Service (IRS)

B) The Federal Open Market Committee (FOMC)

C) The National Securities Clearing Corporation (NSCC)

D) The Securities and Exchange Commission (SEC)

Answer 10

B) The Federal Open Market Committee (FOMC)

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.

Question 11

The rate that commercial money center banks charge each other for overnight loans is

A) the broker call loan rate.
B) the discount rate.
C) the prime rate.
D) the federal funds rate.

Answer 11

D) the federal funds rate.

The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.

Question 12

When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this will do which of the following?

A) Decrease interest rates on loans to consumers
B) Have no impact on lending rates to consumers
C) Loosen the money supply
D) Increase interest rates on loans to consumers

Answer 12

D) Increase interest rates on loans to consumers

When the FOMC directs that Treasury securities be sold in the open market, this will tighten the money supply; securities go into the economy, and money comes out of the economy. Less money available increases interest rates to consumers.

Question 13

Which of the following has the greatest influence on the money supply within the United States?

A) The Internal Revenue Service (IRS)
B) The Depository Trust Corporation (DTC)
C) The Federal Open Market Committee (FOMC)
D) The Securities Exchange Commission (SEC)

Answer 13

C) The Federal Open Market Committee (FOMC)

The Federal Reserve Board (FRB) influences the money supply by buying and selling U.S. government securities in the open market which expand or contract the money supply. The Federal Open Market Committee (FOMC) consists of the Board of Governors of the Federal Reserve System and several Reserve Bank presidents. The committee meets regularly to direct the government’s open-market operations. For example, when the FOMC directs the purchase of securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply.

Question 14

The cost of doing business is closely linked to the cost of money, which is known as

A) supply.
B) demand.
C) interest.
D) M1.

Answer 14

C) interest.

The cost of doing business is closely linked to the cost of money; the cost of money is called interest. In large measure, the supply and demand of money determines the rate of interest that must be paid to borrow it.

Question 15

The Federal Reserve sets which of these rates?

A) Prime
B) Discount
C) Broker call
D) Federal funds

Answer 15

B) Discount

Only the discount rate is set by the Fed. The others are set by the banks.

Question 16

Which of the following would be the interest rate charged for overnight, uncollateralized loans negotiated between two money center banks?

A) Prime rate
B) Federal funds rate
C) Repo rate
D) Discount rate

Answer 16

B) Federal funds rate

The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured loan. It is considered a barometer of the direction of short-term interest rates such as commercial paper and Treasury bills, which often move up or down roughly in parallel with the funds rate.

Question 17

The Federal Reserve could use which of the following to stimulate the economy?

A) Lower taxes
B) Raise the federal funds rate
C) Buy Treasury securities from banks
D) Increase government spending

Answer 17

C) Buy Treasury securities from banks

Taxation and government spending are tools of the president and congress. Changing the federal funds rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising rates slows down the economy.

Question 18

When the Federal Reserve Board (FRB) utilizes the tools available to it, it is influencing

A) fiscal policies.
B) the federal budget.
C) the amount of money raised through taxes.
D) the money supply.

Answer 18

D) the money supply.

Through the use of open-market operations, affecting changes in the discount rate, and setting reserve requirements, the FRB is influencing the money supply. The money supply is the capital available for lending institutions to lend and thus consumers to borrow and spend.

Question 19

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) Gold and silver bars held on reserve at the FR
D) All currency in circulation, including coins

Answer 19

A) $100,000 and larger time deposits and repurchase agreements

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.

Question 20

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) slightly above (a percentage point or so) other short-term lending rates.

C) slightly below (a percentage point or so) other short-term lending rates.

D) notably above (several percentage points) other short-term lending rates.

Answer 20

B) slightly above (a percentage point or so) other short-term lending rates.

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.

Question 21

For those who follow monetary theory, which is the most complete measure of the money supply?

A) M3
B) M1 + M2
C) M2
D) M1

Answer 21

A) M3

M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day.

Question 22

To tighten its monetary policy, making it more difficult for consumers to borrow money, the Federal Reserve Board (FRB) can

A) lower the federal funds rate.
B) raise the federal funds rate.
C) raise the discount rate.
D) lower the discount rate.

Answer 22

C) raise the discount rate.

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.

Question 23

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) Increase interest rates on loans to consumers
D) Have no impact on lending rates to consumers

Answer 23

A) Lower interest rates on loans to consumers

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.

Question 24

Where can demand deposits, checking accounts, paper currency and coins be found in the money supply?

A) M1 and M3 only
B) M1, M2, and M3
C) M1 only
D) M2 only

Answer 24

B) M1, M2, and M3

Demand deposits, checking accounts, paper currency, and coins are a part of M1 in the money supply. However, consider that M2 contains all of M1, and M3 contains all of M2 and M1; therefore, one should recognize that these components are found in each of them: M1, M2, and M3,

Question 25

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) M4.
B) M2.
C) M1.
D) M3.

Answer 25

B) M2.

M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.

Question 26

A barometer of short-term interest rates and one that is therefore considered the most volatile interest rate in the U.S. economy is

A) the federal funds rate.
B) the discount rate.
C) the prime rate.
D) the broker call loan rate.

Answer 26

A) the federal funds rate.

The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more. A barometer of the direction of short-term interest rates, which fluctuate constantly, the federal funds rate is considered the most volatile rate in the U.S. economy.

Question 27

A bank is likely to do which of the following when the Federal Reserve Board (FRB) eases the money supply?

A) Raise its prime rate
B) Lower its prime rate
C) Lower the hypothecation loan rate
D) Raise its broker call loan rate

Answer 27

B) Lower its prime rate

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 eases the money supply (makes more money available to lend), banks can charge less for loans and will lower 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.

Question 28

A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following?

A) The discount rate
B) The prime rate
C) The broker call loan rate
D) The federal funds rate

Answer 28

C) The broker call loan rate

The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.

Question 29

To expand the overall economy, the Federal Reserve Board (FRB), acting as agent for the U.S. Treasury department, will

A) sell securities via open-market operations, pushing interest rates down.

B) sell securities via open-market operations, pushing interest rates up.

C) buy securities via open-market operations, pushing interest rates down.

D) buy securities via open-market operations, pushing interest rates up.

Answer 29

C) buy securities via open-market operations, pushing interest rates down.

To expand the overall economy, we want to push interest rates down by increasing the money supply. Lower interest rates make borrowing and spending easier for consumers. To increase the money supply, the FRB will buy securities via open-market operations, taking securities out of the banking system and putting money into the banking system.

Question 30

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

Answer 30

A) M3

M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.

Question 31

To prevent inflation by tightening the availability of credit, the Federal Reserve Board (FRB) would do any of the following except

A) sell U.S. government securities in open-market operations.

B) raise the discount rate.

C) lower the prime rate.

D) raise the reserve requirement.

Answer 31

C) lower the prime rate.

To slow the economy in an attempt to prevent inflation by tightening the availability of credit (less money available, which raises interest rates), the FRB can sell U.S. government securities in open-market operations, raise the discount rate, and raise the reserve requirement. The prime rate is set by banks not the FRB.

Question 32

Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)?

A) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.

B) By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.

C) By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.

D) By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.

Answer 32

A) By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.

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.

Question 33

When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this

A) stabilizes the money supply.
B) decreases the money supply.
C) increases the supply of money.
D) is intended to hinder contraction of the money supply.

Answer 33

C) increases the supply of money.

When the FOMC directs that Treasury securities be purchased in the open market, this increases the supply of money. Treasury securities are coming out of the economy and, therefore, money is going in—the money supply increases.

Question 34

Which benchmark interest rate indicates the direction of the Federal Reserve Board’s monetary policy?

A) The federal funds rate
B) The prime rate
C) The discount rate
D) The broker call loan rate

Answer 34

C) The discount rate

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.

Question 35

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 discount rate.

C) another FRB member bank at the prime rate.

D) the Federal Reserve Board (FRB) at the federal funds rate.

Answer 35

A) the Federal Reserve Board (FRB) at the discount rate.

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.

Question 36

The Federal Reserve’s dual mandate includes which of these?

I. Maintaining maximum employment
II. Enforcement of price controls
III. Control the value of the dollar versus other currencies
IV. Price stability

A) I and II
B) III and IV
C) II and III
D) I and IV

Answer 36

D) I and IV

The dual mandate is to maintain maximum employment while keeping inflation in check (price stability). They do not enforce price controls. They may takes steps to manage the value of the dollar, but this is not a part of the dual mandate.

Question 37

The Federal Reserve pursues its dual mandate through

A) fiscal policy.
B) monetary policy.
C) trade policy.
D) economic policy.

Answer 37

B) monetary policy.

The Federal Reserve is tasked with using monetary policy to manage the economy. Fiscal policy—taxation and spending—is managed by the legislative and the executive branch. Trade policy is driven primarily by the executive branch, and all of this is part of economic policy.

Question 38

Which of these is not a tool used by the Federal Reserve Board (FRB) to impact the money supply?

A) Open market operations of the FOMC
B)Changing the reserve requirements
C) Changing the prime rate
D) Changing the discount rate

Answer 38

C) Changing the prime rate

The prime rate is set by money-center banks, not the FRB. The remaining answer choices are the tools available to the FRB, which affects the money supply.

Question 39

Seacoast Securities, a FINRA member firm and a large corporation, needs to secure funds to cover customers’ margin purchases. Seacoast reaches an agreement to borrow from a large money-center bank for a loan that the bank can terminate with 24 hours’ notice. The rate that the bank charges Seacoast for this loans is called

A) the discount rate.
B) the federal funds rate.
C) the prime rate.
D) the broker call loan rate.

Answer 39

D) the broker call loan rate.

A broker-dealer borrows funds to use in margin purchases at the broker call loan rate, and these loans may be called with a one-day notice. The use of the funds classifies this as a broker call loan. Seacoast may borrow for other purposes at the prime rate, but not for this activity.

Question 40

First Amalgamated Bank of Buffalo, a large commercial bank, is a member of the Federal Reserve System. Should the bank need to increase its reserves, it could do which of these?

I. Borrow from the FRB and pay the discount rate.

II. Borrow from the FRB and pay the federal funds rate.

III. Borrow from another member bank and pay the discount rate.

IV. Borrow from another member bank and pay the federal funds rate.

A) II and III
B) I and IV
C) II and IV
D) I and III

Answer 40

B) I and IV

When a bank needs to borrow money to increase its reserves, it can borrow from the Federal Reserve Bank or it can borrow from another member bank like itself. When borrowing from the FRB, the banks pay the discount rate. When borrowing from another member bank, the banks pay the federal funds rate

Question 41

M1 is a measure of the value of

A) cash and funds held in DDAs.
B) cash, cash equivalents, and DDAs.
C) M2 plus retail CDs and money markets.
D) retail CDs and money markets.

Answer 41

A) cash and funds held in DDAs.

M1 is the tightest of the money supply measures, including only actual cash in circulation and funds in demand deposit accounts (DDAs) (e.g., checking and savings accounts).

Question 42

The Federal Reserve is concerned that the economy is slowing. With this in mind, which of these actions would the Federal Reserve most likely engage in?

A) Raise the margin requirements under Regulation T

B) Pursue an easy-money policy to lower interest rates

C) Double the reserve requirements for member banks

D) Engage in open market sales of T-bills

Answer 42

B) Pursue an easy-money policy to lower interest rates

Monetary policy is implemented by the FRB. Monetary policy attempts to control the supply of money to influence the level of interest rates which, in turn, will either stimulate or dampen the U.S. economy. If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to lower interest rates by pursuing an easy-money policy. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising margin rates or reserve requirements is considered a tightening action, which will dampen economic activity. Selling T-bills will reduce the money supply and raise rates, which is also a tightening action.

Question 43

Of the standard Federal Reserve tools, which of these is considered the most powerful and used infrequently?

A) Quantitative easing
B) Discount rate
C) FOMC activities
D) Reserve rate

Answer 43

D) Reserve rate

The reserve rate (i.e., the amount member banks keep on deposit at the Federal Reserve for liquidity) has the most dramatic impact when changed. It is rarely changed.

Question 44

Under the dual mandate, the Federal Reserve is most concerned with achieving

A) federal spending and debt.
B) maximum employment and managing taxation.
C) maximum employment and controlling inflation.
D) minimum unemployment and maximum money supply.

Answer 44

C) maximum employment and controlling inflation.

The dual mandate is designed to give this independent government agency two goals: maintain a healthy economy that supplies jobs enough for job seekers and keep prices from fluctuating aggressively. Some inflation is considered healthy. The Federal Reserve has inflation and unemployment targets.

Question 45

Which of these does M2 measure?

I. M1
II. M3
III. Term repos and jumbo CDs
IV. Retail CDs and money markets

A) II and III
B) I and IV
C) I and III
D) II and IV

Answer 45

B) I and IV

M1 is a component of M2 and adds retail CDs and money markets. M2 is a component of M3, plus term repos and jumbo CDs.

Question 46

It is generally agreed upon that the most volatile interest rate in the U.S. economy is

A) the federal funds rate.
B) the prime rate.
C) the call money rate.
D) the discount rate.

Answer 46

A) the federal funds rate.

The federal funds rate is the rate the commercial-money-center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly. Therefore, the federal funds rate can be considered the most volatile rate in the economy.