University of San Carlos - Main Campus

ACCTG 509

Chapter 4

True/False Questions

1)Federal Reserve interest rate decisions can be vetoed by the U.S. President or the Congress.

2. The FOMC is responsible for supervising and regulating depository institutions and foreign exchange traders.

3. Four seats on the FOMC are allocated to Federal Reserve Bank presidents on an annual rotating basis.

4.  The discount rate is usually set about 50 basis points above the target Fed Funds rate.

5. There are 10 Federal Reserve Districts throughout the U.S., each one headed by a Federal Reserve Bank.

1. 1. 1. The major asset of the Federal Reserve is currency outside banks, and the major liability is U.S. Treasury securities.

1. 1. 2. All nationally charted banks are required to join the Federal Reserve System, state chartered banks may choose to join the Federal Reserve or not.

1. 1. 3. Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate for a non-renewable 14 year term.

1. 1. 4. If the FOMC wished to generate faster economic growth, they could issue a policy directive to the Federal Reserve Board Trading desk to purchase U.S. government securities.

1. 1. 5. Open market operations are the purchase and sale of U.S. government and federal agency securities.

Multiple Choice Questions

1. 1. 6. The primary policy tool used by the Fed to meet its monetary policy goals is:

1. 1. 1. 1. Changing the discount rate
         2. Changing reserve requirements
         3. Devaluing the currency  

1. 1. 7. The Federal Reserve System is charged with
         1. Regulating securities exchanges
         2. Conducting monetary policy
         3. Providing payment and other services to  

1. 1. 1. 4. Changing bank regulations
         5. Open market operations

a variety of institutions

4. Setting bank prime rates
5. Both B and C

1. 1. 8. The                                           is a nationwide network that electronically process credit and debit transfers of funds.

1. 1. 1. 1. Fedwire
         2. ACH

1. 1. 1. 3. CHIPS
         4. NASDAQ

1. 1. 1. 5. SWIFT

1. 1. 9. The                                      is a network linking over 6000 banks with the Federal Reserve that is used to transfer deposits and make loan payments between participants.

1. 1. 1. 1. Fedwire
         2. ACH

1. 1. 1. 3. CHIPS
         4. NASDAQ

1. 1. 1. 5. SWIFT

1. 1. 10. Ceteris paribus, if the Fed was targeting the quantity of money supplied and money demand dropped the Fed would likely                 . If the Fed was instead targeting interest rates and money demand dropped the Fed would likely                              .

1. 1. 1. 1. increase the money supply, do nothing.
         2. do nothing, decrease the money supply.
         3. decrease the money supply, do nothing.  

1. 1. 1. 4. do nothing, increase the money supply.
         5. increase the money supply, decrease the money supply.

1. 1. 11. Which of the following is the major monetary policy making body of the U.S. FRS?

1. 1. 1. 1. FOMC
         2. OCC

1. 1. 1. 3. FRB bank presidents

1. 1. 1. 4. U.S. Congress
         5. Group of ten

1. 1. 12. The major liability of the Federal Reserve is
          1. U.S. Treasury securities
          2. Depository institution reserves
          3. Currency outside banks

1. 1. 13. The major asset of the Federal Reserve is
          1. U.S. Treasury securities
          2. Depository institution reserves
          3. Currency outside banks

1. 1. 1. 4. Vault cash of commercial banks
         5. Gold and foreign exchange

4. Vault cash of commercial banks
5. Gold and foreign exchange

1. 1. 14. Given the current economic conditions in Japan, the Bank of Japan is likely to engage in

1. 1. 1. 1. Contractionary monetary policy
         2. Expansionsary monetary policy
         3. Zero inflation monetary policy  

1. 1. 1. 4. Fiscal spending to improve the economy
         5. Cutting the government budget deficit.

Response: The answer to this question may change as Japanese economic conditions change.

1. 1. 15. The fed funds rate is the rate that
          1. Banks charge for loans to corporate customers
          2. Banks charge to lend foreign exchange to customers
          3. The Federal Reserve charges on emergency loans to commercial banks
          4. Banks charge each other on loans of excess reserves
          5. Banks charge securities dealers to finance their inventory  

1. 1. 16. The discount rate is the rate that
          1. Banks charge for loans to corporate customers
          2. Banks charge to lend foreign exchange to customers
          3. Banks charge each other on loans of excess reserves
          4. Banks charge securities dealers to finance their inventory
          5. The Federal Reserve charges on loans to commercial banks  

1. 1. 17. The Fed has traditionally offered three types of discount window loans.                        credit is offered to small

institutions with demonstrable patterns of financing needs,                      credit is offered for short term temporary funds outflows, and                                                        credit may be offered to institutions with more severe liquidity problems.

1. 1. 1. 1. Seasonal; extended; adjustment
         2. Extended; adjustment; seasonal
         3. Adjustment; extended; seasonal  

1. 1. 18. Federal Reserve discount window loans must be                    .
          1. Fully collateralized
          2. Over collateralized

1. 1. 19. A decrease in reserve requirements could lead to a(n)
          1. Increase in bank lending
          2. Increase in the money supply
          3. An increase in the discount rate  

1. 1. 1. 4. Adjustment; seasonal; extended
         5. Seasonal; adjustment; extended

3. Partially collateralized
4. Uncollateralized

4. Both A and B
5. Both A and C

1. 1. 20. Bank A has an increase in deposits of $10 million dollars and reserve requirements are 10%. Bank A loans out 90% of the increase. This amount winds up deposited in Bank B. Bank B lends out 90%, and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?

1. 1. 1. 1. $10.00 million
         2. $19.00 million

1. 1. 1. 3. $22.33 million
         4. $27.10 million

1. 1. 1. 5. $30.00 million

1. 1. 21. The Fed changes reserve requirements from 10% to 8%, thereby creating $450 million in excess reserves. The total change in deposits (with no drains) would be

1. 1. 1. 1. $486 million
         2. $5.625 billion

1. 1. 1. 3. $0.489 billion
         4. $3.795 billion

1. 1. 1. 5. None of the above

0. 1. 22. If the Fed wishes to stimulate the economy it could
1. Buy U.S. government securities
2. Raise the discount rate
3. Lower reserve requirements

1. I and III only
2. II and III only

3. I and II only
4. II only

5. I, II and III

1. 1. 23. Currently the Fed sets monetary policy by targeting
          1. The Fed funds rate
          2. The prime rate
          3. The level of nonborrowed reserves  

1. 1. 1. 4. The level of borrowed reserves
         5. The stock market

1. 1. 24. If the Federal Reserve were to buy dollars by selling yen the result would be to                         the supply of U.S.

dollars and                  the exchange rate in terms of the number of yen per U.S. dollar.

1. 1. 1. 1. Increase, lower
         2. Increase, raise

1. 1. 1. 3. Decrease, lower
         4. Decrease; raise

1. 1. 25. From October 1983 to July 1993 the Federal Reserve targeted

1. 1. 1. 1. Fed funds rate
         2. Borrowed reserves

1. 1. 1. 3. Nonborrowed reserves

1. 1. 1. 4. M1
         5. M3