Federal Reserve questions and answers

Question: If the Fed sets the reserve requirement at 4 percent, the Oversimplified Money Multiplier would be equal to

Answer Options:
A. 40
B. None of the other answers is correct
C. 0.25
D. 4
E. 2.5

Answer: B

Question: If the Fed lowers the reserve requirement, which of the following is unlikely to occur?

Answer Options:
A. Banks will make more loans
B. The Oversimplified Money Multiplier will increase
C. Excess reserves will increase
D. The Fed Funds Rate will rise

Answer: D

Question: Which of the following explains why we say that a loan by a bank increases the money supply?

Answer Options:
A. Loans create assets without creating liabilities
B. Loans create new purchasing power
C. Loans are backed by the FDIC
D. Loans are repaid with interest and this interest increases the money supply

Answer: B

Question: In terms of our political structure, the Fed is

Answer Options:
A. a quasi-independent governmental entity
B. part of the judicial branch of government
C. part of the executive branch of government
D. part of the legislation branch of government

Answer: A

Question: The FOMC

Answer Options:
A. sets the Discount Rate
B. directs open market operations
C. controls check clearing
D. handles deposit insurance

Answer: B

Question: Which of the following does the Federal Reserve most directly adjust using open market operations?

Answer Options:
A. The Open Rate
B. The Fed Funds Rate
C. The Prime Rate
D. The Discount Rate

Answer: B

Question: If the Fed conducts open market operations and sells bonds to bank, which of the following will occur?

Answer Options:
A. The bank’s ability to lend will increase
B. The bank’s Liabilities will increase
C. The bank’s assets will increase
D. The bank’s reserves will decrease

Answer: D

Question: If the Oversimplified Money Multiplier is 8, how large is the reserve requirement?

Answer Options:
A. 80%
B. None of the other answers is correct
C. 12.5%
D. 0.125%
E. 8%

Answer: C

Question: If the Fed wanted to conduct an expansionary monetary policy, which of the following set of actions would be most consistent with that goal?

Answer Options:
A. raise the discount rate, raise the reserve requirement, buy government securities
B. raise the discount rate, lower the reserve requirement, buy government securities
C. lower the reserve requirement, lower the discount rate, sell government securities
D. lower the reserve requirement, lower the discount rate, buy government securities

Answer: D