Module 27 Practice Set 1

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. All of the following are responsibilities of the Fed EXCEPT:

A. control the monetary base.
B. set the reserve requirement.
C. oversee and regulate the banking system.
D. set the discount rate.
E. mint bills and coins.
____ 2. The major tools of monetary policy available to the Federal Reserve System include:
A. reserve requirements, margin regulations, and moral suasion.
B. reserve requirements, open-market operations, and the discount rate.
C. open-market operations, margin regulations, and moral suasion.
D. the discount rate, margin regulations, and moral suasion.
E. tax collections, open-market operations and the discount rate.
____ 3. The tool of monetary policy that involves the Fed's buying and selling of government bonds is:
A. moral suasion.
B. reserve requirements.
C. the discount rate.
D. open-market operations.
E. setting government transfer payments.
____ 4. If the Fed increases the discount rate:
A. the money supply is likely to decrease.
B. the money supply is likely to increase.
C. the money supply is not likely to change.
D. the federal funds rate must decrease.
E. nominal interest rates will fall.
____ 5. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to
the:
A. other member banks and borrow at the federal funds rate.
B. Federal Reserve and borrow at the discount rate.
C. open market and borrow money there.
D. Congress to borrow funds.
E. Federal Reserve and borrow at the prime rate.
____ 6. Which of the following actions would allow banks to lend out more money?
A. an increase in the required reserve ratio
B. a decrease in the discount rate
C. an increase in the federal funds rate
D. an increase in the required reserve ratio coupled with an increase in the federal funds rate
E. an open market sale of Treasury securities.
____ 7. The Fed's main assets are:
A. currency in circulation and bank reserves.
B. the facilities of the twelve district banks.
C. corporate stocks and bonds.
 D. U.S. Treasury bills.
E. checking deposits.
____ 8. The Fed's main liabilities are:
A. currency and bank reserves.
B. the facilities of the twelve district banks.
C. corporate stocks and bonds.
D. U.S. Treasury bills.
E. loans to member banks.
____ 9. To _______ the money supply, the Fed could ________.
A. increase; lower the reserve requirements
B. decrease; lower the discount rate
C. increase; raise the federal funds rate
D. decrease; conduct open-market purchases
E. increase; lower income taxes.
____ 10. To change the money supply, the Fed most frequently uses:
A. changes in the required reserve ratios.
B. changes in the discount rate.
C. open-market operations.
D. changes in the inflation rate.
E. moral suasion.
____ 11. If the Fed conducts an open-market purchase:
A. bank reserves decrease and the money supply decreases.
B. bank reserves increase and the money supply increases.
C. bank reserves decrease and the money supply increases.
D. bank reserves increase and the money supply decreases.
E. bank reserves increase and the money supply does not change.
____ 12. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base
will:
A. increase by $10 million.
B. increase by $8 million.
C. decrease by $10 million.
D. decrease by $50 million.
E. increase by $50 million.
____ 13. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change
in the money supply is:
A. an increase of $10 million.
B. a decrease of $10 million.
C. a decrease of $8 million.
D. a decrease of $50 million.
E. an increase of $50 million.
____ 14. When the Fed decreases bank's reserves through an open-market operation:
A. deposits increase, currency in circulation increases, and the monetary base remains the
same.
B. the monetary base decreases, the money multiplier decreases, and the money supply
increases.
C. loans increase, the federal funds rate rises, and the discount rate rises.
 D. the monetary base decreases, loans decrease, and the money supply decreases.
E. the monetary base decreases, loans decrease, and the money multiplier decreases.
____ 15. Suppose that the reserve ratio is 10% when the Fed buys $100,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the
money supply.
A. $666,667
B. $111,111
C. $250,000
D. $1,000,000
E. $900,000
____ 16. If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the
monetary base, the Fed would likely:
A. increase the discount rate.
B. increase the federal funds rate.
C. increase the reserve requirement.
D. sell U.S. Treasury bills in an open market operation.
E. increase the tax on investment spending.
____ 17. If the reserve ratio is 25%, and the money supply increases by $100,000. The initial reserve injection by
Federal Reserve was:
A. $2500.
B. $10,000.
C. $4000.
D. $25,000.
E. $100,000.
____ 18. Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a result the money supply falls by
$5,000. The reserve ratio is:
A. 100.
B. 10.
C. 0.1.
D. 0.5.
E. 0.25
____ 19. When a bank borrows from the Federal Reserve, it pays the:
A. required reserve ratio.
B. discount rate.
C. federal funds rate.
D. prime rate.
E. mortgage rate.
____ 20. If the Federal Reserve wanted to increase the money supply, it could:
A. decrease the required reserve ratio, increase the federal funds rate, sell bonds on the open
market.
B. decrease the required reserve ratio, decrease the discount rate, buy bonds on the open
market.
C. increase the required reserve ratio, increase the personal tax rate, and sell bonds on the
open market.
D. increase the personal tax rate, decrease the required reserve ratio, and buy bonds on the
open market.
E. decrease the personal tax rate, decrease the required reserve ratio, and buy bonds on the
open market.
Module 27 Practice Set 1
Answer Section

MULTIPLE CHOICE

1. ANS: E PTS: 1 DIF: M REF: Module 27

SKL: Fact-Based
2. ANS: B PTS: 1 DIF: E REF: Module 27
SKL: Fact-Based
3. ANS: D PTS: 1 DIF: E REF: Module 27
SKL: Definitional
4. ANS: A PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
5. ANS: A PTS: 1 DIF: E REF: Module 27
SKL: Fact-Based
6. ANS: B PTS: 1 DIF: E REF: Module 27
SKL: Critical Thinking
7. ANS: D PTS: 1 DIF: E REF: Module 27
SKL: Fact-Based
8. ANS: A PTS: 1 DIF: E REF: Module 27
SKL: Fact-Based
9. ANS: A PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
10. ANS: C PTS: 1 DIF: M REF: Module 27
SKL: Fact-Based
11. ANS: B PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
12. ANS: C PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
13. ANS: D PTS: 1 DIF: M REF: Module 27
SKL: Analytical Thinking
14. ANS: D PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
15. ANS: D PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
16. ANS: A PTS: 1 DIF: M REF: Module 27
SKL: Critical Thinking
17. ANS: D PTS: 1 DIF: D REF: Module 27
SKL: Analytical Thinking
18. ANS: C PTS: 1 DIF: D REF: Module 27
SKL: Analytical Thinking
19. ANS: B PTS: 1 DIF: E REF: Module 27
SKL: Fact-Based
20. ANS: B PTS: 1 DIF: M REF: Module 27
SKL: Concept-Based