Quiz 13: Central Banks and the Federal Reserve System

The Economics of Money, Banking, and Financial Markets

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101
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95
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6
Essay
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Questions

Q1
Free

The most common definition that monetary policymakers use for price stability is

Multiple Choice
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A) low and stable deflation.
B) an inflation rate of zero percent.
C) high and stable inflation.
D) low and stable inflation.
Answer:
D) low and stable inflation.
Q2
Free

Price stability is desirable because

Multiple Choice
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A) inflation creates uncertainty, making it difficult to plan for the future.
B) everyone is better off when prices are stable.
C) price stability increases the profitability of the Fed.
D) it guarantees full employment.
Answer:
A) inflation creates uncertainty, making it difficult to plan for the future.
Q3
Free

Inflation results in

Multiple Choice
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A) ease of planning for the future.
B) ease of comparing prices over time.
C) lower nominal interest rates.
D) difficulty interpreting relative price movements.
Answer:
D) difficulty interpreting relative price movements.
Q4

Economists believe that countries recently suffering hyperinflation have experienced

Multiple Choice
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A) reduced growth.
B) increased growth.
C) reduced prices.
D) lower interest rates.
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Q5

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor.

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A) a nominal
B) a real
C) an operating
D) an intermediate
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Q6

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal

Multiple Choice
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A) anchor.
B) benchmark.
C) tether.
D) guideline.
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Q7

A central feature of monetary policy strategies in all countries is the use of a nominal anchor, which is a nominal variable that monetary policymakers use as an

Multiple Choice
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A) operating target, such as the federal funds interest rate.
B) intermediate target, such as the federal funds interest rate.
C) intermediate target to achieve an ultimate goal such as price stability.
D) operating target to achieve an ultimate goal such as exchange rate stability.
Answer:

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Q8

A nominal anchor promotes price stability by

Multiple Choice
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A) outlawing inflation.
B) stabilizing interest rates.
C) keeping inflation expectations low.
D) keeping economic growth low.
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Q9

Monetary policy is considered time-inconsistent because

Multiple Choice
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A) of the lag times associated with the implementation of monetary policy and its effect on the economy.
B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run.
C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.
D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.
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Q10

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule.

Multiple Choice
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A) inflation rate
B) unemployment rate
C) interest rate
D) foreign exchange rate
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Q11

The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the

Multiple Choice
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A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.
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Q12

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

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A) moral hazard
B) time-inconsistency
C) nominal-anchor
D) rational-expectation
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Q13

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to

Multiple Choice
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A) boost output in the short run.
B) constrain output in the short run.
C) constrain prices.
D) boost prices in the short run.
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Q14

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy

Multiple Choice
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A) using a nominal anchor.
B) using a strict and inflexible rule.
C) on a discretionary, day-by-day basis.
D) using a flexible, discretionary rule.
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Q15

Explain the time-inconsistency problem. What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?

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Q16

Even if the Fed could completely control the money supply, monetary policy would have critics because

Multiple Choice
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A) the Fed is asked to achieve many goals, some of which are incompatible with others.
B) the Fedʹs goals do not include high employment, making labor unions a critic of the Fed.
C) the Fedʹs primary goal is exchange rate stability, causing it to ignore domestic economic conditions.
D) it is required to keep Treasury security prices high.
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Q17

High unemployment is undesirable because it

Multiple Choice
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A) results in a loss of output.
B) always increases inflation.
C) always increases interest rates.
D) reduces idle resources.
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Q18

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called

Multiple Choice
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A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
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Q19

Unemployment resulting from a mismatch of workersʹ skills and job requirements is called

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A) frictional unemployment.
B) structural unemployment.
C) seasonal unemployment.
D) cyclical unemployment.
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Q20

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

Multiple Choice
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A) frictional level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) Keynesian rate level of unemployment.
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Q21

Supply-side economic policies seek to

Multiple Choice
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A) raise interest rates through contractionary monetary policy.
B) increase federal government expenditures.
C) increase consumption expenditures by increasing taxes.
D) increase saving and investment using tax incentives.
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Q22

The Federal Reserve System was created to

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A) make it easier to finance budget deficits.
B) promote financial market stability.
C) lower the unemployment rate.
D) promote rapid economic growth.
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Q23

Having interest rate stability

Multiple Choice
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A) allows for less uncertainty about future planning.
B) leads to demands to curtail the Fedʹs power.
C) guarantees full employment.
D) leads to problems in financial markets.
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Q24

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.

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A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
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Q25

Which set of goals can, at times, conflict in the short run?

Multiple Choice
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A) High employment and economic growth.
B) Interest rate stability and financial market stability.
C) High employment and price level stability.
D) Exchange rate stability and financial market stability.
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Q26

The primary goal of the European Central Bank is

Multiple Choice
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A) price stability.
B) exchange rate stability.
C) interest rate stability.
D) high employment.
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Q27

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate.

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A) primary
B) dual
C) secondary
D) hierarchical
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Q28

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

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A) primary
B) dual
C) secondary
D) hierarchical
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Q29

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________.

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A) price stability; short run
B) price stability; long run
C) reducing business-cycle fluctuations; short run
D) reducing business-cycle fluctuations; long run
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Q30

The First Bank of the United States

Multiple Choice
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A) was disbanded in 1811 when its charter was not renewed.
B) had its charter renewal vetoed in 1832.
C) was fundamental in helping the Federal Government finance the War of 1812.
D) None of the above.
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Q31

The Second Bank of the United States

Multiple Choice
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A) was disbanded in 1811 when its charter was not renewed.
B) had its charter renewal vetoed in 1832.
C) is considered to be the primary cause of the bank panic of 1907.
D) None of the above.
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Q32

The publicʹs fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking:

Multiple Choice
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A) the First Bank of the United States and the Second Bank of the United States.
B) the First Bank of the United States and the Central Bank of the United States.
C) the First Central Bank of the United States and the Second Central Bank of the United States.
D) the First Bank of North America and the Second Bank of North America.
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Q33

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

Multiple Choice
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A) the First Bank of the United States had failed to serve as a lender of last resort.
B) the Second Bank of the United States had failed to serve as a lender of last resort.
C) the Federal Reserve System had failed to serve as a lender of last resort.
D) a central bank was needed to prevent future panics.
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Q34

What makes the Federal Reserve so unique compared to other central banks around the world is its

Multiple Choice
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A) centralized structure.
B) decentralized structure.
C) regulatory functions.
D) monetary policy functions.
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Q35

Which of the following is NOT an entity of the Federal Reserve System?

Multiple Choice
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A) Federal Reserve Banks
B) The Comptroller of the Currency
C) The Board of Governors
D) The Federal Open Market Committee
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Q36

Which of the following is an entity of the Federal Reserve System?

Multiple Choice
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A) The U.S. Treasury Secretary
B) The FOMC
C) The Comptroller of the Currency
D) The FDIC
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Q37

The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System.

Multiple Choice
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A) 25
B) 33
C) 50
D) 67
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Q38

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

Multiple Choice
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A) quasi-public; private commercial banks in the district where the Reserve Bank is located
B) public; private commercial banks in the district where the Reserve Bank is located
C) quasi-public; Board of Governors
D) public; Board of Governors
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Q39

Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.

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A) three; six
B) four; five
C) five; four
D) six; three
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Q40

The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks.

Multiple Choice
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A) 5; 2; 2
B) 2; 5; 2
C) 4;2;3
D) 3; 3; 3
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Q41

Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to ________ percent annually.

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A) four
B) five
C) six
D) eight
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Q42

The Federal Reserve Bank of ________ plays a special role in the Federal Reserve System because it houses the open market desk.

Multiple Choice
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A) Boston
B) New York
C) Chicago
D) San Francisco
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Q43

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

Multiple Choice
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A) Philadelphia
B) Boston
C) San Francisco
D) New York
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Q44

An important function of the regional Federal Reserve Banks is

Multiple Choice
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A) setting reserve requirements.
B) clearing checks.
C) determining monetary policy.
D) setting margin requirements.
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Q45

Which of the following functions are not performed by any of the twelve regional Federal Reserve Banks?

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A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
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Q46

All ________ are required to be members of the Fed.

Multiple Choice
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A) state chartered banks
B) nationally chartered banks
C) banks with assets less than $100 million
D) banks with assets less than $500 million
Answer:

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Q47

Of all commercial banks, about ________ percent belong to the Federal Reserve System.

Multiple Choice
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A) 17
B) 22
C) 37
D) 52
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Q48

Prior to 1980, member banks left the Federal Reserve System due to

Multiple Choice
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A) the high cost of discount loans.
B) the high cost of required reserves.
C) a desire to avoid interest rate regulations.
D) a desire to avoid credit controls.
Answer:

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Q49

The Fedʹs support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its

Multiple Choice
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A) concern over declining Fed membership.
B) belief that all banking regulations should be eliminated.
C) belief that interest rate ceilings were too high.
D) belief that depositors had to become more knowledgeable of banking operations.
Answer:

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Q50

Banks subject to reserve requirements set by the Federal Reserve System include

Multiple Choice
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A) only nationally chartered banks.
B) only banks with assets less than $100 million.
C) only banks with assets less than $500 million.
D) all banks whether or not they are members of the Federal Reserve System.
Answer:

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Q51

The Depository Institutions Deregulation and Monetary Control Act of 1980

Multiple Choice
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A) established higher reserve requirements for nonmember than for member banks.
B) established higher reserve requirements for member than for nonmember banks.
C) abolished reserve requirements.
D) established uniform reserve requirements for all banks.
Answer:

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Q52

There are ________ members of the Board of Governors of the Federal Reserve System.

Multiple Choice
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A) 5
B) 7
C) 12
D) 19
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Q53

Members of the Board of Governors are

Multiple Choice
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A) chosen by the Federal Reserve Bank presidents.
B) appointed by the newly elected president of the United States, as are cabinet positions.
C) appointed by the president of the United States and confirmed by the Senate as members resign.
D) never allowed to serve more than 7-year terms.
Answer:

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Q54

Each governor on the Board of Governors can serve

Multiple Choice
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A) only one nonrenewable fourteen-year term.
B) one full nonrenewable fourteen-year term plus part of another term.
C) only one nonrenewable eight-year term.
D) one full nonrenewable eight-year term plus part of another term.
Answer:

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Q55

The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________ term.

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A) one-year
B) two-year
C) four-year
D) eight-year
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Q56

While the discount rate is ʺestablishedʺ by the regional Federal Reserve Banks, in truth, the rate is determined by

Multiple Choice
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A) Congress.
B) the president of the United States.
C) the Senate.
D) the Board of Governors.
Answer:

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Q57

Which of the following are duties of the Board of Governors of the Federal Reserve System?

Multiple Choice
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A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.
B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.
C) Regulating credit with the approval of the president under the Credit Control Act of 1969.
D) All governors advise the president of the United States on economics policy.
Answer:

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Q58

Which of the following are not current duties of the Board of Governors of the Federal Reserve System?

Multiple Choice
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A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.
B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q.
C) Approving the discount rate ʺestablishedʺ by the Federal Reserve banks.
D) Representing the United States in negotiations with foreign governments on economic matters.
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Q59

The Federal Open Market Committee usually meets ________ times a year.

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A) four
B) six
C) eight
D) twelve
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Q60

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Multiple Choice
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A) Board of Governors.
B) chairman of the Board of Governors.
C) Federal Open Market Committee.
D) Open Market Advisory Council
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Q61

The Federal Open Market Committee consists of the

Multiple Choice
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A) five senior members of the seven-member Board of Governors.
B) seven members of the Board of Governors and seven presidents of the regional Fed banks.
C) seven members of the Board of Governors and five presidents of the regional Fed banks.
D) twelve regional Fed bank presidents and the chairman of the Board of Governors.
Answer:

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Q62

The majority of members of the Federal Open Market Committee are

Multiple Choice
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A) Federal Reserve Bank presidents.
B) members of the Federal Advisory Council.
C) presidents of member banks.
D) the seven Federal Reserve governors.
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Q63

Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input.

Multiple Choice
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A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
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Q64

Although neither ________ nor the ________ are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.

Multiple Choice
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A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate
Answer:

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Q65

The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the

Multiple Choice
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A) beige book.
B) green book.
C) blue book.
D) black book.
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Q66

The research document given to the Federal Open Market Committee that contains the forecast of national economic variables for the next two years is called the

Multiple Choice
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A) beige book.
B) green book.
C) blue book.
D) black book.
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Q67

The research document given to the Federal Open Market Committee that contains forecasts of the money aggregates conditional on different monetary policy stances is called the

Multiple Choice
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A) beige book.
B) green book.
C) blue book.
D) black book.
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Q68

The Federal Open Market Committeeʹs ʺbalance of risksʺ is an assessment of whether, in the future, its primary concern will be

Multiple Choice
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A) higher exchange rates or higher unemployment.
B) higher inflation or a stronger economy.
C) higher inflation or a weaker economy.
D) lower inflation or a stronger economy.
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Q69

Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System?

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Q70

Who are the voting members of the Federal Open Market Committee and why is this committee important? Where does the power lie within this committee?

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Answer:

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Q71

Instrument independence is the ability of ________ to set monetary policy ________.

Multiple Choice
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A) the central bank; goals
B) Congress; goals
C) Congress; instruments
D) the central bank; instruments
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Q72

The ability of a central bank to set monetary policy instruments is

Multiple Choice
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A) political independence.
B) goal independence.
C) policy independence.
D) instrument independence.
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Q73

Goal independence is the ability of ________ to set monetary policy ________.

Multiple Choice
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A) the central bank; goals
B) Congress; goals
C) Congress; instruments
D) the central bank; instruments
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Q74

The ability of a central bank to set monetary policy goals is

Multiple Choice
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A) political independence.
B) goal independence.
C) policy independence.
D) instrument independence.
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Q75

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to

Multiple Choice
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A) withhold appropriations from the Board of Governors.
B) withhold appropriations from the Federal Open Market Committee.
C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.
D) instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve.
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Q76

Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important?

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Q77

Under the European System of Central Banks, the Executive Board is similar in structure to the ________ of the Federal Reserve System.

Multiple Choice
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A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council
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Q78

Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System.

Multiple Choice
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A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council
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Q79

Under the European System of Central Banks, the National Central Banks have the same role as the ________ of the Federal Reserve System.

Multiple Choice
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A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council
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Q80

Members of the Executive Board of the European System of Central Banks are appointed to ________ year, nonrenewable terms.

Multiple Choice
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A) four
B) eight
C) ten
D) fourteen
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Q81

Which of the following statements comparing the European System of Central Banks and the Federal Reserve System is TRUE?

Multiple Choice
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A) The budgets of the Federal Reserve Banks are controlled by the Board of Governors, while the National Central Banks control their own budgets and the budget of the European Central Bank.
B) The European Central Bank has similar power over the National Central Banks when compared to the level of power the Board of Governors has over the Federal Reserve Banks.
C) Just like the Federal Reserve System, monetary operations are centralized in the European System of Central Banks with the European Central Bank.
D) The European Central Bankʹs involvement in supervision and regulation of financial institutions is comparable to the Board of Governorsʹ involvement.
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Q82

The Governing Council usually meets ________ times a year.

Multiple Choice
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A) four
B) six
C) eight
D) twelve
Answer:

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Q83

In the Governing Council, the decision of what policy to implement is made by

Multiple Choice
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A) majority vote of the Executive Board members.
B) majority vote of the heads of the National Banks.
C) consensus.
D) majority vote of all members of the Governing Council.
Answer:

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Q84

As of the beginning of the year 2009, there are ________ countries that have representation on the Governing Council.

Multiple Choice
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A) six
B) eight
C) ten
D) twelve
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Q85

The central bank which is generally regarded as the most independent in the world because its charter cannot be changed by legislation is the

Multiple Choice
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A) Bank of England.
B) Bank of Canada.
C) European Central Bank.
D) Bank of Japan.
Answer:

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Q86

Explain the similarities and differences between the European System of Central Banks and the Federal Reserve System.

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Answer:

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Q87

On paper, the Bank of Canada has ________ instrument independence and ________ goal independence when compared to the Federal Reserve System.

Multiple Choice
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A) less; less
B) less; more
C) more; less
D) more; more
Answer:

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Q88

The oldest central bank, having been founded in 1694, is the

Multiple Choice
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A) Bank of England.
B) Deutsche Bundesbank.
C) Bank of Japan.
D) Federal Reserve System.
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Q89

While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that its independence is

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A) limited by the Ministry of Financeʹs veto power over a portion of its budget.
B) too great because it need not pursue a policy of price stability even if that is the popular will of the people.
C) too great since the Ministry of Finance no longer has veto power over the bankʹs budget.
D) limited since the Ministry of Finance can dismiss senior bank officials.
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Q90

Regarding central bank independence,

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A) the Fed is more independent than the European Central Bank.
B) the European Central Bank is more independent than the Fed.
C) the trend in industrialized nations has been to reduce central bank independence.
D) the Bank of England has the longest tradition of independence of any central bank in the world.
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Q91

The trend in recent years is that more and more governments

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A) have been granting greater independence to their central banks.
B) have been reducing the independence of their central banks to make them more accountable for poor economic performance.
C) have mandated that their central banks focus on controlling inflation.
D) have required their central banks to cooperate more with their Ministers of Finance.
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Q92

Which of the following statements about central bank structure and independence are true?

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A) In recent years, with the exception of the Bank of England and the Bank of Japan, most countries have reduced the independence of their central banks, subjecting them to greater democratic control.
B) Before the Bank of England was granted greater independence, the Federal Reserve was the most independent of the worldʹs central banks.
C) Both theory and experience suggest that more independent central banks produce better monetary policy.
D) While the European Central Bank is independent, it is not as independent as the Federal Reserve.
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Q93

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize

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A) the publicʹs welfare.
B) profits.
C) its own welfare.
D) conflict with the executive and legislative branches of government.
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Q94

The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed

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A) is supportive of congressional attempts to limit the central bankʹs autonomy.
B) is so secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) is willing to take on powerful groups that may threaten its autonomy.
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Q95

Compared to the Federal Reserve, the European Central Bank is less transparent because

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A) the European Central Bank doesnʹt publicly release its inflation rate target for the European Monetary Union while the Federal Reserve publicly releases its inflation rate target for the United States.
B) the Federal Reserve holds a press conference after a policy meeting while the European Central Bank makes no public statement after its policy meetings.
C) the Federal Reserve publicly releases the minutes 3 weeks after the meetings while the European Central bank waits 20 years to publicly release its minutes.
D) the European Central Bank does not publicly release its economic forecasts while the Federal Reserve immediately releases its economic forecasts to the public.
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Q96

What is the theory of bureaucratic behavior and how can it be used to explain the behavior of the Federal Reserve?

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Answer:

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Q97

The case for Federal Reserve independence does not include the idea that

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A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
C) policy is always performed better by an elite group such as the Fed.
D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
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Q98

The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies.

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A) expansionary; higher unemployment; contractionary
B) expansionary; a higher inflation rate; contractionary
C) contractionary; higher unemployment; expansionary
D) contractionary; a higher inflation rate; expansionary
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Q99

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart

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A) an inflationary bias to monetary policy.
B) a deflationary bias to monetary policy.
C) a disinflationary bias to monetary policy.
D) a countercyclical bias to monetary policy.
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Critics of the current system of Fed independence contend that

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A) the current system is undemocratic.
B) voters have too much say about monetary policy.
C) the president has too much control over monetary policy on a day-to-day basis.
D) the Board of Governors is held responsible for policy missteps.
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Recent research indicates that inflation performance (low inflation) has been found to be best in countries with

Multiple Choice
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A) the most independent central banks.
B) political control of monetary policy.
C) money financing of budget deficits.
D) a policy of always keeping interest rates low.
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