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Finance Chapter 4 Test Questions
Finance Chapter 4 Test Questions
118
Finance
Undergraduate 4
09/27/2014
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Term
The Federal Reserve System (Fed), the central bank of the United States, is responsible for setting monetary policy and regulating the banking system.
 Definition
T
Term
Fannie Mae was created to support the financial markets by purchasing home mortgages and automobile loans from banks so that the proceeds could be lent to other borrowers.
 Definition
F
Term
Because of the National Banking Act, the volume of national bank notes depends on the government bond market rather than the seasonal or cyclical needs of the nation for currency.
 Definition
T
Term
A major weakness of the banking system under the National Banking Acts was that the money supply could not be easily expanded or contracted to meet changing seasonal needs and/or changes in economic activity.
 Definition
T
Term
The United States was one of the earliest major-industrial nations to adopt a permanent system of central banking.
 Definition
F
Term
he United States was one of the last major industrial nations to adopt a permanent system of central banking.
 Definition
T
Term
A central bank is a Federal government agency that facilitates operation of the financial system and regulates growth of the money supply.
 Definition
T
Term
Although a central bank does not necessarily operate for profit, it generally deals directly with the public.
 Definition
F
Term
The Federal Reserve Act of 1913 provided that all national and state-chartered banks were to become members of the Fed.
 Definition
F
Term
All commercial banks are members of the Fed.
 Definition
F
Term
State-chartered banks were permitted to join the system if they could show evidence of a satisfactory financial condition
 Definition
T
Term
About one-third, of the nation’s commercial banks are members of the Fed.
 Definition
T
Term
Open market operations involve the buying and selling of securities.
 Definition
T
Term
The Fed Board of Governors is composed of seven members who are appointed for a term of 12 years.
 Definition
F
Term
The only bank asset that can be counted as reserve is deposits with the Reserve Banks.
 Definition
F
Term
The closer to the required minimum the banking system maintains its reserves, the tighter the control the Fed has over the money creation process through its other instruments.
 Definition
T
Term
The ability to change reserve requirement is a powerful tool the Fed uses frequently.
 Definition
F
Term
Banks are required by the Fed to hold reserves equal to a part of their deposits as part of the fractional reserve system of the U.S. banking system.
 Definition
T
Term
If excess reserves are near zero, then a reduction of a bank’s reserves will cause the system to loosen credit.
 Definition
F
Term
The Fed lending rate to depository institutions was consistently lower than the bank prime lending rate during the 1980–2012 period.
 Definition
T
Term
21.Although not provided for in the original organization of the Fed, open market operations have become the most important and effective means of monetary control.
 Definition
T
Term
The Federal Reserve has no power to regulate the overseas activities of member banks and bank holding companies.
 Definition
F
Term
The Fed discount rate is the interest rate that a bank must pay to borrow from its regional Federal Reserve Bank.
 Definition
T
Term
Total deposits can be contracted by holding the amount of reserves constant but raising the reserve requirement.
 Definition
T
Term
The money supply can be contracted by holding the amount of reserves constant but raising the reserve requirement.
 Definition
T
Term
The Fed prefers to change reserve requirements rather than to use open market operations.
 Definition
F
Term
When reserves are added to the banking system, depository institutions may expand their lending but are not forced to do so.
 Definition
T
Term
Member banks of the Federal Reserve System may not borrow from the Fed.
 Definition
F
Term
The Federal Reserve act required that ALL national banks were to become members of the Fed.
 Definition
T
Term
Open market operations are similar to discount operations in that they increase or decrease bank reserves at the initiative of the Fed.
 Definition
F
Term
Empirical evidence shows that in countries where central banks are relatively independent from their governments, there has been higher inflation and lower economic growth rates than in countries where central banks are closely tied to their governments.
 Definition
F
Term
The essential requirements of a well-functioning financial system include an efficient national payments system, a flexible money supply, and a lending/borrowing mechanism to help alleviate liquidity problems when they arise.
 Definition
T
Term
The Federal Open Market Committee directs open market operations by buying and selling securities which are the primary instruments of exercising monetary policy.
 Definition
T
Term
The seven members of the Federal Reserve Board of Governors are responsible for the establishment of monetary policy.
 Definition
T
Term
The primary responsibility of the Fed is to formulate monetary policy which involves regulating the growth of the supply of money, and therefore regulating its cost and availability.
 Definition
T
Term
By exercising its influence on the monetary system of the United States, the Fed performs a unique and important function: promoting economic stability.
 Definition
T
Term
Federal Reserve actions that stimulate or repress the level of prices or economic activity are called dynamic actions.
 Definition
T
Term
Federal Reserve actions that stimulate or repress the level of prices or economic activity are called defensive activities.
 Definition
F
Term
The accommodative actions of the Fed includes buying treasury securities.
 Definition
F
Term
Federal Reserve actions that meet the credit needs of individuals and institutions, clearing checks, and supporting depository institutions are called accommodative activities.
 Definition
T
Term
The minimum amount of total reserves that depository institutions must hold are called fractional reserves.
 Definition
F
Term
The three primary means that the Fed can use to exercise monetary policy includes closed market operations, stabilizing reserve requirements, and freeing the Federal discount rate.
 Definition
F
Term
Discount policy is still a major instrument of monetary policy.
 Definition
F
Term
The Fed would be practicing contractionary monetary policy if, through open market operations, it is a net seller of government securities.
 Definition
T
Term
The Fed would be practicing contractionary monetary policy if it caused a decrease in market interest rates.
 Definition
F
Term
The Consumer Credit Protection Act requires that lenders clearly explain consumer credit costs and prohibited them from charging overly high-priced credit transactions.
 Definition
T
Term

Under the authority of the Federal Reserve Act of 1913:

 

a. all national and state-chartered banks must become members of the Fed

 

b. only national banks were permitted to become members of the Fed

 

c. state-chartered banks were permitted to withdraw from membership with the Fed

 

d. a system of deposit insurance was created

 

 Definition
state-chartered banks were permitted to withdraw from membership with the Fed
Term

Under the authority of the Federal Reserve Act of 1913

 

a. member banks were required to purchase capital stock in the Federal Reserve Banks of their district

 

b. member banks may not borrow from the Fed

 

c. a formal open-market committee arrangement was established

 

d. national banks were permitted to become members of the Fed if they could show evidence of satisfactory financial condition

 

 Definition
member banks were required to purchase capital stock in the Federal Reserve Banks of their district
Term
The primary responsibility of the Federal Reserve System is to:
 Definition
regulate the growth of the money supply
Term
The members of the Fed Board of Governors are:
 Definition
appointed by the President of the United States with the advice and consent of the Senate
Term
Each member of the Fed Board of Governors is appointed for a term of:
 Definition
14 years
Term
One of the major weaknesses of the banking system before the Federal Reserve System was set up was:
 Definition
the arrangement for holding reserves
Term
Before the Federal Reserve System was created, a large part of the reserves of commercial banks was:
 Definition
held as deposits with large city banks
Term
The United States created its system of central banking
 Definition
later than such banks were established in other industrial nations
Term

Member banks of the Federal Reserve System:

 

a. must maintain all reserves with their Federal Reserve Bank

 

b. may include deposits held at large city banks as legal reserves

 

c. maintain levels of reserves based on the size of the city in which they are located

 

d. are permitted to count vault cash as part of their reserves

 

 Definition
are permitted to count vault cash as part of their reserves
Term
Under the Federal Reserve Act of 1913, the number of Federal Reserve districts established is:
 Definition
12
Term

For which of the following are member banks prohibited from borrowing at the Fed’s discount window?

 

a. funds to meet reserve requirements
b. funds to meet depositor withdrawal demands
c. to meet business loan demands
d. all the above are permitted
e. none of the above are permitted

 Definition
funds to meet reserve requirements b. funds to meet depositor withdrawal demands c. to meet business loan demands d. all the above are permitted Answer:e. none of the above are permitted
Term
The discount rate is:
 Definition
the rate a bank must pay to borrow from the Fed
Term

Which of the following statements would be false? The discount rate is

 

a. an instrument of monetary policy

 

b. frequently used as a tool of fiscal policy

 

c. regarded as a fine-tuning mechanism

 

d. all the above are true

 

 Definition
frequently used as a tool of fiscal policy
Term
Open market operations
 Definition
are used by the Fed to alter bank reserves
Term

The Fed Board of Governors:

 

a. is elected by the member banks

 

b. is appointed by the Senate

 

c. has seven members appointed for 14-year terms

 

d. has seven members appointed for a term of 12 years

 

 Definition
has seven members appointed for 14-year terms
Term
The Federal Reserve System exercises its most direct control of the money supply:
 Definition
through open market operations
Term
The Federal Reserve Banks are owned by:
 Definition
member banks of the Federal Reserve System
Term
All Federal Reserve Banks have:
 Definition
check clearance facilities
Term
In addition to the clearing of checks through Federal Reserve Banks, the Fed accommodates check clearing through:
 Definition
its branches and a group of regional check-processing centers
Term
Bank holding companies are supervised and examined by:
 Definition
the Federal Reserve
Term

The Federal Open Market Committee

 

a. is comprised of members of the Federal Reserve board and representatives of all Federal Reserve Banks

 

b. came into being at the time the Federal Reserve System was created

 

c. is made up of the presidents of the 12 Federal Reserve Banks

 

d. was created under a provision of the Banking Act of 1935

 

 Definition
was created under a provision of the Banking Act of 1935
Term
The effect of an increase of required reserves by the Fed is:
 Definition
a decrease in loanable funds of depository institutions
Term
The accommodative activities of the Federal Reserve System are:
 Definition
a. clearing checks
b. meeting the credit needs of individuals and institutions
c. supporting depository institutions
Answer:d. all of the above
Term
The purpose of Regulation Z is to:
 Definition
make consumers aware of the costs of alternative forms of credit
Term
The Truth in Lending Act:
 Definition
limits liability on lost or stolen credit cards
Term

The dynamic actions of the Federal Reserve System:

 

a. contribute to the smooth everyday functioning of the economy

 

b. are designed to meet the credit needs of individuals and institutions

 

c. support depositories and other institutions

 

d. stimulate or repress the level of prices or economic activity

 

 Definition
stimulate or repress the level of prices or economic activity
Term

The Federal Open Market Committee:

 

a. is made up of the presidents of the 12 Federal Reserve Banks

 

b. consists of the seven members of the Board of Governors of the Fed, plus five presidents of Reserve Banks

 

c. is appointed by the Chairman of the Federal Reserve System

 

d. none of the above

 

 Definition
consists of the seven members of the Board of Governors of the Fed, plus five presidents of Reserve Banks
Term
The payment mechanism of the Reserve Bank includes:
 Definition
a. processing and clearing checks
b. issuing currency and coins
c. electronic forms of payment
Answer:d. all the above
Term
The National Banking Acts of 1863 and 1864 were:
 Definition
were modified to permit greater flexibility of operations under the Federal Reserve Act of 1913
Term

The Board of Governors of the Federal Reserve System:

 

a. consists of 7 appointed members
b. sets reserve requirements
c. approves discount rates as part of monetary policy
d. all the above

 Definition
a. consists of 7 appointed members b. sets reserve requirements c. approves discount rates as part of monetary policy Answer:d. all the above
Term
The seven-member board of the Federal Reserve that sets monetary policy is called
 Definition
the Federal Reserve Board of Governors
Term

The Federal Open Market committee:

 

a. establishes and administers protective consumer finance regulations
b. furnishes currencies
c. handles U.S. government debt and cash balances
d. all the above
e. none of the above

 Definition
a. establishes and administers protective consumer finance regulations b. furnishes currencies c. handles U.S. government debt and cash balances d. all the above Answer:e. none of the above
Term

State-chartered banks:

 

a. automatically receive membership in the Federal Reserve System

 

b. are prohibited from membership in the Federal Reserve System

 

c. may be permitted to join the Federal Reserve system, given a satisfactory financial condition

 

d. none of the above

 

 Definition
may be permitted to join the Federal Reserve system, given a satisfactory financial condition
Term

Members of the Federal Reserve System may include:

 

a. commercial banks with a national charter

 

b. credit unions

 

c. savings and loan institutions

 

d. all the above

 

e. none of the above

 

 Definition
commercial banks with a national charter
Term

The chairman of the Federal Reserve System:

 

a. is appointed by the Secretary of the Treasury
b. serves a life term
c. is the president of the New York Federal Reserve Bank
d. none of the above

 Definition
a. is appointed by the Secretary of the Treasury b. serves a life term c. is the president of the New York Federal Reserve Bank Answer:d. none of the above
Term

Three essential needs of a well-operating financial system include all of the following EXCEPT:

 

a. an efficient national payments system

 

b. an elastic or flexible money supply

 

c. a bank insurance system

 

d. a lending/borrowing mechanism

 

 Definition
a bank insurance system
Term
Which monetary policy tool does the Fed use most infrequently?
 Definition
changing reserve requirements
Term
One significant feature of DIDMCA was that it:
 Definition
expanded Fed control over the reserve requirements of non-member banks
Term
During the time period 1980 - 2012:
 Definition
the discount rate was lower than the prime rate
Term
A central bank serves the nation:
 Definition
by regulating money supply growth
Term

The Federal Reserve System consists of all of the following components EXCEPT:

 

a. Federal Reserve District Banks
b. Board of Governors
c. Federal Open Market Committee
d. all of the above

 Definition
a. Federal Reserve District Banks b. Board of Governors c. Federal Open Market Committee Answer:d. all of the above
Term
The Federal Reserve System consists of all of the following components EXCEPT:
 Definition
Monetary Policy Committee
Term

Federal Reserve actions that offset unexpected monetary developments and contribute to the smooth everyday functioning of the economy are called

 

a. defensive actions

 

b. dynamic actions

 

c. accommodative actions

 

d. none of the above

 

 Definition
defensive actions
Term

The basic policy instruments that the Fed uses to execute monetary policy include all of the following EXCEPT

 

a. changing reserve requirements
b. changing the discount rate
c. conducting open market operations
d. all of the above are monetary policy instruments

 Definition
a. changing reserve requirements b. changing the discount rate c. conducting open market operations Answer:d. all of the above are monetary policy instruments
Term
The basic policy instruments that the Fed uses to execute monetary policy include all of the following EXCEPT
 Definition
conducting closed market operations
Term
The percentage of deposits that must be held as reserves is called
 Definition
the required reserve ratio
Term
The interest rate that a bank must pay to borrow from its regional federal reserve bank is called
 Definition
the Federal Discount Rate
Term
The most used monetary policy instrument used by the Fed is
 Definition
open market operations
Term
__________________ become the most important and effective means of monetary and credit control.
 Definition
Open market operations has
Term
The least used monetary policy instrument used by the Fed is
 Definition
changing the reserve requirement
Term
____________________________ sets up a procedure for the prompt correction of errors on a revolving charge account and prevents damage to credit ratings while a dispute is being settled.
 Definition
Fair Credit Billing Act
Term
The ____________________________ conducts monetary policy for the twelve European countries that adopted the euro as their common currency.
 Definition
European Central Bank
Term
The ___________________ conducts monetary policy for the twelve European countries that formed the European Monetary Union and adopted the euro as their common currency at the beginning of 1999.
 Definition
European Central Bank
Term
Currently, the Chairman of the Federal Reserve is ________________________.
 Definition
Janet Yellen
Term
The five components of the Federal Reserve System include:
 Definition
Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees.
Term

The five components of the Federal Reserve System include:

 

a. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Monetary Committees.
b. Nonmember banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees.
c. Member banks, Federal Reserve District Banks, Board of Presidents, Federal Open Market Committee, Advisory committees.
d. Member banks, Federal Reserve District Banks, Board of Governors, Federal Closed Market Committee, Advisory committees.
e. none of the above

 Definition
a. Member banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Monetary Committees. b. Nonmember banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee, Advisory committees. c. Member banks, Federal Reserve District Banks, Board of Presidents, Federal Open Market Committee, Advisory committees. d. Member banks, Federal Reserve District Banks, Board of Governors, Federal Closed Market Committee, Advisory committees. Answer:e. none of the above
Term
Although it enjoys substantial independence in its operations, the appointive power of the president and the ability of Congress to alter its structure make the ______________ a dependent political structure and one of the most powerful monetary organizations in the world.
 Definition
Board of Governors (BOG)
Term

Although it enjoys substantial independence in its operations, the appointive power of the president and the ability of Congress to alter its structure make the ______________ a dependent political structure and one of the most powerful monetary organizations in the world.

 

a. Presidential Appointment Board (PAB)
b. Board of Directors (BOD)
c. Governing Body (GOB)
d. Financial Governors (FOG)
e. none of the above

 Definition
a. Presidential Appointment Board (PAB) b. Board of Directors (BOD) c. Governing Body (GOB) d. Financial Governors (FOG) Answer:e. none of the above
Term
The Board of Governors of the Federal Reserve establishes monetary policy by:
 Definition
setting reserve requirements, altering the discount rate, and through federal open market operations.
Term

The Board of Governors of the Federal Reserve establishes monetary policy by:

 

a. setting reserve requirements, altering the prime rate, and through federal open market operations.
b. setting loan to value ratios, altering the discount rate, and through federal open market operations.
c. setting reserve requirements, altering the discount rate, and through international currency transactions.
d. setting bank profitability ratios, altering the discount rate, and through federal open market operations.
e. none of the above

 Definition
a. setting reserve requirements, altering the prime rate, and through federal open market operations. b. setting loan to value ratios, altering the discount rate, and through federal open market operations. c. setting reserve requirements, altering the discount rate, and through international currency transactions. d. setting bank profitability ratios, altering the discount rate, and through federal open market operations. Answer:e. none of the above
Term

Which of the following is not a method by which the Federal Reserve establishes monetary policy?

 

a. setting reserve requirements,

 

b. altering the discount rate,

 

c. through federal open market operations,

 

d. setting bank profitability ratios,

 

e. none of the above

 

 Definition
setting bank profitability ratios,
Term
Which of the following is a method by which the Federal Reserve establishes monetary policy?
 Definition
a. setting reserve requirements,
b. altering the discount rate,
c. through federal open market operations,
Answer: d. all of the above methods are used.
Term
History generally supports the contention that under the guidance of Paul Volcker, a (n) ____________ Fed policy brought down the double-digit inflation of the 1970s and the early 1980s, and the Federal Open Market Committee consistently responded to his leadership.
 Definition
restrictive
Term

History generally supports the contention that under the guidance of Paul Volcker, a (n) ____________ Fed policy brought down the double-digit inflation of the 1970s and the early 1980s, and the Federal Open Market Committee consistently responded to his leadership.

 

a. loosening of
b. easing of
c. expansionary
d. two of the above
e. none of the above

 Definition
a. loosening of b. easing of c. expansionary d. two of the above Answer:e. none of the above
Term
Today the responsibilities of the Fed may be described as:
 Definition
those relating to monetary policy, to supervision and regulation, and to services provided for depository institutions and the government.
Term

Today the responsibilities of the Fed may be described as:

 

a. those relating to monetary and fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government.
b. those relating to fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government.
c. those relating to monetary policy, to deregulation, and to services provided for depository institutions and the government.
d. those relating to monetary policy, to supervision and regulation, and to services provided for homeowners and the government.
e. none of the above

 Definition
a. those relating to monetary and fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government. b. those relating to fiscal policy, to supervision and regulation, and to services provided for depository institutions and the government. c. those relating to monetary policy, to deregulation, and to services provided for depository institutions and the government. d. those relating to monetary policy, to supervision and regulation, and to services provided for homeowners and the government. Answer:e. none of the above
Term
The banking system of the United States is a ___________ reserve system because banks are required by the Fed to hold reserves equal to a specified percentage of their deposits.
 Definition
fractional
Term

Which of the following statements is most correct?

 

a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth.

 

b. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to expand deposit growth.

 

c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.

 

d. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.

e. none of the above

 

 Definition
d. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.
Term

Which of the following statements is most correct?

 

a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth.
b. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to expand deposit growth.
c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth.
d. Increasing reserve requirements always leads to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth.
e. none of the above

 Definition
a. Open-market operations always lead to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. b. Open-market operations don’t always lead to an immediate change in the volume of deposits; this is especially true when bonds are purchased to expand deposit growth. c. Open-market operations always lead to an immediate change in the volume of deposits; this is especially true when bonds are sold to restrict deposit growth. d. Increasing reserve requirements always leads to an immediate increase in the volume of lending; this is especially true when bonds are sold to restrict deposit growth. Answer:e. none of the above
Term
The __________________, passed in 1968, requires the clear explanation of consumer credit costs and garnishment procedures (taking wages or property by legal means) and prohibits overly high-priced credit transactions.
 Definition
Consumer Credit Protection Act
Term
(n) ____________________ is necessary for the monetary system to carry out the financial function of transferring money, which in turn is a requirement for an effective financial system.
 Definition
efficient payments mechanism
Term
The two routes of check clearance include the _____________ settlement, in which the transaction takes place entirely within a single Federal Reserve district, and the _____________ settlement, in which there are relationships between banks of two Federal Reserve districts.
 Definition
intradistrict, interdistrict
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