ECO 2013 Lecture Notes - Lecture 7: Federal Funds Rate, Subprime Lending, Bank Reserves

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24 Nov 2017

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Deposit insurance a guarantee that a bank"s depositors will be paid even if the bank can"t come up with the funds. Reserve requirements rules set by the federal reserve that determine the minimum reserve ratio for a bank. The discount window an arrangement in which the federal reserve stands ready to lend money to banks in trouble. Excess reserves a bank"s reserves over and above its required reserves. monetary base is the sum of currency in circulation and bank reserves. Federal funds market allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves. Federal funds rate is the interest rate determined in the federal funds market. Discount rate is the rate of interest the fed charges on loans to banks. Commercial banks depository banks that accepted deposits and were covered by deposit insurance.

Related Questions

Q30. The higher the reserve requirement,
a. the more the money supply can expand
b. the more interest the bank will earn on its reserve account
c. the less the money supply can expand
d. both the more the money supply can expand and the more interest the bank will earn on its reserve account

Q31. If depositors withdraw their funds and create a shortage of reserves, bankers
a. have no alternative but to call in outstanding loans
b. can borrow reserves from the Fed
c. must close their operations until their reserves increase
d. must sell bank stock to replenish reserves

Q32. If a bank has excess reserves,
a. its reserves are greater than its liabilities
b. it can make a loan if it wishes
c. it cannot make a loan if it wishes
d. it must borrow from the Fed

Q33. Which of the following is most influenced by changes in the discount rate?
a. the interest rate paid on savings
b. the commercial loan rate
c. the installment loan rate
d. the mortgage loan rate

Q34. The Federal Reserve System is built around
a. four regional banks
b. six regional banks
c. twelve district banks
d. one bank with several branches

Q35. The interest rate at which banks borrow excess reserves from each other is known as the
a. prime rate
b. federal funds rate
c. discount rate
d. T-bill rate

Q36. If the U. S. government increases spending, the U. S. Treasury
a. has the legal right to issue currency to pay for the spending
b. does not have the legal right to issue currency to pay for the spending
c. usually pays for the spending by selling bonds directly to the Fed
d. seldom pays for the spending by selling bonds to the public

Q37. Forces within the economy that naturally tend to counteract recessions and inflation are known as
a. discretionary stabilizers
b. automatic stabilizers
c. demand-management policies
d. fiscal dividends

orchidraven755

1. The Federal Funds Rate is set by the Federal Reserve on the first business day of each month by faxing the rate to the member banks of each Federal Reserve District.

A. True

B. False

2. The Federal Reserve is a single Central bank located on Wall Street in New York City.

A. True

B. False

3. Which of the following is NOT true about the Federal Reserve System?

A. Terms of service of the members of the Board of Governors are longer than the number of years that a two-term President of the United States would serve.

B. The Federal Reserve System is the nation's central bank and is comprised of 12 Federal Reserve Banks that serve as bankers' banks.

C. Some of the main functions of the Federal Reserve System include the authority to control the money supply, to issue currency, to set reserve requirements, and to hold reserves.

D. While Congress controls the actions of the Federal Reserve, the President has the authority to appoint and remove private banks from the Federal Reserve System.

4. Which of the following is NOT true about restrictive monetary policy?

A. A restrictive monetary policy seeks to raise the federal funds rate.

B. A restrictive monetary policy seeks to expand the money supply.

C. A restrictive monetary policy seeks to raise the Federal Funds Rate by selling government bonds or raising the reserve requirement ratio or increasing the discount rate.

D. A restrictive monetary policy is used when the government is concerned about suddenly increasing inflation.

5. Which of the following statements is NOT true about contractionary fiscal policy?

A. Contractionary fiscal policy consists of reductions in government spending or increases in taxes.

B. Contractionary fiscal policy can include both reductions in government spending or increases in taxes.

C. Contractionary fiscal policy seeks to shift the Aggregate Demand curve to the right.

D. Contractionary fiscal policy is used when the government seeks to reduce suddenly surging inflation.

6. The Federal Reserve creates money by printing the amount of desired new money and distributing it via armored trucks and high-security railways to Federal Reserve District Banks.

A. True

B. False

7. If the Fed feared a looming recession was just around the corner, which of the following actions would it "NOT" consider?

A. The Fed would raise the discount rate.

B. In order to influence prevailing commercial interest rates to fall, the Fed would buy large amounts of government securities.

C. In order to expand the money supply (which influences prevailing commercial interest rates to fall), the Fed would either buy large volumes of government bonds, lower the reserve requirement or cut the discount rate.

D. The Fed would seek to expand the money supply because, in so doing, the federal funds rate would fall and that would stimulate commercial interest rates to fall.

8. Which of the following statements is NOT true about the ability of the Federal Reserve System to expand the money supply?

A. The Federal Reserve System uses the fractional nature of the banking system to create money in order to expand the money supply.

B. The money multiplier defines the relationship between new excess reserves throughout the banking system and the creation of money by banks in the system. It is calculated by dividing the number 1 by the Required Reserve Ratio. [1/rr].

C. If the required reserve ratio is 20%, then $80 billion in new excess reserves will create $400 billion in bank system lending throughout the entire banking system.

D. If the reserve requirement is 100%, then the banks can generate 100% in new excess reserves.

9. Which of the following is NOT true about the tools of monetary policy?

A. The Fed can alter the money supply through open market operations, changes in the reserve ratio or adjustments to the discount rate.

B. Lowering the reserve ratio would expand the money supply.

C. Raising the discount rate would restrict the money supply.

D. Adjusting the reserve requirement is the most important day-to-day method for controlling the nation's money supply.

10. If the Federal Reserve wishes to hold off a feared recession, it will sell large volumes of government bonds.

A. True

B. False

harlequincicada312

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

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ECO 2013 Lecture Notes - Lecture 7: Federal Funds Rate, Subprime Lending, Bank Reserves

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