Final Exam Part 4

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1. The Federal Reserve was created in:

Explanation

The correct answer is 1913. The Federal Reserve was created in 1913 through the enactment of the Federal Reserve Act. This act was passed by the United States Congress in response to a series of financial panics and banking crises that occurred in the late 19th and early 20th centuries. The Federal Reserve was established as the central banking system of the United States, with the goal of promoting a stable and secure financial system, controlling inflation, and managing the country's monetary policy.

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About This Quiz
Final Exam Part 4 - Quiz

This Final Exam Part 4 assesses understanding of international economics, focusing on exchange rates, capital flows, and monetary policy. It tests the ability to analyze economic relationships and... see morepolicy impacts in a global context. see less

2. Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap) If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

Explanation

The formula for the Taylor rule states that the target federal funds rate is equal to 2% (target rate of inflation) + 5% (current rate of inflation) + 0.5*(5% - 2%) (inflation gap) + 0.5*(3%) (output gap). Simplifying this, we get 2% + 5% + 0.5% + 1.5% = 9%. Therefore, the target federal funds rate would be 9%, not 10.5%.

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3. The number of regional Federal Reserve Banks is:

Explanation

There are twelve regional Federal Reserve Banks in the United States. These banks are responsible for implementing monetary policy, supervising and regulating banks, and providing financial services to depository institutions. Each of these banks serves a specific region of the country and plays a crucial role in maintaining the stability and efficiency of the nation's financial system.

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4. One monopoly that modern central banks have is in:

Explanation

Central banks have the monopoly in issuing currency. This means that they have the exclusive authority to create and distribute the national currency of a country. By controlling the money supply, central banks can influence interest rates, manage inflation, and stabilize the economy. This monopoly ensures that the central bank has the power to regulate and maintain the value of the currency in the economy.

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5. The primary objective of most central banks in industrialized economies is:

Explanation

The primary objective of most central banks in industrialized economies is to maintain price stability. This means keeping inflation low and stable, ensuring that the general level of prices for goods and services remains steady over time. Price stability is important for economic growth and stability as it allows individuals and businesses to make informed decisions about spending, saving, and investing. It also helps to maintain the purchasing power of money and promotes confidence in the economy. By focusing on price stability, central banks can create a favorable environment for sustainable economic development.

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6. The efficient allocation of resources requires:

Explanation

Efficient allocation of resources requires that prices reflect the relative value of goods and services. This means that prices should accurately represent the worth or value of a particular product or service in relation to others. When prices reflect relative value, consumers are able to make informed decisions based on their preferences and budget constraints, while producers are incentivized to allocate resources efficiently and produce goods and services that are in demand. This helps to ensure that resources are allocated effectively and efficiently in the economy.

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7. In terms of economic growth, the central bank would like to:

Explanation

The central bank aims to keep the economy close to its potential or sustainable rate of growth in terms of economic growth. This means that the central bank wants to maintain a steady and stable growth rate that is sustainable in the long term. By doing so, they can avoid excessive booms or recessions that can lead to economic instability. This approach allows for a balanced and controlled economic growth that can benefit the overall health and stability of the economy.

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8. For the Federal Reserve, the largest liability on its balance sheet is:

Explanation

The largest liability on the Federal Reserve's balance sheet is currency. This refers to the physical cash in circulation, such as banknotes and coins. As the central bank of the United States, the Federal Reserve is responsible for issuing and managing the supply of currency in the country. Currency is a liability for the Federal Reserve because it represents a debt owed to the holders of the cash. When individuals and businesses hold currency, it is essentially a claim on the central bank for the equivalent value in goods and services.

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9. Many governments give their central bank control over issuing currency because:

Explanation

Governments give their central bank control over issuing currency because printing currency can be profitable for a government. This profit motive may lead government officials to print too much currency, which can have negative consequences such as inflation. Additionally, central banks use the profits from issuing currency to finance their operations. Therefore, giving control to the central bank ensures that currency issuance is managed in a way that balances profitability and economic stability. The statement about distributing currency to banks through the central bank is not directly related to the given answer.

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10. The Board of Governors of the Fed performs each of the following functions, except:

Explanation

The Board of Governors of the Fed performs several functions, such as analyzing financial and economic conditions, setting the reserve requirement, and approving bank merger applications. However, making discount loans is not one of their functions. Discount loans are typically made by the Federal Reserve Banks, not the Board of Governors.

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11. If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be:

Explanation

When the inflation rate in country A is higher than in country B, it means that the purchasing power of country A's currency is decreasing at a faster rate compared to country B's currency. As a result, we should expect the number of units of country A's currency per unit of country B's currency to decrease. This decrease can be calculated by subtracting the inflation rate of country B from the inflation rate of country A, which in this case would be 3.5% - 3.0% = 0.5%. Therefore, the percentage change in the number of units of country A's currency per unit of country B's currency is -0.5%.

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12. A central bank holds foreign exchange reserves primarily for:

Explanation

Foreign exchange interventions refer to the actions taken by a central bank to influence the value of its currency in the foreign exchange market. These interventions can include buying or selling foreign currency to stabilize or manipulate the exchange rate. Therefore, a central bank holds foreign exchange reserves primarily for the purpose of conducting these interventions. By holding a significant amount of foreign currency reserves, the central bank can effectively intervene in the market and manage the exchange rate to ensure stability and support the country's economic goals.

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13. Discount lending ties into the Fed's function of:

Explanation

Discount lending refers to the practice of the Federal Reserve providing short-term loans to commercial banks and other financial institutions in times of financial distress or liquidity shortages. This function aligns with the concept of the "lender of last resort," as it ensures that banks have access to funds when they are unable to obtain them from other sources. By offering discount loans, the Fed helps stabilize the banking system and prevents potential bank failures, which could have a detrimental impact on the overall economy.

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14. A good definition for intermediate targets of monetary policy would be:

Explanation

Intermediate targets of monetary policy refer to instruments that are not directly controlled by central banks but are positioned between operational instruments (such as interest rates) and the ultimate objectives of monetary policy (such as price stability or economic growth). These intermediate targets serve as indicators or benchmarks that central bankers use to guide and assess the effectiveness of their policy actions. By monitoring and influencing these intermediate targets, central banks aim to achieve their broader policy goals.

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15. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal:

Explanation

The correct answer is MB. MB refers to the Monetary Base, which includes both currency (C) and reserves (R). Therefore, the sum of currency and reserves (C + R) would equal the Monetary Base (MB).

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16. The term for turning reserves into bank deposits is called:

Explanation

Multiple deposit creation refers to the process by which a bank can create additional deposits in the banking system through the lending and borrowing activities. When a bank receives a deposit, it is able to lend a portion of that deposit to borrowers, who in turn deposit the borrowed funds into their own accounts in other banks. This process continues, resulting in the creation of multiple deposits from a single initial deposit. Therefore, multiple deposit creation accurately describes the process of turning reserves into bank deposits.

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17. The Chairman of the Board of Governors:

Explanation

The correct answer is that the Chairman of the Board of Governors is selected from the Board of Governors and appointed by the U.S. President. This means that the Chairman is chosen from among the members of the Board of Governors and is then appointed to the position by the President. The answer does not mention the length of the Chairman's term, so we cannot determine that from the given information.

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18. The focus for most central banks today is:

Explanation

Central banks today primarily focus on interest rates. This is because central banks use interest rates as a tool to control inflation, stimulate economic growth, and maintain price stability. By adjusting interest rates, central banks can influence borrowing costs, which in turn affects consumer spending, business investment, and overall economic activity. Interest rates also play a crucial role in managing exchange rates and capital flows. Therefore, central banks closely monitor and adjust interest rates to achieve their monetary policy objectives.

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19. The monetary base is the sum of:

Explanation

The correct answer is "Currency in the hands of the public and reserves in the banking system". The monetary base refers to the total amount of currency that is in circulation among the public and the reserves held by banks. This includes physical currency held by individuals and businesses, as well as the reserves held by banks in their accounts at the central bank. By including both currency in circulation and reserves, the monetary base represents the foundation of the money supply in an economy.

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20. If country A wants to fix its exchange rate with country B, then:

Explanation

All of the answers given are correct because fixing the exchange rate between two countries requires the inflation rate in both countries to match. This means that country A's inflation rate will have to match country B's, and country A's monetary policy must be conducted in a way that ensures the inflation rate in country A matches the inflation rate in country B. Additionally, when a country fixes its exchange rate with another country, it restricts its ability to use monetary policy to address domestic issues. Therefore, all of the given answers are correct in explaining the requirements for fixing the exchange rate between country A and country B.

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21. Which of the following features would characterize a good monetary policy instrument?

Explanation

A good monetary policy instrument should be tightly linked to monetary policy objectives. This means that the instrument should directly contribute to achieving the desired goals of the monetary policy, such as price stability or economic growth. By being closely aligned with these objectives, the instrument can effectively influence the economy and help the central bank in implementing its monetary policy.

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22. How many members belong to the board of directors for each of the Reserve Banks of the Fed?

Explanation

Each of the Reserve Banks of the Fed has nine members on its board of directors. These members are divided into three categories: Class A directors, who represent the member banks in the region; Class B directors, who represent the public and are chosen by the member banks; and Class C directors, who are appointed by the Board of Governors and represent the public interest. Together, these nine directors oversee the operations of the Reserve Bank and make decisions regarding monetary policy and economic conditions in their respective regions.

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23. Most of the Fed's income is:

Explanation

The correct answer is "Returned to the U.S. Treasury". This means that most of the income earned by the Federal Reserve is given back to the U.S. Treasury. This is important because it helps to fund the government's operations and reduce the budget deficit. By returning the income to the Treasury, the Federal Reserve ensures that the money is used for the benefit of the overall economy and the country as a whole.

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24. The objectives set for the Fed by Congress are:

Explanation

The correct answer is "By design, quite vague, allowing the Fed to really set its own goals." This means that the objectives set for the Fed by Congress are intentionally not specific, giving the Fed the flexibility to determine its own goals. This allows the Fed to adapt its objectives based on the current economic conditions and make decisions that it believes will best serve the overall economy. By having vague objectives, the Fed can exercise its independence and discretion in setting and adjusting its goals as needed.

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25. The tools of monetary policy available to the Fed include each of the following, except the:

Explanation

The currency-to-deposit ratio is not a tool of monetary policy available to the Fed. The currency-to-deposit ratio refers to the proportion of currency (cash) held by individuals and businesses compared to the amount of money deposited in banks. It is a measure of the public's preference for holding cash versus depositing it in banks. While the Fed may monitor this ratio as an indicator of public demand for cash, it is not directly controlled or influenced by the Fed as a tool of monetary policy.

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26. Which of the following would be categorized as an unconventional monetary policy tool?

Explanation

Lending to nonbanks would be categorized as an unconventional monetary policy tool because it involves providing loans to financial institutions that are not traditional banks. This tool is used by central banks to inject liquidity into the financial system and stimulate economic activity. Unlike discount window lending, which involves providing loans to traditional banks, lending to nonbanks targets a wider range of financial institutions such as investment banks, mortgage lenders, and other non-depository institutions. This tool is considered unconventional because it expands the scope of monetary policy beyond traditional banking channels.

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27. The Fed is reluctant to change the required reserve rate because:

Explanation

The Fed is reluctant to change the required reserve rate because small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits. This means that even a slight adjustment in the reserve rate can result in a significant change in the overall money supply, which can have unintended consequences on the economy. The Fed prefers to avoid such drastic fluctuations and instead maintains a stable reserve rate to ensure a more predictable and controlled monetary policy.

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28. From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was:

Explanation

During the period from 1979 to 1982, the Federal Reserve used bank reserves as the main tool for implementing monetary policy. As a result, one of the unintended consequences was that interest rates increased significantly. This can be attributed to the fact that targeting bank reserves limited the availability of funds in the banking system, leading to a scarcity of money supply. Consequently, the increased demand for borrowing caused interest rates to rise as lenders sought to capitalize on the limited supply of funds.

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29. When the Fed makes a discount loan, the impact on the Fed's balance sheet is:

Explanation

When the Fed makes a discount loan, it increases its assets by lending money to a bank, and at the same time, it increases its liabilities because it now owes that amount of money to the bank. This is the same impact as an open market purchase, where the Fed buys securities from the market, increasing its assets, and pays for them by creating new reserves, increasing its liabilities. Therefore, the correct answer is "The same as that of an open market purchase."

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30. Monetary policy operations for central banks are run through changes in the liability category of:

Explanation

Central banks conduct monetary policy operations by making changes to their reserves. Reserves refer to the deposits held by the central bank on behalf of commercial banks and the government. By adjusting the level of reserves, central banks can influence the amount of money in circulation and control interest rates. This allows them to manage inflation, stabilize the economy, and promote economic growth.

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31. The types of loans the Fed makes consist of each of the following, except:

Explanation

The question asks for the type of loan that the Fed does not make. The Fed offers primary credit, seasonal credit, and secondary credit. However, conditional credit is not a type of loan offered by the Fed.

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32. The United States would be characterized as having:

Explanation

The United States would be characterized as having a controlled domestic interest rate because the Federal Reserve has the ability to adjust interest rates to control inflation and stimulate or slow down economic growth. It also has an open capital market, meaning that foreign investors are able to freely invest in the US market. Lastly, the US has a flexible exchange rate, which means that the value of the US dollar is determined by market forces and can fluctuate in response to supply and demand.

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33. Vault cash is:

Explanation

Vault cash refers to the physical currency held by commercial banks in their vaults. It is considered a part of their reserves because it can be used to meet the cash demands of their customers. Additionally, vault cash is also considered an asset of commercial banks because it represents a valuable resource that they can utilize to conduct their operations.

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34. To be independent, a central bank must have:

Explanation

For a central bank to be independent, it must have control of its own budget. This means that the central bank should have the authority to determine and manage its own financial resources without interference from external entities. Having control of its own budget allows the central bank to make decisions based on its own assessment of the economic situation and monetary policy goals, rather than being influenced by political or fiscal considerations. This independence is crucial for the central bank to effectively carry out its mandate of maintaining price stability and promoting financial stability in the economy.

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35. One reason for having a monetary policy framework is:

Explanation

Having a monetary policy framework is important because it makes clear the specific goals that central bankers are pursuing. This clarity is crucial for effective decision-making and communication with the public and financial markets. It allows for transparency and accountability, ensuring that the actions of central bankers are aligned with their stated objectives. Without a clear framework, it would be difficult to assess the effectiveness of monetary policy and hold central bankers accountable for their actions.

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36. If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country:

Explanation

If capital flows freely between countries and a country has a fixed exchange rate, it means that the country cannot control its domestic monetary policy. This is because a fixed exchange rate requires the country to maintain the value of its currency relative to other currencies, and this can only be achieved by adjusting the money supply. Therefore, the country cannot independently set interest rates or control inflation through monetary policy.

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37. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal:

Explanation

The correct answer is M/MB because the money multiplier (m) is calculated by dividing the quantity of money (M) by the monetary base (MB). The money multiplier represents the amount of money that can be created through the banking system based on the initial injection of funds.

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38. For fiscal policymakers, one of the results of an independent central bank is:

Explanation

An independent central bank means that the government does not have direct control over monetary policy. Therefore, fiscal policymakers cannot simply order more currency from the central bank to finance government spending. Instead, increased government spending has to be financed through either higher taxes or increased government borrowing. This is because the central bank's independence ensures that monetary policy decisions are made separately from fiscal policy decisions.

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39. Member banks of the Federal Reserve System include:

Explanation

The correct answer is nationally chartered banks and state chartered banks that decide to join. This means that both nationally chartered banks and state chartered banks have the option to become member banks of the Federal Reserve System. It is not limited to only one type of bank or only banks with a certain level of assets.

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40. The Governors of the Federal Reserve System are appointed by the: 

Explanation

The correct answer is President of the United States. The President has the authority to appoint the Governors of the Federal Reserve System. This is in line with the Federal Reserve Act, which grants the President the power to nominate and appoint individuals to serve on the Board of Governors. The President's appointment is subject to Senate confirmation. The appointment of the Governors by the President ensures that there is a level of political accountability and oversight in the Federal Reserve System.

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41. Which of the following would be an example of a capital outflow control?

Explanation

This answer is correct because it describes a situation where Mexico is limiting the amount of its own currency, pesos, that its citizens can take out of the country. This restriction on the outflow of pesos can be considered a capital outflow control as it aims to regulate the movement of funds from the country.

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42. If foreigners are restricted in their ability to buy investments in a country then that government is imposing:

Explanation

If foreigners are restricted in their ability to buy investments in a country, it means that the government is imposing controls on capital inflows. This means that the government is regulating and limiting the amount of foreign capital that can enter the country through investments. By imposing these controls, the government aims to manage and control the flow of foreign investment in order to protect the country's economy and maintain stability.

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43. The primary purpose of meetings of the FOMC is to:

Explanation

The primary purpose of meetings of the FOMC is to decide on the target interest rate. The FOMC, or Federal Open Market Committee, is responsible for setting monetary policy in the United States. One of the key tools they use to influence the economy is adjusting the target interest rate. By raising or lowering this rate, the FOMC can impact borrowing costs, investment, and overall economic activity. Therefore, deciding on the target interest rate is a crucial function of the FOMC meetings.

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44. If the market federal funds rate were below the target rate, the response from the Fed would likely be to:

Explanation

When the market federal funds rate is below the target rate, it means that there is excess liquidity in the market. In order to reduce this liquidity and bring the market rate closer to the target rate, the Federal Reserve would likely sell U.S. Treasury securities. By selling these securities, the Fed would decrease the money supply in the market, which would increase the market federal funds rate and bring it closer to the target rate. This action is a contractionary monetary policy measure aimed at tightening the money supply and controlling inflation.

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45. In its role as the bankers' bank, a central bank performs each of the following, except:

Explanation

A central bank serves as the bankers' bank by overseeing commercial banks and the financial system, managing the payments system, and providing loans during times of financial distress. However, providing deposit insurance is not a function of a central bank. Deposit insurance is typically provided by separate entities, such as government agencies or private insurance companies, to protect depositors in the event of bank failures.

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46. The components of the formula for the Taylor rule includes each of the following, except:

Explanation

The components of the Taylor rule are the target federal funds rate, the current inflation rate, and the inflation gap. The 30-year U.S. Treasury bond rate is not included in the formula for the Taylor rule. The Taylor rule is a monetary policy guideline that suggests how central banks should adjust interest rates in response to changes in economic conditions. It is based on the premise that central banks should respond to inflation and economic output. The 30-year U.S. Treasury bond rate is not directly related to these factors and therefore is not included in the formula.

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47. The specific goals of central banks include all of the following except:

Explanation

Central banks are responsible for managing a country's monetary policy and maintaining financial stability. Their specific goals typically include low and stable inflation, high and stable real growth, and a stable exchange rate. However, central banks do not have the objective of directly influencing or targeting high stock prices. While they may indirectly impact stock markets through their policies, their primary focus is on overall economic stability rather than specific stock market outcomes.

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48. Central banks often find:

Explanation

Central banks often find that there are tradeoffs that make pursuing all of their goals simultaneously impossible. This means that they cannot effectively achieve all of their objectives at the same time due to conflicting priorities or limited resources. They must make strategic decisions and prioritize certain goals over others, considering the potential impact and consequences of their actions. This recognition of tradeoffs is crucial for central banks to effectively manage monetary policy and maintain stability in the economy.

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49. An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show:

Explanation

When the Fed conducts an open market sale of U.S. Treasury securities, it means that the Fed is selling these securities to the public. As a result, the banking system's balance sheet will show no net change in assets or liabilities because the sale of securities is offset by a decrease in reserves. However, there will be a change in the composition of assets, with securities increasing and reserves decreasing. This means that the banking system will hold more securities and less reserves after the sale, but the overall value of assets and liabilities will remain the same.

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50. Exchange-rate stability is likely to be a more important goal for the central banks of:

Explanation

Emerging market economies are more likely to prioritize exchange-rate stability because they often have more vulnerable and volatile currencies. These economies are heavily dependent on international trade and foreign investment, making exchange-rate stability crucial for attracting and retaining investors. On the other hand, the central bank of the U.S., being the issuer of the world's primary reserve currency, may prioritize other goals such as price stability or economic growth over exchange-rate stability.

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51. In the United States, one problem with central bank independence is:

Explanation

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52. Which of the following statements is incorrect?

Explanation

The correct answer is that a country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate. This means that a country can allow foreign investments, have control over its interest rates, and also have a fixed exchange rate. This statement contradicts the first option, which states that a country cannot have all three of these factors simultaneously.

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53. If the Fed decides to maintain a fixed euro/dollar exchange rate when they purchase euros:

Explanation

When the Fed decides to maintain a fixed euro/dollar exchange rate by purchasing euros, they increase the number of dollars in circulation. This increase in the money supply puts downward pressure on domestic interest rates. Therefore, all of the given answers are correct.

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54. The attendees at the FOMC meetings receive information prior to the meetings that is contained in books with colorful names. The information that is released to the public prior to the meetings is from the:

Explanation

The correct answer is "Beige book only." The explanation is that the attendees at the FOMC meetings receive information prior to the meetings from books with colorful names. The question asks which book(s) contain the information that is released to the public prior to the meetings. The answer is "Beige book only" because it implies that only the information from the Beige book is made public before the meetings.

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55. Criteria used to judge a central bank's independence include each of the following, except:

Explanation

The criteria used to judge a central bank's independence include budgetary independence, long terms for members, and irreversible decisions. However, the one that is not considered is the cabinet or ministry level of authority. This means that a central bank should not be subject to direct control or influence by the government's cabinet or ministry. This is important to ensure that the central bank can make decisions based on economic considerations rather than political pressures.

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56. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will specifically show:

Explanation

When the Federal Reserve conducts an open market purchase of U.S. Treasury securities, it buys these securities from the market, which increases its assets. At the same time, the Federal Reserve pays for these securities by creating reserves in the banking system, which increases its liabilities. Therefore, the correct answer is that the Fed's balance sheet will show an increase in the asset category of securities and the liability category of reserves by $2 billion.

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57. Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend?

Explanation

Bank A has checkable deposits of $100 million. The required reserve rate is ten percent. This means that Bank A is required to hold ten percent of its checkable deposits as reserves. Therefore, Bank A must hold $10 million as reserves.

Bank A has vault cash equaling $1 million and deposits at the Fed equaling $14 million. These two amounts together equal $15 million, which is greater than the required reserve of $10 million.

The maximum amount Bank A could lend is calculated by subtracting the required reserve from the total reserves. Therefore, the maximum amount Bank A could lend is $15 million - $10 million, which equals $5 million.

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58. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve rate and ER = Excess reserves, then C + D would equal:

Explanation

The equation C + D represents the total money supply in an economy, which includes both currency in circulation (C) and deposits in banks (D). The equation MB times m represents the monetary base (MB) multiplied by the money multiplier (m). The monetary base refers to the total amount of currency in circulation plus the reserves held by banks. The money multiplier represents the ratio of the money supply to the monetary base. Therefore, the equation MB times m accurately represents the relationship between the monetary base and the total money supply.

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59. The Federal Reserve's policy regarding announcing its policy decisions has:

Explanation

Until 1994, the Federal Reserve's policy decisions were kept secret. This means that the announcement of these decisions was not made immediately. However, recently there has been a change in the Federal Reserve's policy, and they now announce their decisions immediately. This change happened after 1994.

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60. One thing that is true about economic policy in the U.S. is: 

Explanation

Monetary and fiscal policy often times conflict because they have different objectives and tools. Monetary policy, controlled by the Federal Reserve, focuses on managing the money supply and interest rates to control inflation and stabilize the economy. Fiscal policy, controlled by Congress and the President, involves government spending and taxation to influence economic growth and stability. These two policies can conflict when they have different goals or when their tools are not aligned. For example, the Federal Reserve may raise interest rates to control inflation, while Congress may increase government spending to stimulate the economy. This can create tension and conflicts between the two policies.

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61. Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision: 

Explanation

The correct answer is "Immediately after the meeting." This means that as soon as the FOMC meetings conclude, the public is informed about the decisions made by the FOMC. There is no delay or waiting period involved, and the information is made available right away.

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62. Each of the following items would appear as assets on the central bank's balance sheet, except:

Explanation

Currency is not considered an asset on a central bank's balance sheet because it is the liability of the central bank. When the central bank issues currency, it is essentially creating a liability for itself, as it is obligated to exchange that currency for other assets, such as deposits or reserves, upon demand. Therefore, currency is not recorded as an asset on the central bank's balance sheet.

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63. Secondary credit provided by the Fed is designed for:

Explanation

The correct answer is "Banks that are in trouble and cannot obtain a loan from anyone else." This is because secondary credit is a form of borrowing provided by the Federal Reserve to banks that are experiencing financial difficulties and are unable to secure loans from other sources. It is a last resort option for troubled banks to access funds and stabilize their operations.

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64. The problem for a central bank setting a zero inflation policy would be:

Explanation

Setting a zero inflation policy would require firms to cut nominal wages in order to reduce labor costs. This is because if there is zero inflation, the prices of goods and services would remain constant over time. If firms want to reduce labor costs, they would have to decrease the amount they pay their employees, which would involve cutting nominal wages. This could have negative implications for workers and may lead to lower standards of living.

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65. General agreement among economists finds that they believe monetary policy is more effective when it is formed:

Explanation

The general agreement among economists is that monetary policy is more effective when it is formed independently of political pressure. This is because political pressure can lead to short-term decision making that may not be in line with long-term economic goals. By keeping monetary policy independent from political influence, central banks can focus on maintaining price stability and promoting economic growth without being swayed by political considerations. This allows for a more consistent and credible monetary policy, which in turn helps to maintain confidence in the financial markets and promote economic stability.

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66. Which of the books used at the FOMC meetings the Board staff's economic forecast for the next few years?

Explanation

The green book is the correct answer because it is the book used at the FOMC meetings for the Board staff's economic forecast for the next few years. The blue book and beige book may be used for other purposes or contain different information, but the green book specifically focuses on the economic forecast.

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67. Reserves are:

Explanation

Reserves refer to the assets held by commercial banks, such as cash and deposits, which are considered as a safeguard against potential withdrawals by their customers. These reserves are liabilities for the central bank, as they are obligated to provide the commercial banks with the funds they need. Therefore, the correct answer is "Assets of the commercial banks and liabilities of the central bank."

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68. Seasonal credit provided by the Fed is not as common as it used to be because:

Explanation

The reason why seasonal credit provided by the Fed is not as common as it used to be is because other sources for long-term loans have developed for banks in seasonal areas. This means that banks in seasonal areas now have alternative options for obtaining long-term loans, making them less reliant on seasonal credit from the Fed. As a result, the demand for seasonal credit has decreased and it has been replaced by these other sources of funding.

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69. Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called:

Explanation

Open market operations refer to the buying and selling of U.S. Treasury Securities by the Federal Reserve for its own portfolio. Through open market operations, the Federal Reserve can influence the money supply in the economy, control interest rates, and stabilize financial markets. This tool allows the Fed to inject or withdraw money from the economy, depending on its monetary policy goals. Therefore, open market operations are an essential mechanism used by the Federal Reserve to manage the economy and implement its monetary policy objectives.

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70. When arbitrage occurs across countries with flexible exchange rates and when the bonds in each country are identical and there are no barriers to capital flows:

Explanation

When arbitrage occurs across countries with flexible exchange rates and when the bonds in each country are identical and there are no barriers to capital flows, the interest rates on the bonds will not necessarily be identical. The interest rates can differ due to various factors such as differences in inflation expectations, risk perceptions, and market conditions. Similarly, the prices of the bonds will not necessarily be identical as they can be influenced by supply and demand dynamics in each country. Additionally, the inflation rates in each country will not necessarily be identical as they can be affected by various factors such as monetary policy, fiscal policy, and economic conditions. Therefore, none of the answers provided is correct.

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71. Which of the following statements is not correct?

Explanation

The statement that is not correct is "The Fed currently sets both an interest rate and a quantity target for monetary policy." This is incorrect because currently, the Fed only sets an interest rate target for monetary policy, which is the federal funds rate. The Fed does not have a quantity target for reserves.

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72. The Federal Reserve's Fedwire system is used mainly to provide:

Explanation

The Fedwire system is a real-time gross settlement system operated by the Federal Reserve. It provides a secure and efficient platform for financial institutions to transfer funds to one another. It allows for large value transfers with immediate finality, ensuring that payments are settled quickly and accurately. The system is widely used by banks, credit unions, and other financial institutions to facilitate various transactions such as wire transfers, securities transactions, and settlement of obligations. Its low cost and reliability make it an attractive option for financial institutions to transfer funds securely.

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73. Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank:

Explanation

If the growth rate of a country exceeds its sustainable rate, the central bank is likely to raise interest rates to slow the rate of growth. This is because when the growth rate is too high, it can lead to inflationary pressures and overheating in the economy. By raising interest rates, the central bank aims to reduce borrowing and spending, which helps to slow down economic growth and prevent inflation from spiraling out of control.

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74. One thing the Fed has learned over the past twenty-five years is:

Explanation

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75. The interest rate that the FOMC currently chooses to control is:

Explanation

The FOMC (Federal Open Market Committee) currently chooses to control the federal funds rate. This is the interest rate at which depository institutions lend funds to each other overnight, influencing the overall availability and cost of credit in the economy. By adjusting the federal funds rate, the FOMC can influence borrowing costs, inflation, and economic growth. The other options, such as the 30-year Treasury bond rate, discount rate, and prime rate, are not directly controlled by the FOMC and have different purposes and impacts in the financial system.

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76. If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchased by the Fed will result in deposit creation of:

Explanation

If the required reserve rate is ten percent, it means that banks are required to hold ten percent of their deposits as reserves. In this scenario, since there are no excess reserves, the banks will need to hold $100,000 ($1 million multiplied by 10%) as reserves. The remaining $900,000 ($1 million minus $100,000) can be used to create new loans and deposits. Since the initial purchase was $1 million, this amount will be multiplied by the money multiplier, which is the inverse of the reserve ratio. In this case, the money multiplier is 1/0.1, which equals 10. Therefore, the deposit creation will be $10 million ($1 million multiplied by 10).

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77. Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by:

Explanation

When the Fed conducts an open market purchase of $1 million, the banking system deposits will increase by more than $1 million but less than $10 million. This is because of the multiple effects of the purchase. Initially, the $1 million will be deposited into the banking system, increasing deposits by $1 million. However, due to the required reserve rate of ten percent, banks are required to hold ten percent of deposits as reserves. Therefore, $100,000 will be held as required reserves, and the remaining $900,000 will be available as excess reserves. Additionally, since the public withdraws ten percent of every deposit in cash, $90,000 will be withdrawn, leaving the final increase in banking system deposits between $1 million and $10 million.

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78. Most central banks, including the Fed and the ECB, provide discount loans at a rate:

Explanation

Central banks provide discount loans at a rate above the target interest rate. This is because the discount rate is typically higher than the target interest rate set by the central bank. The purpose of providing discount loans at a higher rate is to discourage banks from relying too heavily on central bank funding and to incentivize them to seek funds from other sources first. By setting the discount rate above the target interest rate, central banks aim to maintain control over the money supply and encourage banks to borrow from each other in the interbank market rather than relying on the central bank.

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79. The ways the Fed can inject reserves into the banking system include:

Explanation

The correct answer is an increase in the size of the Fed's balance sheet through purchasing securities. When the Fed purchases securities, such as government bonds, from banks or other financial institutions, it pays for them by crediting the banks' reserve accounts. This increases the reserves available to the banking system, providing liquidity and stimulating lending and economic activity. By expanding its balance sheet through these purchases, the Fed effectively injects reserves into the banking system.

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80. If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

Explanation

If the demand for reserves decreases and the current market federal funds rate equals the target rate, there will be an excess supply of reserves in the market. This means that banks will have more reserves than they need to meet their requirements. As a result, banks will have less incentive to borrow funds from each other, leading to a decrease in the federal funds rate.

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81. One reason the target federal funds rate may not equal the actual federal funds rate is because:

Explanation

The target federal funds rate may not equal the actual federal funds rate because attaining the target rate involves forecasting reserve demand and forecasts are subject to error. This means that the Federal Reserve may not accurately predict the amount of reserves that banks will need, leading to a difference between the target rate and the actual rate.

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82. The Chairman of the FOMC is:

Explanation

The Chairman of the Board of Governors is the correct answer because they are the highest-ranking member of the Federal Reserve System and the head of the Federal Open Market Committee (FOMC). The Chairman is responsible for leading the committee's meetings, setting monetary policy, and representing the Federal Reserve to the public and government officials. This role holds significant influence over the nation's monetary policy and plays a crucial role in shaping the economy.

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83. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will:

Explanation

When Bank A sells a $100,000 U.S. Treasury bond to the Fed, it receives $100,000 in return. This increases Bank A's reserves by $100,000, which are considered excess reserves because they are above the required reserve amount. Therefore, the correct answer is that Bank A's excess reserves will increase by $100,000.

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84. If the bonds of two different countries are identical, their expected returns will:

Explanation

If the bonds of two different countries are identical, their expected returns will be equal if capital flows freely internationally. This is because when capital flows freely, investors can easily move their investments from one country to another, seeking higher returns. As a result, the demand for bonds in both countries will be equalized, leading to equal expected returns. However, if capital is restricted or there are barriers to international investment, the expected returns may not be equal as the flow of capital will be constrained.

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85. If the Fed desired to fix the euro/dollar exchange rate, they would have to:

Explanation

To fix the euro/dollar exchange rate, the Fed would need to be willing to exchange dollars for euros whenever anyone asked. This means that the Fed would be committed to providing euros in exchange for dollars at the fixed rate, ensuring that there is a constant supply of euros available in the market. This willingness to exchange currencies is crucial in maintaining a fixed exchange rate and ensuring stability in the foreign exchange market.

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86. The Fed will make a discount loan to a bank during a crisis:

Explanation

During a crisis, the Federal Reserve will only make a discount loan to a bank if the bank is financially stable and able to offer collateral for the loan. This requirement ensures that the bank has the means to repay the loan and reduces the risk for the Federal Reserve. If the bank does not have collateral, the interest rate on the loan will be higher, further protecting the Federal Reserve's interests. The condition of the bank and its ability to provide collateral are crucial factors in determining whether the Federal Reserve will provide a discount loan during a crisis.

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87. The main asset held by a central bank is:

Explanation

Securities are the main asset held by a central bank. Central banks typically hold a variety of securities, such as government bonds, treasury bills, and other financial instruments. These securities serve as a store of value and can be used for various purposes, including implementing monetary policy, managing liquidity in the financial system, and providing stability to the economy. Foreign exchange reserves, currency, and loans may also be held by central banks, but securities are generally considered the primary asset.

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88. Which of the following statements is most correct?

Explanation

The correct answer is that the FOMC sets the target federal funds rate. The FOMC, or Federal Open Market Committee, is responsible for setting monetary policy in the United States. One of the key tools they use is the federal funds rate, which is the interest rate at which banks lend reserves to each other overnight. The FOMC sets a target rate for the federal funds rate, and then uses various tools, including open market operations, to try to achieve that target rate. The actual federal funds rate may fluctuate around the target rate, but the FOMC's goal is to keep it as close to the target as possible.

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89. International capital mobility:

Explanation

International capital mobility refers to the ability of capital to flow freely between countries. When capital can move easily across borders, it allows investors to seek out the highest returns on their investments, regardless of the country. This leads to the equalization of expected returns across countries, as investors will move their capital to countries with higher expected returns, which in turn increases the investment in those countries. This equalization of expected returns helps to align interest rates and investment opportunities, reducing the differences between countries and promoting stability in the global financial system.

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90. Keeping interest rates stable is:

Explanation

Keeping interest rates stable is a secondary goal for central banks. While it is an important aspect of their overall objectives, central banks have other primary goals such as maintaining price stability, promoting economic growth, and ensuring financial stability. Stable interest rates are crucial for achieving these primary goals, as they can impact inflation, investment, and overall economic activity. However, central banks also have to consider various other factors and goals in their decision-making process, making stable interest rates a secondary objective.

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91. Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be:

Explanation

When Tom withdraws $300 from his checking account, there is no change in the total assets or total liabilities of the Fed's balance sheet. However, there is an increase in the liability of currency by $300, as the Fed now owes Tom that amount in cash. At the same time, there is a decrease in the liability of reserves by $300, as the reserves held by the Fed to back up Tom's checking account have decreased. Overall, this transaction has no impact on the total assets or total liabilities of the Fed's balance sheet.

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92. If each of the coefficients in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, this implies:

Explanation

The given correct answer suggests that if each coefficient in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, it implies that the Fed is giving equal weight to the objectives of inflation and output. This means that the Fed considers both inflation and output equally important in its decision-making process.

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93. If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would:

Explanation

If the Fed increases the required reserve rate from ten percent to twenty percent, it means that banks will have to hold a larger portion of their deposits as reserves. This will reduce the amount of money that banks can lend out, as they will have less excess reserves available. As a result, the simple deposit expansion multiplier, which determines the maximum amount of money that can be created through the lending process, will be half as large as it was before the increase.

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94. The ability to control inflation expectations is most closely related to a central bank's:

Explanation

The ability to control inflation expectations is most closely related to a central bank's credibility. Credibility is crucial for a central bank as it helps build trust and confidence among the public and financial markets. When a central bank is seen as credible, people believe that it will effectively implement its monetary policy to achieve its inflation targets. This credibility can influence inflation expectations, as individuals and businesses are more likely to make decisions based on their trust in the central bank's ability to control inflation.

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95. A central bank's sale of securities from its portfolio will:

Explanation

When a central bank sells securities from its portfolio, it is essentially reducing its assets. As a result, the total size of its balance sheet decreases. This is because the securities held by the central bank are considered assets, and when they are sold, the central bank no longer holds them, leading to a decrease in the overall size of its balance sheet.

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96. Over the last few decades, central bankers have:

Explanation

Central bankers have mostly abandoned intermediate targets because they have found that the links between the operating instruments and intermediate targets have become more stable. This means that they no longer need to rely on intermediate targets to achieve their desired outcomes. Additionally, central bankers have also developed more intermediate targets, allowing them to have a more comprehensive approach to monetary policy. This shift in focus has led to a greater emphasis on other tools and strategies in order to effectively manage the economy.

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97. The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

Explanation

When the Fed sells German bonds to commercial banks, it receives cash in exchange for the bonds. This cash is considered an asset for the Fed, but since it no longer holds the bonds, its assets decrease. Additionally, the Fed's liabilities also decrease because it no longer owes the bond to the commercial banks. On the other hand, for the banking system, the value of assets and liabilities does not change because the cash received from the Fed replaces the German bonds in their assets. Therefore, only the composition of assets changes for the banking system.

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98. Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base:

Explanation

When people increase their currency holdings, the monetary base does not change because currency is part of the monetary base. However, the quantity of M2 will decrease because M2 includes currency held by the public as well as other types of money such as checking accounts and savings accounts. So, when currency holdings increase, the proportion of other types of money in M2 decreases, resulting in a decrease in the overall quantity of M2.

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The Federal Reserve was created in:
Given the following formula for the Taylor rule:...
The number of regional Federal Reserve Banks is:
One monopoly that modern central banks have is in:
The primary objective of most central banks in industrialized...
The efficient allocation of resources requires:
In terms of economic growth, the central bank would like to:
For the Federal Reserve, the largest liability on its balance sheet...
Many governments give their central bank control over issuing currency...
The Board of Governors of the Fed performs each of the following...
If the inflation rate in country A is 3.5% and the inflation rate in...
A central bank holds foreign exchange reserves primarily for:
Discount lending ties into the Fed's function of:
A good definition for intermediate targets of monetary policy would...
If M = the quantity of money, m the money multiplier, MB the Monetary...
The term for turning reserves into bank deposits is called:
The Chairman of the Board of Governors:
The focus for most central banks today is:
The monetary base is the sum of:
If country A wants to fix its exchange rate with country B, then:
Which of the following features would characterize a good monetary...
How many members belong to the board of directors for each of the...
Most of the Fed's income is:
The objectives set for the Fed by Congress are:
The tools of monetary policy available to the Fed include each of the...
Which of the following would be categorized as an unconventional...
The Fed is reluctant to change the required reserve rate because:
From 1979 to 1982, the Fed targeted bank reserves as the monetary...
When the Fed makes a discount loan, the impact on the Fed's...
Monetary policy operations for central banks are run through changes...
The types of loans the Fed makes consist of each of the following,...
The United States would be characterized as having:
Vault cash is:
To be independent, a central bank must have:
One reason for having a monetary policy framework is:
If capital flows freely between countries and a country has a fixed...
If M = the quantity of money, m the money multiplier, MB the Monetary...
For fiscal policymakers, one of the results of an independent central...
Member banks of the Federal Reserve System include:
The Governors of the Federal Reserve System are appointed by...
Which of the following would be an example of a capital outflow...
If foreigners are restricted in their ability to buy investments in a...
The primary purpose of meetings of the FOMC is to:
If the market federal funds rate were below the target rate, the...
In its role as the bankers' bank, a central bank performs each of...
The components of the formula for the Taylor rule includes each of the...
The specific goals of central banks include all of the following...
Central banks often find:
An open market sale of U.S. Treasury securities by the Fed will cause...
Exchange-rate stability is likely to be a more important goal for the...
In the United States, one problem with central bank independence is:
Which of the following statements is incorrect?
If the Fed decides to maintain a fixed euro/dollar exchange rate when...
The attendees at the FOMC meetings receive information prior to the...
Criteria used to judge a central bank's independence include each...
Consider a $2 billion open market purchase of U.S. Treasury securities...
Bank A has checkable deposits of $100 million, vault cash equaling $1...
If M = the quantity of money, m the money multiplier, MB the Monetary...
The Federal Reserve's policy regarding announcing its policy...
One thing that is true about economic policy in the U.S. is: 
Once the FOMC meetings adjourn, the public is made aware of the...
Each of the following items would appear as assets on the central...
Secondary credit provided by the Fed is designed for:
The problem for a central bank setting a zero inflation policy would...
General agreement among economists finds that they believe monetary...
Which of the books used at the FOMC meetings the Board staff's...
Reserves are:
Seasonal credit provided by the Fed is not as common as it used to be...
Buying and selling U.S. Treasury Securities for the Fed's own...
When arbitrage occurs across countries with flexible exchange rates...
Which of the following statements is not correct?
The Federal Reserve's Fedwire system is used mainly to provide:
Everything else equal, if the growth rate of a country exceeds its...
One thing the Fed has learned over the past twenty-five years is:
The interest rate that the FOMC currently chooses to control is:
If the required reserve rate is ten percent and banks do not hold any...
Assume that the required reserve rate is ten percent, banks want to...
Most central banks, including the Fed and the ECB, provide discount...
The ways the Fed can inject reserves into the banking system include:
If the current market federal funds rate equals the target rate and...
One reason the target federal funds rate may not equal the actual...
The Chairman of the FOMC is:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's...
If the bonds of two different countries are identical, their expected...
If the Fed desired to fix the euro/dollar exchange rate, they would...
The Fed will make a discount loan to a bank during a crisis:
The main asset held by a central bank is:
Which of the following statements is most correct?
International capital mobility:
Keeping interest rates stable is:
Tom decides to withdraw $300 out of his checking account. The impact...
If each of the coefficients in front of the inflation gap and the...
If the Fed were to increase the required reserve rate from ten percent...
The ability to control inflation expectations is most closely related...
A central bank's sale of securities from its portfolio will:
Over the last few decades, central bankers have:
The Fed sells German bonds to commercial banks. Which of the following...
Which of the following best completes the statement? If people...
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